That’s right.   According to Ray Dalio, he is the “father” of the Chicken McNugget.    That’s right.   The  founder of the billion-dollar hedge fund Bridgwater Associates, Ray Dalio, claims that without his personal financial engineering more than 50 years ago, the Chicken McNugget would never have made it onto the McDonald’s menu.

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

 

A few years after his 1973 graduation from Harvard Business School with an expertise in trading commodities,  in 1975 Ray Dalio  launched Bridgewater Associates from his apartment.   Without any associates, of course.   They came later.

Dalio had two clients early on:  McDonald’s and a chicken producer.   Per Dalio, McDonald’s wanted put the Chicken McNugget on their menu. But they were worried:   If they did, the price of chicken would skyrocket.   Further, chicken prices were notoriously variable.   Keeping the McNugget price “stable” would prove difficult if chicken costs were unpredictable.   “There was a lot of volatility in the chicken market at that time and they were worried that if they set a menu price and the price of chicken then went through the roof that they would get squeezed or they’d have to raise the prices and it would be unstable,” Dalio says.

To defray that risk, McDonald’s wanted to hedge chicken prices as a solution.  However, “there was not a way for them to hedge that, because there was not an adequate chicken market,” Dalio says.

Dalio got creative.  He figured he could hedge the “cost of producing the chicken” instead.   He suggested that since a full-grown chicken was nothing more than a baby chick plus corn and soymeal, hedging the grain prices would solve the problem, buying corn and soymeal futures, thus countering any price fluctuations of the chicken itself.   Dalio’s idea was a winner … and the Chicken McNugget was born.

Who cares, you ask?   Well, we all do.  Food and finance … what a combo!    Like a Big Mac and fries!  

You can never know what choice or action today might result in huge future benefits.   Which is why today, as I typically do every year, we’re going to make 2025 economic predictions.  

How did the expert economists at  ‘The Steak House Index‘  do last year, you ask?   Great question.   Let’s take a look by  clicking here  to review my forecast from one year ago!

 

ARTIFICIAL INTELLIGENCE

 

In January of 2024, I predicted “I’m 100% serious when I say I agree that AI will change the world.  During 2024 I expect the use of AI to explode in ways I suspect most of us are unable to predict.”

I think I can safely say this prediction was spot on.   Just look at the NVDA stock price — up 185% since January 2nd.   Of course, this was a consensus call…not much risk in the prediction, right?    The thing I missed, for the most part, was the exceptionally rapid proliferation of data centers and energy demand.   I should have seen that one coming.   Oops.  

The San Francisco FED, led by President Mary Daly, is located in San Francisco, which also happens to be the global epicenter of artificial intelligence.   Sure, AI is happening all over the globe, but San Francisco, once again, is on the front lines.   It should come as no surprise, therefore, that the SF FED is deeply interested in the economic viability of AI and, among other things, the impact of AI on labor productivity.   Keeping a finger directly on this pulse, President Daly and the SF FED created the Emerging Tech Economic Research Network … specifically for that purpose.  

Open the link and take a look.  

Clearly AI is all around us, even if we don’t yet see it overtly.   For example, in the article entitled “The Rise of AI Pricing” talks about how AI is used in dynamic pricing for both products and services today and that, “At the aggregate level, the share of AI-pricing jobs in all pricing jobs has increased by more than tenfold since 2010″ and, further, “firms that adopted AI pricing experienced faster growth in sales, employment, assets, and markups…”

Use and implementation of AI tools will continue to explode in 2025.   To quote Bob Dylan, “… the times, they are a’changin.”    This will accelerate in 2025. 

 

INTEREST RATES

 

At first glance, interest rates are behaving oddly.   Why are 10-year Treasury rates UP by about 100 basis points since the first FED rate cut about 3 months ago?    The FED  CUT  the federal funds rate (FFR) by 50 basis point and, yet, longer term rates went UP?   Yes they did:

 

This chart, courtesy of Yardeni Research, shows the unexpected trajectory.    The RED line is the federal funds rate (FFR).   The three (3) rate 2024 cuts are apparent.    But the moment the ‘overnight’ FFR went down, longer term rates, specifically the 2- and the 10-year Treasury rates, began to rise.  (BLUE lines.)  Why?  In theory, they should have gone down.   But we’ll get to this later. 

