China has issued a digital Yuan and it's got governments around the world scared and in catch-up mode. So what's the big deal? The world is moving at breakneck pace to a digital based currency system. Cash is being phased out. Consumers around the world are paying increasingly with debit and credit cards. Cash is being used less and less and this trend has only accellerated since the advent of COVID. It only makes sense in a predominantly digital commerce world that this would be accompanied by government issued digital currencies.

When Facebook announced its intentions to launch Libra, the world took notice and action. When a public company with 2 billion users starts issuing its own currency the financial elite start to panic. Just imagine how much power would shift to Facebook. It could become one of the largest financial payment networks in the world overnight. As if it did not have enough power and influence right now, a move to digital banking would tip the balance of power even further to the digital elite. Mark Zuckerberg's argument was simple. "If we do not do it, someone else will" and that is exactly what is happening with China announcing the launch of its digital currency. However, the implications of China announcing a digital currency are just as far reaching as Facebook's announcement.

From a Geo political and economic standpoint, China's launch into the digital world is a significant threat to the dollars global dominance. A digital currency means the ability to bypass US oversight allowing countries that the US is looking to penalize with sanctions, for example, to bypass international payment networks such as SWIFT (which the US monitors closely) and exchange funds anonymously. China's game plan to weaken US dominance in the world is not exactly a secret. As we have written in previous articles, there is a global economic fight for dominance going on between China, US and the EU (less so). One of the last significant bastions of US power in the world is the dominance of the US dollar as the global reserve currency. Almost 80% of all global trade is done in dollars. China is going to keep doing everything it can to disrupt the last bastion of US power.

As we mentioned in part one of this article last week, wealth management firms are managing a cross-section of economic conditions and asset classes that each carry comparative risk. We define comparative risk as the "opportunity cost" of asset allocation in which "yield" is the primary measure by clients.

How much "risk on" or "risk off" is the asset allocation question in the midst of what are inevitably "unknown timeframes" and economic conditions that can outlast any rational mind.

In this article we will talk about some other dilemna's facing wealth management firms and their clients:-

In the last months we have written about bubbles, bonds and the shifting balanced portfolio model in an inflation prone environment. We have a unique mix of variables in play today unlike any other time in history. Zero to 1.6 percent bond yields that are unlikely to cover the rate of inflation, so in essence, negative yielding. There is little to no room for bond prices to rise so the next logical question is: What's the economic rationale for holding bonds? For most institutions, at this juncture and in a climate of forseable low interest rates per the Federal Reserve, bonds are looking increasingly like a losing proposition.

As Christina Lagarde, the head of the ECB (European Central Bank) recently commented "Higher market interest rates pose a significant risk to financing conditions (e.g. a recovery). Rising bond yileds could lead to premature lightening" of credit conditions which of course would hamper yes, you guessed it, a recovery. COVID has walloped the Global Economy, created sky high unemployment and generated a bigger wealth divide. The answer per the Federal Reserve and ECB is continued stimulus and low, exceedingly low, rates.

The Bond Dilemma unless you are Microstrategy

De-FI is an abbreviation for Decentralised Finance and it is changing the global financial landscape. So, what exactly is decentralized finance? De-Fi has arisen in sync with the blockchain revolution and a smart contract platform called "Ethereum" which is an entire universe or the first world computer providing a base technology layer on which every conceivable application is being built to transact business in a secure, borderless and efficient manner. Decentralized Finance or the ability to trade stock, token or asset transactions on decentralized exchanges "peer to peer" without a middleman such as a traditional stock exchange, dramatically lowers the fee structure of what you would pay on a traditional exchange.  

You can now trade stocks, tokens and soon, every type of commodity, asset and collectable "peer to peer" directly without a "trusted middle party" e.g. a bank or stock exchange.These new decentralized platforms also known as DEX's are "Peer to Peer" and "trustless" meaning they do not require Person A knowing and trusting Person B to make a trade or exchange. The Decentralized Exchange (DEX) itself provides the mechanism for a secure exchange.

The Gamestop debacle has opened people's eyes to the fact that not only are "free trading" platforms such as Robinhood not free, they are also subject to censorship rendering the retail investor powerless when it suits the centralized exchanges. Retail buyers and sellers may not know it, but they pay a mark-up or mark-down in the price of any financial instrument (when they buy or sell) essentially paying a premiium for each transaction which is pocketed by the exchange and its partners. Furthermore, as Gamestop investors found out, once losses to a select number of hedge funds became too acute, Robinhood stepped in - under pressure from its peers - to halt or limit trading to the detriment of retail investors.

Last week we wrote about trends that we think will continue into 2021 from 2020. Big technology shifts across AI, 5G, IOT, Blockchain and so forth are going to disrupt and accelerate change across many industries. Banking & Finance is one industry for example that is being challenged by the growing defi (decentralized finance) markets which now have north of $20 billion of assets in their ecosystem. We expect this trend to innovate and grow rapidly providing a growing number of options and products to serve the market.

With a new incoming administration, the stimulus packages will continue. Aside from the growing national debt and its staggering size, this continued onslaught of money flooding into the economy will continue to fuel inflation and devalue the US dollar. The latter alongside low interest rates will force asset managers and every day investors and retirees to seek yield that can offset the loss in value of holding cash.

1. The enormous injection of monies into the economy will cause most quality hard assets to rise in value