It’s been a good week for equities as volatility is squeezed out of markets, but potentially becoming dreaded zombie markets. The Australian Dollar was a surprise performer, potentially benefiting from huge export figures in gold, which was up marginally, but has been consolidating sideways.
The S&P 500 traded higher this week in an action that likely surprised the market in some ways. For those who have tried to be short, we think that the problem isn’t with the trade as much as it is with the changing reality of what the US Dollar is – no longer money and no longer a useable reference rate for value with assets.
The USD status was realised this week as yields dumped into the negative. It is absolutely essential to realise the importance of what is going on here. In a series of developments going back as far as 1995 (or 1971, take your pick), this week the market no longer recognised the US Dollar as money. When rates were briefly negative, the USD was 100% currency and 0% money. If it maintains negative rates, the USD is no longer suitable as a global settlement currency and it loses the global network of transactions that it is used for; the structure that gives it the right to be considered money rather than currency in the first place. With this structure in place, the US Dollar has been the final store of value in any commercial chain of transactions.
As strange as this seems, it is not even a radical position. If you can take it for granted that JP Morgan knows something about money, we can take his quote ‘Money is gold, nothing else‘ at face value that from his strategic, institutional perspective, it was never money in the first place.
In earlier editions of the Byzantine Times we talked about money being major subject-matter for the rest of the year and we have seen it emerge this week. Money is a store of value that ebbs and flows with the market, but long-term it maintains a position of equilibrium within a financial system, an interrelated set of transactions, assets and processes. Although money can be forced by law in the short-term, money must maintain the qualities of the essence of money to continue to be recognized as such. Nick Szabo is the first person to identify this essence properly.
Notably, the US Dollar has failed at this. The US Dollar was money as long as it was a supply-limited commodity with a globally accepted network of transactions that settled into it as a store of value. ‘Monetary’ expansion and negative rates change this.
It’s hard to tell how well people realise this, but there are incredibly remarkable events occuring every couple of days at the moment. When the Silver/Gold ratio hit its peak this year, it was an all-time high since the ratio first existed 3000+ years ago. This week, when the US Dollar failed as money and became 100% currency, it became an existential threat to the financial system – there is no easy conversion of currency into money for the financial system. There is no currency that relates back to money, no reference rate that acts like a store of value!
Daily S&P500 in USD
Weekly S&P500 Priced in Gold
The chart is far more rational, where the low after the GFC was made in 2011 (not 2009) and the recent high was made in 2018, with global trade confronted with the China/USA trade war. The S&P500/Gold market is up a respectable 286% from its low rather than the absurd 440% of S&P500/USD from its 2009 low.
There are a number of stores of value at the strategic and institutional level. Traditionally you might buy assets like equities, commodities or commodity producers, gold, (bitcoin now as well) and oil. Obviously commodities will not be popular in a global recession/depression with their higher risk/return profile. We prefer gold, bitcoin, potentially energy as a first layer of money and a second-layer currency to manage the network of transactions. We also think that this strategic layer will either emerge as an intelligently designed system that works for the system, or evolve naturally without that.
Because what emerges when looking back at how money and currency has been used is that there is a need for a layer of strategic level stores of value called money and a transactional form of money related to those stores of value called currency. For most of the last 100 years it has been the US Dollar as money and all other fiat currencies as currency.
Such as dual-level arrangement of money in strategic:tactical or institutional:retail form would be money in the laymans sense of the word but also real for the institutional flows.
This may be the plan of the Chinese Central Bank Digital Currency (CBDC) who have announced a layered approach to their currency. If it is the case, it will represent a fundamental philosophical improvement of their financial system over the rest of global finance and in some ways is a reversion of the silver:gold ratio system, where the retail layer of the CBDC is silver and the strategic/institutional layer is gold (and we think likely backed with gold and/or other assets).
This week the subject of money was picked up in a letter by Paul Tudor Jones (PTJ) to his investors. His letter was called ‘The Great Monetary inflation‘, mistakenly conflating currency with money but notably including Bitcoin in his list of assets that have traditionally worked well in reflationary periods. You cannot have a monetary inflation, only a currency inflation – debased coins carry less money (gold), but attempt to uphold the same face value as a coin – as currency.
This endorsement by PTJ was a major development in the history of Bitcoin, a blessing from a giant of institutional funds management signalling that institutional finance was well and truly on its way into digital assets. Further to this, PTJ designated Bitcoin as ‘digital gold’ and endorsed it in the way it had been specifically designed for – as a supply-limited commodity with a store-of-value. An amazing and historic moment in the tradition of global finance.
