The Endgame Hasn't Changed
Looking past at previous cycles, the Fed will soon have no choice but to reverse course. When will the money printing resume? That is the question.
“We now understand better how little we understand about inflation."
Jay Powell, Chairman of the US Federal Reserve | June 29, 2022
After a difficult first half of the year for all asset classes, it is time for investors to take stock of what happened and what is coming next. Inflation has been dominating both economic and political news. Polls show that it’s the most important issue for Americans and it is what spooked markets when they realized the Fed would be fighting it hard.
But there is nothing new about what is happening today. It all happened before. Look at what the famous economist Milton Friedman said about inflation and where it comes from. This video is from 1978 but it could have been recorded yesterday/
The problem the world is facing now is that the Fed is lost, completely lost, and doesn’t know how to fight inflation. I am not saying it, the Chairman of the Fed is saying it:
It has been a tough first half of the year for financial assets. The thread below is a good summary of what happened and what were the main drivers of the fall in price of assets.
To fight inflation, the Fed can’t print oil or food, but what it can do is reduce demand by slowing down economic activity. It looks like it’s going to be successful at it: After a negative GDP growth in Q1 in the US, a negative GDP growth is also likely in Q2.
Is it the desired outcome? Most likely.
In a desperate attempt to keep oil prices under control, the US is depleting its strategic petroleum reserves to the tune of one million barrels per day (about 5% of the US daily consumption). The US is jeopardizing its energy security to save a few cents at the pump.
One market has been hit particularly hard by the correction: Crypto. But it’s important to take a step back to look at where the market is coming from.
The number of centralized crypto entities being liquidated, filing for bankruptcy, or limiting withdrawal is unprecedented. A lot of leverage had built up in the system over the past two years, and it is now unwinding painfully. The article below summarizes the situation.
Venture Capitalist Nic Carter shared his thoughts on what is coming for the crypto market in this interview with Forbes.
The Endgame: Debt Monetization
Global Debt-to GDP is about 360%. Assuming a cost of debt of 4%, this means that nominal GDP (real growth + inflation) has to grow at 14.4% every year just to cover the cost of debt and keep the ratio constant. Unless GDP growth explodes unlike anything seen since World War II, inflation will have to run hot for several years to get the ratio down to a more manageable level.
In these times of high uncertainty, you have to go back to basics: How the economy works. The best video to watch on this is the one below from Ray Dalio (founder of the world’s largest hedge fund). It was released in 2013 and has more than 30 million views. When you study history, you realize that the endgame is always the same: Debt monetization, i.e. money printing. Every. Single. Time.
Interview of the Week
Talk Energy | Forest For The Trees with Luke Gromen
The always very clear and articulate Luke Gromen talks about the current state of the global economy. He talks about the Fed raising rates and the impact it will have on the economy and the sovereign credit market. He discusses energy’s role in global events and how Europe has backed itself into a corner by taking Russian energy supply. Lastly, he discusses the impact these trends will have on currencies, real estate, and the energy markets.
Odd Lots | Jay Newman on the Coming Crisis for Emerging Markets
Jay Newman is a long-time Emerging Market debt specialist and a former portfolio manager for Elliott Management. Jay has a wealth of experience in emerging markets -- including going head-to-head with Argentina after the country defaulted on its debt. In this episode, he describes how the world is in for one of the worst Emerging Market debt crises in decades, and gives his thoughts on how foreign investors should approach these markets.
TFTC: A Bitcoin Podcast | Dissecting the contagion with Parker Lewis
In this episode, Parker Lewis from Unchained Capital explains how contagion spread in the crypto market. He reiterates how important it is to self-custody your BTC and to not trust a third party with it, especially if this third party is going to lend out your BTC. Taking a step back, he explains how fiat money, because it is broken, prevents money from playing its role of coordinating economic activity and efficiently allocating capital in the economy.
Bankless | Bear Market War Stories with DCinvestor & Eric Conner
For those of you who need moral support during this crypto bear market, this episode is for you! DCinvestor and Eric Conner, two long-time crypto investors, share their multicycle bear market war stories. They also unpack why they keep on deciding to stay every cycle, what’s different about this cycle vs. previous cycles, the role leverage and macro conditions have played, and their hard-hitting, gigabrain advice for first-time cyclers and multicyclers alike.
The Tim Ferriss Show | #604: Master Investor Ed Thorp part II
This is the second interview of the 89-year old by Tim Ferris in just a few weeks. I had shared the previous interview in a previous newsletter. If you haven’t listened to it yet, go back and start with the first part. The second part didn’t disappoint. This interview covers a wide range of topics: how to think for yourself, mental models for the second half of life, how to be inner-directed, how basic numeracy is a superpower, and the dangers of investing fads. Enjoy!
I can’t resist leaving you with another scene from Margin Call (supposed to take place in 2008 as the Global Financial Crisis is starting) on money.