Bitcoin’s performance in recent weeks has quietly shocked Wall Street.

At the time of this writing, Bitcoin is up more than 41% for the month of November alone — with a week of 24-hours-per-day trading left to go — and less than $500 from its all-time high set in 2017.

The drumbeat of Bitcoin endorsements from financial heavy hitters is starting to feel relentless. In these pages we have talked about MicroStrategy, Square, Paul Tudor Jones, Stan Druckenmiller, and even the JPMorgan research department, which went from trashing Bitcoin to seeing it as a 10X investment.

Now the latest bit of jaw-dropping commentary comes from Rick Rieder, the chief investment officer (CIO) at BlackRock Inc. In a CNBC interview this week, Rieder opined that Bitcoin could replace gold.

“Do I think it’s a durable mechanism that will take the place of gold to a large extent?” Rieder asked in rhetorical fashion. “Yes, I do,” said Rieder in response to his own question, “because it is so much more functional than passing a bar of gold around.”

You might wonder why it matters what the chief investment officer of BlackRock thinks.

The answer to that is: Because BlackRock is the largest asset manager in the world, with a mindboggling $7.4 trillion — that is trillion with a “T” — under management.

Hypothetically speaking, if the CIO of BlackRock wanted to put 1% of BlackRock’s customer assets into Bitcoin, he would have to buy $74 billion worth.

And that same CIO is now doing public interviews saying Bitcoin could replace gold.

When it comes to Bitcoin, for months on end, we have pounded the table hard enough to break it. Perhaps we should have used a metal baseball bat.

For many investors, a burning question now arises: When will Bitcoin have another meaningful correction, or at minimum some type of pullback that makes it safer to buy?

The honest answer is: We have no idea. With an asset like this, you just can’t know. That is why, starting at least six months ago — around the time Paul Tudor Jones made a bull case for Bitcoin — we started warning TradeSmith Decoder readers that, at some point, this thing could just take off like a rocket and not look back.

The reason why it could take off, we explained, was partly because institutional buyers are wholly price insensitive when they decide an asset becomes a must-own allocation. They just tell their trading desk something on the order of, “get me a 1% portfolio allocation to Bitcoin. I don’t care how you do it, just get it done in the next 30 days.” And then they just buy. And buy. And buy.

Stock market investors are used to waiting for corrections, or dips — hence the term “buy the  dip” — before buying into assets they like. It is the nature of stocks to move around a lot, and to have regular pullbacks and retracements.

Commodities and currencies, however, can be different. Every so often, a commodity or a currency can get into straightforward trend mode and just keep on going, a little at a time, for months on end.

Stocks are different, in part, because institutional investors who buy stocks are very aware they are playing a game, and every so often the large buyers step back from the market to see how prices hold up, or the trading desk senses weakness in the short-term price action and decides to step away.

Commodities and currencies, however, can see their prices driven by commercial hedgers and other entities that have no interest in playing the price improvement game at all. They just execute on the need that is in front of them, and the force of their collective behavior can just drive a trend on and on, day after day, for remarkable stretches of time.

Bitcoin might be more like a commodity or a currency than a stock in this regard. There are signs that the buying forces in Bitcoin could be dispersed enough, and price insensitive enough, to let the trend keep going like the Energizer Bunny.

Now, it is entirely possible this note leaves egg on our face. Bitcoin could go into a correction within days, or even hours, and such is always possible with an asset whose price can rise 40% in a matter of weeks.

But it is also possible the big trend run of the type we are describing occurs, in part because retail investors are driving the trend now, too, perhaps in a very big way.

Another secret of Bitcoin’s robust rise is the ability to buy fractional pieces with no concern for the headline price of a coin. If a small investor wants to put, say, $50 into Bitcoin, they can easily do so, thanks to the fact every Bitcoin is divisible into 100 million Satoshis.

This means any investor can set up a Bitcoin auto-investment type program, where they chip a couple bucks in every month — $10, $100, whatever it is —  regardless of the BTC price.

Now, pray tell, what happens if millions of investors start doing that?

This is the door that PayPal has opened up, by making Bitcoin easily accessible to a network of 346 million active users.

PayPal is seeing so much retail demand for its crypto-purchase offerings, it is having trouble keeping up with demand. At the same time, numerous PayPal users are not just tossing a couple bucks into crypto; they are maxing out the purchase limit of $20,000 per week.

Nor is PayPal the only one seeing such demand. Square, another payment processor with a market cap of $90 billion, is seeing rising crypto asset demand via its widely popular Cash App.

Pantera Capital, a crypto-focused hedge fund, believes that retail demand from PayPal and Square users is so strong, that those two entities alone are buying up more than 100% of the newly minted Bitcoin supply.

As you may know, a supply of new Bitcoins is still coming into existence at a fixed mathematical rate. Over a period of a time, on a schedule that is predictable in advance, that rate of new supply will fall toward zero.

In its research, Pantera Capital compared the activity of known suppliers to PayPal and Square with the current rate of new Bitcoin creation. Via that comparison, Pantera concluded that more than 100% of the new Bitcoin supply is being bought.

That suggests that most of the retail investors buying Bitcoin through PayPal and Square have the same attitude as institutional buyers: They are buying Bitcoin to hold, or “hodl,” rather than to trade it. That is why new supply is not being recycled back into the market fast enough to meet demand. 

And when there is too much demand, relative to a fixed rate of supply that cannot expand for any reason — with no court of appeal other than the ironclad laws of mathematics — the only way to adjust a persistent demand-supply imbalance is through upward movement in the price.

The more long-term oriented, price-insensitive, and globally distributed the buying cohort, the longer that upward buying impulse can last. And with more entities offering mouse-click-level access to Bitcoin purchases in 2021 — that will surely happen — the number of Bitcoin “hodlers” is likely to expand by the millions.

This could go on for a while.

If you regret not being involved, you may want to buy a little here and now, regardless of price, just to ease your troubled mind. And then, if a correction does come, have some dry powder on hand and think of it as a blessing.

“Imagine Britain when a Green Industrial Revolution has helped to level up the country,” wrote U.K. Prime Minister Boris Johnson in a Financial Times opinion piece on Nov. 17.

“You cook breakfast using hydrogen power before getting in your electric car, having charged it overnight from batteries made in the Midlands,” Johnson went on. “Around you the air is cleaner; trucks, trains, ships, and planes run on hydrogen or synthetic fuel.”

Johnson’s imagery of a Green Industrial Revolution was the lead-in to a “10-point plan” to bring about economic recovery in part through green investment. For governments around the world, going green is now in vogue.

France and Germany have already announced green energy and climate change spending plans worth tens of billions of dollars. Joseph R. Biden, the U.S. President-elect, announced a green energy and climate change plan earlier this year with a price tag of $2 trillion over the course of four years.

Britain’s level of spending will be less than France or Germany’s intended outlays, but the U.K. government insists it is the targeted nature of the spending that counts.

In his Financial Times opinion piece, Johnson argued the U.K. government’s plan to spend 12 billion pounds (about $16 billion) could draw “potentially three times as much from the private sector, to create and support up to 250,000 green jobs.”

Skeptics will argue that Britain is spending far too little relative to its goal of reaching net-zero emissions by 2050, a target that was written into law in 2019. To have a shot at that goal, Britain would potentially have to spend tens of billions of pounds, year in and year out, for the next two decades.

But either way, Johnson’s 10-point-plan is a significant step forward, and some of the planned initiatives have teeth. For example, the plan calls for banning all new gasoline and diesel-powered vehicles, including delivery vans, by 2030.

There are also plans to make the U.K. “the Saudi Arabia of wind,” with enough offshore wind farm capacity to power every home in the country, and to build new charging stations for electric cars all across the country.

There will also be electric battery gigafactories, thousands of “green buses” to reduce public transport emissions, a billion-pound retrofit of homes, schools, and hospitals to make them more energy efficient, plans to plant 30,000 hectares of new trees, and more. 

