Updated: Oct 4, 2020
We are now entering a period most of us have only read about in history books. That period is the fact that the U.S. is finally at the end of the 90-year long-term debt cycle. At the end of the long-term debt cycle, there is little fuel left in the tank (central bankers no longer have the ability to extend the debt cycle) which means there needs to be a debt restructuring or debt devaluation to reduce the debt burdens and start the cycle all over again. The U.S. (and the rest of the world) will most likely go through a painful and prolonged period of debt restructuring and forgiveness.When sufficient debt is purged from the system, the low debt base is the starting point for the next long-term debt cycle. The U.S. is trillions of dollars in debt, Covid-19 has annihilated a large percentage of U.S. businesses, unemployment is at an all time high while the stock market has recovered to all time highs after the March crash. Let’s go over what's happening behind the curtain, how this is impossible to sustain, and how you as a HNI can take advantage of this once in a lifetime crisis.
They say history doesn’t repeat but it often rhymes. These days are looking very similar to the roaring twenties followed by the 1930’s Great Depression, but in my opinion, this crash is going to be much worse for a few reasons that I’m going to cover. Let’s take a look back in time; The roaring twenties was a decade of great prosperity fueled by more than one million soldiers returning home from World War I, and entering the workforce. This led to the rise of the middle class from the soaring demand of automobiles (and the rising availability of consumer credit to finance them) due to cheap mass production resulting in 60% of american families owning a car. In addition to that, electricity was spreading along with its demand (the boring electric utility companies of today were the sexy stocks of that era).
Then came the Black Thursday crash. This event occurred on October 29th 1929 and the cause was due to panicked investors that sent the Dow plunging 11% at the open in very heavy volume. Many investors were leveraged up to their necks to buy stocks, and the Black Thursday crash financially wiped them out-leading to widespread bank failures. After the Black Thursday crash, the heads of several New York banks quickly tried to instill confidence by purchasing large blocks of blue-chip stocks at premium prices. These actions caused a brief rally on Friday (for the sake of this article we’ll call this the “New Hope Phase”) but due to the fear of the public, the panicked sell-offs resumed on Monday. These courses of events led the U.S. into the Great Depression in which the Stock market didn’t recover for an entire decade while not reaching its all time high again until November 1954, 28 years later.
Now let's look at today to see how things aren’t just similar but actually much worse. For the first time in history we’ve started and ended a decade without an economic crash resulting in the longest economic expansion ever recorded. We saw the stock market reach all time highs before crashing hard in March. Now it’s June 8th 2020 and it appears to me that we’re in another “New Hope Phase” just like we were after the Black Thursday crash before the Great Depression. The Federal Reserve turned on their money printers and have pumped over $3 trillion into the economy (while planning to pump even more) resulting in a very unnatural “V Shape Recovery” that is impossible to sustain. The Fed is now directly buying stocks (Hertz for example went bankrupt and their stock is at an all time high once again!), resulting in widening the wealth gap which always leads to a rise in populism. They've bought junk bonds and even cut bank reserve ratios down from 10% to 0% while the F.D.I.C. is trying to keep America calm by running TV ads telling people that the banks are the safest place to keep your money even though they would become insolvent if just 25% of the population went to withdraw their cash.
In other words, we haven’t seen the real crash yet. Despite the stock market currently at all time high levels again, consumer spending hasn’t really picked up, people are rioting/looting and protesting in all 50 states over racial inequality, tons of businesses are wiped out due to the mandatory quarantine, and the U.S. is still $22 trillion in debt (the highest it’s ever been). To top it all off unemployment is at an all time high while China is attempting to over take the U.S. as the global powerhouse.
In late April, China reached a huge milestone: after five plus years of research by its central bank, China became the first major economy to conduct a real-world test of a national digital currency. The pilot project is occurring in four large Chinese cities (Shenzhen, Suzhou, Chengdu and Xiong'an) making it a clear sign that China is years ahead of the U.S. in the development of what is likely to become a key component of a digital world economy. Unlike Bitcoin, the digital yuan is hypercentralized. It is controlled by the People’s Bank of China (PBOC) and integrated with China’s banking system. A two-tier structure will most likely follow, with the PBOC issuing digital coins to a network of state-owned banks and payments firms, such as WeChat and Alipay, which in turn will distribute them to individuals and businesses through payment and mobile banking apps. The monetary system will be a ledger overseen by the PBOC that documents all transactions with the ability to instantaneously move digital balances among individuals. Given this structure, the digital yuan is likely to overcome the three major obstacles that have prevented cryptocurrencies from achieving scale: price stability, wide acceptability through pervasive payment platforms, and legitimacy in the eyes of governments and regulators.
Clearly, monetary systems are headed toward greater digitization and independence from U.S. intermediaries. Digital currencies further the goal of avoiding dollar transactions and U.S. financial oversight, since they provide a scalable cross-border mechanism that circumvents the current system. U.S. policymakers are unprepared for the consequences. The advent of digital currencies will degrade the efficacy of U.S. sanctions, limiting the country’s options to respond to national security threats from foreign countries while also hampering the ability of U.S. authorities to track illicit financial flows. The backbone of the United States’ financial dominance is the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which facilitates messages between banks about payments orders, and a network of U.S. correspondent banks, while serving as intermediary to execute international payments. Most cross-border payments (approximately $5 trillion per day) are directed through SWIFT messages, and a significant portion gets routed through U.S. correspondent banks.
