Traditional Finance Set for a Decade of Miserable Yields
Will TINA and a demographic mega-trend usher in a new wave of crypto interest?
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Many Wall Street veterans are in agreement. The returns from stocks and bonds over the next decade will be sluggish. Time to add crypto to your savings plans?
Traditional Investment Portfolios Set to Underperform
Morgan Stanley analysts told Bloomberg that “The return outlook over the next decade is sobering. Investors face a lower and flatter frontier compared with prior decades, and especially compared to the 10 years post-GFC, when risk-asset prices were sustained by extraordinary monetary policies that are in the process of being unwound.”
Research Affiliates are even more bearish. Their ten-year forecasts suggest growth in large cap U.S. stocks will be a miserly 0.4 percent. Small caps fare only slightly better at 1.9 percent. With interest rates at record lows, bonds will deliver anywhere from zero to negative returns. They point to emerging markets as the only place to earn a decent return on equities, albeit even they will be returning barely over 7 percent.
Bank of America analysts have warned investors that the 60/40 strategy–60 percent in equities for growth and 40 percent in bonds for security–may need to be reconsidered for the next decade. “The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” they argue.
The historically high inflows into bonds in 2019 and outflows from equities as investors fear a recession have dampened bond yields. They have also caused a sell-off risk. The authors noted that “The challenge for investors today is that both of those benefits from bonds, diversification and risk reduction, seem to be weakening, and this is happening at a time when positioning in many fixed-income sectors is incredibly crowded, making bonds more vulnerable to sharp, sudden selloffs when active managers rebalance.”
GMO’s 7-year forecast has U.S. large cap equities returning minus 3.7 percent, with flat to negative returns from bonds.
Time to Add Crypto to Your Portfolio?
Bitwise recently published a hypothetical paper assessing the power that a one, five, or 10 percent allocation of Bitcoin would have had on an investment portfolio since Jan. 1, 2014. The results are staggering.
Adding a five percent Bitcoin allocation to a “57% allocation to stocks and a 38% allocation to bonds” would have increased investor returns from 26 to 67 percent. A one percent allocation of Bitcoin would have increased total returns by 4.5 percent, with a maximum observed loss from a peak to a trough of a portfolio (MDD) actually lower than that of a traditional 60/40 portfolio.
A 10 percent allocation of Bitcoin would have driven returns close to 80 percent. That research doesn’t play into the noncorrelation narrative, however, as stocks have performed well over the past five years. And hindsight is always 20/20.
But Bitwise also points to three catalysts it says could easily cause Bitcoin’s price to surge. The first is the May 2020 block reward halving, which will have the effect of halving Bitcoin’s supply growth rate.
Calibra, the sister of Facebook’s Libra, is also set to launch a new way of using cryptocurrencies through WhatsApp and Messenger, potentially delivering a built-in user base of an additional 2.7 billion people.
The ‘leading provider of index and beta crypto asset funds’ also cites a Cerulli Associates report from late last year that fund managers are looking to diversify out of equities and bonds and into alternative asset classes.
The Noncorrelation Argument For Crypto
Crypto assets have traditionally had a low correlation with traditional asset classes. With equity and bond returns expected to dwindle over the next decade, many see Bitcoin’s noncorrelation properties as a positive.
Morgan Creek Capital’s Anthony Pompliano recently told FXStreet that “The halving will be a big moment for Bitcoin. I don’t think that the price will shoot up the day after it, but I do think that from the day we are right now, we will see Bitcoin’s price at $100,000 by December 2021.”
As Millennials overtake Baby Boomers in population numbers, a pivot toward crypto assets and away from traditional portfolios may happen anyway. And if it does, it will generate demand for crypto assets, causing prices to rise, ceteris paribus.
As recently reported by Crypto Briefing, the Blockchain Capital Blog defined Bitcoin as a ‘Demographic Mega-Trend’, with interest and awareness rising across all age groups, but, “among those aged 18–34: nearly 1 in 3 prefers Bitcoin to government bonds, more than 1 in 4 prefers Bitcoin to stocks, nearly 1 in 4 prefers Bitcoin to real estate and more than 1 in 5 prefers Bitcoin to gold.”
The demographic pendulum may already be swinging. As Crypto Briefing reported last week, “Grayscale Bitcoin Trust (GBTC) was the 5th largest single holding among millennials, representing 1.84 percent of their equity holdings.”
The Key Take Away
In the low-interest-rate environment that has characterized the post-GFC era, stock markets have soared to all-time highs, in part, as a result of the TINA Effect–There Is No Alternative. As consensus mounts that both equity and debt products face a prolonged period of sluggish returns, crypto assets could enjoy the same TINA benefits.