Recently, the US dollar index DXY has continued to climb, and market volatility has increased significantly. What impact will the continued strength of the US dollar have on the market and asset prices? What measures will the Fed take to affect the liquidity level of the US dollar? What’s next for cryptocurrencies such as Bitcoin and Ethereum? Michael Ippolito, co-founder of Blockworks, invited Jordi Alexander, CIO of Selini Capital, to discuss this. BlockBeats organized and translated it as follows:
Michael: Welcome to today’s episode of “On the Margin”. Today I invited Jordy, CIO of SELINI Capital. Hi Jordy, welcome back to the show.
Jordy: Thank you, Michael.
Michael: First of all, I want to talk to you about the macro level. Can you talk about your macro forecast for the next year and what things will you focus on?
Jordy: The first is liquidity, which drives asset prices in financial markets a lot and permeates the economy in various ways. People have become so used to its existence that they forget that it is not a permanent state. While the current liquidity situation has eased, I’m still concerned about liquidity within the system. We can see that households and businesses in the United States, as well as households and businesses in some other developed countries, still have a lot of cash in their hands, and that will determine whether we are out of inflation or out of austerity. But I think we’re all going to have a hard time getting out of these until liquidity is under control. In addition to that, I’m looking at relative interest rates around the world, which I think is what ultimately drives the currency, not the countries that use the dollar to lend. To be sure, interest rate policy is crucial, but it also depends on how central banks choose between inflation and recession, and where exactly they want to go. In the long run, many situations will still be dictated by future economic conditions.
Michael: Since you’ve been focusing on the strengthening of the dollar lately, let’s talk about that first. In previous episodes, Brent talked about his “dollar milkshake theory,” stating that liquidity would drop due to a shortage of dollars. Why do you think the dollar will strengthen in the future? Why is the strengthening of the dollar a problem we need to pay attention to from a macro perspective?
Jordy: Indeed, the international community’s demand for the US dollar has been unabated, and the US dollar also has advantages that other currencies cannot replace. But in reality, in the event of a crisis, the Fed will provide a lot of dollars to the international market. The result of this is that the US dollar interest rate rises, which affects the currencies of other countries, but countries like Japan cannot afford high interest rates. In my opinion, the dollar’s strengths are being abused these days, and officials are printing more dollars and using that money to buy foreign bonds and create a larger balance sheet.
Michael: There are two main players that are affecting liquidity levels right now: one is the Fed, and the other is the Treasury – the Treasury issues bonds and the Fed eventually buys them. Beginning in March 2020, the Federal Reserve released a lot of liquidity to the market, and this liquidity is now backtracking due to quantitative tightening, and the market has responded more. Could you share with us what you think about the future liquidity trend and how it will affect asset prices? Do you think the Fed will go into a pivot state and secretly inject liquidity into the market?
Jordy: Quantitative easing is always going to be a long period of time, while quantitative tightening is much shorter, and the official balance sheet has been expanding and it has become the norm – cumulative deficit levels from the past trillion It may reach five trillion or even ten trillion step by step. Compared with the decline in asset prices, the indirect inflation caused by the increase in the amount of the balance sheet is more critical, and the decline in purchasing power has made many people feel dissatisfied. Trump has slowed the trend, and more poor people want to align with the rich in power. In order to prevent asset prices from collapsing, the Federal Reserve began to provide a universal basic income to improve the lives of some people and maintain social cohesion, which is also the current official priority.
Michael: I agree with you. The Fed has long been seen as responsible for stabilizing prices and improving unemployment, and the former is even more important. So how do you think the universal basic income measures will be implemented, who will get relief, and what will be the transfer payment mechanism?
Jordy: There are currently two main tools in the redistribution of wealth—taxes and benefits. For example, they can provide benefits to certain groups of people, and they can also tax certain types of income of the rich. For example, Spain recently started to levy a 5% tax on banks. But in the United States, it is very difficult to improve distribution by raising taxes, and the rich will do everything possible to transfer assets abroad. Therefore, the distribution of welfare has become a more reliable way, the official can provide subsidies for people’s basic living needs (according to Maslow’s hierarchy of needs theory). However, this approach does not solve the problem of inflation.
Michael: Can you talk about how a measure like a universal basic income meets the basic needs of the American people through transfer payments, and how will it affect financial markets? Because I think Gavin Newsom reduces California’s gas tax and reduces people’s burdens, but ultimately pushes the price of gasoline even further, so I feel like these measures will ultimately be inflationary.
Jordy: These measures do lead to inflation, and I think it’s going to be cyclical and not going away easily. Inflation levels may indeed remain unchanged for a short period of time, allowing prices to stabilize for a few months, but then surge again. At the same time, once liquidity levels drop in the market, prices can continue to climb, bringing the economy to a standstill and even causing stagflation. Financial markets can easily get caught in this cycle too, because if yields start to fall, asset prices will rise, companies will over-hire and over-spend, causing inflation to rise, and then officials have to resort to tightening . So it’s easier to see the endgame versus the economic balance when you think about it from a first-principles perspective. Obviously, excess wealth and purchasing power cannot always flow to asset prices because those assets are owned by 10%-20% of the population. So, we’re going to have to create wealth for 50%-60% of people, whatever method is used. We can imagine that there is a wall in front of us, huge waves are hitting it, and there will always be a moment when that wall will be breached – whoever can come up with the right bill to achieve this goal, whoever can ascend to the presidency.
