The Lasting Impact of the COVID M2 Surge: Why Diversification Is More Crucial Than Ever

by Astoria Portfolio Advisors, 7/3/25

When the Fed increased the M2 money supply by over 40% during the COVID crisis, our instinct was that the implications would extend far beyond a temporary boost to the U.S. stock market and higher inflation. That intuition is proving accurate. We’re now seeing the long-term ripple effects play out in real time across multiple asset classes and global markets

Let’s be clear: the U.S. effectively exported inflation to the rest of the world. Since virtually all global commodities are priced in U.S. dollars, this massive increase in liquidity reverberated globally and led to higher inflation and FX moves across the world. We’re now witnessing increased geopolitical tensions, a bull market in gold, and a surge in crypto—all arguably symptoms of the same underlying shock: a historic and untested monetary experiment. There is a saying that when the US sneezes, the rest of the world catches a call. In derivatives terms, we would say that international economies have negative convexity to the US.

Why We’re Bullish on Gold and Crypto

Gold remains a holding in our inflation linked strategies and in many of our multi sector bond portfolios. In fact, gold represents a 9% weight in our real assets strategy. We’ve always viewed gold as a reliable portfolio hedge, especially during periods of equity volatility.

Crypto is a bit different. We don’t currently own it in our core ETF models or inflation linked strategies (mainly because the price always seemed to get away from us), but we are playing the theme via second derivative ways (power stocks, nuclear, data centers). We are bullish crypto as an the asset class but waiting for the right entry point. The same structural drivers that support gold—concerns over currency debasement, erosion of trust in fiat systems, and shifting reserve dynamics—also apply to crypto.

The U.S. Dollar Is Still King—But For How Long?

One of our biggest concerns today is the long-term viability of the U.S. dollar as the world’s reserve currency. The recent reconciliation bill adds another $2 trillion in fiscal spending to an already overextended balance sheet. We wrote about this in more depth in a recent blog post: Rising Debt, Shifting Markets.

When you step back, it’s clear that the world is adjusting to the U.S.’s fiscal and deficit issues. FX markets always tell the story best. We always watch the euro closely. Last year in Rome, the euro was around 1.04/1.05. It felt like a bargain. But having seen the euro hover around 1.25 for most of the past two decades, it was clear that level was unsustainably low. Today, we sit closer to 1.15, which still feels low.