'Permanent' inflation and expected returns post-Satoshi

When the world's largest sovereign wealth fund weighs in strongly convinced that inflation is here to stay and therefore investors should expect a prolonged period of low returns, it's worth paying attention. Or at least writing a SNARKy blog post!

Nicolai Tangen, who runs Norway’s $1.3tn oil fund, calls himself “the team leader for team permanent” in the fierce debate over transitory versus persistent inflation.

Tangen said the oil fund, which owns the equivalent of 1.5 per cent of every listed company in the world, thought inflation “could be stronger than what is generally expected” as the world experiences high demand and lingering disruption to supply chains.

OK that sounds pretty bad. And AQR Capital Management, a quant group I highly respect, is forecasting 2% after-inflation expected returns on a 60% stock and 40% bond portfolio over the next 5-10 years. 2% doesn't exactly inspire.

I also recently finished Ray Dalio's "The Changing World Order: Why Nations Succeed and Fail" which is a cool blend of history, markets, geopolitics, and (maybe most importantly) the money and credit cycle. With decades of expansionary money and credit looking like it's plausibly exhausted, it's entirely reasonable for investors to expect lower returns.

And then something funny happened on January 3, 2009...

Blockchain-based digital assets represent a $1.8 trillion market that came entirely out of nowhere just about 12 years ago. Even that timeline should be adjusted to when things really took off in 2020 when the overall market cap was around $250 billion. For better or worse, those of us in crypto just think differently. How could we not? We've been part of an industry going from nothing to trillions and every day new assets and innovations are hitting the market. It's hard to imagine this stopping.

So how does crypto effect how we should think about being in the tail end of an expansionary money and credit cycle? Of living in a world of higher rates after decades of no inflation? How should we think about expected returns for cryptocurrencies, NFTs, or DeFi assets? You can probably guess my usual answer: no one knows! But I do know that it changes things.