The global fiat ponzi scheme

Thursday August 22nd, 2024 - Issue # 78

(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

It’s been a month since I last put pen to paper, and trust me, it’s not because it’s been a slow summer. Let me catch you up on where I’ve been and what I’ve been up to. Please feel free to skip the next few sections — which after re-reading, feels like my personal journal — if you want to get into macro with me.

First, El Salvador. It’s a country brimming with potential and feels like a true land of opportunity. Imagine Costa Rica, but more orderly, cleaner, and with a business-friendly atmosphere that’s palpable. During my time there, I met with regulators, private equity firms, investors, lawyers, and the leaders behind key government programs designed to spur economic growth. We’ve already dipped our toes in the market, but El Salvador stands out as a place where we can really set up shop and expand our interests—it’s a key market on the rise.

From left to right, there are some heavy hitters in this photo. Notably, Rodrigo Ayala, President of Invest in El Salvador, and Jessica Bukele, Director of Invest in El Salvador, who were generous with their time and enthusiastic about the prospects of another company joining their burgeoning ecosystem.

From there, I made a quick stop in Panama. It’s got that Miami vibe but with its own unique flair. I spent a couple of days meeting clients and investors, and while it was a short stay, it left an impression. I’ll be back for sure.

Upon returning, the main focus was making sure our fundraiser for Pierre Poilievre went off without a hitch—and it was more successful than I ever could’ve imagined. I’m leaving it with a sense of hope that maybe, just maybe, Canada can find its path forward with him at the helm.

But now, onto macro...oh boy, has it been an eventful month since I last put out a piece. To those who called for months of chop after we failed to break out past 73k back in early spring—take a bow. The last four months have been excruciating, with high volatility and no real direction. The biggest move came from the Bank of Japan when they announced a rate hike, and suddenly, everyone became an expert on the Yen carry trade.

Now, for those of you who might not be as deep in the weeds, the Yen carry trade is one of the biggest, quietest forces in global finance. Here’s how it works: Investors borrow in Yen, which has traditionally had very low-interest rates, and then use that borrowed money to invest in higher-yielding assets abroad. It’s essentially a way to take advantage of the interest rate differentials between Japan and other countries. For years, this trade has been a cash cow, fueling investments in everything from U.S. Treasuries to emerging market debt.

But here’s where it gets really interesting—and dangerous. The Yen carry trade isn’t just a casual strategy; it’s an extremely leveraged play. Trillions are tied up in this trade, and as it unwinds, hedge funds and institutional investors are scrambling to meet margin calls. This means they’re forced to dump other investments—everything from stocks to bonds to bitcoin—that were pledged as collateral. The ripple effect of this forced selling can trigger a cascade across global markets, making the BOJ’s moves all the more critical.

It took only 48 hours for the Bank of Japan to walk back on their interest rate increase. That quick reversal is telling. It underscores the fragility of the current financial system and highlights why there’s no hard money like Bitcoin—and no better setup for its success.

For a moment, it felt like we were on the brink of a serious global financial crisis. Pundits were calling for the Fed to step in with emergency rate cuts, and the markets were pricing in a recession like it was a done deal. Poor jobs data added fuel to the fire, making it look like the U.S. was teetering on the edge.

But, in true market fashion, just as quickly, the panic subsided. The BOJ backed off from its aggressive stance, and suddenly, the markets breathed a sigh of relief. Recession risks seem to have been mitigated—for now—but it’s a reminder of just how fragile the global financial system is. The entire house of cards is built on confidence and liquidity, and when either of those gets shaken, the whole thing can come tumbling down.

This brings us to gold—sitting at all-time highs and sniffing out what’s to come. Gold is often seen as a safe haven in times of uncertainty, and the fact that it’s at all time highs now is telling. Investors are waking up to the reality that we’re entering a period of sustained economic volatility, and they’re looking for a place to park their wealth. Gold’s rise is a clear signal that the smart money is bracing for impact.

And if gold is any indicator, Bitcoin — as Paul Tudor Jones famously coined it “the fastest horse” — could be next in line. As we’ve seen before, Bitcoin tends to follow gold’s lead, especially in times when trust in the fiat system is waning. With four more years of fiscal irresponsibility ahead—no matter who wins the election—the writing is on the wall. Governments around the world are doubling down on the same failed policies that got us into this mess in the first place: printing more money, racking up more debt, and hoping that they can kick the can down the road just a little bit further.

As my partner Satraj Bambra, CIO of the Round13 Digital Asset Fund recently put it:

“I feel confident that the catalyst for an extreme Bitcoin—and to some extent, a crypto—supercycle is now underway. We know the first rate cut is imminent as recession looms, there is a war in the Middle East, and all these factors lead to more money printing. Governments are not fiscally responsible, making the end game inevitable. The path is not linear and probably painful in the short run, but the journey is clearly underway.”

Comments from our Director of Trading about the remainder of the week:

“The focus will turn to minutes from the Fed's last policy meeting on Wednesday and Chair Jerome Powell's speech at the Jackson Hole symposium on Friday. While a 50 bps cut in September may already be priced in, a 25 bps cut indication could strengthen the dollar significantly as we approach the end of the week.”

See you next week!