Perhaps the US stock market will inflate to some unimaginable peak as well. But if it’s from nothing but currency devaluation, then oil might be $150 a barrel, gold $2,500 an ounce, and a loaf of bread $10. Whether things get to that extreme remains to be seen. But even Warren Buffett is sounding the warning on inflation now. His company, Berkshire Hathaway, had their super Saturday last weekend. This is when Warren and long-time mate Charlie Munger field questions from their shareholders for hours. The Australian Financial Review reports… ‘“We’re seeing very substantial inflation,” the 90-year-old chairman said in his address to investors that was held virtually for the second consecutive year because of the pandemic. “It’s very interesting. We’re raising prices. People are raising prices to us and it’s being accepted.”’ Very few men have as much insight into the US economy as Buffett. His empire is huge and almost exclusively — and famously — geared to the US domestic economy. The crypto craze is only going to get bigger. The windfall profits are so enormous that it can only draw in more money, speculators — and underneath it all — genuine developers and entrepreneurs. I would start getting nervous if I held a business based on the legacy financial system. That includes ASX Ltd [ASX:ASX]. Yep — there is no doubt in my mind that the crypto space will eventually eat the entire share market as we know it. A new infrastructure is being built in the crypto space that is truly international and borderless. You can trade anywhere and anytime. The alpha in the crypto space dwarfs the 7% annual return the financial industry promises. I’m not saying it’s going to happen tomorrow. It may even be a slow death. But the existential threat will be enough to limit how much the market will pay for future earnings, in my view. This is the deadly trap of low interest rates in a decade of astonishing disruption. What am I trying to say? Low interest rates are forcing people away from deposits and bonds toward the stock market. You know it. I know it. They’re looking for yield. And there are companies on the ASX right now paying dividends more than 5% across multiple sectors. But at what risk to your capital? What if you find yourself buying the 2021 equivalent of Blockbuster for the yield? You could argue this was always a risk in the market. And that is no doubt true. But I doubt so many established sectors with massive scale — banks, fossil fuel firms, for example — have suddenly seemed so vulnerable. I’m not even sure the hallowed principle of diversification holds as much sway as it once did. The history of the US stock market over the last 10 years was that you could have just bought the top five US tech stocks and ignored everything else. It was, in hindsight, a performance hindrance to diversify away from these in the name of ‘safety’. But was it actually less risky to buy other industries or more? Standard financial theory says spreading your money across multiple sectors (or countries) left you diversified in a positive way because one area of the economy might flourish while another flounders. But everything is so synchronised now. Holding Nigerian stocks won’t protect you if the US stock market tanks. We’re all hitched on the same train now. This line of thought leads us back to crypto. One of the appeals of bitcoin is that it’s one of the few assets left that isn’t correlated to everything else — at least not yet. Not only do you currently get alpha, an emerging disruptor on a massive scale, but you get an uncorrelated asset class too. This is why it’s absolutely vital you follow what’s happening here. Bitcoin is currently trading for around AU$78,000. The surprise might be how it goes, and how it stays. Regards, Callum Newman,
Editor, The Daily Reckoning Australia | 