Image source: Shenchao TechFlow
Some people will say this:
"The cryptocurrency bull market is over."
"I need to launch my token now because we are in the downside phase of the bull market."
“Why isn’t Bitcoin rising with the big U.S. tech companies in the Nasdaq 100?”
Source: Deep Tide TechFlow This chart comparing the Nasdaq 100 Index (white) and Bitcoin (gold) shows that the two assets are moving in the same direction, but Bitcoin has stalled after hitting an all-time high earlier this year. Got it
This chart of the Nasdaq 100 (white) versus Bitcoin (gold) shows that the two are moving in tandem, but Bitcoin has stalled after hitting all-time highs earlier this year.
But the same people would say the following:
"The world is moving from a unipolar world order dominated by the United States to a multipolar world order that includes leaders such as China, Brazil, and Russia."
"To fund government deficits, savers must be financially suppressed 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 coupled with 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 kind. While I don’t know which country will ultimately dominate and what the trade and financial architecture will look like specifically, I do know what it will look like in general.
I want to step back from the current turmoil in the cryptocurrency capital markets and focus on the broader cyclical trend reversal we are in.
I would like to analyze three major cycles from the Great Depression of the 1930s to the present. This will focus on the American cosmos, as the entire global economy is a derivative financial commodity that governs imperial financial policy. Unlike Russia in 1917 and China in 1949, the American cosmopolitan world was not politically revolutionized by two world wars. Most importantly, for the purposes of this analysis, the U.S. is the best place to hold capital in relative terms. It has the deepest stock and bond markets, and the largest consumer market. Whatever the United States does, the rest of the world follows suit and reacts, leading to good or bad outcomes relative to the flag on your passport. Therefore, it is important to understand and predict the next major cycle.
There are two kinds of periods in history: local periods and global periods. During the local period, governments engaged in financial repression of savers to finance past and present wars. During the global era, financial controls were relaxed and global trade was facilitated. The local period is an inflationary period, while the global period is a deflationary period. Any aggregate economic theorist you follow will have a similar taxonomy describing the major cycles of the historical period of the 20th century and beyond.
The purpose of this history lesson is to invest wisely throughout the cycle. In a typical life expectancy of 80 years, I'd better get more time thanks to the stem cells I injected; you can expect to go through an average of two major cycles. I categorize our investment choices into three categories:
If you believe in the system but not the people who run it, invest in rocks.
If you believe in the system and the people who run it, invest in government bonds.
If you neither believe in the system nor the people who run it, then invest in gold or other assets that do not require any residual state presence, such as Bitcoin. The stock is a legal fantasy, upheld by courts that can dispatch men with guns to enforce compliance. Therefore, stocks need a strong country to exist and retain value over the long term.
In times of local inflation, I should own gold and abandon stocks and bonds.
In a time of global deflation, I should hold stocks and abandon gold and bonds.
Government bonds generally don't retain their value over the long term unless I have unlimited access to them at little or no cost, or a regulator forces me to hold them. This is largely because it is too tempting for politicians to print money to fund their political goals without resorting to unpopular direct taxation.
Before describing the cycle of the last century, I would like to describe a few key dates.
On this day, April 5, 1933, President Franklin Roosevelt signed an executive order banning private ownership of gold. He then broke the United States' commitment to the gold standard by devaluing the dollar from $20 to $35 against gold.
On this date, December 31, 1974, 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 volume of credit rather than the level of interest rates. He then curbed inflation by restricting credit. In the third quarter of 1981, the 10-year Treasury yield reached a record high of 15%, 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 triggered by losses on subprime mortgages on financial institutions' balance sheets.
On January 3, 2009, Satoshi Nakamoto’s Bitcoin blockchain released the genesis block. I believe that our Lord and Savior is here to free humanity from the control of the state by creating a digital cryptocurrency that can compete with digital fiat currencies.
1933-1980 American Pax Rise Cycle
Compared to the rest of the world, the United States emerged unscathed from the war. Considering the American casualties and property damage, World War II was less deadly and materially destructive than the Civil War of the 19th century. While Europe and Asia lay in ruins, American industry rebuilt the world and reaped huge rewards.
Although the war was going well for the United States, it still had to pay for it through financial oppression. Beginning in 1933, gold ownership was banned in the United States. In the late 1940s, the Federal Reserve merged with the U.S. Treasury Department. This allows the government to engage in yield curve control, which allows the government to borrow at below-market rates because the Fed prints 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.
