I would love for someone to find holes in the reasoning in this article (my own Macro Econ skills are not that good).
The author is a major voice in bitcoin circles (search their name with the word "bitcoin" or "crypto" on youtube). And I find it notable that they don't mention bitcoin or crypto anywhere in this post.
Lyn is one of the more thoughtful crypto bulls out there (admittedly a low bar), and the following post with its updates shows how her thinking has evolved.
TL;DR stance as of July 2020: I like it as a small position within a diversified portfolio, without much concern for periodic corrections, using capital I’m willing to risk.
Just a few thoughts of my own. It seems to me that BTC is starting to more and more follow the trend of the S&P macro movement swings. As traders become scared of the stability of the future, they reduce their investment purchases (or sell) across all their speculative assets. This global 'market fear and exhuberance' may end up impacting BTC as much as it does wall street, compounded by automated cross-market bot trading that occurs. (I tend to follow behavioral economics)
Except that's next to impossible to short BTC without incurring major exposure to the crypto market as a whole in process. In other words, you can gamble that BTC will go down all you like in the wonderful world of DeFi, but if your gainzzz are in $random_shitcoin then the fiat value of that will also go down the toilet.
The closest you can do is shorting BTC-adjacent regular stocks like MSTR, MARA, etc.
Most of what she says in this particular article seems pretty on the money. It looks like the Biden admin is very aware of these things and trying to gently tame the stock market to bring it under control. The alternative is a bubble burst.
I'm not sure if that's doable, but I don't see another option.
I don't think it's a good source of investment advice. Endorsing Bitcoin for example is a major flag. She is being paid to promote bitcoin services. I see this as a conflict of interest.
She makes assumptions that are wrong. like:
The danger comes, however, if interest rates start going sideways, or even start going up, structurally.
except that stocks rose in 2016-2017 even as interest rates were rising. Same for the 90s.
I am not sure I disagree but one thing I think is a little misleading is the comparison between the US havin 23% of world gdp and and 60% of world market capitalization. One small problem with that is that countries gdps are often compared by ppp (as in this case) and market capitalizations are compared in dollars.
A more serious issue is that the US markets really represent much more than just the US economy. All the biggest corporations listed in the US have huge busnesses outside the US that count toward other countries GDP. I would guess WallMart is the most US based, but even they have stores in other countries.
Apple is a US company that manufactures in China, buys important components in Asia and has employees and sells products all over the world.
To that effect, it's also not uncommon for foreign companies to list in New York for the prestige, and because of much higher trading volumes. China was doing this until recently.
Along with a recent article (which I can't find - I think she takes them premium once they've been out for a while) where she said that the Fed is probably structurally unable to raise rates above inflation, but that won't prevent them from trying, and we can expect major stock market crashes each time they do. That's pretty much all you need to know: long term, the stock market is going to infinity because the dollar is going to zero (or at least, a value much less than today), but in the short term the stock market could easily see drops of > 50% because it is so heavily levered on zero interest rates right now.
I'd say that the the biggest hole is that her writing ignores coupling of political risk and financial risk. (Probably out of necessity, given her audience. Investing is pointless when you can't enforce property rights.) Historically, when you get hyperinflation, you get disrespect for rule of law, civil disorder, collapse of infrastructure, and revolution in very short order. Commerce can't survive in these conditions, let alone finance. (This is one of the factors that accelerates inflation into hyperinflation - as predictability disappears, so does production, leading to even more scarcity.)
Lyn's predictions exist in the uncanny valley where the petrodollar system collapses and the dollar loses its reserve currency status, but we still retain Internet access, orderly financial markets, bank accounts, property rights, and physical security. I'm not sure this is a given. Historically, transitions to a major new economic system inevitably require a war or at least a revolution, because the winners of the previous economic system will not give up without a fight. There's no guarantee that the new government will honor property rights guaranteed by the old one. (In fact, in most cases the new government explicitly strips property from the previous wealthy elite, and that's a major part of its appeal to the common people.)
Agreed, though I think the causality is a little more nuanced than that: political disorder tends to be a necessary component of bad central banking policy, and thus is a cause as well as an effect of hyperinflation.
