By Arthur Hayes
Compiled by | TechFlow
Some people would say:
The cryptocurrency bull run is over.
I need to launch my token now because we are in the downside phase of the bull market.
Why hasn’t Bitcoin risen along with the big US tech companies in the Nasdaq 100?
This chart of the Nasdaq 100 (white) versus Bitcoin (gold) shows that the two have moved in tandem, but Bitcoin has stagnated after hitting an all-time high earlier this year.
But the same people will say the following:
The world is moving from a unipolar, US-dominated world order to a multipolar world order that includes leaders such as Brazil and Russia.
To finance government deficits, savers must be financially repressed and central banks must print more money.
World War III has begun, and war causes inflation.
Some of the opinions on the current Bitcoin bull run phase and their views on the geopolitical and global monetary situation confirm my view that we are at a turning point — we are moving from one geopolitical and monetary global arrangement to another. While I don’t know which country will ultimately dominate and what the trade and financial architecture will look like, I know the general outline of it.
I want to step back from the current dynamics of the cryptocurrency capital markets and focus on the broader cyclical trend reversal we are in.
I want to analyze the three major cycles from the Great Depression of the 1930s to the present day. This will focus on the American one world because the entire global economy is a derivative of the financial policies of the ruling empire. The American one world did not have a political revolution due to the two world wars. Most importantly, for the purposes of this analysis, the American one world is the best place to hold capital in relative terms. It has the deepest stock and bond markets, as well as the largest consumer market. Whatever the United States does, the rest of the world will follow and react, which leads to good or bad results relative to the flag in your passport. Therefore, it is very important to understand and predict the next major cycle.
There are two kinds of periods in history: local periods and global periods. In local periods, governments financially repress savers to finance past and present wars. In global periods, financial regulations are relaxed and global trade is promoted. Local periods are inflationary periods, while global periods are deflationary periods. Any macro theorist you follow will have a similar taxonomy to describe the major cycles in history during the 20th century and beyond.
The point of this history lesson is to invest wisely throughout the cycles. In a typical 80-year life expectancy, which I ideally get more of thanks to my stem cell injections, you can expect to experience two major cycles on average. I group our investment choices into three categories:
If you believe in the system but not the people who run it, you invest in stones.
If you believe in the system and the people who run it, you invest in government bonds.
If you don't trust the system or the people who run it, then invest in gold or other assets that don't require any remnant of a state to exist, like Bitcoin. Stocks are a legal fantasy, maintained by courts that can send in gunmen to enforce compliance. Therefore, stocks need a strong state to exist and retain value over the long term.
In times of local inflation, I should own gold and abandon stocks and bonds.
In times of global deflation, I should hold stocks and avoid gold and bonds.
Government bonds generally do not retain their value over time unless I can draw on them indefinitely at little or no cost, or unless I am forced to hold them by a regulator. This is largely because it is too tempting for politicians to finance their political objectives by printing money without resorting to unpopular direct taxation.
Before describing the cycle over the last century, I want to describe a few key dates.
April 5, 1933: On this day, President Franklin Roosevelt signed an executive order banning private ownership of gold. He then broke the U.S. commitment under the gold standard by devaluing the dollar from $20 to $35 against gold.
December 31, 1974: On this day, US President Gerald Ford restored the right of Americans to privately own gold.
In October 1979, Federal Reserve Chairman Paul Volcker changed U.S. monetary policy to target the amount of credit rather than the level of interest rates. He then restricted credit to curb inflation. In the third quarter of 1981, the 10-year Treasury yield reached 15%, a record high, while bond prices reached a record low.
· On January 20, 1980, Ronald Reagan was sworn in as President of the United States. He subsequently aggressively deregulated the financial services industry. His other notable subsequent financial regulatory changes included making the capital gains tax treatment of stock options more favorable and repealing the Glass-Steagall Act.
On November 25, 2008, the Federal Reserve began printing money under its quantitative easing (QE) program. This was in response to the global financial crisis that was triggered by losses on subprime mortgages on the balance sheets of financial institutions.
On January 3, 2009, Satoshi Nakamoto’s Bitcoin blockchain released the genesis block. I believe our Lord and Savior is here to save humanity from the control of the state by creating a digital cryptocurrency that can compete with digital fiat currencies.
1933–1980 Pax Americana
Compared to the rest of the world, the United States emerged from the war unscathed. Considering the human and material losses in the United States, World War II was less deadly and less materially destructive than the Civil War of the 19th century. While Europe and Asia lay in ruins, American industry rebuilt the world, and reaped the rewards.
