Ohio will become the first US state to accept tax payments in Bitcoin. This comes a few weeks after it was reported that NFL player Russell Okung was going to be paid partially in Bitcoin.
Bitcoin advocates point to this as signs that Bitcoin is being adopted for payments. We disagree, Ohio is partnering with BitPay which will receive Bitcoin and convert it to dollars which are paid to the Ohio treasurers’ office. Okung is technically receiving Bitcoin but the Carolina Panthers are still paying him in dollars. They are partnering with Zap to swap the dollars for Bitcoin which is then sent to Okung. These may seem like technicalities but are important. Ohio still expects a certain amount of dollars to be paid, irrespective of the price of Bitcoin. The Panthers are still paying a certain amount of dollars, they are not incurring a liability in Bitcoin. As Joe Weisenthal from Bloomberg notes “[w]hat matters is whether people or companies are taking on Bitcoin-denominated liabilities. That doesn’t mean paying for something in Bitcoin, it means having obligations (debt payments, rent, wages) that require a specific amount of Bitcoin.”
We feature another Bitcoin article this week since it has been such a hot topic lately. Renewed interest in the cryptocurrency has come on the heels of strong performance in 2020. Bitcoin was up from $7,216.21 on January 1st 2020 to a record breaking $40,858.59 on January 9th of 2021.
On January 12th, the US mas public a plan to combat China’s rise in Asia and to neutralize the North Korean threat. The plan has been in place since February of 2018. It focuses on cooperating with India to preserve maritime security in the region, increase India’s capabilities to provide security, develop and implement a security strategy to defend Taiwan in case of an attack by China, increase Taiwan’s defensive capabilities, convince the Kim regime to relinquish nuclear weapons, and promote an economic development zone for Southeast Asia that provides a “credible alternative to One Belt One Road”.
Even though this was released during the final days of the Trump administration, the Biden administration has set a strict tone towards China as well. For the first time in history Taiwan’s “de-facto ambassador” was formally invited to Biden’s inauguration. With increasing confrontations between the US and China, Taiwan remains a hotspot which could erupt in conflict. Conflict between the US and China was a common theme in year-end outlooks produced by mayor banks.
Hoisington Investment Management’s chief economist, Dr. Lacy Hunt, remains bullish on US Treasuries. He does not agree that increased fiscal and monetary spending will spark inflation, driving Treasury yields up and bond prices down. He thinks that the economic harm from the pandemic “will take years to repair” and the global buildup of debt will mean fiscal spending is less effective at reviving the economy.
With almost all market commentary talking about rising rates, it is refreshing to hear the other side of the argument. Forecasting interest rates is extremely difficult. The end of the bond bull market has been called many times before only to be proven wrong. In Japan there is a name for the short Japanese Government Bond trade, it is called the Widow Maker. That should tell you how hard it is to correctly forecast interest rates. We wrote about forecasting issues here.
The European Central Bank (ECB) is buying specific bonds to limit the difference between interest rates between the strongest and weakest economies in the Eurozone. This is a step further in the ECB’s monetary toolbox. Before this specific yield spread control, the ECB was doing quantitative easing, but without a specific yield target between the different countries. This is an effort to keep yields low as countries have had to spend to offset the effects of the pandemic.
The Bank of Japan and Reserve Bank of Australia have explicit yield targets for their respective governments’ bonds. There has been speculation that the US Federal Reserve might adopt yield curve control to keep long term borrowing costs low. Although there has been no official sign that this will occur. However, sharp rises in yields would hurt the economy, so the Fed would probably react forcefully in such a scenario.
Most broad market indices such as the S&P 500 or MSCI World are market capitalization weighted. This means that the largest stocks have the largest weight in the index. This is a good representation of market performance since it measures each stock by its total size. The Global Market Portfolio (GMP) is the same, except that it includes every financial asset in the world. The GMP represents the portfolio that we would get if we took every financial asset in the world and added them all up. Doing this is impossible since data for many financial assets is not readily available. However, the article talks about an academic paper which tries to proxy the GMP; the resulting weights are shown in the picture above.
Our Global Asset Allocation strategy is an implementation of the GMP using liquid and low cost ETFs. The GMP is the only true passive portfolio since it measures the actual size of financial assets outstanding. Any other market capitalization weighted index is taking an active decision vs. the GMP. For example, the S&P 500 measures the performance of 504 of the largest stocks in the US. This is active because it only focuses on a subset of stocks from one country in one specific asset class.