Re: your last paragraph, would you mind listing some historical events you're basing this model on? French and Russian revolutions (vaguely) come to mind, but these are more internal events involving unpopular and unreformable in principle regimes[0]. But we are talking about changes in, like, global economic and trade systems.
Here, in the Lyn Alden universe, we have for sure one event, Bretton Woods, linked to WW2. To me this is not much to go on, that link could be partly a coincidence and an acceleration of trends like the old colonial powers waning. Another thing that comes to mind is the changes in precious metals market, related first to late-Middle Ages scarcity and then the initial conquest of Americas. Here the parallels to be drawn are even less clear.
I think that our beliefs on how (and how much) linked these things are (reserve currency, petrodollar system, property as such etc.) are hard to base on actually strong historical reasoning. There could be strong non-historical arguments either way. My speculation is whatever bad things could happen to the USA's system, the rest of the world could go on with lower living standards and less (even less?) international predictability. But many societies are spoiled with those nowadays, 1890s didn't have them and it was still a modern era in the grand scheme of things.
> There's no guarantee that the new government will honor property rights guaranteed by the old one. (In fact, in most cases the new government explicitly strips property from the previous wealthy elite, and that's a major part of its appeal to the common people.)
I'm guessing this is based on the cases of internal revolutions mentioned earlier. Places like Italy and Japan have a really long chain of property with no major expropriations, despite wars and regime changes along the way. We can treat this as somewhat random.
[0] People could jump to say that modern states are also "unreformable" because of the political situation. But our modern regimes are based (officially) on popular will to begin with, so they, in principle, could be reformed based on the same source of legitimacy. This couldn't be said about regimes purporting to be based on divine right of rulers.
I'm thinking pretty generally about changes in economic systems, where one set of power structures and means of production gets swept away by a whole other one. Usually the participants of these frame them in cultural or moral terms, because it's easier to convince the lower classes to fight for you if you say "We're all on one side, we share a common culture, and there's this evil power over there that is a threat to our way of life." But if you look at who the sides are in the conflict, you can usually identify a specific declining economic system identified with one set of combatants, which is being overtaken by a new economic system identified with the other set of powers. (This is a common idea in international relations circles: you get wars when there's a change in the relative balance of power between states, such that each of them thinks they have a realistic chance of winning it.)
Specific examples:
Crisis of the 14th century paving the transition from the feudal era to the renaissance (and the development of market economies and mercantilism). Europe was depopulated by Black Death, the Hundred Years War, and the Wars of the Roses. This gave peasants bargaining power for their labor, and also meant that many younger sons of nobles stood to inherit property. As a result, an economy sprung up around trade and specialization, distinct from the feudal relations between lord and peasant. The catalyst for this was simply death; many of the old power players died off from the plague and subsequent wars, leaving those who didn't die off to rebuild the world based on current economics.
American Civil War. This is usually framed as being about slavery, which it was. But it's often glossed over how much of this debate was actually a clash between two economic systems, the plantation South and the industrial North. When both sides were primarily agrarian, the balance of power favored the more fertile, slaveowning South. But as the Industrial Revolution progressed, its higher productivity a.) gave the North more economic power and b.) also raised wages there, so that it became increasingly attractive for slaves and poor whites in the South to migrate North and take advantage of the jobs in the factories. The 1850s was the crux of that, where U.S. politics still favored the South, but economics favored the North, and this disconnect led up to the Civil War. (Think of how the Supreme Court felt that the Dred Scott decision would settle the question of slavery once and for all, but it was nullified 6 years later under force of arms.) And of course, once the war started, Northern industrial might proved critical in winning it, in the form of factories and railroads.
Italian & German wars of nationalism in 1871. (The American Civil War can also be lumped in with these, and to some extent the Napoleonic wars.) These are cases where an individual city-state within a broader ethno-nation (Prussia for Germany, Rome for Italy) managed to either conquer or convince enough of its neighbors to build a larger nation-state. This was driven by economics, along with changing military tactics. Rifles, railroads, gatling guns, and artillery gave benefits to large standing armies that required the resources of a larger political entity to maintain; meanwhile, industrialization and mass production gives larger economies of scale to larger markets. Those leaders who recognized this pushed for larger states, and it also gave them the means to conquer leaders who did not.
