Racing Ralph

We called this weeks Connecting the Dots “Fiat Fracture” At the core of our writing for the past few years has been the “currency debasement trade” (JP Morgan finally catching on 😉) The world changed post 2008 when the debt driven fiat system reached its natural end point The resulting deleveraging that began to follow was so painful and scary that governments and central banks felt compelled to intervene They basically transferred much of the private debt onto the balance sheets of governments and central banks, monetising that and artificially inflating the assets which are the collateral underpinning a debt based financial system Once you open that door, there’s no going back and you’re stuck in a perpetual cycle of every rising debt, necessitating the need for ever increasing central bank balance sheets and need for lower real rates The periodic attempts to “normalise” out of this get met with market turbulence forcing the Fed and other central banks to once again flood the market with liquidity As true monetary sovereigns, they can never nominally default but they default via the stealth debasement of the currency Now, they’ve managed to pull this trick off because they maintained credibility and market confidence Confidence is the magic fairy dust that Fiat systems rely on to keep functioning The debasement has been slow enough that markets never called the credibility of governments and central banks into question On the surface things looked stable and stocks going ever higher was seen as validation of the credible jobs central banks and governments are doing However, we’ve reached an inflection point where that credibility is starting to be questioned The recent implicit moves to accept higher inflation and pivot towards fiscal dominance, despite already eye watering amounts of debt has started to shake that fickle confidence With twitter and social media making information more freely accessible, more people are starting to understand the slow default occurring via debasement The circa $75 trillion global government bond market which formed a chunk of investor portfolios has not only retuned negative in nominal terms, but those returns are in fiat which is declining at an even faster rate Investors are consequently rotating out of fiat currency bonds and into hard assets Gold which went nowhere for years is up circa 50% YTD 🤯 Bitcoin, which investors will start to understand as the hardest asset and a better version of gold is slowly starting to receive some of those flows, but that will accelerate Confidence is so fickle that once shaken, it can evaporate overnight We’ve seen that in recent examples such as Venezuela Equities in local currency terms go to the moon In all of this, the dollar has been and remains the cleanest shirt in the fiat laundry given its “exorbitant privilege” as the world global reserve currency Yet its failure against “hard assets” is becoming more apparent It feels unthinkable that we could have a global currency crisis yet we’re slowly moving towards that way Before a Swarm of bees leaves the hive,“scout” bees leave in advance to search for a new nest site A few bees start to leave but the majority stay and the hive stays calm Once a new site is found however and communicated with the Queen bee, the queen bee finally leaves the hive and ALL of the bees follow Some central banks and sovereign wealth funds moving into gold and Bitcoin along with some high profile billionaires are like the scout bees Slowly the bees are finding a new nest but the queen bee of confidence is yet to completely leave Once it does, no bees will be left on the fiat hive This is when unthinkable levels of Bitcoin are achieved in one huge god candle overnight Slowly….then suddenly…

Been asked about when we think this Bitcoin and crypto cycle tops and if we’ve broken the 4 year cycle We believe the 4 year cycle has been at least extended to the end next year if not completely broken The crypto cycle typically syncs with the macro and liquidity cycle which usually occurs over a 4yr period However, this rate cutting cycle has been slow and drawn out because of; 1) The economic cycle taking time to normalise from the extremes of covid 2) The continued printing of war time level fiscal deficits despite strong nominal growth Fed rate cuts have consequently been slow and drawn out and have further to go The same is happening globally and we remain in a global rate cutting/liquidity easing cycle which is set to run on well into 2026 While central banks are pumping liquidity, our bags will continue to pump 🚀 That’s the case for an extended cycle However it’s possible the entire cycle has been broken and the crypto bull run could have a few YEARS to play out👀 The US and other major economies are witnessing an exponential spiral in their debt and deficits This is exacerbated by the high nominal rates (Bessent and Trump aren’t even trying to hide this is why they want Fed rate cuts to help temper the spiralling deficit) It’s also compounded by a rising debt intensity of growth That is, it requires more units of debt for each unit of growth Sustaining current levels of nominal growth necessarily requires increasing amounts of nominal debt So both the debt pile is growing exponentially alongside the interest cost - a vicious circle No president or leader can come in and reduce the deficit without accepting lower growth (see in the UK the “black hole” growing from 20bn to 50bn in a year despite the “promises” to bring it back to balance. In the US, Bessent quickly gave up on the aim to get deficits back to 3% and now is relying on the miracle of growth to reduce the deficit - they’re gonna try run it hot 🔥) We’re therefore potentially at that stage where fiscal runs hot and mon pol easy in a continuous cycle to stop the entire system collapsing There’s a real risk that sparks a major currency crisis across major economies Ultimately, the currency is the escape valve in all this At best, they manage to maintain a level of confidence across markets and the public that things don’t dramatically “break” To paraphrase Dalio, a kind of “beautiful debasement” In that scenario, BTC climbs its way to 1mio relatively uninterrupted over the next 3-5 years and overpaid Wall Street analysts keep getting S&P targets wrong because they don’t realise the value of the dollar is falling each year At worse, we have a crisis where confidence disappears, the illusion of control fades and the bond market and currencies of these economies come under speculative attack They will print the money to save the bond market and have little choice but to let the currency go In this scenario, BTC god candles to 10mio+ over the next few years The whole system needs a reset and some form of debt jubilee They managed that with zero rates post 2008 but the Covid induced inflation has now messed that up They therefore either find a way to get rates back to zero or get creative in other ways (such as revaluing the gold to pay down the debt) Ultimately, the pace of currency debasement grows exponentially from here In the best case it compounds over several years In the worst case it happens all at once and there’s a broad collapse in fiat currency Either way, it’s hard to see how they can normalise rates and reduce system liquidity any time soon and the probabilities are that they need to inject exponential amounts of liquidity to keep the system alive The BTC cycle may therefore not just be extended but broken all together and BTC could be set to realise its ultimate bullish fate more quickly than even we anticipated