The short end of the U.S. yield curve has been pinned to zero for some time. It’s zero. We know that. The Fed says it will stay there for some time.

And, Powell says he will not go to negative nominal rates.

OK, so they are our assumptions for today.

Therefore, for the Fed to think about raising short term interest rates, improvement in job creation will be a key driver, regardless of sporadic supply chain induced inflation in lumber, steel, building materials, etc.

But more recently, 10 year and longer term bond yields have been rising as a result of that inflation, and expectations for higher inflation post-vaccines.

That said, U.S. 10 year treasury bond yield lost around 5% at the end of last week to finish at 1.4%.

Whether that was a reversal of the inflation view, or a rebalancing for some other reason, it’s too early to tell.

But if the Fed implements yield curve control at the long end (10 to 30 year treasuries) to keep long rates low in order to ensure debt servicing costs do not get out of hand, real yields will stay low even if and when inflation shows up!

And if real yields stay low, equities will remain supported particularly at the value/yield end, and yup, you guessed it, gold remains an attractive store of value in the face of inflation.

But so too does bitcoin because as a programmatically finite and fast to transact asset divisible into one hundred millionths (not a naturally finite indivisible asset like gold), it’s an easy to transport store of value that you go to if you don’t like gold.

Bitcoin is gaining increased buy-in from institutional investors and companies that need it to enable customer access to it (like PayPal and square) and those who feel it is a better store of value than cash (Tesla). And, from retail investors who see it as a store of value, or just think it is going to go up.

The switch from gold to bitcoin can be seen in the chart below, and it started around October last year when square and MassMutual tipped a combined $150 million into Bitcoin.

And the next peak you are looking at occurred because of this little announcement from Tesla.

But bitcoin has the additional feature of being able to earn a yield by staking and yield farming via distributed finance platforms, and should therefore be even more resilient than gold and non-profitable (tech) company stocks even if real yields do rise.

And even though Janet Yellen has had a few negative things to say about bitcoin over the past weeks (power hungry and attracts black marketeers) don’t forget that at certain times in history, gold has been confiscated.

Government regulation and risks are always present at the beginning of new trends that threaten the establishment. It’s always the way. But sometimes balanced regulation is the antigen for mass adoption.

In summary, if the inflation we are seeing now in the U.S. (lumber, oil, fertilisers, consumer cyclicals with pricing power, rents, etc) turns to broad base reflation (subject to vaccines working) and yields climb further, then either:

• the entire yield curve gets hijacked and interfered with by the Fed before it goes too high, real yields are capped, the entire curve becomes fake, and gold, bitcoin and other real yield sensitive assets remain supported; or

• Powell or his successor (never say never) normalises rates at the short end too quickly in a knee-jerk response causing insolvency events, equities crash like in 1929, and with so much wealth tied up in equities, welfare and helicopter money starts all over again and creates more debt, more liquidity requirements and yields collapse again.

Either way, the same outcome occurs because the current debt stack is too expensive to service if the 10 year rate goes up by say another 1% to 1.5% (for 2.5% to 3% nominal) - and so the Fed needs to keep a lid on the yield curve and interest rates, if the market lets it- and that’s what we might have been seeing last week.

But for how long?

No one knows. A guess might be until the real economy reaches miniscule unemployment and Biden/Yellen can super-size fiscal growth spending once vaccines are successful and people can start to move about freely.

As I’ve written before, the QE Infinity train to the oceans of endless monetary base is going to be very hard to stop.

Just ask the Japanese.

Shinzo Abe’s deflationary experiment proved the point to those who were betting on reflation to take hold. Stock market investors were mowed down for decades.

Bizarrely, complacency in our growing debt stack, continuing QE Infinity and a train track to monetary debasement nowhere that keeps on getting longer, are providing rocket fuel for #gold and #btc and that’s why the long term uptrend for these assets is attractive.

Despite that, we will continue to see switching between the two due to sentiment and the growing corporate/institutional adoption of programmatic gold 2.0, i.e., Bitcoin.

And we might also see more companies electing to hold their cash in Bitcoin and cryptos and accepting Bitcoin for their products, just like Tesla has announced.

What this means for valuation, fundraising and M&A consideration, not to mention for standard banking versus distributed peer to peer finance, is seriously provocative and fascinating.

Still, the irony is thick when you think that the levels of global debt and the cost of that debt if interest rates were to go too high, may be just the very thing the Bitcoin and Gold power couple need to outperform over the long term.

Exciting times to hodl gold and your Nano X - whistle blows - all aboard?

Mike.