#119 Doom Loop

Good Morning Everyone,

This tweet from Arthur Hayes caught my attention this morning. It reads:

Arthur was one of the founders of Bitmex, and has worked in financial markets for a long time. He is extremely sharp, and the depth of his understanding of trading and markets is wild. His writings are one of the must-reads for me due to this depth of knowledge and experience, and communicates this in a straight-up and candid way, which i appreciate; and always makes for a great read!

His tweet is referencing an essay he wrote back in April titled “The Doom Loop“ and beautifully highlights the bind central banks are finding themselves in, particularly the European Central Bank. If you have not read it, i recommend setting aside the half an hour or so required to digest it, as it is eye opening to say the least. This section gives you a good preview of this predicament.

“Now the doom loop begins. Inflation prior to the Russian conflict was already running at 40-year highs across the EU member states. The ECB would love to raise rates and combat this inflation, but it is in a serious bind. If it raises rates and stops purchasing weak member state bonds, then Southern Europe will quickly go bankrupt. The PIGS’ (Portugal Italy Greece Spain) only option at that point would be to go off the Euro so that they can redenominate Euro debt into local currency debt, giving them financial flexibility. That would be the end of the Euro, and would cause massive banking issues for Northern European banks who lent to Southern European companies. The banks’ debt assets would get paid back in local currency, but they would then owe Euros to investors … bye bye, thanks for playing.

If the ECB continues to print money so that the EU survives, then citizens of Northern European countries, angered by rampant inflation, will elect populist demagogues who will blame their economic woes on the profligacy of their Southern neighbours, and will run on a EU-exit platform. It’s the foreigner’s fault! (Hmmm… sounds like a familiar play I read in 1939.)

The ECB is trapped, the EU is finished, and within the decade we will be trading Lira, Drachmas, and Deutschmarks once more. As the union disintegrates, money shall be printed in glorious quantities in a pantheon of different local currencies. Hyperinflation is not off the table. And again, as European savers smell what the rock is cookin’, they will flee into hard assets like gold and Bitcoin. The breakup of the EU = $1 million Bitcoin.

The EU doom loop is a certainty at this point. The degree to which Russian energy flow is curtailed determines the speed of collapse. If surplus countries decide that holding Euro debt assets is not safe, the pace of disintegration quickens even further.”

Oof. Powerful stuff.

The two charts below show USDEUR and EURUSD which is the same chart inverted. The chart/s show the USD looking insanely powerful vs the Euro, and subsequently the Euro looking insanely weak relative to the USD. The USD looks like it’s heading much higher, and the euro like it may be heading back down towards it’s ALL-TIME LOW.

Now, i’m always weary when anything seems certain or is said to be certain. It makes me very uncomfortable because I have very little confidence in our ability to accurately predict the future and process the infinite complexity that exists. The other thing is that traders and financial markets broadly play a lot of information games and are very much in on the meme war nature of our current world, so it’s always to be taken with caution in my opinion, as they may have financial interests motivating their behaviour and essentially be “talking their book“.

However, with that said, things look very very suboptimal for the EU (to say the very least) and I think it’s very likely Arthur is right, and the doom loop has infact begun. I definitely agree that “money shall be printed in glorious quantities in a pantheon of different local currencies”. The trend of USD strength and EUR weakness looks like it’s about to accelerate SIGNIFICANTLY. Whether this leads to the dissolving of the EU as we know it, i remain less certain, but i do think there is a high probability he is on the money.

Where my conviction is abundant is in bitcoin. And when i consider what Arthur lays out; that we could see the collapse of the European Union, and that countries like The PIGS as he references them (Portugal, Italy, Greece and Spain) would need to denominate their debt in their local shitcoin, it seems so obvious that these nations should be accumulating the most scarce monetary good EVER, and securing their balance sheets with bitcoin as a priority and one of national security.

No one said the path to hyperbitcoinization wasn’t likely to be messy. The best thing any nation can do if they have the slightest bit of sense, and desire for a positive outcome, is to stop trying to stop the freight train that is bitcoin and simply opt-in. It really is that simple.

Only time will tell how it all unfolds.. but if just one country wakes up and smells the bitcoin roses, and decides to stop playing a loosing game and elects to leverage the power of bitcoin, the game theory dynamic that would follow would be biblical.

Hope you have a great day. I’ll talk to you tomorrow.

AK

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