Investment strategist sounds alarm on ‘5-decade’ problem

Key Concepts

• Debasement Trade: The concept of investing in assets that are perceived as scarce or holding their value in an environment of increasing money supply and rising prices.
• Affordability Crisis: The ongoing issue where consumers struggle to afford goods and services due to rising prices, even if wages increase.
• Quantitative Tightening (QT): The process by which central banks reduce the size of their balance sheets, typically by allowing assets to mature without reinvesting the proceeds.
• Quantitative Easing (QE): The process by which central banks inject liquidity into the economy by purchasing assets, often to lower interest rates and stimulate economic activity.
• Household Net Worth as a Percentage of GDP: A metric indicating the proportion of a nation's total economic output held by households.
• Consumer Sentiment: A measure of how optimistic or pessimistic consumers are about the overall state of the economy and their personal financial situation.
• Mega Cap Stocks: Stocks of very large companies, often with market capitalizations in the hundreds of billions or trillions of dollars.
• Bitcoin: A decentralized digital currency that operates on a peer-to-peer network.
• Stablecoins: Cryptocurrencies designed to maintain a stable value, often pegged to a fiat currency like the US dollar.
• Payment Processors (e.g., Visa, Mastercard): Companies that facilitate electronic payment transactions between consumers, merchants, and financial institutions.
• Price-to-Earnings (P/E) Ratio: A valuation metric that compares a company's stock price to its earnings per share.

The Debasement Trade and the End of an Era

The year 2025 is being marked by new economic phrases like "tariff tantrum" and the "end of American exceptionalism," alongside older terms like the "debasement trade" resurfacing. Lyn Alden, founder of Lyn Alden Investment Strategy, discusses her December market overview, which focuses on this "debasement trade."

Understanding Debasement

Debasement refers to the erosion of the purchasing power of money due to an increase in the money supply. Alden illustrates this with a chart of Campbell's tomato soup prices over five decades, showing a consistent upward trend regardless of how inflation (CPI) is measured. This indicates a structural problem of rising money supply leading to rising prices, with productivity gains only partially offsetting this effect.

• Impact on Investors: Investors not holding "scarcer assets" see their savings debased over time.
• Impact on Wage Earners: Individuals whose wages are denominated in the debased currency must constantly strive to keep pace with the annual erosion of purchasing power.

The Media's Discovery and the Affordability Crisis

The media's recent focus on the term "debasement trade" is seen as the narrative catching up to consumers' lived experiences. Alden notes that consumers, particularly over the last five years, have been acutely aware of an ongoing affordability crisis. This is reflected in weak consumer sentiment, even as stock markets, especially concentrated mega-cap stocks, reach all-time highs. The average consumer feels squeezed, highlighting a disconnect between market performance and everyday financial realities.

The Peak of Household Net Worth and Shifting Fed Policy

Alden points to the peak of household net worth as a percentage of GDP, coinciding with the era of declining interest rates and the move to zero interest rates. She suggests that the Federal Reserve's ability to rescue the economy with zero interest rates is likely behind us.

• Expectation of Less Fed Intervention: While the Fed may continue to support the ongoing debasement, the 40-year trend of ever-lower interest rates is over. Developed economies have "bounced off zero," with some even experiencing negative rates.
• Sideways Interest Rate Environment: Future interest rate movements are expected to be more in a sideways range, with potential cuts next year followed by possible hikes if inflationary pressures re-emerge.
• End of Structural Asset Price Growth: The structural tailwind of ever-rising asset prices relative to GDP and disposable income is considered to be at an end. While nominal asset prices may still rise, their percentage growth is likely to slow.

Quantitative Tightening (QT) and Future Liquidity

The end of Quantitative Tightening (QT) is discussed, with Alden noting that it has concluded slightly earlier than anticipated due to emerging liquidity issues. She expects the Fed's balance sheet to expand again by next year, though likely not under the label of "quantitative easing."

• Shift to Short-End Focus: Future balance sheet expansion will likely be restricted to the short end of the yield curve, rather than buying longer-duration Treasuries.
• Moderate Stimulus: The level of stimulus is expected to be moderate, roughly in line with nominal GDP growth, providing gradual liquidity support that can marginally benefit asset prices.
• No "Coming to the Rescue" Scenario: Investors should not expect the Fed to provide the same level of aggressive support as in previous cycles. The "punch bowl" is less potent.

Investment Opportunities in a New Landscape

Despite the changing economic landscape, Alden identifies potential investment opportunities:

• Bitcoin: Alden is buying Bitcoin dips, citing its structural drivers and expected benefit from easier liquidity conditions next year. She believes the recent market activity has washed out sentiment, leverage, and reset valuations for Bitcoin-related companies.
• Oil and Gas Names: These are also considered value plays.
• Visa: While other mentioned names are value plays, Alden sees growth opportunities in payment processors like Visa. She believes the recent consolidation is healthy after the stock became excessively valued (P/E ratio over 30). At a more reasonable valuation, Visa has a greater buffer to absorb potential risks, such as those posed by stablecoins and the growth of other payment technologies. She anticipates Visa and similar companies will continue to surprise on the upside for several more years.

Conclusion

The economic environment is shifting, moving away from the era of declining interest rates and aggressive central bank intervention. The "debasement trade" highlights the ongoing erosion of purchasing power, leading to an affordability crisis for consumers. While the Fed's role is evolving, investors can still find opportunities in assets like Bitcoin and established payment processors like Visa, provided they are approached with a realistic understanding of the current economic dynamics and valuations.