Welcome to your December issue of the Global Intelligence Wire.
This is the monthly digest exclusively for Global Intelligence Lifetime Circle members, in which I cut through the media chatter and highlight five underreported news stories from recent weeks.
We’ve reached the end of another year, which means a new one is on its way…and I have big expectations for 2022. I have a suspicion that it could be the year when we’re catapulted into a new financial age. Which is why we start this month’s edition of the Wire in Hong Kong.
Hong Kong and China Take a Big Step Toward Digital Sovereign Currencies
The central bank in Hong Kong is working with the People’s Bank of China (the Chinese central bank) on testing cross-border transactions using CBDCs, or central bank digital currencies.
These are fiat currencies such as the U.S. dollar, the euro, or the Hong Kong dollar and the Chinese yuan—except they are traded and stored digitally using the same blockchain technology behind bitcoin, Ethereum, and all other cryptocurrencies.
This is the world that will exist very soon. It’s likely that by 2025, none of us will be using physical currency anymore. Dollar bills will become collectors’ items and a reminder of a different past. Everything you earn and spend will be a digital transaction on the blockchain.
For now, I find these three facts the most interesting about the Hong Kong/China story:
1. It’s the latest example of central banks testing cross-border transaction networks using CBDCs. France and Switzerland recently conducted their own test.
2. The China/Hong Kong test has consumers in its sights. A People’s Bank of China official said of the test: “In the future, when mainland [Chinese] tourists use the digital yuan to shop in Hong Kong, the foreign currency exchange will be completed between two wallets and local merchants will receive money in Hong Kong dollars, so there will be no currency substitution.” This tells me we are moving into a future where currency conversion is a non-issue—culling yet another middleman (currency-exchange services) from the landscape.
3. China/Hong Kong is just the start. Through a project known as mBridge, those two central banks are teaming up with central banks in Thailand and the United Arab Emirates (as well as with global banking giants Goldman Sachs, HSBC, France’s Société Générale, and six of China’s biggest state-owned banks) to test cross-border payments on an even larger scale.
More broadly, here’s how I see it: Governments, central banks, and the world’s biggest banking companies are showing us exactly where they are steering the world. Money and finance are moving to the blockchain. And that means you should probably own a fairly sizeable slug of bitcoin and Ethereum. Those, and some other cryptos, will prosper in this new, blockchain-based financial age.
Now, moving on to a bold prediction…
The Founder of the World’s Largest Hedge Fund Warns of a Crisis Ahead
Ray Dalio…
If you don’t know the name, or vaguely recognize it in passing, he’s the septuagenarian founder of the world’s largest hedge fund, Bridgewater Associates. He’s always in the news or on one of the business channels talking about markets and whatnot.
Well, Dalio has written a new book, Principles for Dealing With the Changing World Order, and his big conclusion is this: Every empire goes through the same lifecycle…birth, expansion, supremacy, decline, and disappearance.
It’s all tied to predictable economic, political, and monetary cycles. The latter part of the monetary cycle tends to involve an explosion of debt…to keep the empire breathing a little longer.
Precisely zero empires have survived this process, however. Not a single one. Dalio cannot see a reason why the U.S. empire should meet a different fate. He sees a catastrophe ahead. To be clear, this isn’t a knock against America. Nor does it mean that America is going to disappear tomorrow. It’s simply a reading of historical facts.
I point this prediction out only to serve as a preamble to this: Radical change is coming. Historically speaking, we are living on the edge of humanity’s next great transformation: the digital revolution I alluded to in the previous item. CBDCs are just one aspect of what’s happening.
But the revolution at hand isn’t just tied to the rise of the cryptoconomy. Society is changing. Economies are changing. The business models that we know today are going to die off. Money is changing. America’s place—and the dollar’s place—in the global economy is changing.
Waning powers rarely go gentle into that good night. They rage and thrash and throw-down, and they yell at the sun to stop rising! But, as history shows going back millennia, they never win the fight.
My point is this: When financial systems change, the disruption can get ugly. Currencies that we all accept as safe and stable and secure are suddenly none of those things.
Do your lifestyle a favor—insure it with some gold and silver. Not as investments, per se, but simply as an insurance policy, in case I and Ray Dalio are right.
Next up…
Three Times as Many Investors Prefer Bitcoin to Traditional Currencies: Survey
I write a lot about Ethereum, and I am convinced that the #2 cryptocurrency could very well become the #1 cryptocurrency before 2025 (maybe even by 2023) as its uses expand dramatically across so many emerging sectors of the cryptosphere.
But for most crypto investors, their first and biggest love will always be bitcoin.
Bitcoin is, well, bitcoin. It’s never going away. It’s always going to be the professor emeritus of the cryptosphere. And to that end, Grayscale Research has released its third annual Bitcoin Investor Survey which offers some interesting insights into the granddaddy of cryptocurrencies and typical American investors.
Perhaps this nugget is the most intriguing: Three times as many investors surveyed would rather own bitcoin as an investment rather than a fiat currency like the dollar.
Well, doesn’t that just nicely jibe with the previous two items? It’s like a new view of the financial world really is coming together.
Investors are saying that sovereign currencies like the dollar and euro are a dying breed and that cryptocurrencies are much more likely to define the financial world of tomorrow. And just to be clear, tomorrow is really, really close…a whole lot closer than most people think.