First, let’s revisit my predictions from about 1 year ago. 

In January of 2024, I predicted the following on interest rates:  “The only reason the FED will pull rates down that far, that fast, would be because both  (1) inflation is at, or below, its 2% long-range target, and (2) the US economy is weak or shrinking.  While I expect (1) might happen, I do not expect (2) to happen anytime soon.   It is likely the FED will lower the FED funds rate by 100 basis points during 2024 — to the 4.5% range — but I believe short term rate is likely to remain there for an extended period of time.”

Wow.   Even I’m impressed with the accuracy of my prediction one year ago.   Spot on!  Indeed, the FED lowered the FFR by 100 basis points in 2024.  

But I was off on the end-of-year 10-year Treasury rate.   I forecasted a 4.25% rate on the 10-year T at year-end.   Right now, it is closer to 4.60%.   Why is that rate stubbornly high?   I think it’s a supply and demand thing.   For context, remember how low the 10-year Treasury was between 2010 and the beginning of the pandemic.   As 2010 began, the 10-year T was hovering around 3.75%.    From there, it declined reaching a low of about 1.50% in January of 2020.    I believe there are many factors contributing the this exceptionally low rate range, but the biggest, in my opinion, is the supply and demand for global savings.   During the 2010’s, demand was tepid as supply continued to expand impressively.   After the pandemic hit, developed nations around the world soaked up quite a bit of savings supply by selling sovereign bonds to fund pandemic-inspired stimulus.   And now, with few exceptions, developed nations are saddled with abnormally high sovereign debt levels.  The markets fear, I believe, these debt levels will continue to rise as annual deficits seem more structural today than transitory.  

And, of course, none of us have any idea how the new administration’s policies will impact America’s $6.7 trillion dollar annual budget and $1.7 trillion annual deficit.  However, as you know, I have little expectation that Elon and machete-brandishing friends carve much off off the budget and deficit.  And I’m guessing global treasury bond traders agree, and, as a result, they are bidding up treasury rates in anticipation of an ever larger federal debt. 

Which is unfortunate.   Because interest rates matter.  Too low, as we saw in the last half of the 2010’s, and weird imbalances arise.   I mean, “negative” interest rates are truly weird.   Too high, of course, and many individuals and industries struggle.   None more so than housing.  Consider this image, courtesy of John Burns research:

 

 

John Burns suggests that 5.50% is the tipping point for the housing industry.   Above that rate most people — 72% to be precise — will  NOT  take on a new home mortgage.   As a result, existing home sales are negatively impacted and new construction, too, is restricted. 

Even worse, however, is a “higher-for-longer” level for rates after a lower-for-longer episode like we saw between 2017 and 2022.   As you can see in the chart below, courtesy of the FHFA, once home loan rate dipped to the lowest level ever, many homeowners decided it was time to lock in that rate.  And they did.   Beginning in Q1, 2020, more than 20% of all homeowners locked in a rate below 3%.   Clearly, if possible, they will hang on to that mortgage rate for dear life.   Sell your home, buy a new one, and get a mortgage rate above 7%?   Naa … not on your life they are saying.    As you can see, about 85% of all existing home mortgages in the US are below 6%.   

Knowing this, we understand why so few existing homeowners are selling at all. 

 

 

According to our friends over at FreddieMac, the current 30-year ‘conforming’ fixed rate is about 6.85% — far above that 5.5% ‘tipping point’ rate that might trigger increased activity in the housing markets.   This fact might inspire thoughts like, “Hmmm … so how much must the FED cut rates to get the 30-year fixed rate down by another 1.5%?”   It’s a good question, but, alas, the power to push long-term rates down does not rest in the hands of the FED.   No, the FED can only directly impact the federal funds rate, a super short-term rate.  They cannot directly “push” down longer-term rates.   Unfortunately for the FED, lowering the FFR is akin to pushing on rope, as far as long-term and 30-year fixed rates go. 

