This Decade in Macro
A high level overview of the 2020's, and predictions about the markets.
I spend much of my time attempting to figure out what’s going on in the world, and then make bets based upon my assumptions. Like in poker, I’m right more than I’m wrong, but I’m still wrong a surprisingly high percentage of the time. As investing full time over the past few years has taught me, even some of my high conviction bets have turned out to be incorrect.
I’m leading with this because like all my predictions, I don’t see them in black and white, but rather in probabilities. Like a hand of poker, where one can’t see their opponents cards, one doesn’t have all the facts and therefore any predictions are really just educated guesses, or bets. For those who wish to dive further, I've written before about how I come to my conclusions.
I’m just one person with extremely limited information relative to the information that is available, and who is highly aware there’s more that he doesn’t know than that he does know.
Therefore, my success can be linked to two key principles: first, surrounding myself with the smartest minds I can find and doing what I’m great at: synthesizing information to draw conclusions and second, managing my risk like I learned in poker so that no one bet defines me.
Over the past year, I’ve worked closely with my two partners, Harrision Schoeanu and Ryan Tetrault. We’ve formed an investment team, where we share ideas and help each other screen for our biases. Like a rock band, the sum of our parts is greater than what we’d be on our own.
Our predictions about the global macro outlook for 2022 were made at the beginning of the year, and can be found here. Notably, we called for the Nasdaq pulling back to 11,700 and Bitcoin into the $20,000’s, both longshot calls at the time which came to fruition.
If you’re new here, my name is Alec Torelli and I’ve spent thousands of hours in crypto, DeFi and NFTs. My mission at CrypTorelli is to simplify crypto so anyone can understand it. I’ll also share the latest, most exciting opportunities in the space before anyone else. Join the thousands of others to stay up to date.
Amongst our trio’s favorite subjects of discussion is ‘how this all plays out’. In today’s article, I’d like to give a high level overview of the summary of our thoughts in hopes that it sparks further discussion so we can seek the truth together, and that it helps you on your journey. As always, I’ll look forward to your comments and how you’re playing these tumultuous times.
The Current Macro Landscape
They say a picture is worth a thousand words, so let’s start here. It took more than 200 years for the U.S. debt to reach $7 trillion, and the past two to add another $7 trillion.
Don’t be fooled by the smoke and mirrors. Inflation is caused when too much money is competing for the same amount of goods. You’re right to question my assumptions, so here’s Milton Friedman in layman's terms.
While the people in charge of the money supply seem baffled as to the fact that doubling the supply of currency led to higher prices, anyone educated in sound money (Austrian) theory has been calling for this since infinite QE was announced several years ago.
Cause and effects aside, one thing is clear: The Federal Reserve (FED) is in a pickle.
Right now they are tasked with fighting inflation. They do this by raising interest rates (making the cost of borrowing more expensive), which they have done several times already.
It sounds pretty simple, and it is, but like most things in life, it’s not easy.
Why not just raise rates until inflation is back at their targeted goal of 2%?
Here lies the problem. According to history, every time inflation has gotten out of control the only way we’ve been able to control it was by raising interest rates above CPI. (That would mean raising rates to more than 9%!)
This would be extremely challenging due to the amount of debt in our system. In other words, the cost of money would be so expensive that we couldn’t service our debt. Hence the FED’s bind.
What Comes Next?
Well, nobody knows. But the best part about macroeconomics is, like poker, it’s a huge puzzle with missing information that we have to try and put together. And of course, we can bet on it!
Know that any prediction or call you see on the internet relies on a small group of people attempting to solve this impossible puzzle, and therefore it’s an educated guess at best. Anyone who claims they know for sure is a hack, delusional, or trying to sell you something.
We believe the FED continues to tighten until inflation is perceived to be under control. That’s the current path of least resistance. This doesn’t mean we have to wait until inflation will return to 2%, but rather what the public deems as an ‘acceptable’ level.
While the acceptable level of tomorrow may have been unacceptable in the past, the FED benefits from an old marketing technique, price anchoring. Steve Jobs famously did this when he released the iPad. “The price should be $999” he announced, after describing the product. A big $999 appeared on the screen. Moments later the number disappeared and a $499 appeared, the actual price. The audience was thrilled.
After a product seems expensive, anything below that seems like a bargain. With the FED, the market’s price anchor for inflation is so high, that what was once an unacceptable level of inflation would be a happy compromise for most Americans. We believe a more reasonable target is 3.5-4%, the ‘new normal’.
During the unknown amount of time it takes to get inflation under control, consumer spending will continue to drop, and an ‘official’ recession will kick in. We’re already seeing signs of this.
