You're Not Maximising Your Savings Returns.
Your savings are losing value - perhaps bitcoin should act as a supplement.
To Investors,
A while ago I watched a video that explained how when you denominate the returns of the S&P 500 index and those of gold by M2 U.S dollar money supply, the returns of those assets are relatively flat. The basic reasoning was that these are the asset classes of choice that the everyday person uses for their savings, but at first glance the performance of these assets has been extraordinary over longer time horizons, however excessive monetary policy has diminished the value of that asset appreciation because your money is losing purchasing power.
The everyday investor should therefore be worried that their savings are losing value.
I decided to investigate how we can supplement our savings to maximise returns.
Here’s a chart showing the performance of the S&P 500 denominated by U.S dollar M2 money supply.
Returns are relatively flat.
Here’s a chart showing the performance of gold denominated by U.S dollar M2 money supply.
Returns are a little better, but still relatively flat.
Here’s a chart showing the JSE Top 40 index denominated by South African rand M2 money supply. (WTH is that?! - we’ll look at this another day).
Again, returns are relatively flat.
Let’s continue with the United States as a case study since the U.S is the most influential economy in the world.
Remember that money makes the world go around.
The reasons money supply goes up for any issuing country are because of price stability and stimulus.
Price stability
Central banks have a mandate to maintain price stability, which includes manipulating the money supply to influence inflation, current interest rates, job availability, consumer spending, business investment, currency strength, and trade balances.
Inflation targeting is also part of that mandate, i.e. using monetary policy to keep the inflation rate at a certain level.
For the Federal Reserve Bank, the target is 2% inflation. For the South African Reserve Bank, the target is to keep inflation roughly mid-way between 3% and 6%.
This is done purposefully to ensure that we spend the money. (Money makes the world go around).
Stimulus
When what started as a banking and real estate liquidity crisis in 2008 spread to other industries in the U.S. and eventually globally, bailouts were introduced to the U.S. economy via a mixture of fiscal and monetary stimulus to avoid a drawn-out recession and possible economic depression. This same playbook played out globally after the COVID-19 pandemic in 2020.
The chart below shows the movements in the Federal Reserve Bank balance sheet, as well as the U.S. dollar money supply. Note the general upward trend, but more importantly the spikes in 2008 and 2020 in reference to the point above regarding bailouts.
The problem with the steadily increasing money supply is that this is a never-ending situation, especially after the 2008 global financial crisis and after the COVID-19 pandemic, because the U.S national debt has ballooned.
And government spending is currently at close to $4 trillion and is continuing to go up yet the U.S government has been running a budget deficit.
The chart below shows the breakdown of the composition of the U.S. national debt as of 2022.
The 58% of the debt owned by other public investors is understandable. The U.S. is the largest and most influential economy in the world, and the U.S. dollar is the global reserve and trade currency. People, countries, and organisations hold U.S. government bonds as reserves for exposure to the U.S dollar and exposure to the United States of America itself.
The noteworthy part is that the Federal Reserve Bank holds the second largest portion of the debt.
Is the Federal Reserve Bank bankrolling the U.S.’s debt and deficit spending?
It’s worth noting that government spending goes towards public programs like healthcare, state owned entities, national defence, social spending, and the like. Therefore, it’s tough to cut government spending.
So, the U.S government is continuing to run up their debt through deficit spending, and the Federal Reserve Bank is continuing to run up its balance sheet. At this point we can’t be sure when these situations will improve because the figures are increasing annually, which suggests that the recipients of these spending programmes need the additional funds as far as we can tell.
Adding to that, remember that the central bank spends by printing cash, so more cash into the system makes existing dollars less valuable.
Now, if your money is constantly being devalued and the government debt is swelling with no end in sight, and your savings are not capturing the full value of the traditional assets they’re held in - how are you investing and preserving your cash?
I pulled a chart showing bitcoin denominated by U.S dollar M2 money supply.
And the following chart compares the absolute performance of the S&P 500, Nasdaq 100, gold, and bitcoin.
So far, bitcoin seems to be the answer, outperforming the assets mentioned above.
This is because bitcoin is a scarce asset with a fixed supply of 21 million bitcoins at last mine and bitcoin’s transparency allows for more trust in the system.
Usually, wealthy investors don’t worry too much about the S&P 500 and the value of gold, because they understand to invest in scarce assets (where supply is not easily manipulated) to maximise returns. So, they invest in real estate, buy sports teams, and buy rare paintings.
Bitcoin allows for those who can’t afford those other assets to invest in a similar manner as the wealthy individuals.
How can we be sure that bitcoin’s past performance will continue?
We can’t. There’s an adage in finance that says, “past performance is not a guarantee of future results.”
But in January 2024, the U.S Securities and Exchange Commission approved the first 11 Bitcoin Spot ETFs. This was really an “okay” on the value of bitcoin as an investment. As evidence, $17+ billion has flown into those first 11 ETFs alone - a stamp of approval from big money players - those same wealthy individuals who we mentioned understand to invest in scarce assets to maximise returns.
Realising we can’t yet predictably escape the fiat currency era, perhaps bitcoin should really be the savings investment tool of choice if you want to preserve your cash and outperform traditional investments.
I hope you enjoyed reading this letter.
On the journey to becoming a master capital allocator - one lesson down, a billion more to go.
Respectfully,
-Mansa
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Disclaimer: this note is not financial advice and is for informational and entertainment purposes only. We may hold positions in the companies discussed. Do your own research.