Intellectually, one might expect that shortly after the FED begins their rate cut cycle, the entire “yield curve” would fall over time.   Short term rates would fall … and longer term rates would later follow.   However, as you can see below, that is rarely the case.   Take a look at the chart below:

 

 

It turns out that mortgage rates begin falling about 12 weeks  before  the FED’s first rate cut.   Interestingly enough, as you can see above, with the sole exception of the post-housing crash caused by The Great Recession of 2008, 12 weeks after the first FED rate cut mortgage rates were almost unchanged.  

Except this time.   This time, for a variety of reasons, mortgage rates are up about a full percent.   Yes, a full percent.   The chart above was constructed by FreddieMac mid-November.   Rates dipped a little earlier in the month, but they are up again now.  

Why?   And what will interest rates do in 2025?   That’s the million dollar question, right?  Let’s dive in.

The FED expects to make at least two (2) additional FFR rate cuts during 2025.    From the high-water mark of 5.50%, the FFR is now at 4.50%.   Two more cuts in 2025 would bring the peak FFR down to 4.00%.    But the federal funds rate impacts only the shortest of commercial interest rates, like credit card rates or Prime Rate.   Longer term rates like mortgage are much more impacted by the 10-year Treasury.   So, to get a sense about the “longer end” of the yield curve, we have to look there.  

Usually, longer term rates are highly correlated with GDP movements and overall economic strength.   Thru this lens, it makes sense that the 10-year T is up quite a bit since the FED rate cut.  After all, the most recent GDP figure — for the 3rd quarter of this year — came in at a ‘real’ rate of 3.1% and a ‘nominal’ or current-dollar rate of 5.0%.   This is strong growth, pushing the annualized figure for US GDP up to almost $30 trillion ($29.37 T, to be precise.)

However, Neil Dutta at Renaissance Macro believes the up-move in the 10-year T is about something else:

 

“This move is about term premiums going up. That’s a function I think of deficit concerns related to fiscal policies coming out of DC next year (increases in the issuance of debt relative to demand), the ongoing decline in the Fed’s balance sheet (investors must hold more long-duration securities) and bond yields still rising overseas in places like Japan (BoJ tightening) and UK.”

 

Term premiums.   Essentially, a “term premium” is an investor’s demand for a higher rate in order to induce him or her to hold a longer-term (duration) security.    With the flood of global savings in the past couple decades, term premiums declined.   Neil is of the opinion that trend has now reversed.    Primarily, I sense, because the global supply of debt is coming more in line with the demand.  

Bloomberg essentially agrees.   In an article titled, “$50 Trillion Flood of Treasuries Will Test Bond-Market Plumbing” they suggest data indicates the US Treasuries held by the public are likely to surge to $50 trillion within the next 10 years.  Of course, this figure is pure conjecture … but at current deficit trends, it could happen.   The ‘plumbing’ they reference is the banking system ‘Primary Dealer‘ network of US banks that oversee and manage trading in new Treasury issues.    According to Casey Spezzano, a trading specialist at NatWest Markets, the balance sheets of the Primary Dealer network have not grown significantly, while, at the same time, issuance of new Treasury securities has almost tripled.   His comment, “You’re trying to put more Treasuries thru the same pipes, but those pipes aren’t getting any bigger.”  

So, in the final analysis, once again it all boils down to the supply / demand relationship.   Even here, in the $30 trillion US Treasury market, the relationship between supply and demand matters.   US Treasuries may be the safest security on the planet, but they still compete (in a somewhat complex fashion) with sovereign debt issued by other nations.   Across the globe, many — if not most — nations are running deficits and, as a result, are selling debt to cover.   Post-pandemic supply is up.   WAY up.   So is demand, but not as much. 

Will this paradigm change during 2025?    Probably not.  

Let me summarize this way:   While the FED will likely be pushing short-term rates lower, significant increases in the supply of long-term debt is likely to hold longer term rates higher than we might expect.    My prediction:   On the last day of December, 2025, the 10-year US  Treasury will be 4.60%.    I hope this forecast isn’t too optimistic — conditions suggest it could be even higher.  

And on the last day of December, 2025, the FFR will be 3.75% — 3/4 of a percent lower than today.

A final comment on housing:   Assuming John Burns ‘tipping point’ mortgage rate of 5.5% accurate, there is little chance the 30-year fixed rate mortgage will fall below this level during 2025 if my forecast is correct.   Thus, I expect another difficult year for existing real estate sales and limited for-sale inventory, at least by historic standards.  