Unemployment will increase (it’s only 3.6%, still very low). Companies are already anticipating a recession, and this is beginning to take effect now.
The markets, and risk on assets will continue to suffer. We believe the crypto markets are amongst the most ‘risk on’ in the world, are highly correlated to equities, and are therefore a leading indicator of the market’s appetite for risk.
Stocks were next to follow, and we’re part way through the unwinding of the everything bubble. Real estate is next, and we’re seeing very early signs of an increase in supply coming onto the market. That’s the last domino to fall, something I’ve been saying for a while now.
The pain will increase. People will demand more subsidies like they always do. Is Powell delusional, wrong or will things just change? We’re not sure, but we can tell from Covid that the FED is reactionary so they will likely be late to the party.
There comes a point when the FED pivots their stance. Right now their primary focus is fighting inflation, but we soon reach a situation where there’s so much carnage, poor economic outlook and public outcry that Jerome Powell can no longer continue to tighten. We can’t know for certain when this happens, but September is a rough estimate for when we’ll see the last rate hike.
This is another stance I’ve been vocal about since the FED announced it was tightening. In short, I always believed they were bluffing. Nobody agreed with me then (read the comments). I believe my prediction has a higher probability of playing out now than before. As always, time will tell.
Perhaps I was early. Some of the smartest macro minds seem to agree.
This pivot likely happens when the credit markets freeze up and people stop lending and the system is at risk of not having its grease. The FED will need to stimulate demand and spending. Pivots happen in stages, but begin with a pause. The market is always looking for reasons to flip bullish, especially of late, and perhaps this is the sentiment shift they need to give us one last bear market rally.
Furthermore, with most everyone already on one side of the trade, and with investors having record levels of cash on the sidelines, if the FED gives investors a reason to flip bullish, that’s a ton of pent up capital that could pile into risk on assets to drive this mania into a blow off top in a short amount of time.
Earnings will still be bleak, but remember the market is forward looking (6-9 months). If we follow the same pattern as the Covid 2020 bottom, the FED’s ‘infinite QE’ was enough to catapult the market to historic highs.
Regardless of whether we have one last hurrah or if the bubble has already burst, we’re eventually in for a world of pain. We’ve lived through the longest expansion in history, and there’s only one way this inflated bubble unwinds.
While inflation is our biggest fear now, this could flip to deflation during an economic bust (something between a recession and depression) that could last a year. When the market suffers enough, in the range of an 80% pullback off the all time highs, what will be the biggest crash since the Great Depression, they will do what everyone has in history before them: print. An ungodly amount.
The problem with a debt based system is it requires an ever increasing amount of debt to elicit the same effect.
It’s like taking in caffeine or alcohol every day and expecting to get a buzz. One needs to keep increasing the dose. This happens on an exponential scale with our debt.
Putting It All Together
This time they need more juice for the same effect, so they print like never before and we end up with stagflation: a stagnant economy and persistent inflation, or perhaps we reinflate the bubble one last time.
Whatever effects we had before will be dwarfed in comparison to what comes next. The FED will panic, and extreme, unimaginable public pressure will compel them to act. After all, they’re not going to sit around and let the financial system collapse. They will throw everything they have to try and stimulate demand, including helicopter money.
We printed $7 trillion in 200 years, another $7 in the past two. How much will we need to print to have the same effect as last time? We don't know for sure, but it will be enormous, and could be $20 trillion in this decade. Like always, they’ll keep going past the point of necessity in a reactionary manner. By this point, the inescapable damage will be done.
Eventually, people will feel comfortable enough to start spending again because we’re ‘out of the woods’, even though we aren’t. Remember, the injection is just a quick fix. This brief relief and sentiment shift is temporary, and will turn its wheels to inflation once again, only this time the genie is out of the bottle.
All of that newly printed currency needs a home. Inflation is nothing compared to what it could be at the end of this cycle. Before the end of the decade, we could have a return to a 1980’s like environment, where inflation is back above 15%! (The saving grace is the exponential improvement of technology is highly deflationary).
Velocity of money picks up and inflation will rear its ugly head again, much worse than ever before. Ultimately, the FED has a choice between controlling inflation and boosting the economy through loose monetary policy, which really means sacrificing the dollar.
Both are painful paths, but if history has taught us anything, it’s that, without fail, the least painful path of the two is always to print more money. Like being tempted by the power of ‘The Ring’, in Lord of the Rings, it’s an uncontrollable urge too great for man to pass up.
Ultimately, the FED sacrifices the dollar and attempts to print its way out of this mess. Our belief is that a society would rather tolerate more employment and higher prices than being out of work and stuck in a depression. The FED will do whatever it can to avoid the latter, even if it means destroying the value of the dollar.
