An Inflationary Avalanche Leaves No Ambiguity over Impending Rise of Safe Assets

Inflationary pressure continues to weigh on every single thing around us, and once this gargantuan spending call is ratified by Congress, investors will see an avalanche of oil being poured into inflationary flames. So, in our view, under that scenario Fed’s argument that inflation is a purely economic reopening and, hence, transitory phenomenon, will be baseless. In the early 1970s, the Fed chairman insisted that inflationary trends were transitory and best ignored. Some economists who lived at that time are quite vocal in their worries that today’s Fed is, perhaps, making the same mistakes.

If more proof is coming, it means investors must rethink the entire structure of their portfolios heavily tilting towards a mix of safe havens and fast growth stories as opposed to value and dividend stocks.

According to The New York Times, Biden's budget request calls for total spending to rise to $8.2 trillion by 2031, with deficits running above $1.3 trillion throughout the next decade. The growth is driven by Biden’s two-part agenda to upgrade the nation’s infrastructure and substantially expand the social safety net, contained in his American Jobs Plan and American Families Plan, along with other planned increases in discretionary spending.

The levels of taxation and spending in Biden’s plans would expand the federal fiscal footprint to levels rarely seen in the postwar era to fund critical investments.While his plan projects additional tax revenue down the line, the United States would run significant deficits as it borrows money to finance his plans. Under Biden’s proposal, the federal budget deficit would hit $1.8 trillion in 2022.

As last week’s data indicates, for April 2021 the Personal Consumption Expenditures, known as PCE index, rose 0.6%, marking the biggest monthly increase since 2008. The April conventional CPI, consumer price index, which came out earlier in May, showed a headline gain of 4.2% YoY, the highest level since 2008. The core CPI, ex food and energy, came in with a 3% annual rate. Are international dollar investors still comfortable with such a development? Probably not.

To underpin legitimacy of the game changing fears, on Tuesday, the Fed revealed that the amount of overnight banks’ reserves parked at the Fed rose by another $38 billion to $433 billion, up from $394.9 billion last Monday, which itself was the 3rd largest on record, up a whopping $190 billion in one week. This means the November-December 2019 repo crisis is well outstripped by the current events. This also means low yield bonds won’t be welcomed for inflation protection considerations for the time being, but most capped assets like commodities, including wood, oil, petrochemicals, metals and, certainly, gold, on one hand, and cryptos, on the other, have good chances to appreciate no matter how unimpressively some of them look now.

As it turns out, large investors – the so-called "whales" – bought a large amount of Bitcoins (BTCUSD) when it recently plummeted to a price level of around $ 30,000. A recent report by blockchain research company Chainalysis reveals that the whales bought 77,000 Bitcoins worth over $ 3 billion at the end of last week. The company came to this conclusion from the analysis of transaction data available, for example, in the Whale Alert Telegram group (https://t.me/whale_alert_io) and many similar open sources.

When Bitcoin's price briefly dropped to a 5-month low, below $ 30,000 on May 23, in the wake of the news that the Chinese authorities were about to hit cryptocurrencies and local crypto exchanges were suspended due to uncertainty, massive entries by institutional investors were recorded when Bitcoin was trading in the $ 30,000 to $ 35,000 range.

According to the report, although last week many of them sold $ 3.2 billion worth of Bitcoins at a loss, these were still smaller amounts of cryptocurrency compared to losses in late 2017 and mid-March 2020, when prices also fell significantly. This circumstance suggests that such episodes of hyper volatility will gradually smooth out over time.