With Inflation levels hitting records highs never seen in decades, it is now more important than ever to understand its pervasive effect in financial assets and investment options in general.
Let us break it down into pieces for you. The expected value of most financial assets such as shares in publicly listed companies or fixed income instruments, is based in a valuation method called discounted cash flows.
That is, all projected cash flows brough back to the present time using a discount factor in the form of an interest rate that is heavily influenced by the general inflation in the economy.
Putting all together we can see that there is a negative relationship between inflation and Value. The higher the inflation the lower the value of most financial assets.
Now leaving the theory behind, let’s look at the latest news. This week the US government ratified Jerome Powell as the head of the Federal Reserve. Powell have been leading the largest inflation generating exercise in history (printing almost 40% of the money is correlation in only 18 months).
Whether or not the Fed Reserve lead by Powell is going to continue with this track is yet to be see, however all points to an affirmative answer and specially with the new cash starving Infrastructure bill passed into law last week.
And with that, more down pressure to the value of most financial assets due to the rationale explained above.
And here is when incorporating an alternative, low correlated and supply restricted crypto assets such as Bitcoin in a well-diversified portfolio is of utmost importance.
Let’s remember that with more cash in circulation and a fixed number of units issued, Bitcoin can collect the effects of money printing activities of the Fed Reserve and transformed into value for its holders.
No matter what your risk appetite is, a professionally designed portfolio must include a percentage in crypto assets like Bitcoin.
Below is a photo of the Reserve Bank – Bank of New York building in the financial district of Manhattan. Arguably the most influential place in terms of monetary policy in the United States