Mine Digital - May 2020 End of Month Report - Mine Digital
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Mine Digital – May 2020 End of Month Report

May 31, 2020 • 
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This month we saw riots in the US, Hong Kong taken by Beijing, the Economic War heat up and Goldman Sachs take on Bitcoin, Gold and Inflation.

May, 2020 has continued to impress a final unwinding of sense and order on us all with the chaotic riots in the United States. Although it is easy to understand the event as tragic, the complex reaction to it is not fully explained by the trigger.

It has been a few years since the United States has had a national narrative and common purpose, giving way to global humanism, state power and tribalism. It is now upto Donald Trump and the US to re-create an inclusive and accepted national narrative, with a new social contract that embeds common purpose back into the United States, and by proxy the Western World.

They must dis-empower tribalism and avoid a segregation/balkanisation of the United States, where political fealty is embedded in hard racial definitions that also dictate the terms of existance to individuals. This is common enough in many second-world countries and is a well-trodden path towards decay, now as embedded in the Democratic party as the corruption of the national narrative was to the Bush presidency.

We can view the road to World War 2 with so much more clarity with our new experience in the naturally polarising quality of left and right political instincts and realising that without a fundamental change in how we view reality we would get the same result.

The cultural and social changes required, especially in how power structures are viewed and how solutions to problems emerge are embedded in the social philosophy of Bitcoin with its value on trust-lessness, de-centralisation and potentially most of all, the idea that building a perfect concept is the highest moral good – that if things are true to their own essence (in this case if money (Bitcoin) is created that is more like money than what is currently accepted (US Dollar)) that it is the highest moral good.

Good money would be the thing most like money. The ‘other’ view from those (who feel) in control of the US Dollar (or government, school system, academia, science you can take your pick) who would feel that their own control is inherently ‘good’ because they can use it for ‘good’ things. The Platonic and Aristotelian idea embedded in Bitcoin – of constructing things to be as closely tuned to their essence as possible as the highest possible good is a different way of viewing reality.

This is explored a little in ‘The US Dollar has Failed as a Reserve Currency‘ and ‘Money: A Basketcase [A Deep Dive]‘.

The Numbers

It’s been a big green week in the numbers!

Soft commodities are leading in what is likely the start of an inflation motivated rush into commodities. Also pushing this forward is the hyper-normal worldwide expansion of fiat currency (through money, credit/debt, liquidity and asset purchases) as we barrel into a type of growth that must inevitably cause inflation.

We take the Goldman Sachs call on inflation, Gold and Money to be a major signal that this is just getting started, and are encouraged in this view by the break lower in the Dollar Index.

In this event, equities can be strong, as a store of value and in pricing inflation in the future into the price today.

Gold and Bitcoin, mentioned in the Goldman Sachs call, are major laggards in the event that this is the inevitable reality.

The Events

The Goldman Sachs release of their new pamphlet (notes on their call) ‘The Idiots Guide to Understanding Bitcoin’ was released and ought to be embarrassing in its dysfunction.

Goldman Sachs supported the US Dollar and spoke against Bitcoin and Gold.

We might suggest that it is so bad that it cannot have emerged in good faith and can tender the following as evidence.

After being range-bound for the duration of the crises, the US Dollar has broken lower for the first time, immediately after the Goldman Sachs call (occuring in the purple box).

Dollar Index on the Hourly Chart

Dollar Index on the Daily Chart

After trading either side of the magical 100 mark for months, the dollar broke lower after the Goldman call.

Gold made a low at the same time as the call, rallied and since broke its downtrend.

Gold 1hr chart

And in the case that Goldman Sachs is as incorrect about inflation as they are about this blatant lie (that the US dollar ‘will not be’ (already has been) debased).

If we believe that Goldman Sachs are some of the more intelligent people around and this field is their expertise, then they know that the US Dollar has already been drastically debased and that inflationary figures are already emerging from soft commodities.

Unfortunately they did not tender any other reason why Rice, Cattle, Soybean oil, Wheat, Corn, hogs, Coca, Soybeans and Oats should have appreciated this week as soft commodities lead this inflationary scenario.

We have to consider whether equities are pricing in future earnings – inflated earnings. Possibly hyper-inflated as asset prices explode, production costs increase as a result as we enter into an astonishing global record of monetary expansion, credit and debt provision, liquidity provision and fiscal expenditure. From thin air.

This is what the data is telling us at the moment, and also what we expected months ago.

So, straight after their call, the US Dollar and Gold did the opposite of what they said, both of them breaking major technical levels.

(Some) equities are now stores of value.

A debt-contagion bomb also overhangs the financial system with record unemployement and underemployment.

It should not be challenging to realise that the lack of cashflow must/will create the debt-contagion scenario unless what has already paid out can cover it. Unemployment figures are still 10x the average with government handouts disincentivising people from going back to work.

That unemployed public who doesn’t want to go back to work is taking on this debt.

So what we essentially have here, is Goldman Sachs as the Fed mouthpiece (and indeed the US Government mouthpiece) running a defense of the US Dollar. An astonishingly dishonest view, invalidated in its own time in which markets wholeheartedly rejected on the spot.

