Bankless’s latest podcast features investment analyst and economic thinker Lyn Alden on the game-changing macroeconomic trends that are happening right before our eyes.
This article will take the highlights of this podcast and put the global signs in words: stagnant global growth, rampant inflation, wars and energy shortages in Europe, the collapse of the Sri Lankan government, and more.
Somewhere in all the chaos you need to have your own world economy independent plan, and it emerges from it all. No one knows exactly what will happen. But learning from super-talents like Lyn Alden will help us understand where we are — and the opportunities within it.
Bankless editor Jem Khawaja distills this podcast discussion into 3 models to understand the macroeconomic endgame and what they mean for cryptocurrencies…
Lyn Alden is the founder of Lyn Alden Investment Strategies, a leading expert in macro markets. She focuses on the long-term debt cycle and how it affects the cryptocurrency, fiat, bond and stock markets.
This is Lyn’s third appearance on Bankless. Every time she plays, it usually means some breakout in the macro market. Her superpower is to provide clarity in uncertain times, and this episode was no exception.
long-term debt cycle
Lyn Alden’s thinking is guided by Ray Dalio’s theory on long-term debt cycles and macro endgames. These rhyming macroeconomic trends resurface every few decades and lead to massive economic and social unrest. While every cycle is very different, the climax is always triggered by massive debt, low interest rates and currency devaluation.
These factors continue to combine to destabilize the global system and lead to changes at the macro stage. This means the end of an era on a global scale: declining empires, wars, currency rebasing, major demographic changes. Alden believes that the global economy is a taut balloon, the third act of a long economic arc.
In recent history, even before the Covid-19 pandemic, the 2010s could be seen as a mild global depression — despite persistently over-leveraged debt, many countries did not grow during the decade, Alden said.
The pandemic has thrown this precarious state further into chaos, and as a result the U.S. turned to a wartime economy to print money — without wartime production to support it — which led directly to the stagflation we’re starting to see now.
Slowing growth and runaway inflation are flashing leading indicators of a deep downtrend, and when it hits the jobs market — the final domestic indicator we’re waiting for — it’s already entering recession season. Consumer sentiment in the U.S. is at a 70-year low, and pain is starting to show in the daily lives of people everywhere you look.
Dalio’s advocates see the next major U.S. recession as a catalyst for the transition from U.S. domination of the global economy to a multipolar world. Russia, China and India have begun to emerge from dollar hegemony in their respective emerging financial crises, all in sync with Dalio’s “end” and “great reset” models.
against the milkshake theory
Contrary to Dalio et al, there is now a popular economic theory called the dollar milkshake theory.
It was coined by economist Brent Johnson, presumably in reference to Daniel Day-Lewis’s threat to oil tycoon Daniel Plainview in “There Will Be Blood” One of the lines: “I drink your milkshake!”
The idea is that the global financial turmoil we seem to be flirting with will actually be good news for a stronger dollar, as the U.S. economy will eventually drink everyone else’s milkshake and re-establish global dominance.
With the U.S. dollar index DXY soaring to all-time highs, the milkshake theory has understandably brought many economists into the yard. Alden argues that this theory is only true if it is not: short-term dollar strength may be an indicator of long-term dollar decline.
The DXY dollar has strengthened over the past 5 years // via Tradingview
Here’s why: The U.S. dollar is the global reserve currency. All central banks hold large amounts of it. It is also the currency in which most of the world’s offshore debt is denominated. Non-U.S. entities conduct U.S. dollar-based loans and transactions in nearly all markets around the world because it is considered more trustworthy than local fiat currencies.
For example: Alden said the BIS noted that there is $13 trillion in debt globally, and more than $50 trillion in U.S. financial assets such as Treasuries, stocks and real estate.
When there is a disruption in global cash flow, the dollar is effectively short squeezed. This sent it soaring upwards. This is not a sign of its strength, but the weakness that other currencies are showing. In contrast, the stronger the dollar, the lower its status as a global reserve.
This has accelerated the macro macro shift to multi-polarity, which in turn has reduced global reliance on the U.S. economy and its U.S. dollar. In short, this is the argument against the milkshake theory.
Fed: Move slowly and break the rules
At 1.5% interest rates — half of which were raised by 75 basis points last month — Alden said the Fed has been very slow in tackling inflation and now has no choice but to catch up too aggressively. Unfortunately, with the legacy of Fed Chairman Jerome Powell, it has been tightening the slowdown in economic activity.
Alden said the Fed must now raise interest rates until it breaks down on core economic fundamentals such as Treasury bonds or credit markets. This is the point at which it will start to fall back. It’s not all over yet, but the stress test has become very stressful. With illiquidity in the Treasury market already causing volatility and a struggling corporate bond market, there are signs that this could be just a few months away.
Essentially, what we’re seeing is a big game of eagle and chicken. Alden doesn’t think the Fed will be able to continue to tighten policy in 2023, which means there’s no time for subtle adjustments anytime soon. The Fed won’t stop raising interest rates until the dykes start to burst.
Now, that sounds scary, but it’s not as bad as it seems. The Fed steps in regularly to steer macro markets. Just in March 2020 — after the pandemic market crash and subsequent surge in the dollar — the Fed immediately bought Treasuries to reactivate the market.
What this means for encryption
While crypto will play a major role in the makeup of any new global economic framework emerging from the phase shift, digital assets are currently plunging in the macro dryer until all is over. In the short term, a larger rate hike could be bad for the crypto market.
The Merge in particular provides a counter-trend secret weapon for Ethereum, but crypto as an asset or market is not driving the macro machine in the short or medium term. For the Fed, something like cryptocurrencies is considered a barnacle in a sea of worries. The Fed doesn’t care about crypto or CeFi contagion. It has bigger fish to fry.
But maybe they should pay attention. The spread of CeFi has taken away dozens of prominent cryptocurrency banks, worth hundreds of billions of dollars in a matter of weeks. Alden sees cryptocurrencies as “canaries in the coal mine” ahead of emerging things on a more fundamental macro level. She said what we’re seeing in cryptocurrency is just a precursor to what we’ll see in its traditional equivalent.
The good news is that crypto, Web3, and DeFi infrastructures in particular have passed a deleveraging stress test — and did so well. But the stress in traditional global financial markets may be just beginning.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/3-models-to-judge-the-impact-of-global-market-volatility-on-the-crypto-market/
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