The cynical take on all this is that the Johnson government, recently beset by scandals and infighting on the way to a potential No Deal Brexit, is eager to change the subject in the media.

Johnson may also be seeking a bridge of friendship between the U.K. and the United States, knowing that an incoming Biden administration will be pro-green and anti-Brexit, and the U.K. will meanwhile be hosting a huge U.N. climate conference, known as COP26, in Glasgow, Scotland, in 2021. 

With all of that said, it is increasingly clear that green energy initiatives are considered smart politics and a smart way to justify new government spending, with Western economies in need of a post-pandemic boost. 

In terms of reenacting the grand plans of Franklin Delano Roosevelt from the 1930s, projects that move the needle on jobs and infrastructure spending, while appealing to the pro-green instincts of younger generations, tend to make the most sense. 

For investors, the opportunity comes down to government investment and friendly regulatory policies. If capital is flowing into an industry even as rules are being adjusted to favor it, that is double the reason to anticipate an acceleration of private investment.

The good news for investors is that these high-profile green initiatives are likely to last for years, and will pump a fair amount of capital into various green technology areas like wind, solar, hydrogen, geothermal, lithium battery production, electric vehicle (EV) ramp-up, and more.

Another good piece of news is that, as various green energy industries grow larger, economies of scale will lower their unit costs and increase their profit margins. When an industry is able to sell components at ever-lower costs as production volume goes up and to the right, a virtuous feedback loop kicks in where more size means a stronger bottom line. 

A challenge for investors will be avoiding green energy stocks when they are overextended, or when they appear vulnerable to a meaningful price correction. Popularity could make this task harder, with bullish trends for many green energy stock names already underway.

Even still, there will be pockets of opportunity when green energy names go into consolidation mode, or after they come out of a corrective price period (a countertrend breathing hiatus within a larger trend) on their way to higher peaks.

In sum, we are skeptical of Boris Johnson’s motive and wonder whether the U.K. “Green Industrial Revolution” budget will be large enough to meet Britain’s goals.

But there is no question the level of investor attention devoted to green energy stocks is rising — however Britain’s green initiatives shake out — and big opportunities, both long and short, will be afoot in 2021. 

In our view, inflation will make a true comeback in the second half of 2021. Not weak inflation either, but the real stuff. It could be the kind of inflation we haven’t seen in years. Rising wage levels for the average worker could materialize too, providing the fuel source for a sustainable, multi-year inflation trend.

If it happens, there will be good consequences and bad ones. For TradeSmith Decoder subscribers, there will be exciting trading opportunities, on both the long side and the short side of markets. For all its wildness and with no shortage of awfulness, 2020 has been a stellar year for Decoder — hello Bitcoin — and 2021 could turn out even better.

If inflation returns, markets will respond with powerful trend movements, both bullish and bearish. In a development that investors aren’t used to, whole sectors and industries could become bearish shorting targets as inflation fears trigger capital flight. (Utilities and consumer staples, look out below.)

For the U.S. economy, it could be a mixed bag. On the positive side, new jobs are likely to be created — many of them via government programs — and the average worker could be in line for a pay hike (or even an ongoing series of them). We saw early hints of after Election Day, when Florida became the first Southern state to pass a $15 minimum wage law.

On the negative side of the ledger, many more trillions are likely to be spent, and the U.S. national debt total will rocket higher with worrisome long-term effects. A return of robust inflation that feels like a boon, at first, could later feel like a return to the 1970s. Meanwhile, for investors, the long bull market in stocks will finally end. But we don’t expect that to happen right away.

In the aftermath of the 2020 election, the U.S. dollar has been profoundly weak. This was confusing at first because the election delivered a “Biden gridlock” result, in which, barring a surprise run-off result in Georgia on Jan. 5, a Democrat White House faces off against a Republican Senate.

That is a recipe for reduced stimulus, or even no stimulus at all. Consider this Nov. 16 excerpt from Bloomberg, which gives the flavor:

President-Elect Joe Biden’s call for Congress to pass a larger-scale stimulus package ran into swift headwinds, with downbeat comments from a senior Republican senator…

“Right now Congress should come together and pass a COVID relief package like the Heroes Act,” Biden said Monday in Wilmington, Delaware.

Senate Appropriations Committee Chairman Richard Shelby made clear that’s not coming soon. “We’re not going to pass a gigantic measure right now – and the question is will we pass it later? Doubtful,” he said, hours after Biden spoke.

Against a backdrop like that, with the COVID-19 vaccine cavalry on the way, one would expect the U.S. dollar to be stronger, as the U.S. muscles through a pandemic recovery with less spending than expected and a White House that finds its priorities largely blocked.

And yet, the U.S. dollar has weakened substantially since the election, and this may be the message: Government spending in 2021 will not necessarily be blocked by a GOP Senate.

Even if Mitch McConnell takes a sacred vow to kill every bill, the Biden administration may have the means to spend trillions anyway and the technocratic knowledge to make an end-run around the Senate.

Jerome Powell, the Chairman of the U.S. Federal Reserve, has learned a lot over the course of the pandemic. One of the things he learned is that, if the Federal Reserve packages its actions in the right way, it can break the rules and hardly anyone will care.

Billionaire bond-fund manager Jeff Gundlach, and others, have accused the Fed of violating the terms of the Federal Reserve Act with its unorthodox pandemic programs — some done in coordination with the U.S. Treasury — and its willingness to openly buy corporate bonds, including high-yield junk bonds.

This is where the spending back door comes into play.

The Federal Reserve and the U.S. Treasury can team up in creative and unorthodox ways, and pull off technocratic maneuvers that a majority of observers don’t understand. If the Fed and Treasury are also willing to bend the traditional rules, or even break them a little bit, there is a whole lot they can do.

Powell, as head of the Fed, has gone on record repeatedly expressing his opinion that the U.S. government should do more to help the recovery.

Powell’s view, more or less, is that monetary policy (lending programs and credit) has been stretched to its limit, and fiscal policy (direct government spending) needs to kick in to help the U.S. economy make it through.

For the Federal Reserve and the U.S. Treasury to truly team up, and bypass the spending authorization of the U.S. Senate, Powell needs a U.S. Treasury secretary with the same mindset — and preferably one who supports the tenets of Modern Monetary Theory (MMT).

MMT is not a crackpot theory. Advocates believe some questionable things, but the underlying logic is sound, at least from a plumbing perspective.

The core of MMT, more or less, is the belief that a sovereign government in control of its own currency and debt markets has no spending constraint other than inflation. As long as the economy is not seeing an unhealthy level of inflation, MMT proponents believe a government can spend as much as it wants.

MMT theorists also tend to be sophisticated and technocratic, meaning, they have numerous ideas as to how to run the financial system, and how to dampen or block inflation even with government spending on the rise.

For example, one MMT policy prescription is linking mortgage loans to a price-to-rent ratio, so the size of the loan is capped by an index of average rents in a given area. If you wanted to buy a house at a price that is greatly inflated relative to the price-to-rent ratio, you could do so, but the financial system would not support your decision with lending leverage. This would reduce home price inflation by keeping prices more tethered to a realistic measure (local rent averages).

So an MMT theorist with policy knowledge and technical skills would seek to spend government money on new job programs, or community funding for government-approved initiatives, while simultaneously using various financial tools (like capping mortgage size based on price-to-rent ratios) to keep inflation pressures down.

This is how the next U.S. Treasury Secretary will think. In our view, the incoming U.S. Treasury Secretary will almost certainly be pro-MMT, even if they never say “Modern Monetary Theory” out loud.

If you put together a Fed Chairman who is pro-fiscal (Powell) with a U.S. Treasury Secretary who is pro-MMT, and mix in a willingness to bend or break rules, you can get trillions into the hands of consumers and communities in ways that Mitch McConnell can’t stop.

