Original title: Zoom Out

Original author: Arthur Hayes

Original translation: 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 of the bull market."

"Why didn't Bitcoin rise with the large US technology companies in the Nasdaq 100 index?"

This Nasdaq 100 This chart of the Nasdaq 100 (white) versus Bitcoin (gold) shows that the two assets are moving in tandem, but Bitcoin has stagnated after hitting an all-time high earlier this year

This chart of the Nasdaq 100 (white) versus Bitcoin (gold) shows that the two are moving 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 with leaders like China, Brazil, Russia, etc.”

“To finance government deficits, savers must be financially repressed and central banks must print more money.”

“World War III has begun and wars cause inflation.”

Some of the opinions on the current Bitcoin bull market 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 shape of it.

I want to step away from the current turmoil in 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 Great World because the entire global economy is a derivative of the financial policies of the ruling empire. Unlike Russia in 1917 and China in 1949, the American Great World did not undergo a political revolution as a result of the two world wars. Most importantly, for the purposes of this analysis, the American Great 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 outcomes 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 and finance wars past and present. 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 pay attention to will have a similar taxonomy to describe the major cycles of history in the 20th century and beyond.

The purpose of this history lesson is to invest wisely throughout the cycles. In a typical life expectancy of 80 years, which I will 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 rocks.

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 you 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. Stocks therefore require a strong state to exist and retain value over the long term.

In times of local inflation, I should own gold and forgo stocks and bonds.

In times of global deflation, I should own stocks and forgo gold and bonds.

Government bonds generally do not retain value over the long term unless I can draw on them indefinitely at little or no cost, or unless I am forced to hold them by regulators. This is primarily because it is too tempting for politicians to finance their political goals 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 reneged on the U.S. commitment under the gold standard by devaluing the dollar from $20 to $35 against gold.

· December 31, 1974, on this day, 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 curbed inflation by restricting credit. 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 then aggressively deregulated the financial services industry. His other notable subsequent financial regulatory changes included making 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 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 free humanity from the control of the state by creating a digital cryptocurrency that can compete with digital fiat currencies.

1933 - 1980 American Pax Rising Cycle

Compared to the rest of the world, the United States emerged from the war unscathed. Considering the human and property losses in the United States, 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 went well for the United States, it still had to pay for the war 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 could not 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 paid interest at least at the rate of inflation were outlawed, what else could savers do to beat inflation? The stock market was the only way.

S&P 500 (white) vs. Gold (gold) Index (100) from April 1, 1933 to December 30, 1974

Even as gold rallied after President Nixon abolished the gold standard in 1971, gold still did not outperform stocks.

But what happened when capital was free to bet against the system and the government again?

S&P 500 (white) versus Gold (gold) Index (100) from December 31, 1974 to October 1, 1979

Gold outperformed stocks during this period. I stopped the comparison in October 1979 because Volcker announced that the Fed would significantly tighten credit, thereby restoring confidence in the dollar.

Peak Global Cycle of the American Pax Americana, 1980-2008

As confidence grew that the United States could and would defeat the Soviet Union, the political winds shifted. It was time to transition from a wartime economy, remove financial and other regulations, and allow markets to move.

Under the new petrodollar monetary architecture, the dollar was backed by surpluses from oil sales by Middle Eastern oil producers such as Saudi Arabia. To maintain the dollar’s purchasing power, 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 to trade with the world and the dollar strengthened on monetary conservatism. Unsurprisingly, gold underperformed compared to stocks.

S&P 500 (white) vs. Gold (gold) Index (100) from October 1, 1979 to November 25, 2008

Except for bombing some Middle Eastern countries back to the Stone Age, the US has not faced any wars with peer or near peer armies. Even after the US wasted over $10 trillion fighting and losing cavemen in Afghanistan, cavemen in Syria, and guerrilla insurgents in Iraq, 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.

American Pax Americana vs. Medieval Native Cycles, 2008-Present

Faced with yet another deflationary economic collapse, the American Pax Americana once again defaulted and devalued. This time, rather than banning private ownership of gold 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 blocs are once again in full swing. A major turning point was Russia’s invasion of Georgia in 2008, in response to NATO’s intention to admit Georgia to the organization. For the Russian elite, led by President Putin, stopping a nuclear-armed NATO advance and encirclement of the Russian mainland was and is a top priority.

