January 22, 2021
Our latest magazine publishes tomorrow, and it’s jam-packed with original content and phenomenal writing, covering politics and finance with our own American Consequences twist. Look for it to hit your e-mail inbox early tomorrow morning.
There’s also a special bonus feature this month, a 2021 Predictions Special Report. We asked some of the brightest and most successful analysts and writers at Stansberry Research what they predict 2021 will bring… From bitcoin to cannabis, Melt Ups to crashes, and COVID-19 to commodities, we cover it all.
We’re sharing one of these prediction essays with you ahead of publication. It’s written by Internet entrepreneur and investor Eric Wade, also known around here as the “Crypto King.”
Eric is no stranger to American Consequences… We featured him on our cryptocurrencies cover in 2019 and he’s written for us before about bitcoin. Today, Eric talks about a crisis brewing in our country, and what can be done to prepare.
This Technology Is the Answer to America’s Pension Crisis
Prediction: 2021 is the year we’ll start (and then stop) using the term “DeFi.”
DeFi, short for decentralized finance, is a catchall phrase for automated financial transactions. These transactions use blockchains to cut out all middlemen. It makes borrowing and lending – as well as trading cryptos, equities, bonds, securities, and even issuing insurance policies – possible without a human ever getting involved.
Then-Acting Comptroller of the Currency Brian Brooks calls it a trend toward “self-driving banks” in a nod to self-driving cars. In a recent essay, he speculated that the U.S. government may one day give out banking charters to these completely automated platforms.
And then it will be so mainstream there will be no more need to point out that it’s decentralized than there is reason to say “mobile phone” when you refer to an iPhone. We simply won’t need to mention the technology – blockchains – that powers financial products.
It’s only possible because blockchains are completely public and unchangeable. Anyone can see and verify transactions at any time. Once you can do that, you can unleash computer programs on top of those blockchains. And in the process, you can cut out virtually all the layers of middlemen we have in the financial industry today. This will make them so much better so that traditional finance can’t compete.
And it couldn’t come at a better time, because a crisis is brewing in America…
By printing an endless supply of dollars, the Federal Reserve has kept the U.S. out of another depression (so far). But it’s doing something just as dangerous… It’s destroying the value of our savings.
You see, by printing more and more money, the Fed is devaluing the dollar. And it has pushed investment yields off a cliff.
Right now, a six-month U.S. Treasury has a yield of around 0.1%. A 10-year U.S. Treasury yields just 1.1%. Meanwhile, inflation is running at about 1.4%. That means real yields on treasuries are either negative or treading water.
Even if we factor in corporate bonds and an improving economy, we’ll still be in a yield-starved world for decades to come.
According to a December 2019 report from the Pew Charitable Trusts, GDP growth and bond yields over the next 20 years are expected to lag behind returns prior to the Great Recession of 2007 to 2009.
In short, yields have disappeared. And that puts every single American in or near retirement at risk. Retirees rely on yield to pay their rent and put food on the table. Even if they don’t rely on it directly, their pension funds and retirement accounts certainly do.
Pensions, in particular, are getting slaughtered. They were struggling long before the current COVID-19 pandemic and recent round of money-printing.
In 2016, the largest public pension plan in America, the California Public Employees Retirement System (CalPERS) – which has more than $400 billion in assets – estimated it would have a $100 billion shortfall for future liabilities for every 0.2% drop in its overall portfolio returns. If you compare earnings to future liabilities, it has already been in the red by $138 billion.
So what do pensions do when they’re faced with billions of dollars in shortfalls? They go further out on the risk curve and fill their portfolios with overvalued stocks.
Longtime investors may be skeptical that notoriously conservative investments like pension funds will pour into equities during uncertain economic times. When I was a certified financial manager in the 1990s, I would have agreed with you.
But an aging population, lower interest rates, and the lingering effects of the Great Recession have forever changed the investing landscape.
For example, since July 1, 2018, CalPERS’ asset allocation has included 50% in global equities. That’s a big position – one that would have been unthinkable even a decade ago – in a risky asset class for a pension plan.
And it’s not just CalPERS falling further underwater. The Pew Charitable Trusts estimates American pension funds are facing a $1.24 trillion funding gap.
In short, disappearing yields are forcing everyone to look for alternatives. Some investors are turning to DeFi…
One metric we use to follow DeFi’s growth is the total amount of capital being put to work in DeFi platforms. Today, that number is around $22 billion… up from $800 million a year ago. That’s growth of 2,650%. We expect that number to multiply by 10 times that in 2021.
Blockchain-powered projects are a magnet for capital. Because they are so new and growing so rapidly, many DeFi applications pay holders incredible yields on their funds. It’s not uncommon to find double-digit yields simply for lending out stablecoins (crypto tokens that are pegged to the price of another asset… most commonly the U.S. dollar).
Got $10,000? Convert it to 10,000 USDC tokens (1 USDC token should always be worth $1). And as I type this… you could be earning 20% or more on it with DeFi lending platforms like Cream Finance. You read that right… 20% or more… paid out on tokens backed by the U.S. dollar.
We’re seeing a new crop of companies making these yields easier to earn, too. So on the one hand, you have about $18 trillion in negative-yielding debt today. On the other hand, you have smart money earning double-digit yields getting easier and easier.
And DeFi will be part of the solution. Rent-seeking middlemen will still exist for many years into the future, but this year, the world will finally grasp what’s coming. At some point in 2021, I expect you’ll hear the word DeFi almost daily on CNBC.
But as billions of dollars continue to make their way to blockchain-powered investments… the smart money will stop marveling at the technology and start calling it by its real names: income… yield… finance.
P.S. If you’d like to learn more about Eric and why he believes blockchain technology is the No. 1 place to put at least some of your money this year, click here for a free presentation.
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Managing Editor, American Consequences
With P.J. O’Rourke
January 22, 2021