(You could look at most wars from 1865-1917 as transitioning from colonial imperialism to industrial nationalism. The American Civil War, Italian Independence Wars, Austro-Prussian War, Franco-Prussian War, Meiji Restoration, Russo-Japanese War, WW1, and dissolution of the Ottoman and Hapsburg Empires all resulted in a well-organized, mostly ethnically homogenous, and industrialized states taking over former imperial colonies, largely on the strength of the military technology & ta...
2) If US corporate tax rates don’t keep going lower like they have been, that also takes away another lever that has contributed to their persistently strong performance. There seems to be less political and public appetite for more corporate tax cuts.
This does not matter much. The likelihood of taxes going up are very slim. Biden and congress has shown little inclination to want to raise taxes. What matters more is that corporate profits are at record highs.
Major tech companies are generating 30% margins vs. 2-4% GDP and CPI, and that is $ that must go to shareholders regardless, hence higher stock prices (because dividend yields are so low). Also, low interest rates and market dominance. Investors are paying a premium to own shares of companies are are bigger and more dominant than ever...less uncertainty of losing marketshare and hence profits to competitors means higher stock prices and valuations.
It's really interesting watching the crypto talking heads repeat the same messages that William Devane uses at 2 am to sell gold coins to the Fox News "fell asleep in front of the TV" crowd. [1]
It's all going to crash, this time it's different, buy my unproductive (or in Bitcoin's case, net negative productivity) asset.
Generally structured as gish gallop to justify their preconceived notions of structural and societal collapse - and only they can save you, with this one weird trick.
Indeed, because they are productive businesses with revenues, cash flows, assets and most importantly, growth. Folks point to GOOG growing from $800/share 5 years ago to $2800/share today (3.5X roughly) as a sign of inflation, when of course their price to sales ratio has remained roughly constant (some delta for lower interest rates, higher leverage, cyclical trends, etc) and their revenues have grown and continue to grow exponentially. Up almost 3X since 2017. [1]
I thought this article provided a fairly short and reasonable macro view on the United States equity market and its financial relationship with the rest of the world. I understand that Lyn Alden has favorable views on Bitcoin, but I didn't notice any mention of crypto or bitcoin in this article. Was there something about her analysis in this article that you felt led readers astray?
edit I see that she included btc price in the overview next to oil and the 10-yr info.
> Equity valuations in general could simply become so high that the ongoing fund flows required to keep them up at these levels could become insufficient, especially as the Federal Reserve tightens its monetary policy in response to inflation. Upward momentum could turn into downward momentum, causing the marginal investor to shift away to other assets and other markets.
I'd honestly be curious if the Fed would try to shore up fund flows to keep stock prices rising. It sounds like an awful idea, and effectively amounts to a naked "let's make up money and hand it to rich people" play. But is it really that different from bond purchases?
> let's make up money and hand it to rich people" play. But is it really that different from bond purchases
In my (frankly, barely educated) opinion, this is exactly what bond purchases are. I think it's the main factor in the increase of wealth inequality since 2008.
It seems odd to single out Saudi Arabia for investing in US financial markets when many other countries are doing it too. Aren't their trade surpluses with the US a lot more than needed to fund their oil imports?
The petrodollar does seem to be the lynchpin that holds it all together.
If that part falters and oil importing countries stop treating oil as their most critical import then the decades long capital inflows would slowly turn to outflows as oil importing countries start hedging their import risks by selling American assets and buying up non american assets instead.
And, a trickle of capital outflows could easily lead to a stampede for the exit.
The US would probably exacerbate the crisis by raising interest rates.
I kind of think the lynchpin might be that a company can make lots of money by selling things in the US? Then they have to decide what to do with the earnings.
Maybe compare with US tech companies that have lots of overseas earnings. They don't necessarily have a better idea about where to invest the money. It's not like there is a plan to earn money in a certain country to achieve some other goal. It's that making money is good and figuring out what to do with it is a nice problem to have.