Here is a hypothetical example: 

• The Federal Reserve and Treasury combine forces to create a municipal lending program that is tied to “green jobs” at the state or county level.

• Low-interest-rate loans — think borrowing rates so low the cost is close to zero — are packaged for state and local entities with the stipulation that the money is spent on green jobs in a local area (solar installers, wind farm technicians, ethanol plant workers, and so on).

• States and counties borrow trillions by way of the Fed-Treasury joint program. The loans are long-dated and low-cost so there is low risk of default, and no performance reckoning for many years out.

• Meanwhile, hundreds of billions or even trillions in credit are distributed (in loan form) to the states, with the stipulation that the money is spent on jobs or infrastructure-type improvements immediately.

There are a great many technical details left out in the above example.

But the basic idea is that, in a modern financial system, credit and money are the same thing. When banks extend credit, they are, in effect, creating money, because the entity that draws on the credit line, or takes the loan, has newly created funds as a result.

It is normally the case (again, in a modern financial system) that banks create most of the money in circulation, rather than the Fed or Treasury. The banks do this by extending credit, and creating loans with their reserves, in such a manner that every dollar of reserves is multiplied throughout the system.

Our main point here is that, with a little creativity and some artful rule-breaking, the Federal Reserve and Treasury can do this too, either in partnership with banks or bypassing them altogether.

But to make this happen, you need both the Federal Reserve Chairman and the new U.S. Treasury Secretary to play ball, and to have the same pro-fiscal, MMT-style goals in mind for stimulating the economy.

Here is the New York Times from the morning of Nov. 20: 

President-elect Joseph R. Biden Jr. said on Thursday that he had chosen his nominee for Treasury secretary and that he would announce the pick in the near future.

Mr. Biden, at a news conference following a meeting with U.S. governors, said he believed the selection would be accepted by “all elements of the Democratic Party.” He said the choice would be unveiled just before or just after Thanksgiving.

Mr. Biden has been widely expected to choose a Treasury secretary that would make history. The job has only been held by white men in its 231-year history.

Those believed to be on the shortlist include Lael Brainard, a Federal Reserve governor; Janet L. Yellen, the former Fed chair; and Roger W. Ferguson Jr., a former Fed governor and business executive…

The shortlist candidates all have a few things in common. First, they are either progressive in their political views or sympathetic to progressive ideas. Second, they are highly intelligent and highly technocratic, meaning they know the financial system inside-out — with direct knowledge of how the Federal Reserve works — and how to work the hidden levers of the system. And third, they will all be pro-MMT, in word and deed if not public allegiance.

The Fed and Treasury won’t need McConnell’s Senate. They’ll get the trillions through, for good or ill, and the MMT experiment, started in March 2020 with the initial emergency response to the pandemic, will continue one way or another.

Whether you like this news or hate it, it means a roster of excellent investing and trading opportunities in 2021 — as we see progressive technocrats with inside knowledge of the system figure out how to unleash inflation, for good or ill, in a manner the U.S. economy has not experienced in decades. 

Paul Tudor Jones and Stanley Druckenmiller have at least three things in common. They are both multi-billionaires. They are both hedge fund legends in the global macro space. And they have both publicly endorsed Bitcoin and confirmed they are long.

Ray Dalio is another global macro hedge fund legend, with a net worth in the vicinity of $15 to $20 billion. Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world and one of the most successful macro hedge funds of all time. 

Dalio is not yet in the Bitcoin bull camp. But he is on his way. Bitcoin seems to have a magnetic effect on intelligent people: The more they look into it, and the more they genuinely seek to understand it, the more compelling the ownership case becomes.

On Nov. 17 Dalio posted an inquiry on Twitter — you can see the Twitter thread here — to learn more about Bitcoin.

“I might be missing something about Bitcoin so I’d love to be corrected,” Dalio said to start the thread. He then went on to enumerate the problems he sees with Bitcoin being “an effective currency.”

Here is our summary of the problems that Dalio listed (and again, you can see the Tweet thread here):

• Bitcoin is not very good as a medium of exchange. Dalio believes you can’t buy much with it, and it is too volatile for merchants to be comfortable with.

• Bitcoin is too volatile to serve as a store of wealth. It doesn’t have correlation with the things he needs to buy, Dalio says, and thus doesn’t protect his buying power.

• Bitcoin is in danger of being outlawed by governments. If it becomes too successful, Dalio fears that governments will outlaw it.

• It is hard to imagine central banks or corporations using Bitcoin as a reserve asset. Unlike gold, which Dalio points out is the third-most-popular reserve asset — presumably behind government bonds and high-grade corporate bonds — Dalio has trouble seeing a comparable role for Bitcoin.

“If I’m wrong about these things I’d love to be corrected. Thank you,” Dalio said at the end of the thread.

Let’s dig into the points one by one.

First, Bitcoin is absolutely fine as a medium of exchange. There is no friction on this point whatsoever. We can understand why doubters would believe otherwise. But their mental blockage is a form of misunderstanding.

It is true that the Bitcoin blockchain does not move quickly enough to facilitate tens of thousands of transactions per second, and likely never will. But this has no bearing on Bitcoin’s effectiveness as a medium of exchange.

We can explain why Bitcoin will do fine as a medium of exchange via three words — “intermediary payments layer” — and then demonstrate proof of concept with one word, “PayPal.”

When people try to envision Bitcoin as a currency, they often get confused by the difference between the role of Bitcoin itself and the role of payment processors that will facilitate low-stakes transactions.

We can use PayPal as an example here. PayPal, a payments processing company worth $220 billion, is currently in the top 25 of the S&P 500.

PayPal recently announced that, beginning in early 2021, active PayPal users (there are 346 million of them) will be able to use supported cryptocurrency assets (including Bitcoin) to buy things with PayPal’s worldwide network of 26 million merchants.

This means that, if you are one of the 346 million users with a PayPal account, you will be able to use Bitcoin to buy stuff. And if you are one of the 26 million merchants on the PayPal network, you will be able to accept Bitcoin as a form of payment.

So much for a lack of ability to buy things.

Why does this work? Because PayPal will facilitate the intermediary payments layer. Every time a user buys something with Bitcoin, or a merchant takes payment in Bitcoin, PayPal will facilitate the transaction behind the scenes.

In many instances, PayPal will not have to trade on the underlying Bitcoin blockchain at all. If someone in the PayPal ecosystem is buying $100 worth of Bitcoin, and someone else is selling $100 worth of Bitcoin, PayPal will be able to cross-swap those transactions on its own internal ledger.

This is not a new thing. Stock exchanges and banks have done internal cross-transactions, where one user trades assets with another inside the system, for decades. It is a highly efficient way to take advantage of a network.

Then, too, imagine you want to pay for something in Bitcoin, but the merchant you are buying from prefers to be paid in euros. If PayPal is involved, this is once again no problem, because the PayPal trading desk — combined with extremely powerful software — will simply handle the exchange behind the scenes.

Exchanging Bitcoin for euros, or yen, or pesetas, or whatever the local is, will not prove much different than any point-of-sale foreign currency exchange — and banks have again been doing this for decades.

If you have ever traveled abroad, you may have heard the advice that paying for things with an international credit card is a smart thing to do, because the bank will do the foreign currency transaction on your behalf, and likely give you a better rate than you could get on your own.

With Bitcoin, it is the exact same deal. It all comes down to the intermediary payments layer, which is facilitated by PayPal, Visa, Mastercard, and a whole host of others.

The key thing is having Bitcoin become popular enough for the 1,000-pound gorillas in the payment processing space to show willingness to take on Bitcoin and support it. Once that happens, and the payment processors have set up the infrastructure to handle Bitcoin behind the scenes, that’s all you need. And guess what? That has already happened, because PayPal has opened the door.

