Chart of the Day - together

Spent the weekend together with friends & family. It was a good Fall weekend as the weather is crisp in the morning & warmer as the day goes on. In addition, the colors are changing. It leads to some good outdoor time & discussions around a fire

The discussions often end up on politics & fincl mkts. Not sure why, I just seem to end up in those sorts of discussions. There were 2 primary threads - bigger impact, fiscal or monetary stimulus, & better hedge against that, gold or Bitcoin

There was lively debate & I can't hash out all of the angles in my limited characters available, but I thought to myself, what if we look at all of those together? Historically, we had seen fiscal & monetary stimulus work over different time horizons & not at the same time. Covid was different in that regard

In addition, as I have thought to myself before, Bitcoin & gold enthusiasts have a lot in common. They agree on most reasons why one should hold one or the other - move out of fiat system, too much govt or single source of control, debasement etc. The only thing they don't seem to agree on is the validity of the other

For today's chart, I look at in yellow the Fed bal sheet as a % of GDP + the Federal deficit as a % of GDP. We can see over the last 10 yrs, this had been between 22-27% of GDP combined. In fact pre GFC it had been between 5-10% of GDP but ratcheted higher

Then came Covid. This gives you an idea of the magnitude of the response, which we are all feeling & will still feel the effects of. From 25% of GDP to 50% of GDP. A doubling of the impact of govt. Again, in the context of pre-GFC when it used to be 10%, govt is now 5x more impactful

Sure, it has slowed since the peak in 2021 but it is still 50% higher than pre-Covid. While the Fed is reducing its bal sheet, the deficit is poised to go higher still. Do we think this will even go back to 25% much less 10%?

Thus we can see why there are many who want to hedge against too much govt in their lives. Whether one chooses Bitcoin or gold, the logic is clear. Instead of picking sides, I posit what if you had an index that was 50% Bitcoin & 50% gold. You would get the convexity of Bitcoin & the stability of gold

That is the index I created in white. You can see that while it is still volatile, it is not quite as volatile as Bitcoin itself. That fell 77% in 2022 while this 'only' fell 46%. It also hasn't bounced as much off the lows. However, that lower volatility may make it easier for people to stay in this trade

We can also see that this index tracks pretty well versus the combination of fiscal & monetary stimulus. In addition, this index is headed higher because it's anticipating, perhaps as bond yields are, that there is more fiscal spending in the pipeline as we head into an election year

DC agrees we need more govt in our lives. Perhaps we should agree that we can hedge that with both Bitcoin & gold

Stay Vigilant

#markets #investing #gold #bitcoin #stayvigilant