A much bigger issue that I keep seeing not getting enough emphasis is when the real rates go up US will have to keep raising their debt ceiling substantially to fund their debt (34 trillions and counting). If the last deb ceiling raising debacle was of any indication, this will be a very difficult political process in a rising rate environment, not to say US having to pay for interest expenses equivalent to another military when rates go higher by a mere 2-3% is not far fetched anymore at this level of borrowing. So something is got to give, either there is sovereign default which is unlikely or stagflation of some sort with rising rates, I don’t know. I just don’t think Fed is as independent as people would like to think they are.
Also May be I am a moron but how does raising rates help the supply chain crisis when all else said that is what’s behind driving the inflation (at least that’s still the narrative from the administration and mainstream economists)? I mean if the expectations is Americans with their 2 trillion households savings are just gonna start shoring up their cash and stop spending because the rates went up by 75 basis point, I just don’t buy it. May be the Feds don’t want inflation expectations become embedded which I understand even though that seems to be the reality at least for a while till at least 2023.
Debt ceiling debacles are ordinary politics. It has nothing to do with economics. That is just posturing.
It's somebody holding out until they get something else they want. Markets don't even get disturbed by it. The threat is always there but nobody expects them to genuinely cut off their own noses to spite their faces.
Sooner or later it's going to get so absurd that I think they will write legislation to change the whole system because the optics of that theatre will get bad.
If we had to do another 5 trillion in fiscal spending for an upcoming downturn let's say.
I agree big changes will happen. Maybe around 2030 there will be combination of federal debt default (some kind of cram down term extension), and feds roll social security and bankrupt State retirements into one living wage monthly payment for everyone which is age-tested.
My brain dump on this: after USD become decoupled with gold it became a kind of measure of total USA production capacity (capital) - that is mostly equities and real estate. The Feds for now has all the levers to make it so - and make the equities and real estate prices go up smoothly. But it is also a reserve currency of the world - and with globalization this task is bigger and bigger and sucks in more and more USD while the US economy is smaller and smaller part of the global economy. That pumps US equities up (but according to the article not real estate) - and this is why the US equities are 61% of world equities while GDP is only 23%.
This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more. Gold bugs have been wrong for 50 years about that and nobody believes this any more - but actually 50 years is not that long for a world wide buffer to fill up. And this time is really different than 1980 because of higher US debt, smaller economy.
The US debt will at some point become too big and Feds will not be able to defend USD (higher rates means more money goes into debt financing - and if the world stops buying that debt it goes into a self reinforcing loop)..
> This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more.
Why would they think it is not a safe asset and if so what would they do instead with it? Also: Why do you think this shift would be rapid like in a phase shift?
The number one scenario - inflation starts, Feds raises rates, debt service costs raise => debt grows even more and at some point people realize that it cannot be paid back without too much inflation.
Reinforcement in raised rates => depression and stock market crash => investors stop using US equities and real estate as value store.
Property? Gold? Industrial commodities? Mining rights? Used cars? Bitcoin? Farmland? Other hard assets? Arguably that’s already been happening, with the global melt-up in asset values across the board.
Now - why rapid - in general because it will be a bank run. People now assume that the dollars they have in the banks (and in notes) can buy them a part of the world economy - when they realize that this part shrunk they'll try to sell dollars and buy something else - adding to the dollar decline.
I would slightly disagree. USD as measured by the DXY is as much if not more of a function of international demand for dollars (ie Eurodollar markets). There is massive structural demand built into dollars based on coupon payments in $ denominated international sovereign and lessso corporate debt as well as international commodities markets.
Damodaran gave a neat insight on this. "Equities are expensive. Against what? History? We can't go back in time and buy stocks. If we take out money from stocks, where will we park it." Emerging markets exposes to forex risks. Real estate, gold, bonds does not give much returns, crypto is even more riskier. There is nowhere else for money to go.
If 10-year Treasury notes yield 5%, for example, and you want at least a 3% equity risk premium, then you’ll only invest in a stock if you think you can get an 8% annualized return or higher. However, if 10-year Treasury yields are 1.5%, and you still want a 3% risk premium, then you’re willing to pay a higher valuation, and thus accept a lower dividend yield and lower expected returns from stocks; even 4.5% expected annualized returns would be better than a 1.5% Treasury yield.