Bitcoin, in other words, can do just fine as a medium of exchange, because public desire to transact in Bitcoin will create the ability to do so — via integration into the intermediate payments layer — as a matter of free market forces rising to meet demand. Again, with PayPal embracing cryptocurrency payments, and promising a big rollout in 2021, this has already happened.

Moving on to the next objection, Dalio surmises Bitcoin is too volatile to serve as a store of wealth. This is a short-term view and shows a lack of awareness as to where Bitcoin is headed.

Various surveys and forensic analyses of blockchain transactions have shown that a majority of Bitcoin investors tend to hold Bitcoin, rather than trade it. They buy it and hold onto it. Why?

First of all, imagine you had shares in a company you believed could be the next Amazon or Google, and you had bought in at the equivalent of $100. Would you trade those shares? Not if you were sane, you wouldn’t. You might trade a little around the edges of the position — but for the most part you would hold the shares and wait for the multi-thousand-percent price appreciation that was in store.

With Bitcoin, the mentality is comparable. Bitcoin’s ultimate destiny is to be a globally recognized store of value, a kind of “digital gold,” with a multi-trillion-dollar cap. When Bitcoin investors start to understand this trajectory — when the light bulb clicks on — for the most part they lose the desire to trade BTC. They just want to buy more and sit on it, like dematerialized gold in a digital vault.

Eventually, Bitcoin will become a super-boring asset. Imagine a world in which, say, 70% of the Bitcoin in circulation is simply held for the long-term, and Bitcoin has truly global distribution.

In a world like that, the Bitcoin price will be the opposite of volatile. It will be sleepy, with a relatively narrow trading band, because the size and stability of the investment base will dwarf the portion of Bitcoin that is actively traded.

But in order for Bitcoin to get from here to there — to fulfill its destiny as a globally distributed sovereign asset — Bitcoin first needs to see its market cap expand dramatically, on a one-time journey from the hundreds of billions into the multiple trillions, representing a price increase of 10X to 20X, if not more.

To put it another way, imagine Bitcoin as a rocket ship en route to another planet. During the journey, Bitcoin’s price behavior will undoubtedly be dramatic at times. But once it reaches the final destination, the volatility will dissipate.

Then, remember that safe-haven assets often appear volatile because they are priced in volatile fiat currencies, and it is movement in the fiat currency value that gives the appearance of safe-haven volatility.

For example, when the price of gold is rising in U.S. dollar terms, what does that mean? Does it mean that gold is becoming more valuable relative to dollars, or that the U.S. dollar is becoming less valuable relative to gold? If you are pricing gold in dollars, you can’t really separate the two views.

To some extent, if Bitcoin continues to be volatile after reaching maturity as a globally distributed sovereign asset with a multi-trillion market cap, it will likely be due to the currency debasement actions of sovereign governments.

Bitcoin will eventually become the stable and boring benchmark against which other currencies are measured — at which point, if the Bitcoin price moves around a lot in U.S. dollar terms, that will say more about the goings on of the U.S. dollar than it does about Bitcoin.

But again, to reach that point of global distribution, the Bitcoin price will have to rise dramatically. Because the Bitcoin supply is mathematically fixed, and new supply will diminish to zero, the only way to express upward movement in Bitcoin demand is through violent upward movement in the price.

Moving on to the next objection, regarding Bitcoin being outlawed by governments: It is not realistic to think governments can outlaw Bitcoin. It is too late, and the political will is lacking regardless.

Bitcoin, as the world’s first digital store of value, has global consensus and global buy-in. There is only one Bitcoin — and there can only ever be one — because Bitcoin has a train of blockchain transactions dating back more than a decade, and the open endorsement and embrace of wealthy investors and cutting-edge corporate entities on multiple continents.

How do you compete with that? You don’t. It is impossible to recreate the network effects created by global consensus born of 10 years’ worth of head start. Bitcoin’s history, and Bitcoin’s network effects, and the level of commitment and buy-in attached to the Bitcoin transaction ledger specifically, cannot be replicated, ever, under any circumstance.

And because Bitcoin’s combination of history, buy-in, and network effects make it too powerful to replicate — you can’t just “fork” ten years of history! — Bitcoin is also too powerful for any government to ban successfully. It is too late.

Perhaps years ago, if governments had banded together and recognized the Bitcoin threat before Bitcoin adoption had reached critical mass, they could have stopped it. This would have been a matter of killing off a phenomenon before the phenomenon had a chance to truly take hold, and truly exploit the network effects of awareness and buy-in on a global scale.

But again, you cannot create history and you cannot rewrite history. For government bans to kill Bitcoin now would require a time machine.

Then, too, freedom-loving governments would not likely tolerate the notion of banning Bitcoin in the first place. In 2021, the state of Wyoming will have a sitting U.S. Senator who has been a Bitcoin “hodler” since 2013.

Deciding to ban Bitcoin, at this point, would potentially create as much uproar as attempting to ban gold. The very act would be seen as so desperate, and so anti-free market, that it would potentially create capital flight from the country’s fiat currency and bonds, for fear something was seriously going wrong.

 So, no, Bitcoin is not in serious danger of being banned by governments. That was true five years ago. It isn’t true now. And with each passing day, Bitcoin becomes more and more powerful. The global consensus behind Bitcoin is a kind of decentralized sovereignty, minus the need for heads of state or border defense or aircraft carriers. It is bigger than any government now, even America’s or China’s.

As for the last objection, where Dalio suggests it is hard to see corporations or central banks using Bitcoin as a reserve asset: This objection is already out of date.

We have already seen two publicly traded corporations, MicroStrategy and Twitter, endorse Bitcoin as a corporate treasury asset. That has already happened. There will be more.

As another sign of the times, consider this: On Nov. 17, Brian Brooks, the acting head of the Office of the Comptroller of the Currency (OCC) for the U.S. government, was nominated to serve a full five-year term. Why is that notable? Because Brooks was previously the Chief Legal Officer (CLO) for Coinbase, one of the world’s most prominent crypto exchanges (which will likely go public in 2021).

Cryptocurrency is no longer “magical internet money.” It is here, it is real, and it is transforming the system from the inside, rather than trying to bulldoze the system head-on. Libertarian fantasies aside, this is always the way it was going to happen.

As acting head of the OCC — and soon to be permanent head of the OCC, if confirmed by the U.S. Senate — Brian Brooks has taken steps to let American banks take custody of crypto assets. From that point, as market demand dictates, it is easy to picture Bitcoin deposits becoming as readily available and accessible as U.S. dollar deposits.

And then, from there, is it really so hard to see central banks adopting Bitcoin as a reserve asset alongside gold? Why?

Keep in mind that Bitcoin’s store-of-value function — its role as “digital gold” — is far and away the most important use case. Compared to the value of that, the medium-of-exchange aspects pale in comparison. This is why it was a stroke of pure genius to keep Bitcoin free of features and gizmos, making it easier to emphasize the one use case that dominates all others.

Then, too, once traditional banks go the way of PayPal (in part to keep PayPal from eating their lunch) and start offering Bitcoin deposits to consumers, it will only be natural for Bitcoin reserves to become a part of the banking system, and then to become a staple reserve asset for central banks themselves.

For those who can’t get their head around this — because it seems too crazy — keep in mind that all breakthrough technology developments sounded crazy at one time.

Popular Mechanics in 1949: “Computers in the future may weigh no more than 1.5 tons.”

Ken Olsen, CEO of Digital Equipment Corporation, in 1977: “There is no reason anyone would want a computer in their home.”

Bill Gates, founder-CEO of Microsoft, in 1989: “We will never make a 32-bit operating system.”

Steve Ballmer, CEO of Microsoft, in 2005: “There’s no chance that the iPhone is going to get any significant market share. No chance.”

To that roster of infamous predictions — from people who were supposed to understand technology! — will eventually be added the quaint notion that “Bitcoin will never become digital gold.”

