This month’s post is designed to elaborate on our general thinking, but more specifically, on the release of our Purchasing Power Protection Sleeve (‘PPP’), which includes allocations to Bitcoin and Gold in a 70/30 respective split.
Any of the content here can be more deeply discussed if you’d like to reach out.
As we’ve harped on in the past, more stocks and less bonds is a shift we feel necessary to protect against the greatest threat your portfolio faces: purchasing power erosion. The PPP sleeve is just a purer expression, albeit with different risks attached.
I know some people don’t understand or agree with Bitcoin. We won’t act like we have it all figured out, but we do like convexity.
If Bitcoin is what it claims to be, then it would be hard to find a place for capital that offers that much convexity.
Either it is or it ain’t. We will educate to the best of our ability so you can decide on your own and position size from there.
John Luke’s piece will be more data-driven and will share details on the implementation. This note is higher-level, designed to unpack the core of our approach to building portfolios that protect and grow wealth.
Why Aren’t You Mad
We live in the best country in the world. I firmly believe that, and I love where I live. Liberty, justice, individual rights, and the responsibility that comes with them are all things I deeply desire to define our country. Our Declaration of Independence could not be any clearer:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights; that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, Governments are instituted among men…”
That says rights are the innate possession of people. The purpose of the state or government is not to grant rights, but to secure and protect them. When the state claims to derive its authority from any source other than the people, it always leads to the destruction of liberty.
There is no greater power on earth than control of money. A monopoly over the issuance of money inevitably puts ‘we the people’ at risk.
Call me old-fashioned, but I believe there is a direct link between human liberty and sound money. Money free from government control, a true separation of money from the state, has undeniable implications for our freedom and liberty.
It’s my belief that the root cause of our problems is not left or right-wing politics. The issue is our monetary system and the propaganda from both sides to protect it. The free market is the only system capable of producing a monetary structure that does not cheat the common man. Unfortunately, we have a system we like to call free, but can it really be when we have a central authority that sets interest rates and a banking system that can create money out of thin air?
Eventually, we will have to get this right, more right than we have it today, if we want to remain the greatest country on the planet. Until then, our objective is to educate and continue to build solutions to help our investors better navigate the hand we are dealt.
Taxes
What is your effective tax rate?
No, not the one your accountant told you, but your actual effective tax rate. How much of the money you earn or invest goes to taxes?
That’s a difficult question to answer when you consider the list of ways you’re taxed. This is non-exhaustive by the way:
- Federal income tax
- Self-employment tax
- Payroll tax
- Capital gains tax (short and long term)
- Tax on dividends and interest
- Estate tax
- Gift tax
- State Income Tax
- State cap gains tax
- State sales tax
- Sin taxes
- Gas taxes
- Property taxes
- School district tax
These taxes are explicit. You hear people complain about them, but most people have come to grips that these explicit taxes are just part of it.
Despite all this explicit taxation, we still operate at perpetual deficits, and that’s not going to change.
How do they fix those deficits and the mounting debt loads?
The answer is what causes me so much confusion as to why more of us aren’t up in arms.
Their solution to these issues is your money! Specifically, the devaluation of your dollars. They need to steal your purchasing power, and they can do it because they control the money printer. (Insert all the charts we’ve shared over the last year.)
This has been the solution since the Fed was created in 1913 and was magnified in 1971. Sure, debasing your dollar is not explicit, but it’s real… very real, and devastating.
Deflation, what the smart people tell us to be so scared of, is a result of increased productivity and efficiency. It is purchasing power, improving. Technology of all types usually creates it and provides the ability to do more with less, causing prices to fall. This is what a free market leads to: more purchasing power.
This dynamic is incompatible with the system we have, as falling prices make debt much harder to repay. Therefore, the Army of the Fed and all its foot soldiers want us to believe inflation is necessary!
We have a debt-fueled economy. Debt pulls consumption forward, which is fine when there’s surplus. It’s a problem if debt-based consumption is greater than productive capacity in the system. For 50+ years now, our debt has grown at a compound annual rate that dwarfs the growth rate of GDP. That’s how we end up with the debt/GDP ratio we have today. At some point, things need to change, but for now, the show must go on. Choo choo ⇒
I’m restraining myself from writing more than I should here…
Debasing Against What?
President Nixon addressed the country on August 15th, 1971, to announce a ‘temporary’ suspension of dollar-gold convertibility. He finished the address with this assurance, “Your dollar will be worth as much tomorrow as it is today.”
Since then, the dollar has lost roughly 88% of its purchasing power.
For a different perspective, gold traded for $35 an ounce in August of 1971. Today, an ounce of gold costs ~$3,300. I’ll let you do that math on the value the dollar has lost in gold terms, hint, it’s close to 99% and that’s not a typo.
