Central Banks Are Not Only Destroying Markets...
...but Money (Fiat) - and Maybe Civilization - as Well
Happy Sunday (or Monday) World!
I’ve had some charts on my mind, and I’ve been wanting to share them with you. Here goes…
US Dollar Relative Strength Index (DXY)
Below is a chart of the US Dollar Relative Strength Index (DXY).
This index measures the US Dollar vs. a basket of other currencies used by US trade partners. Put in simpler terms, it measures the US Dollar against other major currencies. Put in even simpler terms, while you are losing purchasing power with your dollars in the US, many around the world who don’t use US Dollars are losing relatively more purchasing power. (There is a difference in losing purchasing power in the real world and purchasing power in traditional and digital asset markets, but I don’t have the bandwidth to dive into that today.)
The chart shows that the US Dollar is stronger than it’s been in 20 years. Yes, you read that correctly. The US Dollar is stronger than it’s been in almost 20 years and you are losing purchasing power in the real world. And markets are down across the board. I’ll get back to that last “And” in a just a second.
Quick Note on the Effects of US Dollar Strength in the US and Abroad
When the US Dollar gets strong like this, it does make things better for the 40% of Americans who don’t own any assets (e.g., a home, stocks, bitcoin, etc.). A stronger US Dollar means that whatever these people do save is worth more, and their purchasing power is increased. This is good. But a stronger dollar isn’t good for all people of lower socioeconomic status.
A stronger US Dollar often equates to governments taking greater austerity measures in developing countries whose debt is denominated in US Dollars. To break this down in simpler terms, I’ll give an example.
Because the Dominican Republic’s debt is denominated in US Dollars, when the US Dollar gains strength, it’s harder for the country to pay back its debt. This means that the country has to stop providing resources to institutions that meet human needs, like schools and hospitals, in efforts to pay higher payments on their debt. These payments are higher because the Dominican peso has lost strength vs. the US Dollar.
And so people’s lives get harder in the DR and some immigrate to the US. Some members of the poor (the bottom 40% with no assets) in the US then blame immigrants for coming here and taking their jobs. Populism increases. The Trumps of the world get elected. And so the story goes… Great stuff.
Listen to Immortal Technique for more on this:
“Invasion and rampant monetary inflation / that brought us all to the footsteps of this nation / Peruvians, Haitians, Ecuadorians / Nicaraguans, Columbians, Salvadorians…” -Immortal Technique
The Japanese Yen (JPY)
One of the US trading partner currencies that is down bad against the dollar is the Japanese Yen (JPY). Below is a chart that shows the JPY vs. USD.
This is significant, because, as you can see in the chart, during the 2008 financial crisis and during other financial crises in recent history, investors flocked to the Yen for safety. They aren’t doing that anymore, though. This is yet another indication that market and money dynamics are changing significantly.
When the Japanese Yen and bond markets are no longer safe, we can safely say that we are living in some very uncertain times.
And on the topic of the bond market, back to that other “And”.
It’s no secret that markets - including even bond markets - are down across the board. The Fed is so far behind the curve in their efforts to fight inflation and what we are seeing now is a desperate attempt to get inflation under control, even if it means destroying markets.
But we don’t know if the Fed’s efforts are working, so we may see both our purchasing power and our portfolios continue to decrease. Very special.
And so I come one step closer to becoming a full-fledged maniac who yells about the impending financial and societal collapse on a street corner in New York City, funding my efforts by selling “Never Trust a Bureaucrat!” bumper stickers.
The big thought on my mind: When does it get so bad that they have to go back to printing money again to help everyone they’ve impoverished?
My answer (to myself - again, another sign that I’m going crazy): Probably within three to six months. But that’s just an educated guess - not a fact.
When Money Dies
When currencies die, they often don’t just decline in a linear fashion. There’s a lot of volatility on the way down.
And the more money that gets printed to remedy crisis during these periods, the more money that has to get printed. We’re currently stuck in a pernicious cycle, a cycle similar to others that we’ve seen cause great amounts of confusion, disarray, and uncertainty throughout history.
What Does This Mean for Digital Asset Markets?
People are fleeing digital asset markets right now and retreating to the US Dollar. Oddly enough, when the dollar is strong and digital asset markets are weak, you should do the opposite. It’s very difficult to do the opposite, though; counter trading your emotions is very uncomfortable.
Tune out the noise and do what brings you mental and emotional peace, especially right now. In other words, buy the dip if you want to, but don’t if you aren’t in a good place either emotionally or financially to do so.
When digital assets enter a bear market, bitcoin dominance tends to go way up. Let’s take a look at the BTC Dominance chart below:
Bitcoin dominance refers to how strong Bitcoin is to all other cryptocurrencies. BTC dominance tends to drop significantly in bull markets, and then rise significantly in bear markets. Essentially, people get scared out of holding all of the highly speculative altcoins that they held in the bull market and move mostly into the most trusted crypto, bitcoin.
If we are in a prolonged crypto bear market, sometimes called a “crypto winter”, and you are planning to stay in the crypto market, then bitcoin is often your safest bet. I think that ether (ETH), too, will hold up relatively well compared to most other cryptos if we are in a prolonged bear market, but not as well as BTC.
Lesson: Riskier cryptos (anything other than BTC or ETH) tend to rise in price more in a bull markets as compared to BTC and ETH, but they also tend to drop more precipitously in the bear market. Again, this is why I hardly talk about any digital assets other than BTC and ETH in this newsletter. BTC and ETH are risky enough investments in this space.
If you are new to crypto, start by buying these two assets. Really, just start by buying a small amount of BTC and then learning about the economic and philosophical underpinnings of the asset as well as how to self-custody it.
Addendum to the Last Edition of the Newsletter
In the last edition of the newsletter, I wrote about the leverage unwinding that’s taking place in crypto markets right now and how it’s driving prices lower. I don’t think I made it clear, however, that I think this is a good thing in the long term.
Markets get healthy when they wash out leverage and degenerate speculators. Sure, it hurts in the short term, but when you don’t allow these wash outs to happen, you get our traditional financial system, a system that is deeply corrupted and rife with moral hazard. This is the system that has caused the inequality we see in the world today, and it’s the system that’s on the verge of making us all poor. Good system.
Caitlin Long expands on this idea why the leverage-based financialization of Bitcoin is bad here. Take a minute to read what she has to say.
Thoughts on Ripple (XRP)
I wrote an article on Ripple (XRP) for Nasdaq this week. I may or may not have referenced Insane Clown Posse (ICP) and Juggalos in it. I guess you’ll have to read it to find out.
Homework
If there’s anyone who truly understands how much damage The Fed has done to the fabric of our society, it’s Sven Henrich of Northman Trader. He and Michael Saylor discuss the “raging bear market” that we are currently experiencing and just how much The Fed is to blame for it.
Hope are all staying safe out there. These are challenging and confusing times.
Best,
Frank
Twitter: @frankcorva
And Happy Juneteenth and Father’s Day!
Nice read 👍