Rather than resting on the success of the dollar’s decades-long dominance, U.S. policymakers must act now to protect its economic advantage in the coming era of national digital currencies. This will require launching a “digital dollar initiative,” an effort that brings the government together with the private sector to develop a national digital currency. Otherwise, the failure to develop a competitive American alternative to China’s digital Yuan could significantly hinder the United States’ global influence in the information age.
This may be hard to believe right now but the inevitable “Run on the banks” is coming and I strongly believe cryptocurrency exchanges are going to be the banks of the future. Former chief legal officer at Coinbase Brian Brooks helped get USDC (United States Dollar Coin) on Coinbase where it is today. The USDC is available on Coinbase currently with a 0.15% APY. USDC is a erc-20 token that represents the U.S. dollar digitized as it’s built on top of the Ethereum blockchain. Brian Brooks left Coinbase in March 2020 after being there since September 2018 to join the Department Of The Treasury as its chief operating officer (COO). Then after just a month and a half of being COO he received a major promotion to Comptroller Of The Currency in an effort to quickly get banking licenses for crypto exchanges and get USDC prepared to take the lead as the United States digital dollar before the USD is left in the dust by other currencies. In other words, Coinbase is creating the blockchain-compliant travel rules for cryptos and they are going to bring other U.S. cryptocurrency exchanges with them.
Now, how can you as a HNI, take advantage of the current economic situation and protect yourself from all possible consequences? Given all the factors discussed above, nobody can be 100% sure as to how everything will unfold on a global scale. But what I’m 99.9% sure of is the fact that no matter what happens, it’s still going to be wildy bullish for crypto assets, allow me to explain why.
When the stock market crashed in March, it took precious metals and the crypto market with it. However, the crypto and gold markets were amongst the first markets to recover, and Bitcoin has outperformed the S&P in Q1 and Q2 despite the Fed turning on their money printers to quickly pump up the stock market. Bitcoin was designed for this purpose as it was released January 3rd 2009 at the tail end of the 2008 financial crisis like a lotus flower growing out of swamp water. More importantly, once the real stock market crash happens, investors are going to want to be exposed to assets that can’t be manipulated (devalued) and that serve as a reliable long-term store of value.
The world is slowly but surely going fully digital. And for the first time ever, we have “Digital Scarcity.” Bitcoin and gold share all of the hard money properties with the exception of three, and that's the need for custody, easy transferability, and not easily susceptible to counterfeiting. Let’s go over some examples, imagine if you had $10M in gold, you probably wouldn’t feel safe keeping it in your house or traveling with it without hiring security which would put a target on your back. This is gold's biggest downfall which resulted in banks becoming the custodians for the peoples gold which throughout history has always led to fractional reserve banking. With Bitcoin and crypto, it's digital and can be kept on your phone or on a wallet and you can go anywhere in the world without anyone knowing. Our second example is what if I want to do business with someone on the other side of the world and all I have is gold to transact with? I’m going to have to pay a ton of money to ship it, wait days for it to arrive, and there's always the chance it could get lost or stolen. I can send crypto anywhere around the world no matter the dollar amount and the receiving party can receive it immediately. Our last example is every time you get paid in gold, you risk the gold being fake, as there's tons of fake gold in the world. Given cryptos structure in regards to decentralization and how they reside on blockchains, miners have financial incentive to validate real transactions thus eliminating the “Double Spend Problem”.
Bitcoin was obviously the first crypto currency, but it paved a new wave of innovation by inspiring entrepreneurs to build thousands of alt coins with a plethora of different use cases which created a brand new market/asset class. Let's paint a picture of the future; given everything we’ve covered in this article, I think it’s very reasonable that within the next decade we will see a $10 trillion market cap in crypto assets (we reached $1 trillion during the 2017 bull run) . Right now the crypto market cap is a small $260 billion, making it the smallest major asset class (which also means there isn’t as much capital inflows needed in order to double your money in comparison to all other asset markets). There is $97 trillion dollars in the world (this includes coins, banknotes, money market accounts as well as saving, checking, and time deposits) which means less than 1/2% of the world's money is in crypto assets. So that means in order for the crypto market cap to reach $10 trillion, there has to be an inflow of just $9,740,000,000,000 which is only 10% of the world's money!
Back in September 2019, most of the major Wall Street investment firms including Charles Schwabb, Fidelity, TD Ameritrade and more, cut the commissions from stock, ETF, and options trading, that's a multi-billion dollar revenue source completely gone. Those same firms are already building out their infrastructure so that they can begin offering crypto to their clients to enable them to charge them even more fees than ever before. This is going to result in a huge jump of crypto investors from a small 35 million to 500 million investors given the client base of these large and established firms, and it's coincidentally happening right after we just went through Bitcoins 3rd halving protocol.
I think we are on the verge of what could be the most explosive bull-market in history. Anytime any market sees all time highs, two things have to happen simultaneously; there has to be an increase in demand (a new pool of buyers entering the market for the first time because historic demand won’t send prices to record highs) and a supply that can’t meet that demand. The Bitcoin halving protocol just cut the amount of bitcoin coming into the market in half, creating even more scarcity and an environment for when the crypto exchanges will be the largest sellers of Bitcoin instead of the miners . And the new demand is going to come from Wall Street (it’s highly likely that other global investment firms will follow suit). It’s eventually going to get to a point to where crypto assets are performing so well that it's going to be looked at as foolish if at least 5% of people’s portfolio (401k’s, pensions, hedge funds, investment firms, etc.) aren’t in crypto assets, not only to profit but to serve as hedge against centralized government manipulation. So now you have a choice, you can appropriately position yourself for the next revolution or simply do nothing and get left behind! I’ll end this article with another one of my favorite quotes as it pertains to this topic; “There is no substitute for accurate knowledge”.