To make sure the 1971 gold window closing is crystal clear, bank lending (money creation) used to be governed by gold. Meaning, to lend, you had to have something (gold) behind that loan. Closing the gold window meant money could be created without anything except the promise of the government that it was good.
This allows for money to be created out of thin air. Those who benefit are the ones who own assets. As a matter of fact, it’s our investment thesis in a nutshell. More finite things should go up in price when measured against the thing that is infinite in supply (dollars). Real estate, stocks, etc. I’d argue that a lot of their price increases are due to the money supply increasing.
How else can you explain the fact, according to Lawrence Lepard, that since 1990 the top 1% of the population has 10x’d their share of national wealth, now controlling over 92%. In comparison, the bottom 50% of the population holds less than one-tenth of the wealth held by the top 1%. Rich get richer. Poor get poorer.
Democrat, Republican, I don’t care. If you are fortunate enough to own risk assets, you’d better own them in size because the printer is heating up. More stocks, less bonds relative to traditional dogma; we think your allocation has never been more important to safeguard your purchasing power.
‘Safeguard Your Economic Future’
Fast forward to today, and Trump is basically saying, “We plan to devalue your dollar, but we are going to ‘safeguard your economic future’ while we do it.”
He’s widely expected to sign an executive order that makes it easier for investors to get bitcoin, private equity, gold, and other alternative-type investments in their retirement accounts. The focus for us is on bitcoin and gold, as we are skeptical about the benefits of private investments packaged up for retirement allocations.
One theory could be that Trump wants as many people as possible to own the things that the money printer will send to the moon. The US cannot raise rates, and they cannot cut spending. Devaluing the dollar is the only way out, so it seems owning things of a more finite supply is a good idea.
Sure, we are confiscating your purchasing power, but look at how much higher your bitcoin and gold exposure are going!
One Quick Word on Stablecoins
The Genius Act has gained some attention recently. This newfound love for stablecoins from our government could mean a few things. One thing we think it means is that they have discovered a market, potentially a big market, for a bid on Treasuries.
In other words, somebody is going to have to buy the bonds, and stablecoins could become a sizable buyer. This allows the government to continue to finance itself in a world where the pool of buyers of treasuries seems to be dwindling.
Every stablecoin is supposedly backed by Treasury securities. If the potential size of the markets is in the trillions, our government will do what they can to promote the industry’s growth.
More bonds = more money in the system = more of what we’ve seen since 1971. If stablecoins become a much bigger thing than they are today, you could make the argument that it’s a positive for gold and bitcoin as well.
The Summary
They print money out of thin air, lend it to you with interest, and tax you for using it. We say your path out of that is to allocate properly and that means thinking about risk differently, owning more assets of finite supply.
Your Allocations
Studies show that asset allocation matters far more than security selection. Our first line of defense is to get that decision right. With our backdrop, we prefer to own more stocks and less bonds.
For most investors, this shift accomplishes improving a portfolio’s ability to protect against eroding purchasing power. We expect stocks to do fine and bonds to really struggle. In that world, we want to own more stocks and avoid bonds as much as possible.
Our additional inclusion to address higher equity exposure is simply stock market hedges. We like hedges because of the convexity they carry, and the timing of that convexity paying off. Their presence allows us to own more stock market risk because we’re prepared for left tail events. We believe this can lend itself to portfolios that are better in the tails. More participation in right-tail environments, while avoiding the nasty part of left tails.
Again, and I stress, we think this allocation shift is more traditional in a sense and can accomplish so much towards protecting purchasing power over longer terms.
The rollout of the PPP is designed to further reduce dependence on fixed income. We are eyes wide open with this allocation as there are now risks unique to Bitcoin and Gold that we are absorbing. Including the PPP allocation will not be for everyone, but the potential benefit is significant, and we feel compelled to make it an option.
The heart of our business is options-based. What attracted me to options in the first place was the ability to define the capital you want to risk while positioning for a payoff that could be multiples of what you risk. In other words, convexity.
If Bitcoin is what it claims and economic backdrop is what it is, then we should expect more adoption over time. Sure, there is risk on the table, but it’s paired with quite a bit of convexity.
For the record, Bitcoin is unique in the crypto space in our opinion. We do not include it in the same basket as other cryptocurrencies. As mentioned, be on the lookout for full the full paper in the days ahead.
As always, thank you for your trust. Please don’t hesitate to reach out with any questions at all.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward-looking statements cannot be guaranteed.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.This should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations. Outcomes can and will vary based on individual financial circumstances.
Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2507-30.