It is already happening. The fact that it feels strange is par for the course as we accelerate into humanity’s fourth great age (Stone Age → Agricultural Age → Industrial Age → Information Age).

In closing, we can say with confidence that another big, future event for Bitcoin — we don’t know when, but we know the day will come, and perhaps sooner than anyone thinks — will be the first announcement from a credible central bank that Bitcoin has been added to its reserve mix.

Because, really, why wouldn’t they take action at this point, when the reward for being an early mover (it is still early) is the potential for 10X asset appreciation, if not multiples more? 

Congratulations are in order for Tesla bulls: The S&P 500 Index Committee announced this week Tesla will be added to the S&P 500 in December. Tesla shares (TSLA) jumped 13% on the news, sending Tesla’s market cap to nearly $420 billion.

The Tesla chart is intriguing. If Tesla breaks down from here, it is definitely a sell and could even be an attractive short sale.

There is a history of wildly overhyped growth stocks reaching their valuation pinnacle, and then going into permanent decline, not long after joining the S&P 500 index. To give but one example, search your memory banks for Yahoo, a company that joined the S&P 500 almost exactly 21 years ago, in December 1999.

At the peak of its valuation, which came mere months after joining the S&P 500 — and coincided with the topping-out of the whole dot-com bubble — Yahoo was worth $140 billion.

And yet, 17 years later, in 2017, a much-diminished Yahoo was purchased for less than $4.5 billion, or roughly a 97% discount from its dot-com-bubble peak, by Verizon, a stodgy telecom.

It is very possible that Tesla, whose valuation is pure, unadulterated silliness — see the meaning of Tesla, published on Sept. 2, for more on that topic — is the modern-day Yahoo in terms of wildly inflated expectations.

It is further possible that the inclusion of Tesla in the S&P 500 is the marker of a bubble top, not unlike the inclusion of Yahoo in the same index mere months before the dot-com bubble popped in March 2000. (And make no mistake, history will note the tech bubble of 2020 to have been every bit as crazy as the one that popped in 2000.)   

Note the multi-month triangle pattern in the Tesla chart below. The TSLA share price last peaked on Aug. 31, nearly three months ago. If it breaks out lower rather than higher, watch out.

In fact, if TSLA trades persistently anywhere below $400 per share from this point on, we would abandon all longs. If it breaks down and shows signs of entering a downtrend, we would consider a short sale or the purchase of puts.

The bearishness is not just tied to the S&P 500 inclusion (though that is part of it). It also has to do with the valuation, and the sheer insanity of it. Tesla today is like Yahoo in 1999 in more ways than one. It is a stock powered by fervent belief, rather than math or logic.

Entering the S&P 500 is a notable achievement and a major event. It is also a justification for buying shares before the event happens.

When a company enters the S&P 500 index, a whole universe of passive index products has to purchase shares in that company, automatically, in proportion to the expected allocation. There is an estimated $11 trillion worth of passive funds tied to S&P 500 index products. Bloomberg estimates that, when Tesla joins up, passive indexers will have to buy roughly $40 billion worth of TSLA shares.

That kind of buying commitment is certainly a bullish factor. But it is also a known factor, which means it gets priced into the shares before the event happens. This is partly why TSLA shares jumped double-digits on news that Tesla would be entering the S&P 500 in December.

Tesla will be the largest-ever company to enter the S&P 500 in terms of market capitalization at the time of inclusion. At its current market cap in the $400-billion-plus range, Tesla counts as the eleventh-largest company in the world.

Tesla’s market cap is so large, in fact, that Bloomberg estimates it will have more weight than the bottom 60 companies in the S&P 500 all put together. To make room for Tesla, the passive indexers who track the S&P 500 will not be able to just sell off the company that is getting bumped out. They will have to shave the allocation size of dozens of other holdings.

But the real problem with Tesla, as with Yahoo in 1999, is that the valuation makes no sense. There is no justification for where Tesla’s shares are priced today — not on Earth, not on Mars, not on Alpha Centauri. The math does not work. There is no plausible scenario that changes that.

Put aside for a moment the fact that Tesla’s profits are still based on the selling of regulatory credits, rather than the actual selling of cars. If not for the ongoing exploitation of a green government subsidy, Tesla would have no profits at all.

But let’s forget that for a moment, just as it appears the S&P 500 Index Committee decided to forget it. Take the $556 million in net income that Tesla reported over the past 12 months and assume they actually made it by, you know, selling cars. Then assume that Tesla ramps up its net income to $10 billion by year-end 2023.

For the sake of generosity, we are tallying up Tesla’s $556 million in regulatory credit profits as real and not subsidy driven. We are also going with the wildly fantastical assumption that Tesla will be able to ramp up its net income — not just revenue, but profit — to $10 billion two years from now.

If Tesla can make a real half-billion-dollar profit from selling cars — not credits, which will expire — and then increase that profit by 1,700% over the next few years, you still wind up with a valuation of about $218 billion as based on the average forward earnings multiple for the average S&P 500 company.

Tesla, in other words, could achieve the most spectacular, out-of-this-world profit growth scenario the bulls could hope for, and do it all within two years or less — and the stock price would still warrant being 50% lower than it is now.

But of course, there is no possible way in the known universe Tesla will achieve that kind of profit growth, because Tesla is a car company — there is software, yes, but the software goes inside cars — and as a car company Tesla has brutal competition.

Put aside the fact Tesla’s valuation is more than General Motors, Toyota, and Volkswagen put together, or the fact that all three of those players will be fiercely formidable in the electric vehicle (EV) space, or the fact that Tesla will not have a monopoly on self-driving car fleets run by municipality, or the fact that Tesla cannot claim to be the self-driving leader.

All of that matters, but for the moment we can just look at the pure-play EV competition Tesla has to contend with. Nio, a company known as the “Tesla of China,” has a market cap of $64 billion as of this writing.

If you add up the market caps of Tesla’s publicly traded EV competitors in addition to Nio — names like Nikola, Workhorse, Hylion, and Fisker — you get to $80 or $90 billion. If you then consider still-private EV companies that have raised multiple billions — like Rivian, which took a $700 million investment from Amazon — you have an EV competitor field that is worth well over $100 billion.

To grow into its valuation, then, Tesla will not only have to achieve eye-bulging, record-busting profit growth with no meaningful capex costs, at margins never before seen or even heard of for a car company, it will have to do in the presence of hundreds of billions’ worth of fierce EV competition, not just from the old guard but from a phalanx of well-capitalized pure-play competitors, many of whom the market expects to do well.

Again, there is no planet, neither Earth nor Mars, on which the math adds up. For Tesla to achieve its expected priced-in profit growth, given its current market cap above $400 billion, would be a miracle. To achieve it in the presence of competition from the old guard would be a miracle squared. Add in the competition from pure-play EV competitors and you would need a miracle cubed.

As of this writing, Tesla’s reported return on equity (ROE) numbers were in the low single-digits, around 6%, and that was with the aforementioned regulatory credits.

This is a company that will struggle to achieve even a modestly respectable profit margin, even if it executes beautifully, simply because the car industry is so brutal. And yet bulls are pricing the shares as if Elon Musk has magical powers.

From a math-and-balance-sheet perspective, it makes no sense. But from a human behavior perspective and a complex adaptive systems perspective, it makes perfect sense.

A whole bunch of people got excited about the Tesla story without doing the math or considering the competition — just as they did with Yahoo in 1999.

And the S&P 500 Index Inclusion Committee, while holding its nose at first because of the regulatory credits issue, eventually succumbed to the pressure of leaving such a high-profile company out of the S&P 500. Likely succumbing to market pressure — a very human thing to do — they said “ok” to a company whose profits are illusory and whose valuation is insane, just as they did with Yahoo in 1999.

What happens next will be interesting to watch, and possibly to trade from the short side.

