Paraphrasing my RealClear colleague Joe Calhoun, you can’t invest like everyone else and expect to outperform. Bill Ackman’s billionaire status at such a young age signals that he’s well outperformed as an investor, and the source of his outperformance has been his courage to go against the grain with great frequency.
Ackman’s contrarian approach doesn’t extend to his economics, however. Where he’s unconventional in his capital allocations, he’s highly conventional with his views on the economy.
Take a recent Twitter post from him about Bitcoin, energy and inflation. While there was a tongue-in-cheek quality to it, Ackman observed that Bitcoin’s rising price of late could lead to “increased mining and greater energy use, driving up the cost of energy, causing inflation to rise and the dollar to decline.”
Ackman first misses in his suggestion that increased demand for energy could drive up its cost, thus “causing inflation to rise.” Except that demand could never cause prices to broadly rise, and Ackman surely knows why. Every purchase is a tradeoff. If Ackman takes a big position in Chipotle as he once did, he can only do so insofar as he doesn’t buy something else.
Energy is no different. If we forget that higher prices are a market signal that generally summon more production or extraction of the good that’s rising in price, we can’t ignore that if consumers and producers are paying more for energy, they logically have fewer dollars to purchase other market goods. In other words, a demand-driven price increase is always and everywhere matched with commensurate price decline(s) for other goods and services.
For Ackman to suggest that rising energy costs could “cause inflation to rise” is for the investor to flip causation. It’s the equivalent of the assertion that suntans cause the sun.
The reality is that rising prices are at best an effect of inflation. Inflation is a decline in the monetary unit, in our case a decline in the dollar, but prices can rise for all sorts of reasons unrelated to monetary error. No doubt the price of Honeycrisp apples would soar if they were suddenly discovered to cure heart disease, but as opposed to more expensive apples causing inflation, their price could once again only rise insofar as other market prices were to fall.
More germane to the present, in 2020 politicians panicked about the coronavirus. The political panic was global. One consequence of all the nailbiting was that hundreds of millions of people lost their jobs. That prices around the world rose as a consequence of massive global unemployment was a statement of the obvious. Just as prices fall as more and more specialized hands and machines cooperate in the production of market goods, so must prices rise when hundreds of millions of hands and machines are removed from the production process. Alas, the imposition of command and control is not inflation.
Inflation is but one thing: a decline in the unit of account. The problem is that Ackman writes as though currency decline is what happens after the inflation. No, inflation is the decline of the unit, the rising prices a possible effect.
Still, whether on purpose or unwittingly, Ackman hits on a crucial point; albeit one that will break the hearts of Bitcoin fanatics. They claim their crypto coin is an inflation hedge, but the fact that demand drives up its price shows precisely why it’s not.
Gold tells us why. Its remarkable constancy is what renders it an inflation hedge par excellence. Put another way, the price of gold generally doesn’t move, but the currencies in which gold is measured do. If demand or lack thereof could move the price of gold in the way both move Bitcoin, the yellow metal would never have been chosen by markets as the commodity best suited to measure value.
Notable about gold as this is being written is that’s it’s at all-time highs as measured in dollars. Meaning the dollar is at all-time lows against the constant that is gold. There’s your inflation story, while Bitcoin remains but a speculation on scarcity that may or may not rise in the future for reasons that realistically have nothing to do with currency decline, or lack of same.
Republished from RealClear Markets