Other endorsements he gave were of Bitcoin as ‘the fastest horse’ in stores of value and taking the environment we have been seeing and talking about for granted. We are quick to add to his endorsement that Bitcoin also gives investors access to an entirely new financial system that has been coming together over the last decade and will be amongst (if not the) fastest growing industry globally in the coming decades.
Bitcoin had been strong coming into the halving but was dumped upto 20% from its highs in a trade we had wanted to be involved with, but were not game to look for before the halving.
As well as the asset getting ahead of itself, we think that this selling of the fact before the fact represents emboldened and strong short-sellers who have had a very good run since 2018. We are suprised to see such aggressive selling before the halving and believe that when they are pushed out of the market in the medium term, that it relieves the single most powerful selling pressure on the digital asset market.
This trade may also represent a hardening of the Bitcoin market into a more institutional and difficult trading environment, where the market moves with new and more aggressive timing.
Regardless, all dips are buying opportunities until these dominant short-selling players are broken and a new (bullish) market structure is resolved, where Bitcoin and digital assets price higher in a significant way – we will know this event when we see it.
Finally, this week we added TIPS (Treasury Inflation Protected Securities) – also protected for deflation to our list of ‘money’ that we are keeping an eye on, and noticed that PTJ included it in his list. Unsure of how to interpret it so far, we are interested in ways of viewing the USD as ‘sound money’ and hope that TIPS give us an insight to the fate of the USD that the Dollar Index is unable to because of its necessary structural price strength against the worlds fiat currencies.
With it being reported that Xi Jinping directed the World Health Organisation to cover up the severity of the coronavirus, the Chinese Communist Party presents as a diabolical existential threat outside of its own borders. Always one to double down again, China thought it wise to back this immense indiscretion of originating a global pandemic (although perhaps we have to be open to other possibilities) with a global propaganda campaign and aggressive and antagonistic military incursions in Indonesia, Vietnam and Japan. Taken at face value they are the actions of madmen and will be viewed very seriously during a pandemic they originated. This is not going to be let go by the United States, and with German media (via its intelligence agency) reporting on this, the EU has finally made its own intentions clear.
After noting in an earlier edition of the Byzantine Times that Saudi Crown Prince MBS has gone too far in his oil supply shock,
‘Bad things are coming to Saudi Arabia, or more specifically to Mohammed bin Salman (MBS).…However the moves came about, this opinion is that MBS’ attempt to cut America out at the knees here will be taken as a final act of bad faith that he will not recover from. His pursuance of dramatic, absolutist and ham-fisted positions where all the toys are thrown out of the cot will see him taken as a child or a madman.’ (under link heading ‘Geo-Politics)
the US has decided to abandon Saudi Arabia this week, removing military installations in a sign that also means that negotiations over the oil supply issue have failed and the US has crystallised its belief in how that came about. In the same article we noted the bizarre rationale of oil producing nations who are fully dependent on a western consumer they take for granted. They have also paid no notice of a US Administration who has decided that the US would have energy independence (specifically to give them freedom in dealing with issues like Saudi Arabia) and who have already weaponised the US Consumer against China in trade negotiations.
In fact it is a delusion of the highest order that China, built on the Western Consumer and access to western markets, education, technology and capital and Saudi Arabia, having fallen over an energy supply (that they themselves call an act of God – Allah’s blood) that was only valuable because of the western consumer could successfully take such aggressive actions against the western world and the western consumer.
Of course as the hegemony, US Foreign Policy has allowed these failures to some degree but it speaks to a lack of cultural sophistication to value the short-term use of power to set a playing field of zero-sum gains where they can only bite the hand that feeds – it also feels co-ordinated in its intent and effect.
All of it is very dangerous stuff by Russia, Saud, and China and relies on the old-guard of the post-USSR American neo-liberal foreign policy which is now over – the hawkish residual question of global economic actors attitudes towards the US is: why do these places believe they have a right to a western consumer they act in bad faith towards? How could you conclude in attacking the source of your power?
The dovish answer is that they are playing the game according to the rules set by the last 2+ decades of deadly, ignorant and arrogant US Foreign Policy.
It had been a wild run-up ahead of the halving, and we had been looking for a big short in anticipation of the event.
The market made its move this morning, coming off almost 20% from its high after being resisted from around $9,200-9,400 and rejected above $10,000.
We had been looking for a dramatic sell-off, but would only be the proverbial stopped clock to claim we would have got the sell-off today. We wanted to make a tactical trade short a day or two before the halving, afterwards recommitting to an enthusiastic strategic long.