Chart source: Deep Tide TechFlow Comparison of the S&P 500 Index (white) and the Gold (Gold) Index (100) from April 1, 1933 to December 30, 1974
Even after gold rallied in 1971 after US President Richard Nixon abolished the gold standard, gold's return rate still did not exceed that of stocks.
But what happens when capital is free to gamble with institutions and governments again?
Chart source: Deep Tide TechFlow Comparison of the S&P 500 Index (white) and the Gold (Gold) Index (100) from December 31, 1974 to October 1, 1979
Gold has outperformed stocks during this time. I stopped comparing in October 1979, as Volcker announced that the Fed would tighten credit significantly, thereby restoring confidence in the dollar.
1980-2008, the peak global cycle of American governance
As confidence grew that the United States could and would defeat the Soviet Union, the political winds shifted. Now is the time to transition from a wartime economy, lift financial and other regulations, and let markets liven up.
Under the new petrodollar currency structure, the U.S. dollar is supported by oil sales surpluses from Middle East oil producers such as Saudi Arabia. In order to maintain the purchasing power of the dollar, it is necessary to raise interest rates to curb economic activity and thereby curb inflation. Volcker did just that, sending interest rates soaring and the economy tumbling.
The early 1980s marked the beginning of the next cycle, in which the United States, as the sole superpower, spread its wings in world trade and the dollar strengthened due to monetary conservatism. As expected, gold underperformed compared to stocks.
Chart source: Deep Tide TechFlow Comparison of the S&P 500 Index (white) and 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 United States has not faced any war with a military of its own or near-peer class. Even after the United States wasted more than $10 trillion, fought and lost against cavemen in Afghanistan, against cavemen in Syria, and against guerilla insurgents in Iraq, faith in institutions and government has not wavered. After Jesus' glorious glory millennia ago, God is wreaking havoc on America this time.
Comparison of American Pax and Medieval Native Cycles, 2008 to Present
Faced with yet another deflationary economic collapse, American Pax defaulted and devalued again. This time, instead of banning private ownership of gold and then devaluing the dollar relative to gold, the Fed decided to print money and buy government bonds, euphemistically called quantitative easing. In both cases, the amount of dollar-based credit expanded rapidly to "rescue" the economy.
Proxy wars between major political groups are once again in full swing. An important turning point was Russia's invasion of Georgia in 2008, in response to the North Atlantic Treaty Organization (NATO)'s interest in Georgia joining the organization. For the Russian elite, headed by President Putin, preventing the nuclear-armed NATO from advancing and encircling the Russian mainland was and remains a top priority.
Currently, a fierce proxy war breaks out between the West (the United States and its vassals) and Eurasia (Russia, China, Iran) in Ukraine and the Levant (Israel, Jordan, Syria, and Lebanon). Either conflict could escalate into a nuclear war between the two sides. In response to the seemingly unstoppable course of war, countries are turning inward to ensure that all aspects of their national economies are ready to support war.
For the purposes of this analysis, this meant that savers would be required to finance the nation's wartime expenditures. They will be economically suppressed. The banking system will allocate most of the credit at the direction of the state to achieve certain political goals.
The American Pax once again defaulted on the U.S. dollar to prevent a deflationary depression similar to the Great Depression of 1930. The United States then erected protectionist trade barriers as it did in 1930-1940. All nation-states are looking out for themselves, which can only mean experiencing severe inflation while experiencing financial repression.
Image source: Shenchao TechFlow
From November 25, 2008 to present, the S&P 500 (white) vs. gold (gold) vs. Bitcoin (green) is 100
This time, with the Fed devaluing the dollar, capital is free to leave the system. The problem is that at the start of the current local cycle, Bitcoin offers another stateless currency. The main difference between Bitcoin and gold is that, in Lynn-Alden's words, Bitcoin's ledger is maintained via an encrypted blockchain and money moves at the speed of light. In contrast, gold's ledger is maintained by nature and moves only as fast as humans can actually move the gold. Compared with digital fiat currencies that also move at the speed of light but that governments can print in unlimited quantities, Bitcoin is better than gold. That’s why, from 2009 to now, Bitcoin has somewhat stolen gold’s thunder.
Bitcoin has outperformed gold by so much that you can’t see the difference in returns between gold and stocks from this chart. As a result, gold underperformed stocks by nearly 300%.
