The first quarter of 2021 witnessed equity indices market highs while bond prices declined with the worst quarterly performance for fixed income investments in many decades. The old 60/40 approach to investing with 60% stocks and 40% bonds is no longer an effective strategy for wealth accumulation which is something I have warned about in prior updates and writings with interest rates likely trending higher coming off four decades of declining interest rates. Accordingly, we have eliminated traditional bond funds as part of client portfolios and are only employing “tactical” bond managers that hedge out rising interest rates which cause bond prices to drop. The Columbia Mortgage Opportunities Fund is one of the leading bond funds we hold which has successfully implemented these strategies for clients and the fund was up over 6% YTD for the period ending March 31st 2021.
While there is still uncertainty abound, the road to get back to pre-pandemic levels in the USA by many indications from data is quite encouraging and the services sector is finally starting to snap back. In addition, manufacturing activity continues to expand and US GDP is widely expected to rise about 5.5% in 2021 by many economists. The jobs market, which had been one of the last areas of the economy still showing some weakness, had huge growth in March with the unemployment rate slipping all the way back down to 6%. Millions of Americans (and millions of others around the world) are getting vaccinated on a daily basis, so there is a real possibility we could see life returning to something resembling normal by this summer in the USA – fingers crossed and prayers.
Many investors have been re-positioning their portfolios by adding risk assets such as stocks. With a few stops and starts, growth and cyclicals sectors have led the equity markets higher while defensive issues and Treasury bonds have underperformed thus far in 2021. Gold has fallen off of its highs, while Bitcoin has rocketed into the stratosphere. Given where the economy is at right now (steadily on the improvement trajectory with the Fed and US Treasury doing everything possible to keep it that way) recovery plays, including cyclicals and value stocks, could be solid investments over the next year. Once again, we are including a comprehensive global financial report from our strategic partner, BlackRock, attached for your review covering the global macro investment picture.
In addition, I think it is critically important to elaborate on the revolutionary effects of blockchain technology and cryptocurrencies which are causing major ripples throughout the world economies and global markets and will have profound effects on how we will live and interact in the future. The year 2021 will be known as the year cryptocurrencies went mainstream. The flood of institutional investors entering the asset class, the decision by traditional payment companies to offer crypto access and payment options, and the dynamism of listed (public) digital asset companies, futures contracts, and Exchange Traded Funds or ETFs all point to a sea of change in our understanding and perceived value of cryptocurrencies and blockchain technologies.
Cryptocurrencies like Bitcoin and Ethereum are powered by a technology called the blockchain. At its most basic explanation, a blockchain is a ledger of transactions that can be viewed and verified. The Bitcoin blockchain, for example, contains a record of every time someone sent or received Bitcoin. Cryptocurrencies and the blockchain technology that powers them make it possible to transfer value online without the need for a middleman like a bank or credit card company. Bitcoin has multiple uses to serving as a partial substitute for cash and in some instances bonds and is now also being perceived by some as a substitute for gold, which has failed to rise in price in the first quarter of 2021. Bitcoin is the reserve currency of the crypto asset market with the most secure blockchain network in the first global digital monetary system and recently, Bitcoin was referred to as a substitute for gold by Fed Chair Jerome Powell who noted that one day the Fed might also develop a digital dollar. Interestingly, Powell also expressed concerns that Americans may potentially want to hold digital dollars during any future crisis, leading to potential bank runs out of fiat paper currencies.
On that note and my many other concerns, the US published national debt is now in excess of 28 trillion dollars and the actual unfunded national debt is in excess of 141 trillion dollars when we include unfunded liabilities such as Medicare, Social Security, publicly held debt, pension and retiree health care liabilities and other US liabilities. Decades of the under the table dealings from corrupt and inept politicians from both political parties has led to the exploding national debt and based on what we have seen coming out of Washington, the out of control profligate spending and corruption is going off the charts. Therefore, many people who have grown wary of the central banks and government controls and manipulation of fiat paper currencies have invested in Bitcoin, as did many investors looking for ways to diversify their portfolios. As its popularity has grown, Bitcoin, which has no central authority, has been used increasingly for international money transfers as well as for everyday commerce. More than 100,000 merchants now accept bitcoin for transactions. One of the main attractions of Bitcoin is that it has a finite and known cap on its supply with the value of Bitcoin increasing as demand increases, also making it an attractive vehicle for investors.
Accordingly, Bitcoin is gaining momentum and credibility as an alternative to the US dollar and other global fiat paper currencies backed by essentially nothing. However, I am concerned that at some point corrupt government leaders will view Bitcoin as a threat to their fiat money schemes and impose restrictions and/or excessive oversight and taxes on crypto currencies. But they will have to act soon because Bitcoin is fast becoming mainstream with its value soaring this year as major firms such as Bank of New York Mellon, asset manager BlackRock Inc, credit card giants MasterCard, Visa, and PayPal all backed cryptocurrencies. Tesla Inc, Mass Mutual, Square Inc, MicroStrategy Inc and many other companies have also invested in Bitcoin with growing institutional adoption and demand in lieu of fiat paper currencies and government debt. The SEC has never approved a digital asset Exchange Traded Fund or ETF, but that has not stopped many firms from trying. This year, Fidelity, Goldman Sachs, SkyBridge Capital, NYDIG and VanEck, among others, have all thrown their hats in the ring to launch crypto currency ETFs.