"""
That is from the article. But it only works if US assets are the only game in town.
Equities are expensive against future earning potential. Simple as that. I agree though, there aren't a lot of alternatives at the moment.
But you need either growth or dividends to earn on stock. Growth might become a lot harder in a rising interest rate environment and dividends are not a great return with current market levels.
Ray Dalio has a bit in his latest book Changing World Order where he points out what nations/empires in the past have done when faced with similar situations that the US now finds itself in. When debt is high, and country fundamentals are decreasing (like internal stability, and global share of economic output) countries can either buckle down and take the austerity measures required to increase output + decrease the debt… or they can print more money to pay off the debt which leads to inflation. They almost always choose to print money.
Get rdy for some events that haven’t happened in earnest for around 80 years.
Dalio has gathered quite a lot of data - but he fails to discuss one difference between those past empires and USA. In the past money was based on gold and debasing the currency was quite easy to spot. With pure fiat money there is no such clear measure to tell that it is inflated.
> With pure fiat money there is no such clear measure to tell that it is inflated.
Especially if you read HN, where many people believe and will try to explain why currency debasement is a completely outdated idea, generally not applicable in our modern financial system.
I’ve been in a company heading for the layoff more than once. The final sign that it’s coming is a strange ossification of goals and thinking around ideas that more or less amount to “focus on every other data point other than the ones we’re failing at”.
I’m still reading that book, but he describes pure fiat as response to that kind of dynamic (people noticing the value of the debt being reduced relative to hard money and it being harder to sell). I believe he cited a couple other examples of pure fiat/lack of gold or hard asset convertibility, but don’t remember what they are. This wikipedia article mentions some examples: https://en.wikipedia.org/wiki/Fiat_money
For the debtor or the creditor? For the creditor the right level is 0 or short. Maybe if you are close to retirement and you strongly value stability over growth it has a role. There is some nuance here for large complicated portfolios but for most people the answer is don't be holding treasuries, don't be a creditor.
For the debtor the answer may be, as much as possible. If I can get at 3% loan with 7% interest that is the deal of the century. I'm getting a negative real risk premium on a return yielding asset.
Right now treasuries are reward free risk. A mortgage is low risk high reward.
It's also worth pointing out that austerity would probably fail miserably given the specifics of our situation. The time for Austerity was maybe circa 2004 or 2011 when debt to gdp was half of what it is now. We are WAY past that point.
We are massively overleveraged, both externally and internally. If we just tighten our belt, we are going to cause a massive debt default deleveraging. Austerity works when a single sector is slightly over leveraged and just needs to shift numbers around for a year or two to make the math work. That's not even close where we are at. Every single sector of the US economy is massively overleveraged. There is no playing with the math. We either grow the pie (roughly, GDP) or the system needs to get massively overhauled. There is no "beautiful deleveraging" in Ray Dalio terms.
Through that lens, the choice is either inflate or massive systemic failure. It's not hard to see which direction we are heading if you do buy that premise.
The simpler explanation for the disparity between US GDP and stocks is that the stock valuations are inflated. The market has corrected many times in the past. The article did not explain why the current bubble is different from previous ones.
The article starts out with a mis-labeled graph. It says "For example, public US equities now represent about 200% of US GDP, which is an all-time high:" but the graph actually shows value of US equities in dollars. Here is the actual graph showing it in percentage of GDP:
You can see that the stock market reached 146% in 2000 and 137% in 2007 before previous crashes. In 2017 it was at 153%. Presumably the author's 200% number is correct, but it's still not much higher than previous peaks.
I expect the article contains other similar errors.
63 comments
[ 2.7 ms ] story [ 133 ms ] threadThe author is a major voice in bitcoin circles (search their name with the word "bitcoin" or "crypto" on youtube). And I find it notable that they don't mention bitcoin or crypto anywhere in this post.
https://www.lynalden.com/cryptocurrencies/
TL;DR stance as of July 2020: I like it as a small position within a diversified portfolio, without much concern for periodic corrections, using capital I’m willing to risk.
The closest you can do is shorting BTC-adjacent regular stocks like MSTR, MARA, etc.