The above chart shows how we frame the market now. If it does retrace to our blue box ‘buying as much as we can here‘ we think that it would be temporary and fleeting. At the same time, there is immense and significant buying pressure, and the old target is still a juicy trade to wipe out the aggressive and historically successful short-selling in the market.
When the market structure is relieved of the tension of these short-sell actors (which we think are now dead-wrong and mispriced) we expected a repricing in the realm of our medium term target, potentially as a 2-part rally that blows shorts out a second time, taking persistent and mechanical traders out for good.
Volumes are higher this week on the rally – a great indicator that the rally is natural that confirms reports of it being a spot rally.
Market sentiment has turned neutral, with old-hat retail crypto still a bearish bunch. There have been reports of this being an institution-led rally, which supports a personally held theory that before the next major repricing higher there had to be a handover of the asset from retail to institutional hands at the right prices.
We had noticed BTC Dominance rolling over the last couple of weeks. We had noted that a BTC repricing was possible because it was the easiest digital asset for short-selling to target. In short sellers being successful – convincing retail traders that the market would/should be suppressed, they are hoisted on their own petard for having no counterparties, and we expect both a repricing higher of Bitcoin, but also a catch-up of the right digital asset projects.
The right digital asset projects are mostly in the business of decentralised finance. The race to become the first 3rd generation decentralised computing protocol will also be a major game-changer across the board.
We took notice of the assets that had done well in this period, seeing a real test of people who were acting with confidence in a period of bullish BTC prices but negative sentiment.
This week we added TIPS (Treasury Inflation Protected Securities) – also protected for deflation to our list of ‘money’ that we are keeping an eye on, and noticed that PTJ included it in his list.
The report on gold this week was that Australian gold exports were up 225% in March over February. An anecdotal report was that Germany was a buyer – potentially that the EU or other institutions were the buyer.
We have been, and still are bullish on gold in every sense of the word. We wonder if the market has to break-down to the down-side, out of the consolidation to around (x) before going higher.
We are strategically long gold and will be looking for a tactical trade to bid at x.
While acknowledging that it has had a great run from historically low prices, we don’t think that silver has a role to play as a store of value
Why we don’t like Silver
Silvers role had previously been to act as currency, where Gold was money (N.B. we recognise that this is not a completely clean definition, and both are a bit of both). An established reference rate (15:1 of silver to gold) guaranteed the validity of silver coinage because it could be exchanged for gold.
That one item acted as money and the other as currency was a necessary function of the role that each plays in commerce. This dual, relational money/currency structure is likely a necessary component of how money and currency must be used in a financial system.
In support of this, when bank-notes came in in the 19th century Gold was maintained against bank currency but silver was no longer respected as having value – because it didn’t after it was no longer used as currency. This has persisted right up until today.
We think that silver is never coming back as currency and perhaps it was never true money.
The future of Gold and Silver
So if Germany / the EU is in the market buying gold, we are on the lookout for statements on the settlement of trade in USD, on the development of new international currencies, on asset-backed currencies from institutions such as the Bank of International Settlements (BIS) as well as the International Monetary Fund (IMF) and World Bank.
With what is in development it is hard to see the role of a Chinese Yuan, even a gold-backed yuan with strategic and retail levels play a role as the global reserve currency – that it wouldn’t even be pursued in the first place.
After all of the complaint about the Americans ‘exorbitant privilege’ and after all of the work performed to dislodge the US Dollar as the global reserve and settlement currency, no nation will even want a role in replacing the USD. Russia, China and potentially the EU will push for an international asset-backed currency to avoid having to shoulder the exorbitant responsibility of the exorbitant privilege.
Again, and at risk of rehashing something an upteenth time, it is hard to see nations persistently at work against the international community – Russia entrapping Europe as an energy customer (recently attracting flack for being in Libya) and China as agitator in its region and the world, succeeding in parlaying global institutions they did not create, that do not reflect their cultural values into tools of their cult of personality administrations into a global economy built on top of the western consumer and middle class.
Where the US Dollar rally (a) was hard-fought and the sell-off (b) far smoother (and making a new low (c)) we think that with the lower high (d), the short but scary dip into negative rates this week and the weakness (e) that the game is on in the US Dollar, in which we now expect significant weakness.
Treasury Inflation-Protected Securities
We are still on our training wheels with the TIPS, but think that they are both a source of ‘sound-money’ available to fund managers, as well as their deflation and inflation protection mechanisms potentially creating a concerning feedback loop of monetary expansion in 12-24 months.