On January 21, 2020, Grayscale Investments became a Securities and Exchange Commission (SEC) reporting company, registering its shares with the Commission and designating the Grayscale Trust as the first digital currency investment vehicle to attain the status of a reporting company by the SEC. The Grayscale Investment Trust debuted as The Bitcoin Investment Trust on Sept. 25, 2013 as a private placement to accredited investors and subsequently received FINRA (Financial Industry Regulatory Authority) approval for eligible shares to trade publicly. The Grayscale Bitcoin Trust is a digital currency investment product that we utilize to position a small percentage of Bitcoin in client accounts because storing cryptocurrency safely is notoriously challenging, and the company assures investors that the Grayscale Bitcoin Trust's assets "are safeguarded by a robust security system that uses industry-leading security standards." The trust shares trade daily under the symbol GBTC with the share price rising about 58% YTD for the first quarter of 2021.
Digital asset manager Grayscale Investments is 100% committed to converting the Grayscale Bitcoin Trust to an exchange-traded fund or ETF and Bitcoin exchange traded funds have already been launched in Canada and, as noted earlier, many US investment companies have also applied to the SEC for Bitcoin exchange traded fund launches which we believe are forthcoming. I have conducted extensive research on blockchain technology and cryptocurrencies and will continue to monitor this new sector for investment opportunities and please feel free to call me to discuss your Bitcoin holdings and other investments we are making to capitalize on the blockchain technology phenomena.
International Race for Digital Currency World Dominance
The Wall Street Journal recently reported the People's Bank of China, communist China’s central bank, unveiled a digital renminbi/yuan and “encouraged” its use by Chinese citizens. It is the first digital currency launched by a major country and is a direct competitor with Bitcoin and other digital currencies. Xi Jinping, the Chinese Communist Party leader, who has targeted 2050 for the year China would surpass the United States as the world’s preeminent global superpower and to displace the USA from that post, has said that he desires to “set the rules” for central bank digital currencies (CBDC) globally. The launch of the digital yuan now allows China to gain considerable market share over other CBDCs that might be launched in reaction, such as the Fed/MIT US program.
The global risk presented by a digital yuan may be at least part of the reason the US and its allies are considering a boycott of the 2022 Beijing Olympics and there is a growing movement in the European Union, including among members of the European Parliament, to boycott the Beijing Olympics over the multiple human rights abuses in China. The digital yuan is reported to use near field communication technology, or NFC, that would allow customers at the Olympics to pay vendors by tapping an NFC-enabled payment device with their telephone, much like Apple Pay. Now, imagine the global attendees of the Olympics to have that technology, tied to a digital yuan account, and taking it back to their countries around the world, especially if the digital yuan could be translated to the Olympic guest’s own country's currency instantaneously by the payee’s device in his or her own country. It will be as if yuan were a global currency, a no-fee American Express debit card, accepted everywhere without transaction or exchange fees to customer or merchant. All this presents a significant geostrategic and political threat to Western-style democracies because of its risk to US dollars privilege as the world’s reserve currency. Accordingly, Fed Chair Jerome Powell stated in testimony that developing a Fed-backed central bank digital currency is a “very high priority project”. However, considering that China’s Communist Party leaders allowed international flights out of Wuhan, while canceling domestic airline flights and trains out of Wuhan within China, billions of global citizens will not trust China’s digital currency after China’s communist party leaders knowingly unleased the Covid 19 virus, killing millions around the world. Unfortunately, it is clear to billions that China’s communist party leaders will pursue world dominance at any cost and by any means and the digital yuan is now part of their arsenal.
Accordingly, I will continue to monitor new developments in the digital currency space and how it may affect the markets in the future. The US dollar has been the world’s reserve currency since the end of WWII when it replaced the British pound sterling. At that time, the USA was one of the few developed Northern Hemisphere economies that had not absorbed war damage to its plant and equipment infrastructure, and with a political system that was not in fear of the post-war tumult of communism and socialism that had swept or threatened much of the post-war world. The USA was the world’s financial hegemon and the “safe haven” for a return to a thriving, capitalist, global, economy.
With the advent of the new cryptocurrency wars evolving, we are in unchartered waters and the global pandemic crisis and its effects are also still unknown. As of this writing, Fed Chair Jerome Powell, who recently appeared on the CBS News’ "60 Minutes," show said he believes the US economy will begin to grow "much more quickly" along with job creation. However, Powell warned that the greatest risk for the economy is a resurgent COVID-19 outbreak and noted cases across the USA have been slowly increasing, which he called "troubling." Overall, Powell struck an optimistic tone and pointed to forecasters who predict a GDP growth of up to 7% for 2021, which could be the largest increase in three decades. Inflation is also another major factor we are monitoring and if the rise in inflation is not temporary, and instead implies that the trillions of stimulus dollars combined with a looming economic reopening and massive pent-up consumer demand causes a structural rise in inflation, then the outlook for the stock market will change, and likely not for the better. But knowing that this inflation wild card is still months away (at least so for now) affords the benefit of the doubt that inflation may still be contained, although we will be watching inflation stats closely going forward. Accordingly, we will remain “tactical” in our approach to managing money focusing on sector allocations and great security selections as markets and new technologies continue to evolve.
We continue to send our valued clients timely updates, videos and newsletters via email, so please call our office if we do not have your current email address and also advise us of family, friends and co-workers who you feel will benefit by also receiving our timely and informative email updates. As a Certified Financial Planner, my responsibility is to keep track of your investments and to develop appropriate investment strategies in an ever-changing world to help you be in a better position to reach your long-term financial goals. I am focused on preserving principal, providing dividend yields and interest above bank earnings rates while still maintaining the potential for capital appreciation. When it comes to your investment portfolio, I believe the most prudent strategy is to maintain a long-term perspective, but be flexible and open minded in an ever changing financial environment.
Al Procaccino II, MBA, CFF®, CFP™, CFS®
President & CEO