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Bitcoin is starting to outperform gold again. Bitcoin has been moving up relative to gold. Many people are saying we're in another supply shock and we are when it comes to oil for sure, but we are not in a broad-based supply shock like we were after COVID. Nothing like it. In fact, quite the opposite in housing.
Kathy Wood is sounding the alarm on a massive shift in the global economy and Bitcoin is right at the center of it. As gold prices stumble and traditional indicators flash warnings similar to the 1970s, Wood points out that Bitcoin is officially starting to outperform gold once again. While the Fed maneuvers through Trumpanomics and shifting interest rates, Wood explains why Bitcoin isn't just a digital asset.
It's a crucial hedge against the deflationary forces of AI and robotics. . Here are a few market indicators. We're seeing the S&P to gold and we've been watching this carefully. Remember, it was it was a leading indicator for some very bad times in the '70s. And there are some strategists out there who think we're going back into those bad times.
We do not, but this is uncomfortable in that it has tipped down. This is the offset to some extent until very recently. It's crude oil. S&P to crude oil and that uptrend is still in place even with the the really near more than 50% increase in oil prices. Here's Bitcoin to gold. Bitcoin is starting to outperform gold again.
Gold peaked January 28th, the day that Warsh was announced as the next Fed chairman if Congress approves him. And and he is slightly hawkish. So, Bitcoin has been moving up relative to gold. That's that's interesting. And then this one is still a puzzle. Why is that green line, metals to gold, still going down?
Is it China? Is something really wrong in China? I don't know if it's just China. But it is puzzling, especially now that the gold price has has gone down from nearly, I think it was almost was it $5,600 down to $4,400. We haven't seen a clear turn in this in this variable, which is quite interesting.
It used to correlate very well with the with the 10-year Treasury yield, which you see in purple there. They they parted ways in '22 when the Fed started tightening. And I would say when central banks started selling gold, I mean buying gold and selling dollars. And again, the yen carry trade unwinding starting in the summer of '24.
So, all of those should be in there now and my guess is that the the the 10-year Treasury yield is probably going to fall because we've had a lot of major forces pushing it up. Not the least is of which has been the recent flare-up in commodity prices. If we're right and supply, the supply side of the economy is coming to the rescue, we're we're probably going to be surprised at um
interest rates coming down as opposed to going up. And here, credit default swaps on banks. You know, private credit is this infecting is it going to be systemic issue? This chart would suggest no, it's not backing up into the banking system. And this is the high yield chart. So, junk bonds relative to Treasuries.
They're not seeing any any anything on the horizon bothersome. In in fact, they're near all-time lows. So, these charts, these last two charts, would say nothing to worry about. We know there's a lot to worry about. The market has gone through about a volatility here. But if we're right that there's a boom, that inflation is going to resolve to the downside after this conflict passes.
And that productivity, profitability is going to increase. We think that's very positive for the equity markets. Profit measures came out for the fourth quarter. And they look very good. Now, again, active management's going to be important here. Is margin compression going to be a problem for consumer goods and related companies?
In the short term, we think it is. Longer term, we think it will be another reason for companies to harness AI and other productivity tools to to stem decline in margins and and maybe even increase margins in the future. So, as measured by Trueflation, the year-over-year price consumer inflation rate is about 1.7%.
Now, it got as low, I think, as 1.4 or 1.3. Has come up a little bit here, but has not gone anywhere near that 3.4% PPI inflation rate. Even though gasoline prices are a big a big psychological and and impactful category, other prices must either be coming down or or or I find it difficult to explain.
And even more so when we look at the core Trueflation inflation rate, it's at 1.1% and you can see it struggled in the 2 to 3% range for 2 and 1/2 years or so. It has resolved to the downside. And if you look at what's going on right now, we haven't seen this kind of CPI inflation core inflation rate since COVID when we were in dire straits.
So, that is very interesting. Here are some other reasons inflation's coming down. Again, very different from post-COVID when we had that supply shock. And many people are saying we're in another supply shock and we are when it comes to oil for sure, but we are not in a broad-based supply shock like we were after COVID.
Nothing like it. In fact, quite the opposite in housing. Housing inflation is nil for existing home prices and still negative for for new home prices. And and yet here you do see the supply shock when it comes to oil. How long will this last? Well, the longer the Middle East turmoil continues, the longer this supply shock will last.
And the question is, who's going to pay for it? Is it going to get through to the consumer price level? Or is it going to be eaten by the the by by the consumer companies who have to pay up, but can't get their pricing through to the end consumer. And we have a strong point of view about that. Here's another chart.
This is commodity broad-based commodity index. And you can see a bit of a supply shock, but I would submit that it is more than that. It is demand going up relative to supply. And this is a call for action, a call for more supply. Again, who's going to pay for this is the question. Is it going to get through to the consumer price level?
While macro indicators may appear mixed, credit markets offer a more reassuring signal. Measures such as credit default swaps on banks and high yield spreads show little evidence of systemic stress. This is particularly important given concerns about private credit and potential contagion. If these risks were materializing, they would likely be reflected in widening spreads and rising default insurance costs.