Even though the war was going well for the United States, it still had to pay for it through financial oppression. Starting in 1933, the United States banned gold ownership. In the late 1940s, the Federal Reserve merged with the U.S. Treasury. This allowed the government to engage in yield curve control, which allowed the government to borrow at below-market rates as the Fed printed money to buy bonds. To ensure savers couldn't escape, bank deposit rates were capped. The government used the marginal dollars saved to pay for World War II and the Cold War with the Soviet Union.
If gold and fixed-income securities that pay interest at least at the rate of inflation are outlawed, what else can savers do to beat inflation? The stock market is the only way out.
The S&P 500 (white) versus the Gold (gold) Index (100) from April 1, 1933 to December 30, 1974
Even after gold rallied after President Richard Nixon abolished the gold standard in 1971, the yellow metal’s returns still didn’t outpace those of stocks.
But what happens when capital is free to bet against institutions and governments again?
The S&P 500 (white) versus the Gold (gold) Index (100) from December 31, 1974 to October 1, 1979
Gold outperformed stocks during this time. I stopped the comparison in October 1979 when Volcker announced that the Fed would tighten credit dramatically, thereby restoring confidence in the dollar.
1980–2008: Peak Global Cycle of the American Pax Americana
As confidence grew that the United States could and would defeat the Soviet Union, the political winds shifted. It was time to transition away from the war economy, to lift financial and other regulations, and to let markets run wild.
Under the new petrodollar monetary architecture, the dollar was backed by surplus oil sales from Middle Eastern oil producers such as Saudi Arabia. To maintain the purchasing power of the dollar, it was necessary to raise interest rates to dampen economic activity and, in turn, inflation. Volcker did just that, letting interest rates soar and the economy tank.
The early 1980s marked the beginning of the next cycle, during which the United States, as the sole superpower, spread its wings with world trade and the dollar strengthened due to monetary conservatism. Unsurprisingly, gold underperformed compared to stocks.
The S&P 500 (white) versus the Gold (gold) Index (100) from October 1, 1979 to November 25, 2008
Aside from bombing some Middle Eastern countries back to the Stone Age, the US has not faced any wars with an army of equal or near equal caliber. Even after the US wasted over $10 trillion fighting and losing cavemen in Afghanistan, cavemen in Syria, and guerrilla insurgents in Iraq, people’s faith in institutions and government has not wavered. Following Jesus’s grand grab for glory thousands of years ago, Allah is about to wreak havoc on America this time around.
Comparison of the American Pax Americana and the medieval native cycle from 2008 to the present
Faced with yet another deflationary economic collapse, the U.S. Paxos defaulted and devalued again. This time, rather than banning private gold ownership and then letting the dollar depreciate relative to gold, the Fed decided to print money and buy government bonds, euphemistically calling it quantitative easing. In both cases, the amount of dollar-based credit expanded rapidly to “save” the economy.
Proxy wars between major political groups have once again broken out in full force. A major turning point was Russia’s invasion of Georgia in 2008, in response to the North Atlantic Treaty Organization (NATO)’s interest in Georgia’s admission to the organization. For the Russian elite, led by President Vladimir Putin, preventing a nuclear-armed NATO advance on and encirclement of the Russian mainland was and is a top priority.
Currently, there are fierce proxy wars raging between the West (the United States and its vassals) and Eurasia (Russia, Iran) in Ukraine and the Levant (Israel, Jordan, Syria, and Lebanon). Any of these conflicts could escalate into a nuclear war between the two sides. In response to the seemingly unstoppable march of war, countries are turning inwards, ensuring that every aspect of their national economies is prepared to support the war effort.
For the purposes of this analysis, this means that savers will be required to finance the nation's wartime spending. They will be financially oppressed. The banking system will allocate much of its credit at the direction of the state to achieve certain political goals.
The Pax Romana defaults on the dollar again to stop a deflationary depression similar to the Great Depression of 1930. The US then puts up protectionist barriers just as it did in 1930-1940. It’s all nation states looking out for themselves, which can only mean experiencing financial repression while also enduring violent inflation.
S&P 500 (white) vs. Gold (gold) vs. Bitcoin (green) from November 25, 2008 to present day, 100
This time, as the Fed devalues the dollar, capital is free to leave the system. The problem is that at the beginning of the current local cycle, Bitcoin provides an alternative stateless currency. The main difference between Bitcoin and gold is that, in the words of Lynn — Alden, Bitcoin’s ledger is maintained by a cryptographic blockchain, and the currency moves at the speed of light. In contrast, gold’s ledger is maintained by nature, and it moves only as fast as humans can actually transfer gold. Compared to digital fiat currencies that also move at the speed of light but can be printed in unlimited quantities by governments, Bitcoin is superior and gold is inferior. This is why from 2009 to now, Bitcoin has somewhat stolen gold’s thunder.
