Bitcoin keeps gaining momentum in price and institutional interest. The world’s favorite cryptocurrency has gone stratospheric since late last year and recently eclipsed the $50,000 level. Such mind-boggling returns have caught the public’s attention, including Elon Musk. Tesla, the 5th largest company in the world by market capitalization, used an impressive $1.5B cash on its balance sheet to buy the virtual currency.

In fact, public appetite is so high that the Grayscale Bitcoin Investment Trust, though officially an open-ended vehicle, has traded as high as 30% above its net asset value in recent months. Moreover, if the fund were an ETF, with $36b in assets, it would be the 24th biggest in the US. While volatility remains a key issue, with every year that it survives and gains adoption, Bitcoin is more likely to succeed due to network effects (more users make it more useful) and the Lindy effect (the longer a non-perishable thing survives the longer it should persist).

So, why all the hype?

Well, it’s a macro story! (Or we wouldn’t be talking about it). Governments and central banks have given investors plenty of reasons to consider alternative stores of value. The growth rate of US monetary aggregates¹ is unprecedented, both compared with US history, and with the history of other major economies, as shown in Chart 1.

Holding money that a central bank is explicitly trying to devalue, while lending money to a highly indebted government at negative real yields is not for everyone.

What does this tell us about the broader investing environment?

That global liquidity is cascading to every corner of the market. This is clear in the dollar’s and real yields’ negative correlation with equity prices since the March bottom. Despite elevated valuations and frothy sentiment, we believe central bank activity suggests that the current conditions could last for a while. After all, new bull markets born during a recession typically last for years, not months. In other words, we expect this bull market has a long way to run both in time and price.

The primary short-term risk to the market is euphoric investor sentiment. Price action has gotten increasingly speculative (Special Purpose Acquisition Companies, or “SPACs”², Initial Public Offerings or “IPOs”, call option buying³) and conditions suggest the market is overbought. But for good reason: the vaccine rollout paves the way for a rapid rebound in economic activity in the second half of 2021. As the most recent Bank of America Fund Manager survey puts it, “the only reason to
be bearish is…there is no reason to be bearish”. We’ll be watching yields closely for clues to liquidity, but maintain our view that rates won’t rise too far too fast. We could see equity prices trade sideways or down in the next couple weeks due to mean reversion but not by enough in time or price for us to de-risk our current portfolio meaningfully. We don’t see this risk as systemic unless fiscal & monetary policy mistakes derail the post-Virus recovery.

With this month’s moves, we exited over extended positions in US small caps and Asia ex-Japan. We initiated a position in emerging markets minimum volatility equities to buoy any mean reversion in the region. We also initiated a position in US infrastructure equities. US infrastructure has lagged developed country peers for a long time and it’s been a drag on the economy. We believe that with new leadership and ultra-low interest rates, the time to rebuild America is now. We expect infrastructure will be a major policy goal for the Biden administration and we want to own companies that will benefit from this initiative. We maintain a small and agile position in short-term bonds to take advantage of any pullbacks in risk that are not related to fundamental areas of real concern.

Finally, know that all our Strategies will adapt to fundamental or rules – based, not emotional influences. We seek opportunities for solid risk adjusted returns and to preserve capital in asset market downturns.

1. Monetary aggregates are the money circulating in an economy to satisfy its current monetary needs. There are two indicators for monetary aggregates collected by the OECD: “narrow money” (M1), a means of exchange and “broad money” (M3), a way to store value.

2. A special purpose acquisition company, also known as a “blank check company” is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process.

3. A call option, often simply labeled a “call”, is a contract, between the buyer and the seller of the call option, to exchange a security at a set price.

¹ Information as of 02/12/2021. Individual account allocations may differ slightly from model allocations.

Recent Portfolio Changes

We initiated a position in U.S. Infrastructure Development. We believe this space will benefit from a potential increase in infrastructure activity in the United States, a main priority of the Biden Administration.

We initiated a position in Minimum Volatility Emerging Market Equities. To maintain cyclical exposure in our barbell approach, while mitigating downside risk due to potential extended conditions. International stocks should benefit from improving global growth and a weak USD environment as the year progresses.

We exited positions in U.S. Small Caps and Asia ex-Japan Equities. A tactical move to take off risk in positions that have appreciated greatly. We are still bullish on small caps and expect to actively deploy at more attractive entry points.

¹ Information as of 02/12/2021. Individual account allocations may differ slightly from model allocations.

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