I'm not sure if that's doable, but I don't see another option.
She makes assumptions that are wrong. like:
The danger comes, however, if interest rates start going sideways, or even start going up, structurally.
except that stocks rose in 2016-2017 even as interest rates were rising. Same for the 90s.
A more serious issue is that the US markets really represent much more than just the US economy. All the biggest corporations listed in the US have huge busnesses outside the US that count toward other countries GDP. I would guess WallMart is the most US based, but even they have stores in other countries.
Apple is a US company that manufactures in China, buys important components in Asia and has employees and sells products all over the world.
https://www.lynalden.com/fiscal-and-monetary-policy/
Along with a recent article (which I can't find - I think she takes them premium once they've been out for a while) where she said that the Fed is probably structurally unable to raise rates above inflation, but that won't prevent them from trying, and we can expect major stock market crashes each time they do. That's pretty much all you need to know: long term, the stock market is going to infinity because the dollar is going to zero (or at least, a value much less than today), but in the short term the stock market could easily see drops of > 50% because it is so heavily levered on zero interest rates right now.
I'd say that the the biggest hole is that her writing ignores coupling of political risk and financial risk. (Probably out of necessity, given her audience. Investing is pointless when you can't enforce property rights.) Historically, when you get hyperinflation, you get disrespect for rule of law, civil disorder, collapse of infrastructure, and revolution in very short order. Commerce can't survive in these conditions, let alone finance. (This is one of the factors that accelerates inflation into hyperinflation - as predictability disappears, so does production, leading to even more scarcity.)
Lyn's predictions exist in the uncanny valley where the petrodollar system collapses and the dollar loses its reserve currency status, but we still retain Internet access, orderly financial markets, bank accounts, property rights, and physical security. I'm not sure this is a given. Historically, transitions to a major new economic system inevitably require a war or at least a revolution, because the winners of the previous economic system will not give up without a fight. There's no guarantee that the new government will honor property rights guaranteed by the old one. (In fact, in most cases the new government explicitly strips property from the previous wealthy elite, and that's a major part of its appeal to the common people.)
Here, in the Lyn Alden universe, we have for sure one event, Bretton Woods, linked to WW2. To me this is not much to go on, that link could be partly a coincidence and an acceleration of trends like the old colonial powers waning. Another thing that comes to mind is the changes in precious metals market, related first to late-Middle Ages scarcity and then the initial conquest of Americas. Here the parallels to be drawn are even less clear.
I think that our beliefs on how (and how much) linked these things are (reserve currency, petrodollar system, property as such etc.) are hard to base on actually strong historical reasoning. There could be strong non-historical arguments either way. My speculation is whatever bad things could happen to the USA's system, the rest of the world could go on with lower living standards and less (even less?) international predictability. But many societies are spoiled with those nowadays, 1890s didn't have them and it was still a modern era in the grand scheme of things.
> There's no guarantee that the new government will honor property rights guaranteed by the old one. (In fact, in most cases the new government explicitly strips property from the previous wealthy elite, and that's a major part of its appeal to the common people.)
I'm guessing this is based on the cases of internal revolutions mentioned earlier. Places like Italy and Japan have a really long chain of property with no major expropriations, despite wars and regime changes along the way. We can treat this as somewhat random.
[0] People could jump to say that modern states are also "unreformable" because of the political situation. But our modern regimes are based (officially) on popular will to begin with, so they, in principle, could be reformed based on the same source of legitimacy. This couldn't be said about regimes purporting to be based on divine right of rulers.
Specific examples:
Crisis of the 14th century paving the transition from the feudal era to the renaissance (and the development of market economies and mercantilism). Europe was depopulated by Black Death, the Hundred Years War, and the Wars of the Roses. This gave peasants bargaining power for their labor, and also meant that many younger sons of nobles stood to inherit property. As a result, an economy sprung up around trade and specialization, distinct from the feudal relations between lord and peasant. The catalyst for this was simply death; many of the old power players died off from the plague and subsequent wars, leaving those who didn't die off to rebuild the world based on current economics.