Our pricing of the equity markets hinges on the S&P 500 priced in Gold, as the chart that makes sense. Although we see it bought as a store of value and for inflation, we think that there is a place to get short again when priced in gold.

Fair warning though – a fall in stocks due to a debt-contagion financial event is likely to lead to a bailout of the financial system that would in no uncertain terms realise all of the assumptions we have made here about inflation and alternative stores of value. The S&P could double, triple, quadruple over 1-3 years.

But we still think that this chart would trade lower in that case.

S&P 500 Priced in Gold

China and the US

In a month for Bitcoin where the China/US economic war is relegated to third place it is a busy period! Although we covered it last week it looks like more of the same. China is beating the drums of war, with Hong Kong and Taiwan the initial targets.

Xi’s communist party has passed laws that give it full control over Hong Kong, which will lose its special status, its people will resist, and they will suffer as a result. Bitcoin and Gold was said to be supressed as Bitcoin trading was cracked down. China is apparently worried about capital flight.

The longer-term problem that China faces on the global stage is that the liberal western world has significant understanding, openness, tolerance of misunderstandings and failures to communicate, but once a label of bad actor is applied it is difficult to remove.

All of this with the Yuan on the verge of collapse, which will require increasingly more dramatic support in an environment of capital flight and a Chinese exclusion and replacement in the global economic order.

G7 Changes

Donald Trumps suggestion of the G7 as being an ‘Outdated Group of G7 Countries’ may seek to sideline Europe on the world stage. Europe has been quiet on the many rapidly evolving fronts that are an existential threat to them. They are paralysed, unable to act, completely beholden to bureaucracy and the failed global humanist paradigm that thought a utopia would emerge – if only we had enough rules to enforce it!

His additions that include Russia, South Korea, Australia and India are an encirclement of China, a decision that may count on sometimes xenophobic Russians losing any goodwill or trust they had for China due to the Coronavirus. India’s border skirmish with China and its involvement in the G7 put it front and centre of the new world order – India is marked to replace China as a good faith actor to become the worlds manufacturing hub.

Bitcoin

It may go without saying that we are wildly bullish on Bitcoin in this environment.

Bitcoin is a store of value, is a digital gold, it has open acceptance from institutional fund manager royalty in Paul Tudor Jones, JP Morgan has started banking Bitcoin exchanges and Grayscale is now buying more than the entire mining supply by itself.

Alt coins have been very bullish the last 5 days with Ethereum above major levels, Cardano overtaking Tezos, Maker rallying 50% yesterday and a general bullishness in the space.

As new technology, a new industry, a strong macro-story and trillions of dollars injected into an economic/financial system without yield it seems clear that these projects are going to keep rallying.

We wouldn’t be suprised to see a huge FOMO rally in Bitcoin, 50% or even more, higher than where it is today. It could begin any moment.

However, we have seen that 3x the number of calls are being bought than puts. The market IS incredibly bullish but is not going anywhere yet.

We can see in the chart that Bitcoin broke the uptrend lower recently (false-broke it) and we are tentatively buying it for an immediate break of the high.

Alternatively our wedge in the red frames the price in a different way, that perhaps will play out, especially given the one-way traffic from the low at $4000.

So if the red-wedge does start to play out, we will look for a false-break lower from it in the next week, watching closely to catch it at the right time and bidding hard for a break of the high that we think could carry-on for weeks as the market breaks its long-term (2 year) downtrend.

Bitcoin / USD

Volume

Volume is fairly low considering what is going on in alt-coins.

Sentiment

Sentiment is still relatively low for Bitcoin – however this instrument is probably not as good for institutional interest as the figures from Grayscale, and the fact that Goldman Sachs addressed it in their call.

BTC Dominance

Bitcoin dominance is lower the last couple of days, as expected.

Money

Our focus on money got interesting this last week due to Goldman Sachs interest in the subject.

What we believe, is that money is one thing, currency another. Money cannot be debased but currency can. Debased coinage carries less gold, but the same face value.

For the USD, this means that the network of transactions it is used in as the global settlement currency from which it derives its value as the final settlement currency that underwrites the global financial system cannot be debased, but the USD themselves can.

Gold

Gold broke our narrow up-trend we suggested last week, but since also broke the counter-trend.

As mentioned, Gold made a low during the Goldman Sachs call and rallied higher. It will be interesting to watch the next couple of weeks, especially if it rallies and the dollar index keeps coming off.

We still prefer a bullish outlook overall, potentially something similar to below.

DXY

The world will not get out of this with a stronger dollar.

A very notable event this week was that the dollar traded lower, breaking out of the range it had been in.

TIPS

Treasury Inflation Protected Securities traded higher the last couple of days as the dollar index traded lower.

When we price TIPS in the dollar index, we can see that the market IS trading an inflation scenario where the United States Dollar loses supremacy.

Buckle UP!

Written By: Thomas Kuhn, CFA

Thomas is a 12-year veteran of financial markets working to bring digital assets into the fold of traditional financial markets.  With an interest in fundamental analysis with a technical overlay, Thomas actively takes positions in the markets he covers. As well as producing education for traders, Thomas writes for Mine DigitalCFA Asia-Pacific Research Exchange and Hackernoon.

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