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A Window into Institutional Adoption of Digital Currencies

Institutional adoption of digital currencies and payment methods is on the rise. We are seeing a tectonic shift in the payments landscape along with the rise of Bitcoin. However, behind Bitcoin, blockchain companies and projects are looking to reinvent the way individuals and entire industries transact across the entire global industrial landscape.

One of the the core concepts behind blockchain is "trustless" transactions which essentially means transactions between two parties that are controlled by a piece of computer code "A smart contract" that is programmed to embody the transactional details and execute automatically. Essentially any "exchange" of property or digital property can be programmed accordingly removing the need or reliance on centralized parties or intermediaries to broker an exchange for fees. The movement to decentralised finance for example aims to remove "banks" and "brokers" as intermediaries allowing what is known as "peer" to "peer" transactions. Individual A can buy a stock or any asset directly from Individual B in a secure and trustless manner or Individuals can send monies "peer to peer" directly to one another without a bank as an intermediary.

Every transaction on the blockchain is recorded in a tamper proof ledger. No one can go back in time and modify the ledger which makes blockchain one of the most secure and transparent technologies in history to date.

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28 Trillion Reasons to be Vigilant

$28 Trillion - take a moment to reflect on this number - is the current total of the US National Debt. As of June 17th it is precisely $28,311,074,615,442.85. We titled this blog post "28 Trillion reasons to be vigilant" because this number is not going down, has not gone down in the last 15 years and is unlikely to go down. So, what does this mean for the USA and for you?

1.The cost of servicing the national debt as a percentage of US revenue is going up.

2.If interest rates rise significantly, even as high as 3-4%, how sustainable is servicing the national debt? The Fed has a significant incentive - 28 trillion incentives - to keep interest rates as close to zero for as long as possible without going into negative yield territory. This would very likely have been the case had COVID never happened. COVID however has provided the US a perfect storm to do keep interest rates at all time lows and inject $6 trillion and counting into the economy. This serves several national purposes: It provides massive liquidity to withstand the shock of COVID, it devalues the US dollar by doing so, which in turn dilutes the national debt value, it keeps interest payments on the national debt as low as possible and it allows for the most optimum conditions for the economy to return to pre-COVID employment numbers.

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The Melt Up Ingredients -Stimulus, Debt, Inflation & Low Interest Rates

We have seen this movie before. After the roaring 1920's, the stock market melted up to euphoric highs only to crash in stupendous fashion. In the internet boom of the late 1990's the NASDAQ hit likewise euphoric highs only to crash back down to earth. Following extremely lax lending practices coupled with low interest rates the flying real estate boom coupled with mortgage backed securities fueled the 2007/8 great recession taking the entire banking and monetary system to the brink. Massive stimulus injections lifted us out of that great depression.

Economists have long seen repeating economic cycles in history. Booms followed by Bubbles and then Busts with long periods of economic stagnation, only for the cycle to repeat. We have written about this before but want to write about it again because while we have seen this movie before in the US and all around the world, the movie we are seeing unfold the US today is different to one's we have seen in US history.  

The convergence of record national debt, stimulus, low interest rates, inflation, a booming stock market in the midst of a global recession have created a mix of ingredients that could fuel one of the great bubbles and busts of the modern era.

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Inflation - How Big a Risk Is It?

The exponential rise in the national debt since COVID began by the tune of more than $3.8 Trillion of stimulus monies was inevitably going to lead to a wave of hard asset inflation as well as consumer inflation. The only question was "how much"?

In the last couple of days, the markets woke up to the fact that inflation might be worse than the federal reserve predicted. The CPI (Consumer Price Index) numbers released for April 2021 rose 0.8% versus an expected rise of 0.2% month over month. Should we be alarmed and worried? In the short term, the answer is "not really". If you have been tracking first quarter earnings calls, you will have heard many CEO's describing how tight supply chains are right now. Higher costs of raw material inputs are being passed onto the consumer. As COVID restrictions ease and consumer demand for goods and services rise alongside tight supply chains operating on "just in time" demand cycles, the natural consequence of greater demand and tight supplies is higher price increases.

It is difficult to say how inflation numbers will fare over the coming months as it will take time for supply chains to re-calibrate and meet rising demand.  However, as this occurrs, inflation numbers will likely decrease as supply increases. Overall, however, we expect the inflation trend to show up as net higher consumer prices across most hard and soft asset categories, compared to before the pandemic.

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The Impact of The Biden Tax Plan

Joe Biden announced his new trillion dollar infrastructure plan last week and how he intends to fund it, which sent chills through the markets and the $400,000 plus annual income earners. Of course, this should not have come as a surprise. The odds of the Biden Administration not implementing such a key campaign promise was close to zero. What the announcement did do was sound the alarm ammong the top segment of american earners that it was time to take action and evaluate steps to mitigate taxes going forward under the likely scenarios outlined by the president.

The actual proposal however still needs to pass the chambers of congress and the resulting outcomes will not be known until it does. It is likely that the proposed announcement of a hike on income and capital gains taxes was a negotiating tactic and it would be unlikley that long term capital gains would be as high as the 39.6% proposed rate and more likely to be sub 30%. In addition, it is anticipated that there will be an increase in estate and gift taxes which will also require heirs to pay capital gains taxes on assets above a certain amount that they inherit.

The cosy tax rules governing asset inheritances which has allowed wealth to be locked up generationally without taxes needing to be paid on any assets held for the long term looks likely to change. The Biden infrastructure proposal needs funds to pay for it and just adding to the national debt to pay for it is not a solution. In a predominant capitalist society the spoils of industry and most advantageous tax rules go to the few while comparatively much larger segments of the population live on sub $15/hour wages and are unable to cover the increasingly expensive needs of life.The middle classes are shrinking and the working classes have felt left behind.The new Biden Tax plan aims to address some of these imbalances.

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1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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