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Market Lab Report - Global Tightening Afoot

Market Lab Report / Dr. K's Crypto-Corner

by Dr. Chris Kacher

The Metaversal Evolution Will Not Be Centralized™ 


Powell's change of heart from dove to hawk

For the first time since 2018, Powell has changed his stance on QE by becoming more hawkish due to spiking rates of inflation. The CPI hit a 39-year high. As a consequence, we may very well see a market correction in the major avgs of 20% or more if history rhymes. He removed the word "transitory" as even he can see that inflation is persistently pernicious, even using the government's manipulated CPI data.

On Tuesday, the UK labor market reported a strong jobs report with even lower unemployment at 4.2%. The Bank of England hiked rates by 25 basis points for the first time in more than three years when they met on Thursday. The ECB meanwhile stood pat saying they will be the last major central bank to hike rates despite rising inflation due to economic issues. “Inflation will take longer to decline than previously expected,” Lagarde said. She felt the economy is too fragile to say when rates will be hiked. “Conditions for rate rise not likely to be met in the time frame expected by markets,” Lagarde said. Markets are currently expecting a rate rise before the end of 2022. The ECB thus confirmed that it will be the last major western central bank to tighten its monetary policy. Germany also came in with PPI numbers at +19.2% vs +18.4% y/y prior, their highest level in 70 years.

The U.S. PPI also came in hot at 0.8% last month, above the expected 0.5%, and rose to 9.6% over the last year in November from 8.8% the prior month marking the highest level on record. Meanwhile, inflation has been soaring in the UK but the counterforce is the C19 mutation which is spreading fast which keeps restrictions in place thus hampers the UK economy further. This is their stance despite numbers that the mutation causes far fewer fatalities thus is not as dangerous. The world will reach herd immunity most likely sometime in 2022 if all past pandemics going back hundreds of years are any clue. The human immune system learns thus past pandemics never persisted.

Markets are already in a corrective phase. Should the major averages correct 20% or more, Powell would then likely step in and reverse his stance once again, supplying the markets with a continuous and potentially accelerated flow of QE. He certainly left open the possibility that anything is possible going forward depending on the data that reflects growth, inflation, unemployment, and markets. At least a reversal of tapering or any rate hikes would be in keeping with the last decade as well as prior long term cycles going back hundreds of years. Debt at current levels has led to the same seemingly inevitable conclusions. But in the meantime, the trend toward tightening around the globe suggests potentially big headwinds ahead.

What if... [3 Scenarios]

Scenario 1: If Powell were to let free market work by reducing the QE punchbowl to zero over time, we would have a deflationary depression that would be like the Great Depression on steroids. We would see a massive unwinding of all the QE that began in late 2008. Markets would crash, food shortages would prevail, banks would fail, and into that vacuum would rise dictators. #Hitler

Credit would explode in value in such a deflationary system, so a credit crisis would ensue wiping out much credit. People who think they have money in the bank would find otherwise as banks shut down. The Fed is highly unlikely to break with hundreds of years of history and take this action. As stated, M2 never materially diminishes once debt is at current levels. If a country borrows more than 77% GDP, they pass the event horizon and cannot escape. The servicing of the debt eats away at GDP. Currently, $280 T in global debt exists while global GDP is only at $70 T, thus debt stands at 80% of GDP.

Scenario 2: Fed eases forever a la QEndless. Credit must grow forever to protect an inflationary environment. By doing this, more wealth is transferred from the non-rich to the rich. But before the middle class gets wiped out, they rise up against the rich as there are many more of them. You have a turning of society of us vs. them, the have-nots vs the haves. A new leader that supports a populist movement will be elected that is supported by the masses. Hitler rose to power due to the hyperinflationary environment that was created. This happens because the masses get even more manipulated when things are dire. When you have corruption and money, you must have corruption most everywhere through society.

Scenario 3: Bitcoin and hard assets continue to be escape valves from currency locks or depreciating fiat. Many are leveraging up away from fiat and getting wealthy in this Era of QE, but revolution, nationalization, or war may come to take the asset back. People today cannot imagine such a time, though such periods are not uncommon looking back over history. Further, high levels of inflation will often erode base values of hard assets so even though one's home may have tripled in value in a decade, it's real value in present-day dollars is less than it was a decade ago. Only bitcoin, barring an unknown black swan, appreciates in value in present-day dollars, bucking the trend of falling fiat. We have never had an asset that provides such an escape valve from nationalization or war. You just need to memorize your bitcoin wallet's seed phrase to unlock your wealth anywhere you are in the world.

In the meantime, one may ask what snowflake causes the avalanche? The Fed is grasping at anything they can. The system demands more QE which will create more instability which creates more social unrest and populism. The majority of Americans and Brits dont have $1000 in savings so are living paycheck to paycheck or in some cases, from helicopter money to helicopter money which is an early form of the wrong form of universal basic income. The 40% increase of the money supply this year translates into an increase in household wealth but only to the top echelon who keep most of their savings in stocks, real estate, and hard assets, all which are going higher due to debasing fiat. This is driving populism to all-time highs. In past cycles, this has resulted in revolution and a hot war. In today's world, such may get circumvented by a currency war between the U.S. dollar, the Chinese digital yuan, and bitcoin as weaker fiat get bitcoinized or dollarized. That said, China's Belt and Road Initiative is a powerful force as they print money to fuel this vast global network since the larger it becomes, the more its digital yuan gets used.

QE Debt vs. GDP

On the positive side, we have the tailwind of bleeding edge technologies which are growing exponentially. Blockchain together with AI will boost efficiencies while lowering costs by orders of magnitude across a broad spectrum of industries. This greatly boosts productivity thus GDP. That said, perhaps another non-conventional war will be the race between QE which directly correlates with global M2 vs. the turbo boost in productivity from blockchain and AI which spur GDP.

As for spiking inflation, the other side of the coin for wage inflation is wage deflation. Real income is dropping in terms of buying power against falling fiat. So you may be making more dollars, but these dollars hold buy less.

The faster money gets printed, the greater the divide thus the greater the polarization between China and the U.S. in terms of WW 3 taking the form of a currency war. China has used the Belt and Road Initiative to drive the use of its digital currency while attempting to suppress bitcoin and crypto in general. The U.S. is hopefully smart enough given the number of politicians that are being educated by top minds in blockchain about its potential to allow crypto to thrive, thus gaining a sharp edge over China and for the U.S. dollar.
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