As Independence Day approaches here in the United States I am grateful to all of you who strive for freedom, whether in word or in deed.
Current Market Conditions
For the past few quarters, the return of inflation has been a key investment theme. Inflation acceleration or deceleration drives long-term Treasury rates, as well as commodity prices, including oil, copper, lumber, corn, and wheat.
Inflation acceleration has recently peaked, and we are now seeing ongoing elevated, yet decelerating (quarter-over-quarter) figures. How this affects different asset classes remains to be seen and is something I am watching closely.
The post-Covid economic recovery has been robust to date, but is also in a state of flux. While the services sector is seeing unprecedented year-over-year growth, the goods portion of the economy is stagnating. Supply constraints are very real and are hampering production of goods in the US and around the world.
Bitcoin remains nearly 50% below its April all-time high of approximately $64,000. Given our outsized position of this relatively new (12-years old) asset class across our portfolios, we have certainly felt the effects of this drawdown on our recent returns.
I am increasingly optimistic, however, that we have endured the majority or all of the pullback in price for 2021. The expulsion of Bitcoin miners from communist China by the CCP in June has caused a massive translocation of miners to other free countries (especially the United States) who are more welcoming of this decentralized monetary network, which offers social justice, freedom, security, and exponential monetary benefits to its users.
It is estimated that 2% of the world’s population currently uses or holds bitcoin, and this number is approximately doubling every year. The adoption of Bitcoin is akin to the expansion of the internet in the 1990s and 2000s, and its benefits are even more far-reaching.
The fact that El Salvador has declared Bitcoin as “legal tender” and has decreed that this parallel financial system be implemented throughout its borders by September 2021 is breathtaking. Bitcoin’s adoption by nation states across Central and South America, as well as Africa and Asia, in the coming years is inevitable–in my opinion–and will lead to its ultimate, ubiquitous usage.
As the long-term log chart of bitcoin’s price shows in the above graphic (“Bitcoin / U.S. Dollar”), the price has risen exponentially over the years, and is currently holding above the 12-month and 48-month moving averages. These findings are evidence of an extremely strong secular bull market… one that may endure for decades. Based on the rapidly growing adoption, strength, and utility of Bitcoin around the world, this recent 50% pullback in price provides a perfect opportunity to add to our long-term positions.
We are very early days in this incredible story, and I am confident that we will benefit greatly as so-called “early adopters.” Volatility is a small price to pay for exceedingly large long-term gains.
Strategies for Vailshire’s Separately Managed Accounts
Short periods of underperformance are to be expected within any portfolio, and ours is no different. However, given the systematic, full-cycle investment strategies used within Vailshire’s SMAs, such periods of suboptimal returns are generally short-lived. More importantly, they have historically provided the best opportunity for new investments and/or rebalancing for future profits.
Warren Buffett’s adage of being “fearful when others are greedy and greedy when others are fearful” holds especially true today. We have used recent divergent price action between our stocks and bitcoin holdings to trim the former and increase the latter.
Over time, this practice has served us very well. I expect no different in the coming quarters and years.
Depending on your financial objectives and individual account investment privileges, Vailshire’s separately managed accounts are currently allocated in the following manner:
- 27.5-40% US stocks (large, mid, and small caps, including technology and energy stocks)
- 10% emerging market stocks
- 7.5-15% cash
- 30-50% bitcoin, ethereum and/or related proxies (based on personal preference and trading permissions)
- 5% commodity-based equities
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)
The recent peak in inflation acceleration is leading to a transition period across stocks, bonds, commodities, and currencies in the US and around the world. As such, we are in a holding pattern within our portfolios until a decisive direction is ascertained across these many asset classes.
The pullback in bitcoin related to communist China’s ban of Bitcoin miners presents an extremely lucrative opportunity for those of us who understand the long-term prospects for this rapidly expanding monetary network. Based on my extensive research, I firmly believe that we will look back at today’s bitcoin price of approximately $33,000, and be astonished at how cheap it was to obtain in mid-2021. Six-digit prices are likely in the coming years, and we will do well to accumulate and hold a sizable portion within our portfolios.
Needless to say, I am exceedingly optimistic about our Vailshire portfolio positions for the coming quarters. If you have been wanting to open a new account or put some new cash to work, today would be the perfect day to do so!
Living well and investing wisely with you,
Jeff Ross, MD, MBA