Crypto in Context: Inflation, Value, & Deleveraging
As the “everything bubble” comes to an end, how does crypto fit into the picture?
Teetering on the Brink
Over the last couple of days, I have read a handful of articles about how “the worst is behind us” in crypto markets. Another handful seems to indicate that a “relief rally” is either happening or is about to.
As for me, I’ve been predicting the demise of the global financial system since the early 90s. For nearly 30 years, I have been a financial Chicken Little to anyone who would listen.
The problem with being a Chicken Little Perma-Bear is, it’s very easy to underestimate the viciousness, incompetence, and/or depravity of the Boomers that control the levers of global finance.
But then, 2008 came along, and the financial system actually collapsed. The collapse put the viciousness, incompetence, and/or depravity of the Boomers on full display.
From that mess, they proceeded to blow up the “everything bubble.” They cared nothing more than to ensure their retirement plans stayed intact.
Let the rest of the world eat cake.
To this day, the legacy global financial system is still on life-support. Much like a comatose grand-parent, no one wants to pull the plug on, the financial system keeps gurgling away.
It’s permanently attached to an intravenous bag of fiat currency. It looks like a living thing, but it’s basically a vegetable.
Quantitative easing and zero-minus rates are not temporary, nor are they ‘fixes.’ It’s just the way things work.
Now the Federal Reserve (the Fed) is temporarily taking the life support away. Against all reason, equities and crypto are pumping.
This is not going to end well.
The Federal Reserve
The Fed’s mandate is:
…to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates
Stable prices? Nope. “Moderate” long-term rates (e.g. 5–6%)? Nope.
In terms of ‘maximum employment,’ we have a country full of:
- Crappy, low-paying service sector jobs;
- Time and resource wasting bullshit jobs; and
- The rest of the jobs that actually matter
And that is what the Fed is hanging their hat on to claim “we’re not in a recession.” Why would the Fed lie about a recession?
Because they have to.
The Fed needs “dry powder” (e.g. a non-zero interest rate) to lower once the economy collapses. Make no mistake, it’s going to collapse.
And when it does, the Fed will pivot, and the money printer will come back on. Trouble is, this time, it’s probably not going to work very well.
To put it all in perspective, right before the 2008 collapse unfolded, this is what the messaging looked like:
Despite a recession that had been going on since December 2007, the Fed still hadn’t called a recession. And they were anticipating “moderate growth” exactly one-month before global markets collapsed.
What does this all have to do with today? All the problems we had then are still there, except global markets are exponentially more leveraged than they were in 2008.
In other words, we’re all sitting on a financial nuclear bomb. And risk-on investors are currently banging on it with a sledgehammer just to see if it works.
That crazy crypto thing
In the 400-years since the Treaty of Westphalia, the Euro-Christian nation-state based economic system has consistently valued two core financial holdings:
Land; and
Gold.
If you owned enough of both to sustain yourself, no sovereign generated financial calamity could touch you. Great wars, collapsing nation-states, the birth of new nation-states, asset bubbles, credit collapses, none of it could snuff out your financial candle.
Of course, you could lose those things. And, of course, someone could have come along and stolen them. But just from a pure financial “freedom” standpoint, land and gold are likely your two safest bets.
That’s still true.
If you want to maximise the likelihood you can survive any financial calamity a government can cook up, own a debt-free house, the land it sits on, and keep a bag of gold under your mattress. You’ll probably do just fine.
Everything else is pure speculation. But crypto is interesting in that regard. There is a tiny chance the next financial collapse provides the spark to a new crypto-based economic regime.
The central bankers of the world have lost control of the financial system. But, much like crypto, there’s a tiny chance they can reign the mess in.
But the Boomers pulling the levers of finance aren’t trying to fix the problem. They’re trying to keep their little fake wealth scheme alive.
To prop up their scheme after the 2008 crash, they doubled the M1 money supply between 2008 and 2020. To prop the scheme after the Covid crash, the Boomers quadrupled the M1 money supply between 2020 and today.
How much money do you think they’ll have to print to cover the next crash? I’m guessing it will be a lot — far more than most people might think.
And that’s assuming the Fed can even pull it off.
They are most certainly going to try though. That will be the spark, the tinder is foreign sovereign debt.
Foreign sovereign deleveraging
Corporate debt, as a percentage of US GDP, is at an all time high. Here’s what that looks like:
The next crash is going to unwind that mess. Trouble is, that’s not the only mess out there.
