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Song of the Week - Steve Winwood - Back in the High Life Again
Table of Contents
Global Recession
Points Fatigue?
Crypto Macro
Price Action
Arbitrum Degen and Vesting Schedule
SUI Reminder
Another Bitcoin L2
Conclusion
Internal References
1. Global Recession
The UK is officially in a recession.
Japan is officially in a recession.
Germany is officially in a recession.
The US entered a “technical recession” in 2022, but everyone pretended we didn’t. The entirety of the US stock market is essentially held up by just 5 tech company stocks.
China is doing everything it can to hold its real estate and stock markets up.
Midwit economies are faltering.
The West as a whole is going to have a rough time this year, and it will be a stagflationary event that has been building for years. Stock markets across the board are all at all-time highs.
The DAX, the S&P, the Nikkei are all at All-Time Highs. The FTSE 100 (British Stock Index) is 4% off its All-Time High. And we’re seeing recessions across the board. It is truly 2020 all over again where assets ran wild as millions were laid off and lost their jobs. The reasons why this is happening now are different from 2020, but a very similar flavor of events.
Stagflation.
We have stagnating Western economies across the globe. One would be hard-pressed to point to a Western country where one could reasonably say things are going well for the < 25-year-olds. American expats are flooding into the Eurozone and driving prices up while migrants flood into Europe and bring problems with them. Most of the West has several critical industries where they are either struggling to find qualified talent or where bureaucrats have knee-capped once-productive industries.
The younger generations aren’t starting lives all across the West as birth rates plummet. People will point to different causes based on their politics, and my politics cause me to point to economics. People no longer feel like they will ever make it through normal means so we see the expansion of degeneracy across the board.
People need to bet on things because of how the economy has deteriorated. Everyone is trying to play catch up on where they think they should be for their age. Even crypto, I think most of us can admit we aren’t here for the technology. Yes, it might be a coincidence that the techno-pirate wild-west functionality of crypto just happens to align with political views we may or may not hold, but it’s highly likely that we only ever heard about/got interested in crypto because of the income potential.
I genuinely believe it’s one of the few ways out and one of the few sectors where a person can be productive and reap outsized gains. But that does not polish my motivations and make them bright and shiny. I’m not idealistic in that sense at all. I genuinely believe that the adoption of this technology has still not been priced in at all in any meaningful sense.
But that does not matter at all to the average person. All that matters is how the economy feels. Across the West, it does not feel good. You’ll note that even in Japan, their “Core core” year-over-year CPI remains inflated.
You’ll note that the “Core Core” Inflation (equivalent to US Core Inflation) is 4.3%. US Core is 5.3%, so in this sense, Japan is catching up and will likely pass the West in a few months…
None of this is important (yet, Inflation will be the important driver for Japan soon).
Sticky inflation has led to the BoJ signaling that it will end negative interest rates in April. The headlines don’t know what to think. Some will tell you that Japanese CPI figures are positive (slowest core growth in 22 months)(this is meaningless since the BoJ only cares about the ‘Core Core’), while others will point out that CPI is still above the BoJ’s inflation target which I pointed out last year would be the thing that the new BoJ head will be using to determine policy.
If Ueda sticks to his academic formulas and interpretation, he is going to have no choice but to start slowing down the rate of QE and allowing interest rates to rise if the inflation rate continues to remain elevated compared to CPI over the last 3 decades.
Sure, he’ll probably wait for a couple of months, half a year, maybe even a full year of data to confirm this, as you’ll note in his own papers and writings he often says that the consequences of waiting too long to end ZIRP and NIRP are relatively low compared to the consequences of ending early.
It’s been 10 months since I said this. He’s moving exactly on schedule for 1 year to end NIRP. Now consider a world within which the BTFP swap desk shuts down with no replacement in March. The Dollar Milkshake continues anew and liquidity continues to get pulled out of the Yen. Ueda genuinely has no choice but to allow interest rates to go up in Japan and to eventually hike rates. Not in April of course, April is when they end NIRP and switch to ZIRP. But that won’t be enough, don’t look now but the USD/JPY is at 150 again. It will push higher in March and April.
The only question is will we see Japan intervene in FX markets like they did previously, or will we see a BoJ that steps in and begins hiking rates to hold the USD/JPY down? Time will tell, but the BoJ is heavily benefitted by the FOMC cutting interest rates here in the US as their FX holdings (treasuries) appreciate the lower interest rates are here.
They are in much the same boat that we are, except their situation is dire, while we just want our bags pumped more. As is often repeated, now more than ever; “We can be stupid longer than they can be solvent.”
All across the board, we see financial disorder and a system of fiat that previously had no competition for its most productive citizens. We were cattle born within a barbed wire fence, your productivity went to your farmer, or you starved/died. There were no other outlets for work, you earned in the local currency or you did not earn.
Now things are on their head thanks to the internet. You can geo-arbitrage and live in Buenos Aires while working on a computer for an American company and you’re only 2 hours ahead of Eastern Time. Even earning $40,000 USD is a king’s ransom in Buenos Aires. Up until this year, the government was not even bothering to check immigrant VISA overstays. Much like the Southern US border, you could simply show up and trust in a system that was too corrupt/ineffectual to stop you from entering and staying as long as you pleased.
American expats are flooding Portuguese towns and pushing locals out of the city centers as they can no longer afford to pay the rent that Americans working online can afford. Similarly, industrious SE Asians and South Americans are outcompeting Americans for jobs that previously were only done by Americans as WFH has made employers reconsider the salaries they pay when Latin American contractors online will complete work at 80% of the quality for 25% of the cost.
Will there be a global conflict in such a world? Will BRICS coalesce into a coherent group capable of dictating safe passage through the Red Sea and Suez Canal? Will global shipping for the West become even more expensive and cost-prohibitive as the younger generation feels more alienated and cut off from entering their communities? Will people turn more towards degeneracy as their only option for social mobility?
Who can say? But it feels an awful lot like crypto is becoming less and less correlated to traditional assets. That presents both a positive future for those of us who secured crypto for ourselves, but also a very negative social potential where there is no ladder up for many in the next generation who cannot code/actively contribute to the space.
There is a small part of my mind that can’t help but feel concerned. The thing that nags at me most is the need for a globalized payment infrastructure of crypto to emerge this cycle. Not just so that “we can spend crypto at the corner store.” But so that we can offer legitimate economic participants an entry into this space.
We need to broaden our ability to compete for productivity alongside and against other fiat currencies. It can’t simply be El Salvador where this is possible, it needs to be everywhere.
The corner store guy should be able to earn crypto if he chooses. It’s not about giving back. If we are to maintain any sort of social cohesion, everyone needs to have a simplified means of accessing and acquiring crypto that doesn’t involve knowingly signing transactions and understanding smart contract risk.
In the same way, Square revolutionized mobile payments by making it easy for users to accept and manage credit/debit card payments through their cell phones, there is a significant need for the same usability to emerge for the common person to accept crypto payments in their native currencies.
While many hope that we leave the rest of the market behind; that actually occurring, is my biggest concern.
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