We can say, too, with the utmost confidence that, unless a legitimate straight-up miracle occurs, the resolution of this story will be significantly lower share price for Tesla within 12 months’ time.

The S&P 500 inclusion news is likely the end of the game, coming near the likely end of a historic tech bubble for the ages, with more parallels to Yahoo and the 2000 dot-com-bubble endgame than one can count.

If you thought globalization was dead, think again. In some ways, it is stronger than ever.

There are certainly factors that favor protectionism, and trade wars, and a withdrawal from partnerships and agreements. But there are also powerful forces pushing in the other direction.

These counterforces have the potential to produce more globalization over time, not less, with greater cooperation between nations.

One important factor is the growing rift between the United States and China. With each passing day, it seems, the U.S.-China relationship grows colder. As we explained on Sept. 21, the U.S. and China are falling into “the Thucydides trap” — the dangerous scenario that unfolds when an established superpower fears an up-and-coming one.

The U.S. and China have too many cultural and commercial ties to simply break off the relationship completely. In some ways, the relationship is like a bad marriage. Each tires of the other, but there is no easy way to split up the assets.

When a marriage breaks up, the ex-couple also tends to divide up its pool of friends. Some friends go with one spouse and some with the other.

When two superpowers have a falling out, to the point of going cold or severing most ties, the split-up effect on friends and allies is even more pronounced. For other nations the question increasingly becomes, “Whose side are you on?” 

This is a force pushing in favor of globalization and free trade, rather than against it.

As the U.S. and China head for break-up, and a full-blown superpower rivalry, each nation will want to cement the allegiance of as many allies as it can, to increase its sphere of influence on the global stage, while denying that same influence to the other side.

In that respect, China scored a major strategic victory on Nov. 15, by way of securing the largest free trade agreement in the history of the world. 

The Regional Comprehensive Economic Partnership, or RCEP for short, is a trade pact between 15 nations in the Asia-Pacific region. In total it covers more than 2 billion people — about 30% of the world’s population — and a combined gross domestic product (GDP) worth $26.2 trillion.

The RCEP was eight years in the making, with the earliest efforts starting in 2012. It includes the 10 nations that are part of the Association of Southeast Asian Nations (ASEAN), along with the non-ASEAN nations China, Japan, South Korea, New Zealand, and Australia.

China will dominate the RCEP, but that was not always the plan. India was originally included, and would have acted as a powerful counterweight to China within the RCEP trade network. But India dropped out of negotiations last year, due to concerns of exposing India’s emerging economy to cheap Chinese exports. The RCEP agreement has a clause that allows India to rejoin if it chooses.

In addition to being the largest free trade agreement ever conceived, the RCEP is the first ever trade pact that includes China, Japan, and South Korea within the same framework.

The main goal of the RCEP is to smooth the path of trade among the 15 Asia-Pacific nations, eventually paving the way for a comprehensive free-trade zone, in the style of the European Union or the old North American Free Trade Agreement (NAFTA).

As a result of the agreement, more than 90% of tariffs will be dropped between RCEP members. Japan, for example, expects to see $50 billion per year worth of automotive tariffs eliminated in its trade with China.

The agreement will also standardize “rules of origin” guidelines for all 15 nations, and smooth out the process for building multi-country supply chains within RCEP. This, in turn, will make it easier for multinational companies to keep their goods production in the Asia-Pacific region. If, say, the United States puts tariffs on a certain product coming from China, RCEP will make it easier to shift the production to, say, Vietnam, with the Vietnamese plants importing parts from China.

RCEP took eight years to negotiate — with India dropping out toward the final rounds — because large-scale trade agreements are intensely tricky and complex.

But that is also why such agreements can be incredibly valuable if done right: By working through the details on hundreds or even thousands of trade items, and reducing friction and tariff barriers on the flow of raw materials and goods between trading partners, the whole system can work more smoothly.

In addition to being the largest free trade agreement in history, RCEP was the first major international effort to be executed via Zoom, against the backdrop of a pandemic.

Rather than have the heads of state and trade ministers gather in a single place, as would normally happen for a deal this historic, the RCEP signing ceremony was carried out by videoconference.

On Sunday, Nov. 15, each of the 15 countries made a show of the country’s trade minister signing a copy of the pact on camera — the president, prime minister, or head of state alongside — and then showing the signature to the camera.

RCEP is a significant win for China, both economically and geopolitically, because China has taken a significant step toward deeper commerce and friendship ties in the Asia-Pacific region.

This step could prove especially valuable in the coming age of central bank digital currencies (CBDCs), as technology enables the bypassing of an intermediary currency for trade transactions.

One of the reasons the U.S. dollar dominates international finance and trade transactions is because, with the 20th century way of doing trade, there was almost always a time lag between the start of a transaction and the completion of it, and that lag favored using third-party U.S. dollars.

But as new technology makes instant peer-to-peer transactions possible, even at the scale of hundreds of millions or billions, it will become even easier to cut out the middleman currency — which has typically been the U.S. dollar — or replace it with a CBDC like the digital yuan. 

With the signing of RCEP, the United States and India will have to think hard about how to counter China’s stepped-up influence on the global stage. Otherwise, if the balance of commerce and trade tilts too far in China’s favor, the global playing field threatens to become a national security threat.

In addition to that concern, if RCEP nations deepen their links with each other over time, exporting firms in the U.S. and India could gradually find themselves getting shut out.

The United States in particular has two ways to counter RCEP. It can deepen and strengthen its trade ties and strategic relationships with Europe and South America, creating a kind of “West versus East” dynamic, or it can attempt to rejoin other Asia-Pacific trade agreements, or both. Building relationships with Africa and Central Asia will also become a priority.

However the chessboard takes shape over the next decade or so, the forces of globalization have been newly invigorated by the realities of geopolitics.

If a superpower is going to face off against a comparable superpower, that superpower will need friends and allies — and ties between nations are built, in part, by mutual trust and a free flow of goods and raw materials.

China knows this, and has taken a big step toward improving its geopolitical chessboard position via RCEP. The United States will have to respond, and figure out how to deepen and strengthen its own position in doing so.

A day will come when it makes sense to short the juggernauts: Amazon, Apple, Facebook, and Google.

That day is not today, and it may not be here for a while yet. But it will come.

As we explained on Aug. 3, the tech juggernauts are trading like a zero-coupon U.S. Treasury substitute. Investors have been reflexively trained to buy Amazon, Apple, Facebook, and Google when little else is working, because the tech giants are seen as impervious to downturns and competition, with reliable cash flows that function like a hidden yield. (They are “zero-coupon” because, rather than offering an annual dividend, the cash flows accrue for a payoff down the road.)

The trouble, though, is that the valuation multiples for all four have gone into the stratosphere, in the same manner that the price of a U.S. Treasury 10-year note yielding less than 1% can be said to be stratospheric. (When yields go low, prices go high, in a mechanical inverse relationship.)

The extreme valuation multiple for the tech juggernauts is comparable to treasury bond pricing that pushes the nominal 10-year yield below  1% (and the real yield — meaning the yield after inflation is accounted for — below zero).

What this means is that, if long-term yields begin a sustainable rise for any reason — at the time of this writing, the U.S. Treasury 30-year bond yield is about half what it was two years ago — then bond prices fall a lot, and so do valuation multiples for the tech juggernauts.

That, in turn, means you could see these names lose 30% to 50%, in share-price terms, even if the business case (revenues and profits, for example) does not change all that much.

If, say, the share price of Apple can double in 2020 for reasons almost entirely related to macro factors (because the underlying revenues barely rose), then macro factors can, at some point, do the same thing in reverse.

Meanwhile, the tech juggernauts have additional problems beyond inflated multiples. The world’s governments are increasingly starting to treat the four like hostile nation-states.

On the hostility front, consider Alibaba (BABA), which could be considered China’s version of Amazon and Google combined. The cancellation of the Ant Group IPO and a new wave of anti-tech regulations from Beijing have given BABA its worst run of share price performance since 2015.