American Civil War. This is usually framed as being about slavery, which it was. But it's often glossed over how much of this debate was actually a clash between two economic systems, the plantation South and the industrial North. When both sides were primarily agrarian, the balance of power favored the more fertile, slaveowning South. But as the Industrial Revolution progressed, its higher productivity a.) gave the North more economic power and b.) also raised wages there, so that it became increasingly attractive for slaves and poor whites in the South to migrate North and take advantage of the jobs in the factories. The 1850s was the crux of that, where U.S. politics still favored the South, but economics favored the North, and this disconnect led up to the Civil War. (Think of how the Supreme Court felt that the Dred Scott decision would settle the question of slavery once and for all, but it was nullified 6 years later under force of arms.) And of course, once the war started, Northern industrial might proved critical in winning it, in the form of factories and railroads.
Italian & German wars of nationalism in 1871. (The American Civil War can also be lumped in with these, and to some extent the Napoleonic wars.) These are cases where an individual city-state within a broader ethno-nation (Prussia for Germany, Rome for Italy) managed to either conquer or convince enough of its neighbors to build a larger nation-state. This was driven by economics, along with changing military tactics. Rifles, railroads, gatling guns, and artillery gave benefits to large standing armies that required the resources of a larger political entity to maintain; meanwhile, industrialization and mass production gives larger economies of scale to larger markets. Those leaders who recognized this pushed for larger states, and it also gave them the means to conquer leaders who did not.
(You could look at most wars from 1865-1917 as transitioning from colonial imperialism to industrial nationalism. The American Civil War, Italian Independence Wars, Austro-Prussian War, Franco-Prussian War, Meiji Restoration, Russo-Japanese War, WW1, and dissolution of the Ottoman and Hapsburg Empires all resulted in a well-organized, mostly ethnically homogenous, and industrialized states taking over former imperial colonies, largely on the strength of the military technology & ta...
This does not matter much. The likelihood of taxes going up are very slim. Biden and congress has shown little inclination to want to raise taxes. What matters more is that corporate profits are at record highs.
Major tech companies are generating 30% margins vs. 2-4% GDP and CPI, and that is $ that must go to shareholders regardless, hence higher stock prices (because dividend yields are so low). Also, low interest rates and market dominance. Investors are paying a premium to own shares of companies are are bigger and more dominant than ever...less uncertainty of losing marketshare and hence profits to competitors means higher stock prices and valuations.
That's not how it works. Margins != net income != cash flow.
And a company's cash flow does not necessarily flow to shareholders.
It's all going to crash, this time it's different, buy my unproductive (or in Bitcoin's case, net negative productivity) asset.
Generally structured as gish gallop to justify their preconceived notions of structural and societal collapse - and only they can save you, with this one weird trick.
[1] https://www.youtube.com/watch?v=VVcdvT09qr4
[1] https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/pri...
edit I see that she included btc price in the overview next to oil and the 10-yr info.
I'd honestly be curious if the Fed would try to shore up fund flows to keep stock prices rising. It sounds like an awful idea, and effectively amounts to a naked "let's make up money and hand it to rich people" play. But is it really that different from bond purchases?
In my (frankly, barely educated) opinion, this is exactly what bond purchases are. I think it's the main factor in the increase of wealth inequality since 2008.
It would have been more sensible to end the stock market with a land value tax but people want to see some blood. Especially their own.
If that part falters and oil importing countries stop treating oil as their most critical import then the decades long capital inflows would slowly turn to outflows as oil importing countries start hedging their import risks by selling American assets and buying up non american assets instead.
And, a trickle of capital outflows could easily lead to a stampede for the exit.
The US would probably exacerbate the crisis by raising interest rates.
Maybe compare with US tech companies that have lots of overseas earnings. They don't necessarily have a better idea about where to invest the money. It's not like there is a plan to earn money in a certain country to achieve some other goal. It's that making money is good and figuring out what to do with it is a nice problem to have.
Also May be I am a moron but how does raising rates help the supply chain crisis when all else said that is what’s behind driving the inflation (at least that’s still the narrative from the administration and mainstream economists)? I mean if the expectations is Americans with their 2 trillion households savings are just gonna start shoring up their cash and stop spending because the rates went up by 75 basis point, I just don’t buy it. May be the Feds don’t want inflation expectations become embedded which I understand even though that seems to be the reality at least for a while till at least 2023.