Let’s move on to other topics.   What’s happening in China?

 

CHINA

 

As my long-time readers know, I believe the Chinese economy is in deep trouble.    All of my reading, much of it between the proverbial lines, suggests they are firmly in the grips of what sophisticated economists call a ‘balance sheet recession’ much like the one that deflated the Japanese economy for more than 2 decades.   The US experienced a similar, but more muted and less protracted, example of that economic event in the decade that followed The Great Recession of 2008.    Unfortunately for China, their recession shows no evidence of abatement … in fact, I believe their problems are growing larger and accelerating.    During 2025, I believe this fact will become more and more evident to all. 

Of course, President Xi Jinping would tell you, “He’s wrong!  Don’t believe Terry!”   According to Xi, “China’s gross domestic product is expected to expand around 5% for the full year of 2024.”   On track, he told his national audience in a televised appearance on December 31st.

Bull.   Or chicken.   Or, inasmuch as this is China, let’s say snake, since 2025 is the “Year of the Snake.”   Sorry, my Chinese friends, your President is fibbing. 

Ironically, I believe their fall into recession was mostly self inflicted.   I began to focus on China’s housing problem almost a decade ago.   Early in 2015 I made a ‘wildcard’ prediction. Here’s what I published:

“The Chinese new home market will finally crash.   Sales and prices will plummet. 

But we may not know it. The chart (below) shows new home value trends from 2011 to EOY 2014. The data source is the “National Bureau of Statistics of China,” an agency with little credibility or accuracy. Looking thru the ‘rose colored glasses’ one must wear when assessing Chinese statistics, the crash may have already happened. (Meaning: Actual results may be much worse than shown.) Global implications? Well, about 15% of China’s GDP is driven by housing. China’s GDP is now about $10 trillion (US GDP is about $18 trillion; European Union-$14 trillion) so a large hiccup here (if we know about it) could have meaningful impact on the global economy.”

Well, as it turns out, I was right on the outcome … but wrong on the timing.   The Chinese housing market has crashed … it just took longer than I expected.    Here is where I blogged extensively in 2016 about their housing market problems.   Read  “Its Easy to Buy a House – in China” here  by simply clicking on the bold text.   Over the years, I’ve written numerous blogs on the topic.   You can read  “Broken China” here  and   “China Redux” here   again, clicking on the bold text.

Ironically, I believe the majority of the cause was self inflicted.   Their leadership screwed up by first allowing the housing bubble to get out of hand, and then permitting it to inflate year after year, only to finally pop the bubble back in 2022.   Tens of billions of dollars were lost, both in China and globally, and millions of Chinese citizens were harmed.   Ironically, again, this happened in a tightly controlled political system.  

The implications of this event in China are wide and variable.   For example, if the measure of youth unemployment in China truly is about 16%, what does that suggest politically?   That’s harder to forecast, of course, but make no mistake here:   Chinese citizens are not happy with their financial conditions and their central government right now. 

A December 19th article in the Economist Magazine titled, ‘How to get a free meal in China‘ discusses their slowing economy and how many restaurants are offering free meals to those in need.   Most of which, are young folks in their ’20s and ’30s.   And the article comments, “The food industry, like other sectors of the economy, has suffered from the public’s thriftiness. National restaurant chains report lower average spending per customer. Beijing’s big food and beverage companies saw their profits fall by 88.8% year on year in the first half of 2024, according to city statistics.”

This may not be an official SHI10 metric, but take it for what it is:   A clear indication that their economy is hurting. 

And 2025 will be worse still, economically speaking.  You want something to worry about?   Worry about China.  The downstream, knock-on, and unintended effects of past, current and future policy in China are my greatest concerns in 2025, and offer the greatest risk to the global economy as a whole. 

Let’s take a look at the US labor market.

 

UNEMPLOYMENT / LABOR MARKET

 

As 2024 ends, the US employment market has finally returned to relative balance and equilibrium.  Let me explain. 

