To investors,

Financial markets have been on a tear for the last 12 months. Everything in your portfolio appears to be going up at an exciting rate. If I were to ask each of you the performance of your portfolio, you would quote me a percentage increase on a nominal basis. If I then asked you for the real rate of return, you would take the nominal number and subtract 6%+ inflation to get the real rate.

The problem?

Your nominal rate of return is based on a comparison to an asset that continues to fluctuate in value, so it doesn’t adequately represent the true return on investment that you are capturing.

Let me explain more.

Every investor in the western world denominates their portfolio in US dollars. They quote the prices of their stocks, bonds, and commodities in the US dollar exchange rate. When they say that the S&P 500 is up 29% over the trailing 12 months, they are explicitly highlighting the difference between the dollar value and the stock market.

But we are living in a time where there has been historic expansion of the money supply, which means that the S&P 500 appreciating in value could have as much to do with the dollar depreciating in value as it could with the stock market actually increasing in value. This makes it tough to measure true value creation and value capture by investors.

A better way to look at the value of your portfolio, and any appreciation or depreciation, is to denominate the assets in bitcoin. Now before you roll your eyes and move on to the next notification, hear me out. Bitcoin is a digital store of value that has a finite supply. It also has a much lower inflation rate (1.78%) than majority of the currencies that you have previously used to denominate your portfolio.

When you look at the S&P 500 denominated in bitcoin, it doesn’t look pretty. Here is the all-time performance.

And then here is the one year chart of the S&P 500 denominated in bitcoin.

Almost every asset on earth is losing value against Bitcoin, the digital store of value. This is a really important concept to understand, because as Peter Thiel has continued to reiterate - Bitcoin is the most honest market we have. The supply of the asset is programmatic and can not be manipulated by anyone. The value is determined by a free market, without the intervention of a nation state, central bank, or financial organization.

If you denominate your assets in a store of value that is constantly being devalued, everything you own will appear to be increasing in price. You feel like you’re getting richer and richer. It is easy to understand why you would rather own the assets than the depreciating store of value (dollars). But you must ensure you are intellectually honest with yourself. Are the assets accruing more value or is the denominating currency losing value? Both make the price of the asset increase, but only one of them is a true measure of value accrual and sustainability.

A great way to conceptualize this idea is to remember that in any given year, countries with the highest inflation numbers also have the best performing stock markets. Whether we are talking about Venezuela, Zimbabwe, or Argentina, investors holding stocks in these markets appear to be getting wealthier and wealthier until all of a sudden there is a catastrophic tipping point and no one can get out. I’m not arguing that this is what is happening in the United States, but the extreme example makes the less extreme example more obvious.

As many of you run through the calculation, you will find that your portfolio has been drastically losing value when measured in a digital store of value that is immune from supply manipulation. Your stocks are down. Your bonds are down. So are your currencies and commodities. Bitcoin has increased by more than 300% in the last 12 months when measured against the US dollar, so the rest of your portfolio simply follows suit.

The US dollar will continue to be a fantastic medium of exchange. It is highly liquid, accepted by millions of businesses and individuals globally, and comes with the full faith and credit of the United States. But the dollar may not be the best store of value asset to denominate your portfolio at this time, especially when you consider approximately 40% of all dollars in circulation have been created in the last 18 months.

My point in writing this is not to convince you to go put all of your assets in bitcoin, but rather to get you to switch your frame of reference. The assets you allocate towards have to keep up with, and ideally outperform, bitcoin. This is no easy task. The digital store of value has grown at a compound annual growth rate of 180% for the last decade.

Hopefully this perspective is helpful as you all seek to better understand your portfolio, the true appreciation/depreciation, and how to allocate your resources moving forward. The pursuit of intellectual honesty is a noble one, but it is almost never easy. Hope you have a great start to your week. I’ll talk to everyone tomorrow.

-Pomp

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THE RUNDOWN:

Bitcoin’s Biggest Upgrade in Four Years Just Happened – Here’s What Changes: The first bitcoin upgrade in four years has just gone live. It is a rare moment of consensus among stakeholders, and it’s a big deal for the world’s most popular cryptocurrency. The Taproot update means greater transaction privacy and efficiency – and crucially, it will unlock the potential for smart contracts, which can be used to eliminate middlemen from transactions. Read more.

SEC Rejects VanEck’s Spot Bitcoin ETF Proposal: The U.S. Securities and Exchange Commission rejected investment firm VanEck’s proposal for a spot bitcoin exchange-traded fund in a decision released on Friday. The agency had previously delayed its final decision on the proposal in September. In its letter, the SEC wrote that “the Commission concludes that [the fund] has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with … the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and to ‘protect investors and the public interest.’” Read more.

The Crypto Capital of the World: The anything-goes ethos has dogged Ukraine for years, and now the government is hoping to bury it, with an assist from cryptocurrency. In early September, the Parliament here passed a law legalizing and regulating Bitcoin, step one in an ambitious campaign to both mainstream the nation’s thriving trade in crypto and to rebrand the entire country. Read more.

Sam Bankman-Fried Discussed the Best Blockchains for Mass Crypto Adoption and the Rise of NFTs: Crypto billionaire Sam Bankman-Fried, who heads up the FTX exchange, recently discussed the current cryptocurrency climate, including the outlook for institutional investment, the rise of non-fungible tokens and how a badly placed ad can make rookies question the legitimacy of a crypto exchange. Read more.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE

Lyn Alden is the founder of Lyn Alden Investment Strategy, which provides market research to hundreds of thousands of individual investors and financial professionals. Lyn’s focus is on value investing with a global macro overlay, including currency differentials, shifts in monetary policy, and equity valuations.

In this conversation, we discuss inflation, employment, supply chain disruptions, monetary policy, fiscal policy, stocks, bonds, commodities, and bitcoin.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE

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Nothing in this email is intended to serve as financial advice. Do your own research.

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