Taking risk and placing bets is not an area I need to improve. The hyper-conservative, black-swan-surviving side of my investment barbell is. The yin to my yang.
As someone with a large (very large) portion of my wealth in hyper-volatile digital assets, that side could probably use some attention. My view is that selected digital assets are still incredibly underpriced, and that the consensus view on certain assets (ZEC and NEAR among them) vastly underestimates their importance in an AI-powered world.
However, I’m also aware of my flaws. So, this week, I’ve been absorbing counter opinions from oldies with far less risk tolerance than me to improve the conservative side of how I manage my money. Sell it all and prep for the crash?! (spoiler alert: no)
Bonds
In case you hadn’t heard already, bond yields in the US (and many other countries) are the highest they have been in decades, and it’s causing a few savvy investors to worry.
Why?
Well… my anon friend. Government bonds kind of underpin financial markets. US Treasuries are commonly treated as the benchmark for low-risk returns, where instead of being reliant on a specific company’s profit margins, investors are ‘simply’ reliant on the US government.
With the rise in Treasury yields, investors are now questioning whether they should continue taking exposure to perhaps overblown equity markets with uncertain future profits fuelled by crazy CAPEX, or instead listen to the sweet nothings whispered by the alluring interest on government debt (hmm, can’t really make government debt sound sexy, can you?).
Two competing opinions are circulating:
High bond yield = safer alternative to overblown equities = find safety in cash
The first argument is that rising bond yields are going to put enduring strain on the economy until it potentially snaps and causes a big old crash in equities.
Why?
Higher yields make borrowing more expensive for companies taking on new debt or refinancing, putting pressure on profits. They also offer investors a more attractive alternative to chasing what some describe as an “overblown bubble in AI equities”. If investors can earn more from bonds, they may be less willing to pay sky-high prices for uncertain future profits.
The government faces higher interest costs too (over $1.4T a year), as it refinances its $40T bag of debt. Yup, that’s trillion with a big fat T.
High bond yield = warning sign of weakening dollar = find safety in equities
The counter argument is that with rising government debt and a growing interest bill, it forces the central bank to keep interest rates low and print extra cash just to pay off the government’s bills. A term known as Fiscal Dominance.
From this perspective, sitting in cash brings its own risk; If you’re holding cash you’re getting diluted via money printing and the downstream inflation it causes. Even if you’re earning 5% in 10 Year Treasury bonds, inflation of products over the same duration can be greater. If we look back the past ten years, you would have lost 28.1% via the inflation of products. Suddenly that 5% yield doesn’t look so juicy…
The counterpoint to seeking ‘safety in bonds’ is then to own productive, cash-generating businesses, precious metals, or cryptocurrency, as these assets are seen as safe havens that offer protection against an economy where policymakers favour paying off debt over preserving the purchasing power of money. There Is No Alternative.
So, what do you do?
What am I doing?!
Having a large portion of my net worth in highly volatile magic internet money, I’m paying attention to both sides of this argument. Ultimately, I want exposure to the upside if undervalued assets reprice substantially, but also enough protection that any kind of crash wouldn’t force me to sell.
To up my wisdom stats, I sought education from three people far more tapped into the markets than me: Howard Marks, Luke Gromen and Lyn Alden.
Let’s see what each of them says, and then apply it to my current portfolio.
Howard Marks: selling your stocks doesn’t necessarily solve the problem
Obviously, higher yields put the government’s $40T debt in a little bit of a pickle, but Howard questions whether the government’s current response actually fixes anything, and the impact that would have on equities.
In his September memo, he looks at Treasury efforts to bring long-term yields down by buying back bonds. This works because bond prices and yields move in opposite directions: the lower the price, the higher the yield a buyer gets. The reverse is also true.
The question is, how are those buybacks funded? If those purchases are financed by issuing shorter-term debt, the government hasn’t reduced what it owes; it has just brought forward the date when it needs to borrow again. It’s like you owe your mate some money, but instead of paying him off with your own money, you borrow from another mate to pay him back. But…. the new mate wants his money back sooner.
Howard raises another point that the companies pouring money into data centres and infrastructure require (and are receiving) huge amounts of funding. Funding that competes for capital with the US Treasury market. Which, in a funny little paradox, can push yields higher. The AI boom that investors hope will grow their wealth and outpace inflation could paradoxly help sustain higher yields, putting pressure on those same AI companies’ valuations.
So what happens next?
Marks doesn’t see a sudden funding crisis as the most likely outcome. Nor does he think selling stocks for dollars automatically protects you from a problem that could ultimately affect the dollar itself. He sees reasons to consider diversification, but doesn’t make the case for radically repositioning around a macro prediction. He still sees substantial strengths in American businesses.
Noted.
Luke Gromen: what happens when higher rates make the debt problem worse?
Watch the referenced video on YouTube
Gromen takes the argument further.
In the interview with GoldRepublic, he argued that higher rates are becoming an increasingly awkward tool for fighting inflation. They make borrowing more expensive for businesses and households, but they also increase the interest bill on the government’s roughly $40T of debt as it gets refinanced… Basically, in his view, like a little kid trying to dig a trench around his sand castle as the tides rise in, the US is running out of options.
His concern is that the government keeps borrowing to cover the growing bill, and then continued borrowing eventually pressures policymakers to prioritise financing the debt over fighting inflation. That is the fiscal-dominance argument we spoke about earlier. In this environment, preserving purchasing power becomes priority number one.
Gromen is a laser-focused, well-spoken gold maxi who comes armed with stats. If fiscal dominance reaches the tipping point he anticipates, he expects capital to move out of government debt and into gold. His bet is that investors (and countries) in an enormous government debt market start looking for protection in a smaller gold market, pushing its price substantially higher.
Lyn Alden: stay flexible
Lyn adds a complication to this argument: even if you’re right about currency debasement, you can still overpay for the assets you expect to protect you.
In her June newsletter, she favours scarce assets and profitable businesses, but stresses reasonable valuations. She points out that gold, Bitcoin and AI stocks can all become expensive when enthusiasm gets ahead of them. Her approach is to gradually rebalance away from crowded assets and towards those that are less popular and reasonably priced. The question obviously becomes: has enthusiasm gotten ahead of itself?
I’m comfortable arguing why an asset should become more valuable. But how much of that future is already in the price? And if a position grows into a huge portion of my wealth, am I still managing it, or just becoming more attached to my original argument?
My takeaways
My takeaways are as follows:
I’ll continue shifting some profits from NEAR and ZEC into cash and gold, while looking for other asymmetric bets in physical AI and robotics.
I’m managing risk through a barbell: a hyper-aggressive side for upside, and a more conservative side for protection. Cash covers spending and gives me flexibility; gold offers protection against the monetary risks discussed above, although its price can still fall.
I currently weight the aggressive side more heavily because of the risk I’m willing to take, and my view that we’re still in the earlier stages of a market recovery.
If Bitcoin reaches new all-time highs, I plan to shift the weights further towards cash and gold. But I’m building that reserve along the way, rather than relying on the market to reach a particular price before protecting myself.
For me, the change is to build enough of a floor that I can keep taking risk without a bad market forcing my hand. I don’t need to stop believing in the upside to take some money off the table.
I’ll keep sharing what I’m learning and how it changes my portfolio each week. If that sounds useful, subscribe and follow along.