Rapture #244: Crisis

Rapture #244: Crisis

I took another hiatus in order to travel, as the market is offering little opportunity for profit.

It's bad

I don't know what else to say besides the macro environment has continued to worsen. I sound like a broken record at this point. I recently finished When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany to better prepare for what I view as the emergent base case for the times ahead, whether they are months/years or within the decade. I am leaning towards months/years. One of the feelings this book captures is how everyone thought the macro situation could not worsen in the 1930s, yet something new was always around the corner. I feel we are in a similar scenario now.

My base case is over the next 3 - 18 months major areas of some of the largest economies, from sovereign debt to real estate to banking to energy markets, will break, forcing central bankers around the world to resume QE, following the lead of the UK's recent move. Additionally, I believe war mobilization will accelerate in various areas of the world, the most obvious being in Ukraine.

This path leads to hyperinflation in some of the world's largest economies, which will lead to further political extremism and increase the probability of global war.

What will the US do

I think the US continues to increase rates and still does not opt to re-engage in QE. I take the Federal Reserve at their word that inflation is their #1 priority right now, purely because politically speaking the US general population is feeling inflation far more right now rather than feeling the pain of being unemployed. Democracies tend to overprioritize solving the most current painful problem of the populace. Furthermore, I don't think politically speaking the citizens of the US will want to save allied countries' economies at the risk of higher inflation.

If US QE does come, I don't think it will be amongst the first domino to fall over the next 3 - 24 months. Economic carnage in the UK, Europe, Japan, and potentially the US is on the horizon first.

In response to the upcoming calamity, I believe the US advances the narrative, via the IMF/World Bank, that US allies should consider adopting the dollar (in CBDC form) to stem off their crises. This narrative especially gains traction if Russia ends up in a war with all of NATO and if China invades Taiwan, which would likely mean the beginning of World War III.

Alternatively, some new currency will have to be created or the EURO will have to die and each European country will go back to having their own currencies. Open to ideas on this front. In the 1930s, Germany created a currency partially backed by land to try and stem off hyperinflation. There will likely be more experiments like this one.

I know these positions sounds absolutely crazy, but I don't think the US will opt to resume QE in the US, which would be one of the major ways to potentially stem the pending foreign currency/debt crisis (they are linked because the solution to a sovereign debt crisis is printing enough money to pay the debt, which destroys the currency), unless the US economy specifically enters a severe recession with a looming threat of a sustained depression. If the dollar continues to strengthen, inflation and capital flight will kill many of the major foreign currencies.

I have seen other compelling theories, such as the one outlined by Arthur Hayes, that hypothesize that the US will utilize QE to purchase foreign currencies/securities. This move would effectively prop up US allies' foreign currencies. This approach will eventually put the USD at severe risk of hyperinflation depending on the magnitude of QE required.

I don't know if the Federal Reserve will view QE as a means to purchase allies' currencies/securities as an inflationary pressure or not, but I think they will opt for caution on this front.

What it means for crypto

While I still believe we have the capitulation event for risk assets on the horizon, once the panic is over, a new narrative will take hold: crypto is the best alternative to fiat. In my opinion, this narrative will be the foundation for the most significant bull run in crypto to date. I postulated this would be the next crypto narrative on January 12th in Rapture #108.

I think both crypto and the USD will gain in this scenario while nearly all other currencies/asset classes fall. If the US decides to resume QE domestically, then crypto would gain while USD would likely fall.

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