The most recent  ‘Civilian Labor Force‘  figures from November reflect just over 168 million Americans (and, included therein, as I mentioned in a prior blog, some number of undocumented workers), of which about 7.15 million are unemployed.    The official unemployment rate is 4.2% — a number equal to the pre-pandemic measure in October of 2017, more than 7 years ago.   To find another unemployment reading that low we have to go all the way back to the beginning of 2001.   

At the same time, for the first time in years, the number of “open jobs” in the economy roughly matches the number of unemployed folks.   According to the most recent JOLTs report data, from October of this year, the number of “job openings” across the United States today is 7.7 million.  

Many consider this miraculous.   That the FED was able to engineer a “soft landing” and keep unemployment from spiking, many say, is unheard of in modern times.   But so was the Covid Pandemic.  Since 2020, we’ve all experienced a whole lot of “unheard of” things.   And so we begin 2025 with a country at stable employment.   Good.  Without exception, this is the strongest economic indicator for continued GDP growth.   Employed people spend money.   Unemployed people spend much less. 

Making a 2025 prediction requires us to once again consider the supply / demand relationship for labor.   Future demographic trends and immigration levels (legal and otherwise) are both likely a drag on labor supply; Automation and AI are likely a drag on demand. 

Larry Summers, an economic luminary and ex-Chief Economist of the World Bank, and a few friends recently wrote an interesting piece titled, “Technological Disrpution in the US Labor Market” that you might want to glance at.   If yes,  click here  to open the link.   Essentially, however, here’s the message:

 

“We argue that AI could be a GPT on the scale of prior disruptive innovations, which means it is likely too early to assess its full impacts. Nonetheless, we present four indications that the pace of labor market change has accelerated recently, possibly due to technological change.”

 

But in the final analysis, the push/pull seems about equal, so, all in all, I’m expecting little change in the employment situation.   I expect we’ll finish 2025 at an unemployment rate at or below 4.5%.

Let’s take a look at inflation. 

 

INFLATION / CPI

 

Beginning in January of 2021, in the depths of the Covid Pandemic, the inflation rate as measured by the consumer price index (CPI) took Americans on a wild ride.   As you see in the chart below, the CPI peaked in June of 2022 at almost 9%.   Since July of 2024, the rate has bounced around on a downward trajectory, settling for now in the mid-2s.  

 

 

Of course, in response, beginning in early 2022 the FED raised their “overnight” interest rate, the federal funds rate, or FFR for short, ultimately by more than 500 basis points, or 5%, to a terminal rate of 5.50%.   I suspect they would say “we did it!” if asked behind closed doors.  I still contend the majority of the inflation spurt was the result massive supply chain disruption, deglobalization, and the oversized fiscal stimulus from Uncle Sam and other generous central governments.   But, sure, take that victory lap my FED buddies.   Why not.   The inflation monster is likely tamed once again.

I mentioned fiscal stimulus.   However it begins, stimulus ultimately manifests itself within the money supply numbers.   M2, the best metric for measuring money supply movements, shows the MASSIVE  money supply increase between February of 2020 (pandemic begins) and April of 2022 (FED rate hikes begin).     Take a look at the chart:

 

 

Which begs the question:   When was the last time US money supply increased by 41% in about 2 years?   The answer:  Never.   Since America became America in 1787, and the dollar became the dollar, this has never happened before.   So to all my ‘Modern Monetary Theory‘ readers out there I say this:   The MMT theory has been proven false.   Empirically.   MMT doesn’t work.   A massive money supply increase  will  trigger an inflationary response.    Every time.   Case closed.

The FED has assured us they are deadly serious about pushing inflation back to the 2% level.    And while this may sound simple, the outcome is far more difficult to achieve, let alone control.  The FED has a small, limited number of tools in their tool box for this purpose.   The biggest, of course, the the “hammer” effect of raising or lowering the FFR.  Way back in 1980 — almost 45 years ago — under the leadership of FED Chairman Volcker, the FED raised the FFR to  over 19%  in their attempt to force inflation back into a more reasonable 2-3% range.   Unsurprisingly, as a direct result of the FEDs draconian move, the US economy went into a tailspin.   Within months, one of the longest, deepest recessions in recent American history began.    It was brutal.   Prime rate soared to over 20%.    It was ugly. 

Did it work?  Did inflation finally retreat to the 2% – 3% range?   Sure.   In 2001.   20 years later.  