Here is another take and I'm going to credit Don Luskin from TrendMacro for this chart. And what he does, trying to help people understand the the debt and the deficit situation, is he says you know, when you compare debt to GDP, what you're comparing is a balance sheet item to an income statement item, the equivalent of.
Really, you should be comparing debt to equity. So, equity is the the black line. Debt is the purple. And GDP is the red. And if we go to the next chart, you will see that while debt to GDP is above one here, the one ratio, you can see debt to equity is at .5. And actually it's very low by historical standards.
Uh the other thing I will say is if you look at debt to assets, another balance sheet item, um the asset side of the US balance sheet is really at cost. What did the land cost? What did the gold cost when it went on to the federal balance sheet? Uh well, some of these costs were 50 to 75 years ago. And so if we if we really thought about this, we could sell some of our land and I forget how much land the government owns.
It's a substan- I think it's over a quarter of all the land in the United States. Uh so we could defray the debt that way. Now, I'm not recommending it and we do want uh uh discipline. So I'm very happy that there is uh a concern about the deficit and the debt uh because if you think about government spending which is the problem, um every incremental dollar in government spending is effectively an incremental tax dollar.
We've either got to pay for it today uh in taxes, tomorrow in taxes, or the most regressive tax of all is inflated away, which we don't think that's going to happen, uh but that is what happened during the '70s. Another hotly debated issue is the dollar. DXY is the trade weighted dollar. It's only six countries.
It's not the 26 countries in the Fed's measure. Um it doesn't include China, the the yuan, for example. Uh but how high will the dollar get? Last year the narrative was the US exceptionalism is dead, the dollar is in decline, and uh it's inexorable. It's it's going to continue. And you can see here um many people um believe that the dollar will end the year as measured by the DXY at 103.6.
Now, that is very interesting to us because you can see on the next page where we are in the context of history. Uh we are just below 99. So what Cal Shay is suggesting is uh the the people who are um willing to trade or make a prediction, uh they actually think the dollar is going to go up. Uh and that goes against conventional uh wisdom.
Now, we agree that uh it is going to go up uh mostly because of what I just mentioned about foreign direct investment and our capital friendly, business friendly tax policies, also deregulation is um we think going to increase the return on investment in the United States relative to that in the rest of the world.
That is dollar positive. And we take this chart all the way back into the early '80s. Why? Uh it is uh because we like to illustrate what happened during Reaganomics. And we think Trumpanomics uh resembles greatly actually uh Reaganomics. And look what happened to the dollar back then. Now, it was coming from the depths of despair in the late '70s, but it really went into overdrive to the point where all the treasury and monetary ministers around the world got together and said, "This is becoming a deflationary risk to the rest of the world." Uh because a lot of dollar a lot of debt is denominated, was, and still is denominated in dollars.
So the dollar the debt service was getting more and more expensive back then. Uh we think we're not going to see a surge like we did in the early '80s, but we think the pressure is to the upside. And if you look at this chart in in the context of history, you will see that we are closer, if you take out that that boom in the early '80s, we're closer to the higher end of uh the dollar's range than we are to the lower end.
And again, I think that goes against con- conventional thinking right now. Look at monetary policy from a very short-term point of view, meaning it's the yield curve as measured by the two-year treasury yield minus the three-month treasury yield. Um in negative territory, that would suggest the Fed was leaning uh I would say hawkish or uh restrictive.
And you can see we've just crossed into a positive slope. Uh just crossed, so uh maybe the Fed is uh operating at uh a neutral rate. It's not too hawkish, it's not too dovish. Uh we're in a neutral zone uh right now. And uh this chart I've featured a number of times. I I find it fascinating. Uh this is the yield curve again, but it's the 10-year treasury yield uh minus the two-year treasury yield.
And this is the one most commonly referenced. And you can see the downtrend that's been in place really since uh the '08-'09 uh debacle, the global financial crisis. And the reason I'm interested is even after COVID, when monetary authorities around the world were, you know, put the accelerator to the floor and fiscal policy uh was profligate.
I mean, just money thrown at the problem around the world, we couldn't get this measure of the yield curve back into that 200 to 300 uh basis point range. Uh and I just have been wondering, what does that mean? Uh effectively it means that that the long-term treasury yield was not following short rates the way it normally does.
Uh and why would that be? Uh and here again, have we hit another peak and are we tipping over again? I don't know. But what that would tell us, and of course consider the source, it would fit in with our sort of deflationary undercurrent thesis around technology. Uh uh and and we saw this in the 50 years uh that ended in the late '20s, uh the late '20s in the 1900s, uh which was also ripe uh with uh innovation.
So telephone, electricity, internal combustion engine, uh all um riding on top of the railroads that were built out in the 1800s. Um well, the equivalent to the railroads this time where where is the internet in the digital world. And now we have uh we have robotics, energy storage, AI, very importantly AI, uh blockchain technology, and uh multiomics technology.
All of those are highly deflationary trends. And could the yield curve be picking up on that? We think it might. What emerges from Cathie Wood's analysis is a picture of an economy in transition. Traditional indicators are sending mixed signals, but beneath the surface, a powerful set of forces is reshaping the macro landscape.
Inflation, while still present in pockets, appears to be moderating. Interest rates may be closer to a peak than a plateau. And technological innovation is exerting a deflationary pressure that challenges conventional economic models.
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