Currently, fierce proxy wars are raging between the West (the United States and its vassals) and Eurasia (Russia, China, 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 to war, countries are turning inwards, ensuring that all aspects of the national economy are ready to support the war effort.

For the purposes of this analysis, this means that savers will be asked to finance the state’s wartime spending. They will be financially repressed. The banking system will allocate most of its credit at the direction of the state to achieve certain political goals.

The Pax Americana 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 like it did in 1930-1940. It’s all nation states for themselves, which can only mean experiencing financial repression while also enduring violent inflation.

S&P 500 (white) vs. Gold (gold) vs. Bitcoin (green) 100 from 25 November 2008 to date

This time, as the Fed devalues the dollar, capital is free to leave the system. The problem is that Bitcoin offers an alternative stateless currency at the start of the current local cycle. The main difference between Bitcoin and gold is that, in Lynn-Alden's words, 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 physically move 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, while gold is inferior. This is why Bitcoin has somewhat stolen gold's thunder from 2009 to now.

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 background and description of the past 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 should: outperformed equities and fiat currency debasement. However, timing is everything. If you bought Bitcoin at its recent all-time high, you may 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 teach us about the future?

Governments have always suppressed domestic savers to finance wars and winners of past cycles and 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 markets throw free money and credit into businesses that don’t produce the actual products needed in a wartime economy. The Pax Americana 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, which reduced costs and increased the amount of credit.

In private capital markets, credit is allocated to maximize shareholder returns. The easiest way to increase 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 bringing in more revenue is challenging, and there is no guarantee that it will boost stock prices. But mathematically, by reducing unrealized losses, you can increase stock prices, and large-cap companies with access to lots of cheap credit have done just that since 2008.

(See source)

Another low-hanging fruit is higher profit margins. So instead of trading 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. The U.S. manufacturing industry is already so fragile that it can’t produce enough ammunition to respond to Russia’s fighting in Ukraine. Moreover, China has such a clear advantage in manufacturing goods that the U.S. Department of Defense’s supply chain is filled with key components produced by Chinese companies. Most of these Chinese companies are state-owned. Quantitative Easing (QE) combined with shareholder-first capitalism has made the US military "giants" dependent on the nation's "strategic competitor" (their words, not mine), China. What a travesty! The way the American Pax Americana and the West collectively allocate credit will be similar to that of China, 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 of you who are obsessed with watching the balance sheets of major central banks and think that credit is not growing fast enough to drive crypto prices higher again, you must now be obsessed with watching the amount of 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 markets, and banks dutifully buy this debt.

In short, in past cycles, we monitored the size of the central bank balance sheet. In this cycle, we must monitor the fiscal deficit and total non-financial bank credit.

Trading Strategy

Why am I confident that Bitcoin will regain its magic? Why am I confident that we are in a new localized, nation-state-first inflation cycle?

Check this out:

The U.S. budget deficit is expected to soar to $1.915 trillion in fiscal 2024, surpassing last year’s $1.695 trillion and hitting its highest level outside the COVID-19 era, according to a federal agency that attributes its 27% increase from an earlier forecast to increased spending.

For those worried that a “slow” Biden won’t keep the economy moving before the election with more spending, here’s the answer.

The Atlanta Fed forecasts a staggering +2.7% real GDP growth in the third quarter of 2024.

For those worried that the American Reign is heading for a recession, it’s 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 2023 GDP. For context, US GDP fell by 0.1% in 2008 and by 2.5% during the 2009 global financial crisis. If there were another global financial crisis this year similar to the last one, the decline in private economic growth would still not be more than the amount of government spending. There would not be a recession. This does not mean that large numbers of ordinary people would not be in serious financial trouble, but that the American Pax Americana would continue to move forward.

I point this out because I believe that fiscal and monetary conditions are easy and will continue to be easy, and therefore holding cryptocurrencies 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 devaluation through the expansion of the banking system and centralized credit allocation is imminent.

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