Not long after we wrote about the Ant IPO cancellation (which directly harmed BABA), it was revealed that the cancellation was directly ordered by Xi Jinping — China’s leader for life — to put Jack Ma in his place. Talk about a chilling effect.

Meanwhile, in the United States, the House Subcommittee on Antitrust has issued a scathing report advising extreme remedies for the monopolistic behavior of the big four — Amazon, Apple, Facebook, and Google — including the possibility of breakup. The Department of Justice (DOJ) is also pursuing Google in its biggest antitrust action in decades, and Facebook has aroused bipartisan ire on multiple fronts.

The tech juggernauts have mostly brushed off all these threats. They are seen as too big, too powerful, and too well-lawyered to be seriously threatened.

That view may be more or less correct — and yet, regulatory and political winds are consistently blowing against them now. It is possible those winds turn into a gale at a highly inconvenient time. Like, say, against a backdrop of investors rotating their capital into small caps (and out of safe-haven big tech) in a vaccine-themed recovery play, or when long-term rates are rising because the specter of inflation has returned.

This tees up the latest antitrust effort from Europe: They are now pursuing Amazon.

On July 19, 2018, the European Union (E.U.) hit Google with a fine of 4.3 billion euros relating to Android, the Google smartphone operating system. This was part of a broader ongoing fight, with the E.U. accusing Google of anticompetitive behavior in areas including web search results, the Google Play Store, Google Maps, and the acquisition of Fitbit.

Google has appeared to mostly shrug off Europe’s challenges, filing court appeals in some places, paying fines in others, and agreeing to behavior compromises in still others. The net effect has been like a Chihuahua nipping at the heels of a Great Dane — so far. But the Chihuahua is persistent.

Now the E.U. is bringing Amazon into its sights. On Nov. 10, the European Commission concluded a year-long probe by hitting Amazon with antitrust charges.

Europe’s main accusation is that Amazon broke the rules by using non-public data, collected from third-party sellers, to sell its own products.

If, say, floral print dresses were selling well through the Amazon website, and Amazon reviewed the data of third-party floral-print-dress sellers to see which styles in particular were selling, and then made its own version of the dress, that would be considered a breach of EU competition rules.

The EU is also looking into whether Amazon wrongfully gave its own products preferential treatment over third-party sellers on the Amazon platform, or gave better service to logistics and delivery customers who paid more than other customers.

“We must ensure that dual-role platforms with market power, such as Amazon, do not distort competition,” said Margrethe Vestager, Europe’s top competition regulator.

Amazon’s third-party-seller business generates roughly $69 billion per year, according to the Wall Street Journal. That is far less than the $128 billion Amazon generates through direct sales, and less sexy than Amazon’s $40 billion cloud services business (which is smaller but growing far faster).

This means that, even if Europe draws blood on the third-party-seller front, it will only impact a portion of the Amazon empire, and won’t touch the most important areas. Then, too, Amazon, like Google, can afford the world’s best lawyers and will hire them by the dozen, which means most aspects of the case could drag on for years.

Still, it isn’t a good look. The hostile regulatory actions against Apple, Amazon, Facebook, and Google are starting to pile up. Beyond a certain threshold of scrutiny, investors could start to feel twitchy. One can only wonder, for instance, what kind of political heat Facebook will feel in 2021.

For investors, the primary takeaway here is that the tech juggernauts are not safe to buy on every dip. Their competitive positioning — in terms of the business of tech — may still be invincible. Their macro and regulatory positioning most certainly is not. 

On March 6, 2020, we wrote in these pages that 80 million Americans were likely to be infected by COVID-19, and that more than 400,000 Americans could die as a result.

At that early date, many did not believe it. Many thought it impossible. And yet, here we are. At the time of this writing, more than 242,000 Americans have died since February by official estimates, and the 400,000 threshold looks well within reach.

Scientists at the Institute for Health Metrics and Evaluation (IHME), at the University of Washington, anticipate the U.S. death toll could exceed 500,000 by end-of-February 2021 if social distancing habits and mask-wearing requirements stay relaxed.

And even if social distancing habits and mask-wearing measures are stepped up, the IHME models suggest another 100,000 Americans could die by the end of February. This puts the tally square in the range of our original 400,000 estimate.

If the total number of deaths surpasses 418,500, it will mean more fatalities attributed to COVID-19 than all U.S. civilian and military deaths in World War II.

On Thursday, Nov. 12, the United States broke a new single-day record for case rates and hospitalizations, with 153,000 new reported cases and 66,000 Americans hospitalized.

Eighteen states are now reporting record levels of hospitalization. Though intensive care unit (ICU) beds are reaching capacity, the bigger problem is staff shortages, as health care workers stay on the clock until they drop.

In North Dakota, the personnel shortage is so acute that staff are allowed to keep working even after they test positive for COVID-19. In El Paso, Texas, officials said they were bringing in 10 refrigerated morgue trailers, also known as “morgue trucks,” to deal with volume overflow as Texas becomes the first state to surpass a million cases.

North and South Dakota are leading the curve in terms of new cases and fatalities per capita right now, with other parts of the Upper West and Midwest not far behind, because these places are already cold.

All of this is going to get worse as winter descends, with low-temperature areas offering a preview of what the rest of the country will experience.

While the virus can survive and spread in high-temperature conditions, it does better in low-temperature conditions, and thrives in the presence of indoor gatherings with a lack of circulated air. As more American get-togethers move indoors, and Americans in general feel pandemic fatigue, the virus is in position to accelerate its spread in nearly every U.S. state.

“We are entering Covid hell,” says Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota and member of the Biden coronavirus task force.

Osterholm’s preferred solution is another round of mandatory national lockdowns, to help rein in COVID-19 hospitalizations and deaths before the vaccine cavalry finally arrives. But that almost certainly will not happen.

To the extent local lockdowns are ordered, they will come in conjunction with hospitals and morgues facing an El Paso situation, where resources are strained past the breaking point.

“We are past the point of getting the virus under control,” says Christopher Murray, the director of the IHME. “There is too much of it out there.”

Investors are looking past all of this — or trying hard to look past it, anyway — because equities represent a long-term stream of future cash flows, with most of those cash flows on the other side of the pandemic.

When you buy shares in a company, you are paying for a stream of returns that stretch out not just months or quarters into the future, but years and decades into the future. Thanks to the likely arrival of 90% effective vaccines, that means the number of quarterly earnings reports to be weighted post-vaccine far outnumber the handful likely to be dubbed pre-vaccine.

And when the United States makes it through Covid Winter — which could be America’s darkest winter in living memory, stretching back to the days of World War II — Wall Street anticipates vigorous economic activity, and exciting profit opportunities for the publicly traded survivors, on the other side.

Stock market optimism, in spite of what is coming, also relates to the Federal Reserve promising more or less unlimited support for credit markets. For companies with robust balance sheets and access to corporate lending sources, the key thing will be getting to the other side of Covid Winter — where new market share will be available by way of all the competitors who didn’t make it through.

On the human side of the equation, the next few months will be a time of precaution, and a time to avoid hospital trips if possible. When hospital capacity is maxed out, care shortages for non-pandemic-related issues can become dangerous. If someone needs a bed for a non-COVID-related issue and can’t get one, or needs a doctor or a nurse when none are available, that is when the problems of the pandemic spill directly into daily life.

Last but not least, on the market front, the intensity and ferocity of the COVID-19 surge means bullish investors are not home free.

There is a tension between wanting to look past the short-term pain of Covid Winter, with a focus on long-term growth and the prospect for dominant businesses, versus worries relating to the economic destruction that could unfold in the next three to six months, and nagging questions around the distribution and logistics of a COVID-19 vaccine.