There are tons of countries that can’t pay their bills either:
When the next crash hits, US corporate debt unwinds, just like it did in 2008. Then, right on its heels comes a cascade of sovereign defaults. If that happens, things are going to get ugly fast.
The clever among you might notice El Salvador is right at the tippy-top of that distressed sovereign debt list. The really clever among you might recall El Salvador was also the first country to accept Bitcoin as legal tender.
I don’t think that’s a coincidence.
El Salvador had a front-row seat to the Latin American Debt Crisis of the 1980s. They saw first-hand what the International Monetary Fund (IMF) did to those countries, where the crisis is called “The Lost Decade”.
I think there’s a non-zero chance that if El Salvador decides to default on their sovereign debt, they’ll pump their resources into Bitcoin instead of getting rekt by the IMF.
And if enough other countries follow suit and decide that servicing American Boomer stock market excesses is less valuable than taking a long-shot on a Bitcoin pump, they might just do the same.
At which point Bitcoin will probably moon to ridiculous new highs. Add a dash of FOMO, which will drive more adoptions and increase the network effect, and it will make the previous $BTC all time high look like a joke.
All of which leads to a pretty titanic shift in the global financial space. Again, it’s a tiny chance. But it’s definitely plausible, especially if the US is in total meltdown mode at home.
The value of Bitcoin
Bitcoin (and crypto in general) has the same intrinsic value as a US Dollar, which is zero. US Dollars are little pieces of paper you carry around that represent notations on a centralised digital ledger, aka the bank.
Bitcoin is a little snippet of code you carry around that represents notations on a decentralised digital ledger, aka the blockchain.
One is controlled by super-fallible human beings and is actively manipulated to favour the few over the many. One is controlled by (most likely) infallible code that (most likely) can’t be manipulated.
One has wide sovereign backing, the other has very limited sovereign backing. One has wide adoption and acceptance. The other does not.
If you don’t own debt-free real estate and gold, the risk of holding either one is high. But US Dollars are guaranteed by design to lose purchasing power.
Bitcoin, on the other hand, might lose purchasing power, or it might multiply it. No one on earth can tell you with certainty which way that’s going to go.
If Bitcoin does lose its purchasing power permanently, the loss will be catastrophic for the holders. US Dollar losses will also (likely) be catastrophic, they’ll just (likely) be more predictable.
Point is, it’s not clear where we’re going to be in a few months. My guess is it’s likely to be somewhere unexpected. I don’t know about you, but I’m betting on Bitcoin just in case.
Crypto Deleveraging
With the Terra Luna collapse and the cascade of leveraged failures (e.g., Three Arrows, Celsius, etc.) has got many folks saying the worst of the crypto crash is behind us.
I disagree.
Just because crypto deleveraged first doesn’t mean it can’t still crash. Yes, the leverage got washed out, AND crypto can still be overbought.
Remember, crypto markets are completely unregulated. Anyone who wanted to could leverage themselves to the moon in the crypto markets.
A ton of people did precisely that and now they’re rekt. They’re not rekt because of the deleveraging. The deleveraging occurred because the Fed is withdrawing liquidity.
But equities haven’t deleveraged yet. Neither has all the sovereign debt we talked about earlier in this article. It’s just about guaranteed that deleveraging is coming.
I don’t believe for a second that crypto markets are somehow going to pump when equities start tanking hard. In other words, the crypto deleveraging is the canary in the coal mine for the equities markets.
And now crypto investors are starting to run back into the mine.
Conclusion
At the risk of being labeled a perma-bear (or worse), I remain confident crypto markets are going to suffer in the coming weeks. A few weeks back I decided to start dollar-cost-averaging (DCA) into a handful of projects.
I also didn’t expect markets to start pumping shortly after. I think I’ll give the DCA a break for the next couple weeks.
I remain cash heavy because I see way more downside risk than potential upside returns. Buying now feels like scrounging loose change on the freeway.
Even when the Fed inevitably pivots, I think the markets are going to be sideways and choppy for a while. The Fed is doing the worst possible thing at the worst possible moment.
When their lagging indicators finally catch up to their policy moves, the damage will already be done. Funny thing is, they’re literally telling us they’re going to tighten in a recession.
Some commentators called the last Fed meeting “dovish”. Fastest rate hikes in 40-years along with the fastest QT drawdown is “dovish?”
Good luck with that.
Remember, these are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