In our experience, things move slower than most pundits predict, so this probably takes 7-10 years to play out fully.
What Happens Next?
That’s a story for another blog, but honestly, we’re not entirely sure. Let’s let one thing play out at a time.
You can read the work of Ray Dalio and The Changing World Order and Principles for Dealing with the Changing World Order, as it’s the single best piece of reading on this subject that we’ve come across. Here’s a video summary.
In short, it’s not pretty. We’re nearing the end of a 75 year super cycle (long term debt cycle) that plays out at most once in a lifetime, and because of that, most people have never experienced it nor are prepared. Being caught off guard can lead to ruin, so it’s our belief that getting educated is the single best way to protect yourself and your family.
Typically this time period is characterized with restructuring of the world order, debts and the monetary system, which sometimes happens only after wars and revolutions.
There’s nothing that says we must suffer through a war for things to change, but history has shown that when a nation becomes sufficiently divided and neither party is willing to compromise, and wealth gaps get increasingly large, war is often the outcome.
We believe a peaceful transition is possible if we work together toward a common goal and remember that the problem isn’t each other but rather that we have a system that isn’t working for us. Regardless of one’s stance, the best thing one can do is to continue to educate themselves and be prepared by taking responsibility for their own future.
We hope that this time is different. For the first time in history, we have a choice. All countries who can print, will print, and therefore follow a similar path to the U.S., although we subscribe to the ‘Dollar Milkshake Theory’ that it’s through the strengthening of the dollar that other fiats collapse.
Put another way, the dollar is the best of the shitcoins in the fiat system. Although we expect the USD to ultimately underperform hard assets, in the short term we believe there is at least a 30-50% chance of a liquidity crisis causing forced selling, in which case the USD is poised to appreciate versus virtually all assets. This will be short-lived however as the Fed’s response, printing more money, will cause hard assets to rise again at the expense of the dollar.
As fiat currencies begin to collapse worldwide, we can finally opt out of the system by buying Bitcoin, taking self-custody, and storing our wealth in an asset which cannot be debased by government manipulation (which is an invisible form of time theft and tax).
Start your journey here.
What Are We Betting On?
When it comes to investing, it’s crucial that one's time horizon matches their thesis. Since this is a long term macro outlook, investments we believe will perform well during this part of the cycle are hard assets whose supply cannot be easily debased. Commodities, including gold and silver should do well. For a higher risk, more leveraged bet on the same narrative, miners are promising.
Gold has suffered from a historic underperformance and is one of the most unloved assets in the world. As investors wake up and smell the coffee that the bond market is dead (it’s producing a negative real yield), they’ll move elsewhere.
As it's been said about this market, there’s nowhere to hide. We’ve experienced the popping of the everything bubble, and crypto, stocks and real estate are all part of it.
The investors conundrum: when everything is overvalued and cash loses an official 8.5% a year, what does one buy?
Cash is great so long as we’re in a bear market because the decline happens faster than the money bleeds to inflation. Overall, this leads to an increase in purchasing power, which is really what matters. As I’ve come out with before, it’s the best asset to own during a bear market.
Right now we’re mostly in cash, with some small exposure to gold, silver and miners and Bitcoin and Ethereum.
When we hit the influx point and it looks like a FED pivot is in sight, either because inflation concerns have subsided or the market cries mercy and the FED is forced to pivot to ‘save the economy’, we believe this is a generational opportunity to profit from investing in the best scarce assets, most notably Bitcoin.
While there will be other cryptos that perform better, and some which will surely outperform in the short term, we ultimately view them as early stage venture opportunities.
Alt coins act as leverage on the market and move faster than Bitcoin, both on the way up and the way down. Understanding market sentiment, psychology and the larger macro picture is crucial to timing the crypto market. Otherwise, one gets left holding the bag when alts drop 95%, as most have done historically.
Our focus is to use our market expertise and apply a macro overlay to investing in crypto over the next decade to ride the wave of a technology that’s being adopted faster than the internet.
We thrive in the uncertainty and pressure, love the poker component of properly managing risk and the fun of looking for the next asymmetric opportunity.
Ryan, Harrison and I are launching a crypto fund, Double Up Capital, which will bet on and intraday trade blue chip assets like Bitcoin and Ethereum, to layer-1 smart contract protocols, play to earn gaming, decentralized finance (DeFi), metaverse, and early-stage token opportunities.
We are currently raising. If you or someone you know would be a good fit, please get in touch.
We’ll be sharing more details in the coming weeks and months. Subscribe to know when it becomes available.
What are your thoughts on the markets?
Alec