The end of quantitative easing
While I think my background and description of the past 100 years of financial history is incredible, it does not eliminate concerns about the end of the current bull market. We know that we are in a period of inflation, and Bitcoin has done what it is supposed to do: outperform stocks and fiat currencies. However, timing is everything. If you bought Bitcoin at its recent all-time highs, you might feel like a beta cuckold because you extrapolated past results into an uncertain future. Having said that, if we believe that inflation is here to stay and that war (whether cold war, hot war, or proxy war) is coming, what does the past teach us about the future?
Governments have suppressed domestic savers to finance wars and winners of past cycles and maintain system stability. In this modern era of nation-states and large integrated commercial banking systems, the primary way governments finance themselves and key industries is by dictating how banks allocate credit.
The problem with quantitative easing was that the market poured free money and credit into businesses that did not produce the actual products needed by the wartime economy. The American Pax Association is the best example of this phenomenon. Volcker ushered in the era of omnipotent central banks. Central bankers buy bonds to create bank reserves, which reduces costs and increases credit lines.
In private capital markets, credit is allocated to maximize shareholder returns. The easiest way to increase stock prices is to reduce floating profits through buybacks. Companies with access to cheap credit borrow money to buy back stock. They don't borrow money to increase production capacity or improve technology. Improving the business in hopes of bringing in more revenue is challenging, and there's no guarantee it will stimulate the stock price. But mathematically speaking, by reducing floating losses, you can boost your stock price, and since 2008, large-cap companies with access to lots of cheap credit have done just that.
Image source: Shenchao TechFlow, please see the source for details
Another low-hanging fruit is improving 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 China and other low-cost countries. U.S. manufacturing is already so fragile that it cannot produce enough munitions to respond to Russia's fight in Ukraine. Furthermore, China has such a clear advantage in manufacturing goods that the U.S. Department of Defense’s supply chain is filled with critical components produced by Chinese companies. Most of these Chinese companies are state-owned enterprises. Quantitative Easing (QE) combined with shareholder-first capitalism has made the U.S. military “giant” dependent on the country’s “strategic competitor” (their words, not mine), China. How ironic! The American Pax Association and Western Collective will allocate credit in a similar way to China, Japan and South Korea. Either the state directly instructs banks to lend to this or that industry/company, or banks are forced to buy government bonds at below-market yields so that the state can hand out subsidies and tax breaks to "suitable" businesses. In either case, the rate of return on capital or savings will be lower than nominal growth and inflation. Assuming no capital controls, the only way out is to buy stores of value outside the system such as Bitcoin.
For those who obsessively watch changes in the balance sheets of major central banks and believe that credit is not growing fast enough to drive cryptocurrency prices higher again, you must now obsessively watch the credit lines created by commercial banks. Banks achieve this by lending to non-financial businesses. Fiscal deficits also generate credit, since deficits must be funded by borrowing on sovereign debt markets, which banks dutifully purchase.
In short, in past cycles we monitored the size of central bank balance sheets. In this cycle, we have to monitor the fiscal deficit and total non-financial bank credit.
Trading straregy
Why am I confident Bitcoin will regain its mojo? Why am I confident we are in a new localized, nation-state-first inflation cycle?
Check out this information:
The U.S. budget deficit is expected to surge to $1.915 trillion in fiscal 2024, surpassing last year's $1.695 trillion and hitting its highest level outside of the COVID-19 era, according to a federal agency that increased its earlier forecast 27% were attributed to increased spending.
For those worried that a "slow" Biden won't spend more to keep the economy humming ahead of the election, here's the answer.
The Atlanta Fed forecasts real GDP growth of a staggering +2.7% in the third quarter of 2024.
Image source: Shenchao TechFlow
For those worried about a recession in America, going through a recession when the government is spending $2 trillion on top of tax revenue is mathematically extremely difficult. This is equivalent to 7.3% of GDP in 2023. For context, U.S. GDP fell 0.1% in 2008 and 2.5% during the 2009 global financial crisis. If another global financial crisis similar to the last one occurred this year, the decline in private economic growth would still not exceed the amount of government spending. There will be no recession. This doesn’t mean that a large number of ordinary people won’t find themselves in serious financial trouble, but America will continue to move forward.
I point this out because I believe fiscal and monetary conditions are accommodative and will continue to remain accommodative, so holding cryptocurrencies is the best way to preserve value. I'm sure the situation today is similar to what it was in the 1930s to 1970s, which means that, given that I'm still free to move from fiat to crypto, I should do so because of the devaluation caused by the expansion of functionality and centralized credit distribution through the banking system coming soon.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Deep Wave TechFlow"
Original author: Arthur Hayes
