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Bitcoin: a symptom of market mania — or the new gold?

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The price of bitcoin has soared eightfold since March. It was $5,000 a coin then. It was over $40,000 this week.

It is one of the best performing things you could have held since the pandemic began. That will have felt great for its early adopters. But it now leaves pretty much everyone in the markets in something of a quandary.

Do we buy or do we sell? This is the royal we . . . my own bitcoin holding is not big enough to bother selling. Is the exponential rise in the price of bitcoin yet another symptom of the outbreak of speculative mania in markets, a spillover from the rampant overvaluation of the US tech sector that will eventually prove to have no intrinsic value at all and fall to zero or thereabouts?

Think Tesla with no actual cars. Or is it something else altogether — less a mania in the tradition of tulip bulbs and Beanie Babies and more an anti-mania in the tradition of gold?

Think of the reasons to hold gold. If inflation is coming (and it probably is) you want to hold a real asset that can hedge against it — one that can’t be inflated away by relentless money creation and currency debasement. That’s particularly the case in an era of very low interest rates. If governments work to keep interest rates lower than inflation in order to reduce the real value of their horrible debt burdens, everyone knows they need a safe haven, but everyone also knows the traditional ones (government bonds) no longer offer that safe haven.

That turns us to gold, the one asset that has a 3,000-year record of protecting purchasing power. No wonder the gold price is up around 40 per cent since 2018.

I hold a lot of gold for all these reasons. But here’s the thing. Might bitcoin be better at being gold than gold? The managers of the new SkyBridge Bitcoin Fund certainly think so. The supply of gold isn’t completely static, they say — it rises at about 1.25 per cent a year as more is mined. It can be expensive to store and tricky to transfer around the place in its physical form. It is easily confiscated and it isn’t particularly easily divisible in a hurry.

Bitcoin has none of these drawbacks. The supply is inelastic and capped (only 21m digital coins will ever exist). You can send it around the place as easily as you would an email (as long as you don’t lose the codes that allow you to access it). It’s fungible, resilient, verifiable, independent of any government and crucially easily divisible (I own a total of 0.0066 of a bitcoin).

Transactions in it are permanent and immutable: no institution can erase them. You get the idea. Finally it is a millennial thing. A generational transfer of wealth will gain speed over the next 20 to 30 years. When “wealth is owned by younger people . . . digital currencies will gain preference relative to anachronistic gold,” says SkyBridge.

Add it all up and it makes perfect sense. SkyBridge analysts are not alone in their passion here. The big driver behind the recent rise in the price of bitcoin has been institutional adoption, with fund and wealth managers beginning to see bitcoin as a legitimate portfolio diversifier.

In the UK the big news has been Ruffer, the investment manager, putting around 2.5 per cent of its Ruffer Multi-Strategies Fund into bitcoin at the end of last year (good call so far!) on the basis that the current macroeconomic environment (extreme monetary policy, ballooning public debt, anger at governments) provides the perfect environment for an asset that “blends the benefits of technology and gold”.

You’ll be ready to buy in by now. So how rich will it make you? The bulls like to start with the size of the gold market (the value of all gold above ground at the moment is about $12tn) and go from there. This brings JPMorgan to suggest a long-term price possibility of $146,000 and cryptocurrency investor Tyler Winklevoss to offer $500,000 as a “conservative target” if bitcoin becomes a “gold disrupter” and no upper limit at all if it ends up being commonly used as a payments network rather than just another asset to hold and pray over.

A year ago that would have sounded nuts. Now, it looks as if a wave of mainstream institutional investment is really under way — watch out for the multi-asset fund your pension pot is invested in acquiring some). The network is expanding. It appears to sound perfectly reasonable to a large part of the market. $1m here we come.

OK. Let’s come back to earth. Bitcoin has passed a lot of milestones. It has got this far without being banned by governments. It has achieved institutional acceptance (making it much less likely to be banned in future). It has hung on to its number one crypto status and it has made everyone who said it was going to zero feel a bit silly (and a bit poorer than they needed to be).

