Big Inflation, Big Problems

Big Inflation, Big Problems

1) I sent my readers a special report in the middle of last year. I explained why I was worried inflation was going to explode higher.

We’re seeing that it in action now. The numbers are at a 40-year high in the US.

I got that call right. What I got wrong was expecting the gold price to move up sooner, and harder, as a result.

However, the appeal of gold just keeps going up.

Central banks keep pumping out credit and debasing their currencies.

Now we have the US continually using the US dollar as a strategic tool against foreign countries like Iran, Venezuela, and now, Russia.

China especially knows that the US dollar system gives the US enormous strategic power.

It’s only natural that they’ll work to replace it with something else. They’ll find a willing coalition to work harder.

And quite rightly so, really. The US gets a free ride thanks to this international ‘exorbitant privilege’.

You often hear gold and Bitcoin [BTC] talked about as ‘rivals’ for the next reiteration of the currency system. There may be a role for both as this unfolds.

Traditional central banks are going to keep accumulating gold for their reserves.

They’ll make sure the physical gold is secure within their borders too. The last few years have shown that paper claims on gold aren’t secure.

But we also have central banks moving toward digital currencies too. Even President Biden is pushing for it.

An old friend of mine sent me a message asking if central bank currencies hurt or help bitcoin.

That’s a question I keep wrestling with.

My bias is to say it hurts. Ultimately, the governments will push their legal tender laws against bitcoin. Governments don’t like competition, and bureaucrats like power.

But even if bitcoin isn’t used for payments, that doesn’t mean it has no role in the future. It’s a mistake to think that utility equals value.

My colleague Vern Gowdie brought up art this week in this context. Why is someone prepared to pay tens of millions for paper and paint?

One strategy here is to hold both bitcoin and gold. We don’t know what the future of money looks like, but we do know it won’t look like today.

My strong suggestion is to follow this trend as much as you can.

The war in Ukraine — and the financial repercussions for Russia — make all of this even more acute.

2) I’ve been thinking about something called the ‘U’ portfolio lately. This is an idea I got from former banker Satyajit Das back in 2012.

His idea — if I remember it correctly — was to have 90% of your money in capital-secure assets like cash. Then, 10% went into deep-out-of-the-money options, both puts and calls.

The idea was to take your market exposure way down, and one set of the options might pay off if we got a big move in the market, either way.

Why am I thinking about this?

It seems to me that the risks in the market are going up with inflation. Stocks don’t like high inflation. They like it, historically anyway, to be falling.

However, there’s a twist here for Australia and the ASX.

As a big commodity producer, inflation shows up as higher prices for raw commodities, and therefore bigger revenues for the mining industry.

We could see the market split between the resource sector and industrial stocks further over 2022.

That’s unless something breaks out there. The price rises in the energy commodities have to be hurting importers like China and India.

For how much longer can they take the pounding? That’s a big question now and for the rest of the year.

3) Don’t forget to check out my podcast here.

This week, we’ll be releasing an episode with energy analyst Mark Rossano. You’ll discover his latest thoughts on oil and the energy disruption happening across Europe…and the investment opportunities that spring from it!

We also have a great back catalogue of content already. The list is only getting longer. And it’s all FREE.

All the best,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia