Navigating Late-Stage Fiat: Optimizing Your Portfolio for Inflation
Why mainstream portfolio allocation guidance is all wrong:
In our late-stage fiat era, all fixed-income investments (savings, CDs, annuities, permanent life insurance, etc) are a Ponzi scheme because they directly or indirectly rely on increasingly toxic U.S. Treasuries for their return, which are entering a debt death spiral. The only investments safe from being rugged are those rooted in scarce assets:
How should you allocate your net worth to maximize the return on your savings? You need to understand how inflation corrupts the rate of return to make effective decisions about where to place your money.
In our late-stage fiat era, central banks continuously devalue the currency by increasing the money supply. The new money is given to cronies—groups that keep the politicians in power—which includes both the masses and the elites. Politicians are strongly incentivized to hide the true inflation rate, so they put a lot of effort into minimizing the official inflation index (CPI). There is thus no single inflation rate—new money goes into consumer goods, property, debt, and equity markets at different rates.
The inflation rate is different for everyone, depending on which assets you want to buy. If the CPI index is 2%, but stock and home prices are increasing at 12%, anyone who cares about saving and building wealth faces an inflation rate much closer to 12% than 2%. Generally, however, inflation is the rate of increase in the money supply above the rate of economic growth.
We can estimate this number by looking at the difference between GDP and asset prices. The actual U.S. annual economic growth rate (the net increase of capital and consumption) is around 2% per year. The average S&P 500 return has been 10%-12%. You'll find similar trends in other assets, such as real estate.
The S&P index is one of the best indicators of inflation because (1) the largest companies are primary (via cheap debt) or secondary (via goods sold) beneficiaries of new money.
The S&P is therefore effectively the hurdle rate that all other investments must match. A hurdle rate is the baseline rate to beat to even consider any other investment. In other words, any alternative destination for your money needs to be above 10-12% to even be worth considering.
This is not the mainstream view. The mainstream position is that the yield on U.S. Treasuries is the baseline rate since Treasuries are supposedly the safest asset class—they are guaranteed by the U.S. government. According to the mainstream, there is a range of risk classes from low-yield but safe Treasuries to corporate bonds to the stock market. The error in this view is that it (1) trusts the official CPI numbers and (2) does not acknowledge that U.S. Treasuries are in a debt death spiral.
Traditionally, debt was treated as an alternative to equities—lower yield, but safer, since bonds (including corporate bonds and Treasuries) have guaranteed returns, whereas stocks are only positive when corporations manage to make a profit.
But in our late-stage fiat system, most stock appreciation is due to currency devaluation, not corporate profits. Furthermore, the debt death spiral means that (1) inflation will remain unmanageable and therefore (2) the low-interest rate policy since the 2008 financial crisis will not return, and therefore (3) interest rates will keep increasing and therefore (4) bond prices will keep falling. This is because the U.S. has no feasible strategy to pay off its debt, as the interest payments alone will swamp the ability of the U.S. government to pay. Treasuries will increasingly become toxic assets as other nations refuse to keep subsidizing our budget deficits.
Bottom line—while there is no “safe haven” asset, the S&P index has become the baseline yield to beat. Cash and cash-like assets (U.S. Treasuries) should only be reserved for short-term needs and emergency funds. In real terms, their yield is well below the currency devaluation rate, and their risk is higher than equities, so there is no reason to hold these depreciating toxic assets.
There are thus just two categories for asset allocation:
1: inflation-sheltered investments (stock market indexes like the S&P)
2: higher-yield alternative investments (i.e., Bitcoin)
Bitcoin can be seen as an "exit liquidity attack" on U.S. Treasuries
My main point here is that the only viable options for portfolio allocation are 100% equities (stocks) or equities + higher-performing investments like Bitcoin. It’s important to understand how the debt death spiral creates the opportunity for Bitcoin as an exit liquidity attack on U.S. Treasuries:
As investors shift from Treasuries into Bitcoin, the government must increase yields to attract more Treasury buyers. Higher yields mean a higher interest expense, which requires issuing even more Treasuries. This is a self-reinforcing cycle, where the more investors move into Bitcoin, the greater the pressure on traditional assets, and the more attractive Bitcoin becomes.
As investors realize that the inflation rate is higher than the official numbers suggest and that U.S. Treasuries are becoming toxic assets, they will seek alternative stores of value. Bitcoin, with its fixed supply and decentralized nature, offers a compelling exit strategy. By reallocating funds from Treasuries to Bitcoin, investors can protect their wealth from devaluation and escape the negative real yields of traditional safe-haven assets.
Bitcoin's rise as an asset class is a direct response to the failures of fiat currency and the growing distrust in government debt. As more capital flows into Bitcoin, it not only undermines the perceived safety of U.S. Treasuries but also accelerates the shift away from fiat-based financial systems.