Today’s Profit Watch begins with a thought experiment: Events keep shaping up that could see bitcoin push towards US$100,000.
You probably think I’m joking.
Let’s follow the trail of evidence!
Look first at the US government debt situation right now.
Bloomberg reports that the US is at ‘significant risk’ of breaching its federal debt limit by September.
That’s just two months away.
The US Treasury Department has already been using what’s called ‘extraordinary measures’ to fund the government since March.
I can hear your objection already. We’ve been here before. The US debt limit usually gets extended and life goes on.
But Donald Trump can’t hide the fact that his new tax laws have not resulted in increasing government revenue off corporate America. They’re not even flat. They’re downright down.
That’s a large problem when the US government is already trying to service the gargantuan debt that it already has: US$22 trillion and counting.
It’s enough to make even the seasoned optimist question the stability of the US dollar, which, as we all know, underpins the entire global trading system.
What do investors that hold US government debt get for the privilege of lending to the most indebted borrower in the history of the world?
That’s right. The current yield on a 10-year Treasury bond is 2.05%. The current US inflation rate is 1.8%. That leaves a pittance in ‘real return’.
The whole world will shake if there’s a panic around this.
Here’s the dynamic afflicting the capital markets right now. The relentless advance of technology just keeps cutting costs across the economy. That’s deflationary.
But the central banks cannot allow this. The financial system must have debt and inflation. The system breaks down otherwise.
That means the Fed and the Reserve Bank are constantly swimming upstream.
They will keep facing pressure to juice the economy with rate cuts and ‘quantitative easing’.
This has two notable effects. One is that it drives inequality through the roof.
The second is that it could send asset markets soaring more than they already have.
This is one reason why stock markets could ‘melt up’ in the next six months before getting crunched by the reality of the real economy. It’s all paper fiddling.
There’s another thing. This world of low interest rates may make sense when inflation seems tame and unlikely to return.
But we have the unsettling and vexed question of oil prices…
Oil could bust…or BOOM
Hedge funds around the world, for example, are beginning to position for a potential surge in oil and petroleum product prices in the fourth quarter of this year.
As I’ve written before, new shipping rules — due to come into effect in January 2020 — are one of the biggest regulatory changes to hit oil…ever. See this from Reuters:
‘Investors in turn are coming up with strategies and launching funds with exposure to parts of the oil and shipping industries they expect to benefit from the new emission caps.’
These new rules are coming in at the same time that Libya is in a civil war, the US is pressuring Iran, and Venezuela is largely out of the game.
Should another pillar of the oil market fall, the market could panic. An oil spike is not what the world needs when there’s over US$12 trillion in negative-yielding bonds around the world.
It could send investors pouring into anything that can’t be created on a printing press. Read: Bitcoin and gold.
Take the above with a word of caution, too. Currently, Asia is awash in oil products because of big ramp-ups in China. There are no guarantees here.
But the appeal of bitcoin is that it offers some protection from this scenario, while at the same time having multiple bull drivers of its own.
One of those I have written about since February: The coming of the bitcoin ‘halvening’ in May 2020.
Then we have the potential for institutional and retail capital to keep coming into the crypto market as it gets easier to buy and store.
Let me remind you of one final thing: Bitcoin’s reputation doesn’t match its weight.
What I mean is that bitcoin has a market cap of around US$220 billion right now. That’s nothing in the context of the trillions locked up in government debt the world over.
Bitcoin could be about to see massive demand just as the supply is about to get cut in half.
I love nothing more than finding ‘asymmetric’ bets in the market. These are small stakes you can take that drive your overall returns.
Most traders know all too well that 80% of their trades are small losses and small wins. It’s the 20% where you make the real money.
Bitcoin is one such potential trade this year. For more, go here.
PS: There are few analysts I admire more than my friend Greg Canavan. His authority on the gold market, for example, is unmatched.
Greg called this year’s rally in gold and gold stocks to a tee. I was too stubborn in my own view to listen…and missed out on some cracking gains. Don’t be pigheaded like me. Embrace a diversity of views.
Greg tells me gold is brewing to go even higher (I mean this literally…he works two buildings down from me).