Inflation Alarms

The adults are echoing, ‘all roads lead to inflation’. Where investors can turn to for hedged alpha.

Welcome to Peak Performance. I’m Que, and if you know me from WXCafe, you aware that I’m passionate about diving deep into market insights. Resultant of popular demand, I’ve teamed up with Apex Capital Management to bring you this newsletter, where we dissect the latest trading trends, highlight market movers, and provide actionable insights for retail and institutional investors alike.

Apex’s flagship product is called Athena, a long/short hedge fund focussed on quantitative, short-term trading in Equity Indices, Commodities and Foreign exchange. This newsletter will deliver the inside scoop weekly - from market moves and analysis to philosophies and lessons the team and I gathered along the Athena Journey.

Our goal? To provide insights into the top 0.1% of traders; everything from robustness to the professional strategies that underpin Apex Capital’s decision making.

Why Gold and Bitcoin Are Smart Bets

Let’s talk about two investment legends, Stanley Druckenmiller and Paul Tudor Jones, who have raised considerable alarms about inflation and the US economic landscape.

Let’s discuss Druckenmiller’s recent interview on Bloomberg, where he sounds the alarm about the Federal Reserve’s recent rate cuts. His concern is that these cuts could lead to the same mistakes made in 1970’s. He pointed out that inflation is still a real hurdle, and the Fed’s hesitation to act swiftly may lead to similar consequences down the road.

Similarly, Paul Tudor Jones highlighted his concern surrounding a fiscal ‘reckoning’ with CNBC, predicting that inflation is here to stay. He presently sees gold and Bitcoin as crucial ‘safe havens’. With national debt skyrocketing and potential tax hikes looming post-2024, Jones believes traditional stocks are likely to be at risk, a common thought-thread amongst sophisticated investors.

Given thoughts from Druckenmiller and Jones, it’s clear that gold and Bitcoin are likely great investments in the current climate. Druckenmiller argues that ongoing government spending is pushing inflation higher, hence leaning toward hedging via commodities. Gold, for instance, has made an impressive leap from around $2,000 to nearly $2,750 an ounce this year, indicating that a growing number of investors are looking for safe assets amid uncertainty. With Jones echoing, ‘all roads lead to inflation’, the adults in the room are pivoting and talking their books.

Looking ahead, its likely that if economic growth continues, inflation will continue to rise in lockstep. This means that it’s wise to hedge portfolios. Stocks are likely to perform in the short term, however long-term strategies are increasing exposure to gold and Bitcoin as safeguard against fluctuations.

Likewise, we’re witnessing a unique set of circumstances: while 10-year Treasury yields have spiked over 4.25% , gold prices are climbing with Bitcoin recently breaching $71,000. It’s a curious mix, again signalling that investors are pivoting towards safer bets like gold and Bitcoin. The fear narrative is that inflation is not under control and could resurface, forcing the Fed to pivot their stance. The market is signalling uncertainty.

Druckenmiller is betting against U.S. Treasuries, convinced that we’ll face long-term inflation pressures. With the market pricing in recent rate cuts, it is clear that the consensus believes it to be too aggressive. After all, the two most recent rate cuts equal to 50 basis points were in 2001 and 2008, right before major recessions! Powell has been reassuring economic strength, so why not ease in with a smaller cut, like 25 basis points? I think that we're all reading the room here...

David Sacks’ comments on the All-In podcast struck a chord for me, reinforcing why I'm leaning heavily into commodities and Bitcoin. Sacks highlights how the last decade normalised “emergency conditions”—low interest rates, unchecked government spending, and virtually consequence-free policies since 2008. But now we’re entering an era where these indulgences come with a cost. As Sacks points out, if the government keeps inflation up by monetising debt (QE), the bond markets will demand higher rates, which weighs down equities. Alternatively, if the Fed tightens further to tackle inflation, government spending will face necessary cuts. Either way, the higher-for-longer rate environment casts doubt on equities and bonds, making commodities and Bitcoin the safer bets.

In Simple Terms...

The ball has been kicked down the road such that we are at a T-junction. Since 2008, we've seen artificial demand for U.S. Treasuries and inflation artificially inflating equity markets. Now, the U.S. economy finds itself in a catch-22. Empirically, keeping rates higher for longer has lost its potency to reduce inflation, dampening economic growth and outlook. On the flip side, aggressive rate cuts signal a recessionary environment. It's a delicate balance with no easy solutions. This environment makes gold and Bitcoin not just speculative assets but necessary hedges against inflation and economic volatility.

Bitcoin Institutionalised - The New Safe Haven.

Bitcoin (BTC) has been gaining traction as a hedge against U.S. economic uncertainty, with analysts projecting it could reach $200,000 by 2025. This optimism stems from growing institutional interest, particularly from firms like BlackRock, which view Bitcoin as a valuable asset and inflation hedge. As institutional investors add Bitcoin ETFs to their portfolios, BTC’s stability and market position are further reinforced.

Historically, Bitcoin has demonstrated resilience, boasting an average annual return over 100% in 7 of the last 10 years, despite significant volatility. Its low correlation with traditional assets deems it an effective diversifier, demonstrated by its ‘flight to safety’ asset nature, whereby one can seek no further than the COVID-19 pandemic and recent geopolitical conflicts. Rising U.S. debt and federal deficits add to Bitcoin's allure as a hedge against the weakening dollar, further solidifying its role as an alternative reserve asset.

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