But none of these things give it intrinsic value. For that, bitcoin needs not just the scarcity its fans rave about: scarcity does not in itself give a thing value. It needs more active investors, it needs a much deeper and more liquid market (only a tiny part of the bitcoin market is ever traded — hence its volatility) and it needs wider acceptance.

All these things may happen. And I’ll be buying a little more as a hedge against that — not so much as to ruin me if it goes to zero, enough so that I don’t feel too awful at $500,000.

But the euphoric price rises of the last few weeks still scream mania at me. There is hysterical anger on social media against critics of the oddly specific targets. When no one knows anything, why say $146,000, why not “around $150,000”. Then there are crashed platform websites — Coinbase had a bad day on Wednesday. All these things will have a familiar feel to bubble watchers.

My go-to inflation hedge will remain gold for the simple reason that it isn’t new. I’m nervous about the next few years and I want a portfolio protector that has a multi millennium record in the safe haven top spot. I’m also going to take the main lesson from bitcoin (when fixed supply meets rising demand, prices soar) and bump up my general commodity holdings. As economies recover this year they might not rise eight times, but they should see the same (short term at least) dynamic that has made bitcoin do so.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. Views are personal. merryn@ft.com. Twitter: @MerrynSW





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Vale chief rejects talk of iron ore supercycle

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Iron ore is not on the cusp of a new supercycle, according to the head of one the world’s biggest mining companies, who expects demand for the steelmaking ingredient to flatten out after a couple of years of the current tightness.

Eduardo Bartolomeo, chief executive of Brazil’s Vale, said the record surge in iron ore prices over the past year was very different to the boom of the early 2000s, which was driven by China’s rapid industrialisation. 

“In the last supercycle we had urbanisation in China. It was a structural change. A shock in demand,” he told the Financial Times. “We are not talking about a huge shock in demand now. I would say it is marginal. It is not a shock.”

But he added that, with big global economies revving up and iron producers running at or near capacity, prices could remain elevated until 2023.

“Although there is strong talk about cuts, production is still going up in China and now you have Europe coming back and the US announcing a huge stimulus package. There are also restrictions on supply,” he said. “This market is going to be tight for a while. At least two years.”

Iron ore has spearheaded a broad-based rally in commodities over the past year, rising more than 150 per cent to a record high above $230 a tonne last week, mainly on the back of strong demand from steel mills in China, before paring gains and hitting $209.35 on Friday.

As China’s steel production continues to expand analysts believe prices can remain around current levels but say the market will be highly volatile.

Iron ore’s turbocharged performance has been a boon for big producers including Vale, which require a price of only about $50 a tonne to break even.

It has fanned talk of a new commodities supercycle — a prolonged period where prices remain above their long-term trend, usually triggered by a structural boost to demand to which supply is slow to respond.

Following a deadly dam disaster two years ago that killed 270 people, mainly company employees and contractors, Vale was forced to curtail production.

Its output fell from a planned 400m tonnes a year to about 300m tonnes in 2019 and 2020, and the company lost its position as the world’s largest iron ore producer to Rio Tinto, which has managed to produce about 330m tonnes in each of the past two years.

Bartolomeo said Vale eventually needed to increase production to 400m tonnes because iron ore was a “high fixed-cost business”. However, he said the company would do so in a “very paced way”, mindful of safety.

Erik Hedborg, analyst at the CRU consultancy, said Vale’s journey to 400m tonnes would take time because it required the “restart of many mines, which will go through several complex licensing processes”.

Over the medium term — from 2025 to 2030 — Bartolomeo said Vale expected diminishing demand for iron ore from China because of increasing use of scrap in electric arc furnaces.

“Everybody talks about the circular economy. Scrap is going to come to China. It has to. We see it diminishing demand for iron ore from China.”

Bartolomeo said there would also be a shift to higher-quality iron ore as the steel industry sought to reduce emissions by moving to less polluting methods of steelmaking such as hydrogen-based production.

“All the roads lead to high-quality iron ore and Vale is very well positioned for that,” he added. 



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US banks could cut 200,000 jobs over next decade, top analyst says

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US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”



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Inflation wild card unsettles markets

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Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

michael.mackenzie@ft.com

*The value of core inflation has been changed since first publication.



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