My point:   Inflation is a brutal adversary.   To beat it, the FED has to be willing to crush the American economy at the same time.   That’s the tradeoff.   That will always be the tradeoff.

Now that the CPI inflation rate is hovering in the mid-2s, I suspect the FED will leave their hammer in the tool box.   During 2025, I expect the two most popular inflation measures — the CPI and the PCE — to bounce up and down between 2% and 3%, without too much direction or control.   Ironically, the housing component of both metrics is proving to be the most troublesome or ‘sticky’.   Housing costs is more than 1/3 of the CPI and about 20% of the PCE.   The FED knows they have little ability to impact this piece of the puzzle. 

Inflation will end 2025 at 2.5% in my opinion.   Expect minor ups and downs during the year … but I really don’t expect much to change here.    Now, let’s take a look at GDP. 

 

GDP

 

Ahhh … our good buddy GDP.    You, sir, are the reason the  Steak House Index  exists.

We don’t yet have the Q4, 2024 GDP figures — and won’t until January 30th.    The most recent Atlanta FED ‘GDPNow’ Q4 forecast is a 3.1% ‘real’ rate; the latest NY FED prediction is 1.86%.   And, of course, the ‘current-dollar’ figure will be at least 2% or more higher.  The SHI10 seems to agree — the actual figure should come in at 2% or higher.  

I am confident that during Q4, our annualized GDP rate will have eclipsed $30 trillion for the first time.   That M2 increase continues to slosh around the economy lifting real GDP at the same time it pushes up prices and, ultimately, consumer prices.   Take another look at that M2 chart above.    During the FED rate hikes and economic tightening, M2 slid from its near term peak of $21.7 trillion all the way down to about $20.6 trillion in October of 2023.   That 5% M2 decline was not economically stimulative.   Yet GDP grew regardless.   And now, as 2024 ends, M2 is almost back to its prior peak.  We’re back to a $21.4 trillion figure.  Over time, M2 growth is a critical input for a growing GDP figure. 

GDP forecasting is tough.  This must be one of the most complex metrics our government statisticians follow.   Regardless, absent exogenous non-economic events that could mess up my forecast, I feel 2025 will be another strong growth year.  Support for this forecast and tailwinds include that 41% M2 increase, full employment, the AI boom, the ‘wealth effect’ of record stock market gains, and America’s ‘balance sheet’ as reflected in the FED‘s z.1 report.   The biggest headwind, of course, are the “higher-for-longer” interest rates.   

One year from today, I believe our GDP will continue to reflect trending at or near a ‘real’ 2.5% growth rate and it will grow close to 5% measured in current dollars.  

To the steak houses?

 

 

Well, the holidays are definitely over.    Today’s SHI10 reading of a negative 53 is historically consistent with many past Q1 readings.   The fun and games of the holidays are over; America is back to work.  Steak houses are no longer full.    Here’s the trend report:

 

 

 

Over the past few years, I’ve written quite a bit about bitcoin.   I’ll finish today’s super-blog with my thoughts on this topic.    Remember: Hate the message … but always love the messenger!  🙂

 

BITCOIN

 

Five years ago, on January 3, 2020, one bitcoin (BTC) had a ‘value’ of $7,270.   About 5 years later, on December 5th of this year, it reached $103,629.   Not a bad investment, right? 

But here’s the thing:   In my opinion, it’s not an investment.   Quite the opposite, again in my opinion, bitcoin a mania, a sham, a bubble.   It’s the modern equivalent of the 1630’s Dutch Tulip Bulb, the 1720’s South Sea Bubble, the ‘Dot-Com’ bubble that finally burst when the 21st century began, beanie babies, and, of course, don’t forget the least famous of them all:   Hen Fever.  

Sure, sure, I know.   BTC has been around for almost 20 years now.   And for all that time, I’ve been telling you it’s a sham … a Ponzi scheme.    And so far, other than the temporary collapse in 2022, the price has held up pretty well.   I understand.   But I believe bitcoin will crash one day, like all manias ultimately do, and become worthless.  

Consider the lesser-known bubble we now call Hen Fever.