How though? Reducing spending on Social security or military, would be incredibly unpopular.
Not the government.
Some of us just don't believe this.
It's somebody holding out until they get something else they want. Markets don't even get disturbed by it. The threat is always there but nobody expects them to genuinely cut off their own noses to spite their faces.
It's not great, but it is par for the course.
If we had to do another 5 trillion in fiscal spending for an upcoming downturn let's say.
This can stop in a rapid phase shift once people realize that USD is not such a safe asset any more. Gold bugs have been wrong for 50 years about that and nobody believes this any more - but actually 50 years is not that long for a world wide buffer to fill up. And this time is really different than 1980 because of higher US debt, smaller economy.
The US debt will at some point become too big and Feds will not be able to defend USD (higher rates means more money goes into debt financing - and if the world stops buying that debt it goes into a self reinforcing loop)..
Why would they think it is not a safe asset and if so what would they do instead with it? Also: Why do you think this shift would be rapid like in a phase shift?
Reinforcement in raised rates => depression and stock market crash => investors stop using US equities and real estate as value store.
And Feds needs to raise rates - because of negative effective funds rate (https://www.lynalden.com/wp-content/uploads/newsletter-2022-...) - this is also something that people might not perceive for a long time - but then suddenly see it.
Also, again my question: What would people buy instead?
I don't know - most probably it will still be much slower than bitcoin maximalists imagine (see for example https://noahpinion.substack.com/p/inflation-is-up-but-the-in...). Maybe it will be like going bankrupt: “Gradually, then suddenly.”
If 10-year Treasury notes yield 5%, for example, and you want at least a 3% equity risk premium, then you’ll only invest in a stock if you think you can get an 8% annualized return or higher. However, if 10-year Treasury yields are 1.5%, and you still want a 3% risk premium, then you’re willing to pay a higher valuation, and thus accept a lower dividend yield and lower expected returns from stocks; even 4.5% expected annualized returns would be better than a 1.5% Treasury yield.
"""
That is from the article. But it only works if US assets are the only game in town.
But you need either growth or dividends to earn on stock. Growth might become a lot harder in a rising interest rate environment and dividends are not a great return with current market levels.
Ray Dalio has a bit in his latest book Changing World Order where he points out what nations/empires in the past have done when faced with similar situations that the US now finds itself in. When debt is high, and country fundamentals are decreasing (like internal stability, and global share of economic output) countries can either buckle down and take the austerity measures required to increase output + decrease the debt… or they can print more money to pay off the debt which leads to inflation. They almost always choose to print money.
Get rdy for some events that haven’t happened in earnest for around 80 years.
Especially if you read HN, where many people believe and will try to explain why currency debasement is a completely outdated idea, generally not applicable in our modern financial system.
For the debtor the answer may be, as much as possible. If I can get at 3% loan with 7% interest that is the deal of the century. I'm getting a negative real risk premium on a return yielding asset.
Right now treasuries are reward free risk. A mortgage is low risk high reward.
We are massively overleveraged, both externally and internally. If we just tighten our belt, we are going to cause a massive debt default deleveraging. Austerity works when a single sector is slightly over leveraged and just needs to shift numbers around for a year or two to make the math work. That's not even close where we are at. Every single sector of the US economy is massively overleveraged. There is no playing with the math. We either grow the pie (roughly, GDP) or the system needs to get massively overhauled. There is no "beautiful deleveraging" in Ray Dalio terms.
Through that lens, the choice is either inflate or massive systemic failure. It's not hard to see which direction we are heading if you do buy that premise.
The article starts out with a mis-labeled graph. It says "For example, public US equities now represent about 200% of US GDP, which is an all-time high:" but the graph actually shows value of US equities in dollars. Here is the actual graph showing it in percentage of GDP:
https://fred.stlouisfed.org/series/DDDM01USA156NWDB
You can see that the stock market reached 146% in 2000 and 137% in 2007 before previous crashes. In 2017 it was at 153%. Presumably the author's 200% number is correct, but it's still not much higher than previous peaks.
I expect the article contains other similar errors.