Bitcoin has outperformed gold so much that you can’t tell the difference in returns between gold and stocks from this chart. As a result, gold has underperformed stocks by nearly 300%.
The end of quantitative easing
While I think my context and description of the last 100 years of financial history are incredible, that doesn’t eliminate concerns that the current bull market is over. We know that we are in a period of inflation, and Bitcoin has done what it is supposed to do: outperform stocks and fiat currency debasement. However, timing is everything. If you bought Bitcoin at its recent all-time high, you might feel like a beta cuckold because you extrapolated past results into an uncertain future. That being said, if we believe that inflation will continue and that war (whether cold, hot, or proxy) is imminent, what does the past tell us about the future?
Governments have always suppressed domestic savers to finance wars and winners of past cycles and to maintain systemic stability. In this modern era of nation-states and large integrated commercial banking systems, the primary way governments fund themselves and key industries is by dictating how banks allocate credit.
The problem with quantitative easing is that the market will throw free money and credit into businesses that don’t produce the actual products needed in a wartime economy. The American Pax Romana is the best example of this phenomenon. Volcker ushered in the era of all-powerful central banks. Central bankers created bank reserves by buying bonds, thereby reducing costs and increasing the amount of credit.
In private capital markets, credit is allocated to maximize shareholder returns. The easiest way to boost stock prices is to reduce unrealized gains through buybacks. Companies with access to cheap credit borrow to buy back stock. They don’t borrow to increase capacity or improve technology. Improving a business in the hope of generating more revenue is challenging, and there’s no guarantee it will boost stock prices. But mathematically, by reducing unrealized losses, you can boost stock prices, and large-cap companies with access to lots of cheap credit have done just that since 2008.
Another low hanging fruit is higher profit margins. So instead of using stock prices to build new capacity or invest in better technology, companies are reducing labor costs by moving jobs to other low-cost countries. The U.S. manufacturing industry is already so fragile that it cannot produce enough ammunition to fight Russia in Ukraine. Quantitative Easing (QE) combined with shareholder-first capitalism has made the U.S. military "giants" dependent on the nation's "strategic competitors" (their words, not mine). What a travesty! The way the American Pax Americana and the West collectively allocate credit will be similar to that of Japan and South Korea. Either the state will directly instruct banks to lend to this or that industry/company, or banks will be forced to buy government bonds at below-market yields so that the state can dole out subsidies and tax breaks to the "right" businesses. In either case, the return on capital or savings will be below nominal growth and inflation. Assuming no capital controls, the only way out is to buy a store of value outside the system like Bitcoin.
For those who obsessively watch the balance sheets of major central banks and think that credit growth is not fast enough to drive cryptocurrency prices up again, you must now be obsessed with watching the credit created by commercial banks. Banks do this by lending to non-financial businesses. Fiscal deficits also create credit because deficits must be funded by borrowing in the sovereign debt market, and banks dutifully buy this debt.
In short, in past cycles we monitored the size of central bank balance sheets. In this cycle we must monitor fiscal deficits and total non-financial bank credit.
Trading straregy
Why am I confident that Bitcoin will regain its mojo? Why am I confident that we are in a new localized, nation-state-first inflation cycle?
Look at this information:
The U.S. budget deficit is expected to soar to $1.915 trillion in fiscal 2024, exceeding last year's $1.695 trillion and hitting its highest level outside the COVID-19 era, according to a federal agency that attributed its 27% increase from an earlier forecast to increased spending.
For those who worry that a "slow" Biden won't keep the economy moving before the election by spending more, here's the answer.
The Atlanta Fed forecasts real GDP growth in the third quarter of 2024 at a staggering +2.7%.
For those who are worried that the American Empire will go into a recession, it is mathematically extremely difficult to experience a recession when the government is spending $2 trillion on top of tax revenues. This is equivalent to 7.3% of GDP in 2023. For context, US GDP fell by 0.1% in 2008 and by 2.5% during the 2009 global financial crisis. If there was another global financial crisis this year similar to the last one, private economic growth would still not fall by more than the amount of government spending. There would be no recession. This does not mean that large numbers of ordinary people would not be in serious financial trouble, but the American Empire will continue to move forward.
I point this out because I believe fiscal and monetary conditions are easy and will continue to be easy, and therefore, holding crypto is the best way to preserve value. I am convinced that conditions today are similar to those of the 1930s to 1970s, which means that given that I can still freely move from fiat to crypto, I should do so because debasement through the expansion of the banking system and centralized credit allocation is imminent.