In the 1840s, the young English Queen Victoria triggered a chicken craze.  The young queen was incredibly fond of her exotic birds.   Then, in 1842, she received a gift of 7 exotic chickens from the Far East known as Cochin China Fowl.  The society papers got wind of the Queen’s new hobby and soon everyone in London society followed in her steps.  By 1845, locals were breeding and exchanging exotic and exorbitantly priced chickens.  

Then Hen Fever jumped the Atlantic.   Americans were soon infected.   At the ‘Boston Poultry Show‘ of 1949, over 10,000 chicken lovers and speculators were able to view chirping, screeching, and squawking birds of all types, breeds and sizes.   One commentator declared it was “indeed a magnificent exhibition.”   Over the next 5 years, exhibitions were popping up throughout America, all featuring a number of new, exotic, and expensive chicken breeds.  Collectors hired bodyguards to protect their chicken coops. 

But as quickly as the fascination with fowls spread, the chicken bubble burst.   By 1855, the market was over-saturated with expensive chickens that suddenly no one seemed to have any interest in anymore.   “You can’t get rid of these birds!” wrote one upset owner recounted in the 1855 book, “The History of The Hen Fever,” By George P. Burnham.   “It is useless to try to sell them; you can’t give them away; nobody will take them.  You can’t starve them, for they are fierce and dangerous when aggravated, and will kick down the strongest store-closet door; and you can’t kill them,  for they are tough as rhinoceroses, and tenacious of life as cats.”

LOL.   No, folks, you just can’t make this stuff up.  

 

But I digress … let’s get back to BTC.  

First, let me be perfectly clear:   I am an absolute believer in cryptocurrency.  I am convinced this digital invention will change global finance in many ways.   However, I will go on record here saying I  DO NOT BELIEVE,  when the dust finally settles on this chapter, that finance will have been fundamentally altered outside of government control.   Sorry, but digital currencies must ultimately be controlled by governments.  

Think about this for a moment.   Listening to a popular podcast, I heard the speaker opine that with the new administration he expects ‘stable-coins’ — let’s call this an SC — to become a mainstream global method for creating ‘real-time’ payment systems.   His contention, essentially, was that instantaneous payment between buyer and seller can be achieved using an SC as the bridge.   With a ‘stable’ price of $1, this SC would be backed 100% by short duration US Treasury instruments thereby rendering it the safest financial medium on the planet.  And because the SC is completely digital, a buyer could concivably instantly convert any currency into its equivalent in SC and the seller could do the reverse, SC into the seller’s currency, again instantaneously, thereby perfecting a real-time payment for goods or services. 

At the high level, I agree this form of exchange will occur.   However, it will be the US government that creates it and benefits from it.

Could I be wrong?   Of course.  Crazier things than BTC have proliferated throughout history.   However, this one seems clear and obvious to me:  Developed nations like the US, England, Europe, Australia, China, Japan, etc., have about $100 trillion of debt outstanding.   Another $200 trillion of non-sovereign debt is floating around the globe, most of it priced in US dollars.  BTC is a threat to these countries … and a threat to their currencies … AND a huge threat to their sovereignty.  

And, at the center of it all, at least today, is the United States Federal Reserve.   The US dollar is king.   80% of global export invoicing happens in US dollars.   Almost 90% of all foreign exchange transactions occur in US dollars.  Finally, according to the FED, “The U.S. dollar is overwhelmingly the world’s most frequently used currency in global trade.” 

If you’re interested in reading the source document called “The International Role of the US Dollar” click here.  The President, Congress and the Federal Reserve will do all they need to do in order to ensure this continues. 

It’s entirely possible that various other private tokens, NFTs, etc, will find some use case within commerce — and such use will be permitted.   But BTC, I believe, cannot gain traction.   Developed nations won’t allow it.  Governments will retain control over currencies.  They must.   Global financial systems would collapse if competing digital currencies were allowed to proliferate. 

Will BTC “end” in 2025?    Probably not.   I expect the current mania to continue … bubbles need to peak at absurd levels before they collapse.   We’re not there yet.   That will take a year or two more, I expect.   My 2 cents folks.    Many disagree.   Time will tell.   🙂

 

Happy New Year!

 

Thanks for checking in.

<::>  Terry Liebman