Edition #78
Anniversary of the Gold Standard, Stellar Stock Fundamentals, BTC Adoption & Price Outlook
Economy:
Had it not been for the special announcement in yesterday’s newsletter, the most important thing I was planning to share was a remembrance of the 50-year anniversary of the United States dropping off the gold standard & embracing a fiat currency. In my opinion, this decision by the Nixon administration, and whatever puppet masters existed in the U.S. government at the time, marks one of the key turning points in international economic affairs.
Without going into my own personal diatribe on why I believe the gold-backed U.S. dollar is more desirable than having a fiat currency, below is an excellent video from Anthony Pompliano which covers most of the main talking points that I would have discussed. The data that he references in this video can be viewed in depth at WTF Happened in 1971.
It’s amazing to think that the United States has been operating without any true tangible value behind our currency for 50 years. On the other hand, there are clearly some merits to a fiat system if we’ve been able to operate & grow GDP as the world’s most dominant economic super power in world history for 50 years without any tangible asset to support our currency.
The fact is that the United States will never go back to a gold standard. It’s equivalent to allowing a young child to eat candy for every meal of the day for one month, then asking them to only eat vegetables from then on. The child will not make that choice on there own, despite the health benefits of the child in the short & long-term. Once the freedom has been given to government to act in accordance to its own self-fulfilling compass, it will not relent or give back that flexibility. Fiat currency is the ultimate flexibility, which will almost surely never be reversed. In an era of fiat currency, the true value of the dollar is merely held up by the silhouette of confidence in the United States, both as an economic & military power, and the fact that the petrodollar system has remained intact since 1945.
Stock Market:
As of market-close on August 16th, 89% of companies within the S&P 500 have reported earnings for the most recent quarter. So far, my general sentiment is that it’s been a great earnings season for the majority of companies, particularly those in the tech/software space. With that said, I saw some great data from Charlie Bilello (@charliebilello on Twitter) which highlights some of the broader dynamics we’re seeing in terms of company performance.
First & foremost, in terms of the top line, companies are seeing record-breaking levels in terms of revenue growth on a year-over-year basis (aka relative to Q2 2020).
On the aggregate, companies within the S&P 500 (which has a 27% weighting to information technology) have grown their revenues by +21.4% relative to their sales 12 months ago. That’s an unheard of level of growth on the aggregate, and highlights just how significant this period of performance has been. Interestingly enough, if we the S&P 500 has gained +38% between 6/30/2020 to 6/30/2021. If a stock’s price is a function of the revenues the company is able to generate, it’s not very surprising to see that the S&P 500 has been able to have such strong gains over the last year. It’s happening partially due to increased revenues being generated by the companies within the index!
Not only are revenues rising, but companies are more cost efficient than ever relative to their revenues. In the data below, we’re evaluating operating profit margins, which are a core measure of cost efficiency of a business. Operating profits are simply the amount of revenues left over after deducting costs associated with operations, such as cost of goods sold, selling, general and administrative expenses.
As we can see from the data, companies are generating extraordinarily high levels of operating profit margins. Although this graph starts in the year 2000, this is the highest level of OPM in history. For every $1 a company earns in revenue, they generate $0.136 in operating profit. It doesn’t sound like a substantial amount, but is actually extremely impressive.
Finally, we can look at the bottom line by evaluating the earnings per share (EPS) of S&P 500 companies. EPS is simply a calculation of a company’s net income (operating income less taxes & interest expense) divided by the number of shares outstanding for that company.
On the aggregate, S&P 500 companies are generating $49.11 per share. Similar to the other metrics above, this is also a record high result. If we specifically focus on the blue line, GAAP EPS, we can see that earnings have more than 4x’d since the COVID lows in Q2 2020 from $11.88/share.
To make a long story short, companies are performing & firing on all cylinders. When we look back over the last 12 months and it seems unfathomable that the S&P 500 has gained +38% during that time, these figures show us how it’s been possible in terms of stock market fundamentals. The stock market is simply a clearing mechanism that attempts to value the future cash flows & earnings that are generated by a company on a go-forward basis. 12 months ago, we had no idea that the S&P 500 would be breaking records in terms of revenues, operating efficiency, and EPS metrics, but smart investors felt confident that conditions would be better than they were in the present moment. How much better? No idea, but almost certainly better than they were in Q2 2020.
Cryptocurrency:
Over the weekend it was revealed that Walmart is in the process of hiring & recruiting a Digital Currency and Cryptocurrency Product Lead position at the company. This news comes only a few weeks after Amazon also posted a job application for a Digital Currency and Blockchain Lead. Suddenly, the two largest retailers in the world have recognized the relevance of cryptocurrencies and the potential for increased demand of their goods/services if they accept crypto in exchange. Whether they keep the digital currencies on their balance sheet or convert them back to USD immediately, the rate of adoption and significant milestones continue to increase.
Additionally, it was also recently discovered that Lloyds Banking Group, the second largest bank in the United Kingdom, is hiring a Digital Currency & Innovation Senior Manager. This will not slow down.
Over the weekend, I posted the following on Twitter:
I standby my prediction that BTC will eclipse $50k this week, though I’ll be willing to face the music if I am incorrect. For those of you who have been apart of this newsletter since the beginning, you’ll recall that there were several moments during this most recent Bitcoin collapse when I reiterated my belief that the price would return above $50k by the end of the year.
In Edition #6 published on 5/24/21, when BTC was trading at $35k at the time of writing:
“I wouldn’t be surprised if we see a retest of the $27k-$29k range in the coming days or week… At the end of the day, I really don’t know where it goes in the short-term, but I reiterated to some of my close connections that I think price may get back over $50k again sometime this year.”
We did in fact retest the $27k-$29k range less than one month later on 6/22 and again on 7/19 before this most recent rally.
In Edition #14 published on 6/3/21, around a price of $37k:
“While the significance of the decline cannot be understated, and objectively seems to shift the trend towards the downside, I continue to remain optimistic on the cycle trend & have been purchasing BTC on a daily basis over the last week. I’ve had many friends & connections reach out to me about my opinion during this decline, in which I’ve continued to reiterate that I believe we’ll be back over $50k by the end of the year. In my eyes, that is the conservative view.”
The tweet that I have above is my current view on the BTC market. In short, I’m remarkably bullish and continued to reiterate my positive outlook even when things felt extremely dire. I put my money where my mouth.
Until tomorrow,
Caleb