And it’s not just in-the-know crypto-geeks like me who see this future emerging.
More than half—55%—of today’s bitcoin owners are newcomers who joined the cryptosphere in the last year. And they’re telling surveyors that they are not selling because they see bitcoin as a store-of-value asset.
Which tells me something. Bitcoin volatility doesn’t appear to be the result of newcomers freaking out. They’re the ones holding. So, who might it be? Well, I’ve shared my suspicions before—it’s the smart money…the big investors! They’re manipulating the market by creating selling pressure which implies that bitcoin is crashing.
Why?
Because 90% of all the bitcoin that will ever exist has already been mined. The last 10% will be mined over the next 120 years or so, in increasingly tiny fractions. So, what do you do if you want to load up on as much bitcoin as you can? You FUD the price. (FUD is a term you’ll see in crypto and general investing for when investors create Fear, Uncertainty, and Doubt in the market.)
You sell just enough to get the price moving lower. You wait for others to join the tide…then you step in and use the proceeds from your sale to buy back more bitcoin at lower prices.
Frankly, I’m just happy to see increasing numbers of people moving into bitcoin because they see it as a safer choice than currencies. It’s the start of a long-term trend.
Next up, my old stomping ground…
Why Inflation Isn’t Going Away Anytime Soon
You likely know that I was a writer at The Wall Street Journal for the better part of two decades. Just recently, I came across a piece by a former colleague named Greg Ip, one of the best economics writers in the mainstream media. And he has a really interesting take on this current bout of inflation. (That story is behind a paywall, so let me summarize for you here.)
Inflation for November hit its highest level since the early 1980s. Greg points out that back in April, economists were predicting we’d be at an inflation reading of 2.5% right about now and that “Even by the forgiving standards of economic forecasting, that’s a miss of epic proportions.”
For the record, I wrote back in February that in 2021, we’d hit 5% (which we hit in early summer) and that we’d likely see a 10% reading (which happened on a month-over-month basis in October).
But what I find most interesting is that he is the first mainstream economics writer I’ve seen to point out that this isn’t the same ol’ same ol’ inflation. It’s not a supply issue or a demand issue—it’s a mutant issue that is both supply and demand driven.
This is what I have been jabbering on about for most of the year. We have a global, pandemic-fueled supply crisis, that has slammed headfirst into an excess of fiscal stimulus (demand). And both of those piled into two decades of excessively (wrongly) low interest rates.
The result is the perfect storm which is now giving us inflation that’s not going to magically disappear just because the Fed raises rates. As I’ve noted elsewhere, supply-chain issues are not a Federal Reserve issue. This time around, they’re a global phenomenon and U.S. interest-rate policy won’t really impact that.
The real question that Greg touches on at the bottom of his piece is this: Higher inflation could become self-perpetuating through price and wage-setting behavior. Then, the solution to this unfamiliar inflation becomes painfully familiar: higher interest rates and perhaps a recession.
By the way, the WSJ also ran a story recently about companies who reported that they have budgeted more money for pay increases next year than at any point since 2008, because of higher inflation. So, the storm only intensifies.
Hmmm…this might be the reason why we own exposure to energy, commodities, and precious metals in our Global Intelligence Portfolio. As inflation rises, they’ll all win.
Finally, this month, we stick with inflation for a beat longer…
Is “Stagflation” Returning? This Chief Economic Adviser Thinks It Might Be
A few years ago, I wrote a story saying that we (America) were very likely to see the return of stagflation at some point. That is, too much money in an economy that is unbalanced and so weak internally that the Fed has to constantly prop it up with more and more cash.
Well, apparently Mohamed El-Erian is now onboard with that thinking, too. El-Erian is the chief economic adviser for global financial services juggernaut, Allianz. He’s warning that the Omicron variant, supply-chain woes, and record-high inflation pressures could see America revisit 1970s-style “stagflation.”
I remain convinced that this is a real possibility. Let’s walk through a small example:
1. The Fed is forced to raise rates more than once in 2022. Probably four or five times.
2. Higher rates push up the cost of debt for consumers and businesses.
3. Consumers are spending more to service their debt, which means they can’t afford certain aspirational items that they now buy without much thought…like new cars, where the average new-car price is more than $45,000.
4. Public companies are paying more for debt and, thus, their profits are falling.
5. That hits stock prices and consumer sentiment, so the economy slows.
6. Car manufacturers cut production lines. Car retailers cut staffing. Unemployment in the auto sector mounts.
7. Yet, global supply-chain inflation persists.
8. America has rising unemployment, declining personal income, higher interest rates, and high inflation.
It’s a sobering thought. But as I always say, there are solutions to every situation. That’s why I’ve built our portfolio of investments the way I have… Within our portfolio, you’ll find the stocks, currency, and commodities investments that can not only protect your wealth from a new era of stagflation, but actually grow your wealth during it, as well. So, we’re well prepared for this eventuality.
And that brings us to the end of this month’s Wire.
I hope you and your family have a Christmas that is fantabulous (to steal a Van Morrison word). It has been one heckuva year. And another soon arrives.
I will be back next month with your first Wire of 2022. If you have any feedback or any topics you’d like me to address in a future issue, you can reach me through the contact form on the Global Intelligence website.
Until then, thanks for spending the year with me and I’m really glad you’re a subscriber.