When smart people look at Bitcoin, they wind up buying it. This seems to be happening with clockwork-like regularity now. It feels like every other week or two, if not every other day or two, some new individual or entity, known for excellence in their domain of expertise, is buying BTC.

The latest example of this is Stan Druckenmiller, a retired multi-billionaire hedge fund manager known for having one of the greatest money management track records of all time.

While handling billions in assets for George Soros, and simultaneously for his own fund, Druckenmiller achieved better than 30% per year compound annual returns, on average, with no losing years, over the course of roughly 30 years.

To pull that off with a small account would be impressive. To do it with tens of billions is stunning. And Druckenmiller did not do it in the manner many would expect.

He specialized in exploiting financial crisis events, for example, and by his own admission probably made more on the bearish side than the bullish side of markets. (Although, to create a track record like that, you have to show routine flashes of brilliance as both a bull and a bear.)

Now Druckenmiller, who has long been a fan of gold, is buying Bitcoin.

“Bitcoin could be an asset class that has a lot of attraction as a store of value to both millennials and the new West Coast money,” Druckenmiller told CNBC. He also acknowledged that Bitcoin, in terms of price appreciation, looks far more attractive than gold.

“I own many more times gold than I own Bitcoin,” he said, “but frankly, if the gold bet works, the Bitcoin bet will probably work better because it’s thinner and more illiquid and has a lot more beta to it.”

We would quibble with calling the Bitcoin market thin and illiquid, but we know what he is driving at.

The Bitcoin supply is predetermined, and expands very slowly at a predetermined mathematical rate, and at a certain point will stop expanding permanently. That makes the Bitcoin supply curve a nearly flat line, whereas the demand curve is more like a 45-degree angle.

The only way to address the supply-demand imbalance, with demand for Bitcoin rising steadily as supply stays flat, is thus to see an upward adjustment in price and market cap. That speaks to one of the chief differences between gold and Bitcoin today: Gold as an investable asset already has a supply measured in the trillions, whereas the Bitcoin supply is still measured in the hundreds of billions.

When the Bitcoin market cap has run into the trillions too, making it comparable to gold, the price will calm down.

As the price-per-unit reaches a rough level of supply-versus-demand equilibrium, with the vast majority of Bitcoin held in permanent savings accounts rather than traded, it will become the destiny of the Bitcoin price to become as boring as the Swiss franc. But it will take a while, and the full breadth of a spectacular upward journey, to get from here to there.

For those who have been with TradeSmith Decoder, none of this is new. It was all laid out for subscribers, with detailed analysis and explanation, over the course of 2018 and 2019. 

Still, it is nice to see Wall Street catching up.

JPMorgan analysts came out with a new research note on Nov. 6, for example, showing that institutional inflows into a popular Bitcoin trust vehicle came side-by-side with outflows from popular gold ETFs. Big players are buying Bitcoin, in other words, even as they sell off a portion of their gold holdings to do so.

If Bitcoin continues to perform as an “alternative currency” competitor to traditional gold, the JPMorgan research note opines, then the Bitcoin price “would have to rise 10 times from here to match the total private sector investments in gold via ETFs or bars and coins.”

Yep. Sounds about right.

When Pfizer, in conjunction with BioNTech, announced more than 90% effective vaccine results on Nov. 9, the entire investing world got reordered. Suddenly, there was a wholly different reconfiguration of what the world could look like in a years’ time.

It doesn’t happen often, but the market does this every once in a while. An unanticipated event, or an unexpected piece of news, can force-feed a whole new scenario that needs to be “priced in” through value adjustments. The more divergent the scenario shift, the more disruptive the adjustments can be.

We know the vaccine-powered sentiment shift is real, and not just equity investors playing the hope game, because bond markets and commodity markets were dramatically impacted alongside global equity markets.

Crude oil prices rocketed higher on Nov. 9, and U.S. Treasury prices fell, causing long-term interest rates to rise notably. Equity investors alone cannot move markets in that manner.

For some areas of the market, this injection of vaccine hope was akin to Lazarus rising from the dead. Along with the obvious example of cruise ships and airlines — more people will take trips if COVID-19 is defeated by a vaccine — various real estate stocks like Host Hotels and Resorts (HST), Simon Property Group (SPG), and SL Green Realty (SLG) rose 30% to 40%.

“Real estate was a COVID loser. Many of the business models were an assembly of people,” said Michael Knott of Green Street Research. “And now with the potential vaccine, it’s like Doc Brown figured out how to get his time machine to work.”

Edward Acton, a strategist at Citigroup, wrote to clients that the positive-news shock of a 90% effective vaccine “catalyzed a rogue wave of rotational optimism across global bond curves and risk-assets alike.”

In nautical terminology, a rogue wave — also known as an “extreme storm wave” — can be twice the size of other storm waves and appear to come out of nowhere, catching a ship’s crew completely off guard.

So it makes sense that Acton would compare Monday’s vaccine-fueled price action, which swamped markets globally, to a rogue wave, though this development was a positive one for humanity.

But it certainly wasn’t a positive development for “work from home” stocks and other pandemic plays, many of which have taken extreme hits this week.

When a rogue wave powers up, it draws a great amount of liquidity unto itself, concentrating the liquidity in a specific area. In a risk-off event, you might see a great wash of liquidity go into, say, U.S. treasury bonds or precious metals.

In this particular event, which was “risk-on” for specific areas of the market, we saw a concentration of rogue-wave liquidity go into the beaten-down assets and industries that would benefit from a quicker end to the pandemic.

But the thing about a wave like this is that liquidity has to be drawn from other places, because there is only so much to go around at a given time. Adjacent to the rogue wave, you can have giant empty spaces, or surface-level depressions, where liquidity used to be.

And so it was with pandemic-powered momentum stocks, which, as a group, took their biggest hit on record this week, and possibly the biggest hit ever, as liquidity was sucked away from momentum names.

Bloomberg tracks something it calls the U.S. Portfolio Momentum Total Return Index, which basically measures the performance of momentum-oriented stocks in comparison to value stocks.

“After Pfizer Inc. revealed its COVID-19 vaccine,” reported Bloomberg, “the momentum factor — which buys the past year’s winners and dumps its losers — plunged 3.4% in early New York trading” to register “the biggest intraday drop since records began in 2000.”

Two of the highest-profile names to get hammered this week were Zoom Video Communications, Inc. (ZM) and Beyond Meat (BYND).

On Nov. 6, a Friday, ZM closed above $500 per share. On Nov. 10, a Tuesday, ZM closed just above $376 per share, for a loss of nearly 25% over the course of two trading days.

It remains true that video communications are the future and that Zoom-style video conferencing is here to stay. The problem was the insanity of Zoom’s valuation, which had reached an incredible forward multiple of 55 times price-to-sales. At that level, Zoom might as well have been priced for infinite growth.

Beyond Meat (BYND) has had a similar comeuppance, with the shares losing 35% in roughly a month. As with Zoom, the future for plant-based meat substitutes is bright — but not nearly as bright as the nutty valuations implied.

We can also see the impact of a vaccine-inspired grand rotation in the dramatic performance gap between small-cap stocks and large-cap tech stocks. Following the vaccine news, the small-cap Russell 2000 index rocketed to new highs, while the tech-heavy Nasdaq Composite — which is still below its Sept. 2 high as of this writing — went into retreat.

In the TradeSmith Decoder portfolio, we have noted that, while precious metals and precious metals equities were hurt by this vaccine-themed rotation — in part due to long-term interest rates rising on the prospect of economic growth — Bitcoin and Bitcoin-related equities have not been hurt at all.

We also see a major trading opportunity in forex, as the result of an overly strong currency (not the dollar) set to weaken substantially in 2021, with a new wave of vaccine-fueled global optimism kicking off an uptrend that could last for months.

And last but not least, the sharp upward move in fossil fuel energy prices, with the potential for global travel to bounce back faster than anticipated, has sparked our strong interest in energy-related names.