Michael: So what will the endgame you just mentioned be like? According to you, how can we allow water to pass through the walls?
Jordy: I think the most likely scenario is that central banks will eventually become instruments of power, and central banks around the world will have unprecedented power, not only more private information, but also control. Since 2020, the Federal Reserve will bypass the financial system and directly incentivize certain economic behaviors, targeting specific groups to increase their purchasing power, including when and where they spend. For example, in Singapore, you will receive a message on your mobile phone that you have received 200 yuan and can go to the food center to spend within two months. Such an approach can guide the specific flow of money and purchasing power, because pure easing will only allow assets to flow to the rich.
Michael: Indeed the Fed has tried to intervene, like in 2020 with a string of interventions by the Fed, which is quite unprecedented. They bought corporate bonds and made direct loans to small businesses. Officials sometimes want to intervene to block such transfers in the short term, but are unlikely to succeed in the long run. The other thing is, I also think that if the Fed’s liabilities are direct fiat, it’s going to be very inflationary, because the reason we separate the Treasury from the Fed is to make sure that the Fed’s liabilities don’t become fiat, to avoid massive inflation. Do you think it would make a big difference how the Fed’s liabilities became legal tender?
Jordy: I’m thinking that to really cause inflation, money has to go to people who want to spend it. If you just give the money to the bank and the bank doesn’t release the money, then it doesn’t create inflation and the money doesn’t go into the real economy. Not only on the demand side, inflation is also on the supply side, and both are increasing, we just don’t know how much. My thinking on these issues is that if people are just willing to put their money in the bank, it’s not going to cause inflation. However, people will always want to get out of this model and buy something real. While the U.S. dollar is the most powerful currency, it’s still just fiat, just some paper money that people will always want to use to buy real assets. Well, when people put money into the market at the same time, there is bound to be inflation.
Michael: As far as I know, there are indeed many reasons for inflation, such as geographic pressures, which limit the ability of companies to outsource their supply chains. The Fed’s solution to the current supply and demand problems is simply to print more dollars, which may seem like a cover-up, but it’s tantamount to hitting the stone with the same egg. So how effective do you think the authorities are in addressing all of these issues, and what risks do they have that haven’t been fully explored?
Jordy: Every place tends to protect its own people. Therefore, the US dollar has become a weapon, and local governments will print a lot of money to buy US dollars and foreign debt, thereby increasing the local purchasing power. As a result, the dollar will be abused, its status as a reserve currency will be reduced, and the international economy will be adversely affected. So as long as the dollar is in this position, there will be a lot of people using it for this purpose, so at some point there will be a rally against the dollar and the question is what will happen then. The euro is in a completely different world, and it has helped the finances of Spain, Italy, Greece, and others during its years of operation. But I think the idea that Europe intends to achieve unity through monetary unity is a bit crazy, because it is difficult to guarantee that every country has the same monetary policy. For now, though, European solidarity will remain, but the future is hard to predict. Some people may feel that Bitcoin is an alternative, but I think people use Bitcoin because they want to have something unregulated. So even if the number of people using Bitcoin increases tenfold, it will not be included on the balance sheet of the central bank.
Michael: I know you are an advocate of Bitcoin. Can you talk about the future trend of Bitcoin, such as whether the era of hyper-Bitcoinization will come? What do you think will be the best development outcome of Bitcoin in the future?
Jordy: I think it’s hard for Bitcoin to become a global currency , because in addition to the long-term problems it needs to solve, Bitcoin’s greatest strength is also its greatest weakness — Bitcoin’s protocol is difficult to change. So even if someone says we need to solve security problems in a hundred years, miners will not be motivated to create security for the network because they don’t get enough Bitcoin, and the predictability and immutability of Bitcoin then becomes its biggest weakness. The second is the issue of quantity. The number of Bitcoins in the world is only 21 million, but the population is billions. No one wants to have only a pitiful 0.006 Bitcoins in their wallets, because they are accustomed to the US dollar and have a large amount of currency.
Michael: In your opinion, will there be a perfect monetary architecture in the world that can continue to function for thousands of years? If we look back, most monetary systems can only exist for a while, then their fatal flaws are exposed, and then we can only keep adjusting them. Do you think we haven’t found the perfect solution, or are we incrementally finding a better system?
Jordy: I’ve been thinking about this over the years, but I’ve found that it’s very difficult to bring together all the features we expect in a system, such as fair distribution. Once the distribution in the system is no longer fair, it is bound to collapse. In my opinion, incentives are critical for any monetary system and we need to know which forces will support or oppose the system with incentives. For Bitcoin, some people may have a lot of it, while others do not, its distribution is really difficult to be fair. At this time, some people have some extreme ideas, such as setting a world currency and issuing one to everyone in the world. This may seem fair, but soon someone could go to Africa and buy millions of this currency. Therefore, it is difficult for us to find an absolutely perfect system, and we can only say that Bitcoin is more suitable for our current situation. And for gold, I think its era is over and it’s almost impossible for us to see it return to its glory days.
Michael: Why do you think so?
Jordy: Bitcoin, as the digital version of gold, has many superior properties that gold does not. First, central banks can control the gold in their hands; second, gold is difficult to move and difficult to verify. It’s basically millennials and baby boomers who really hold gold, and the only ones who will tell us that gold is the hard currency. At the moment, countries like the US, China and Russia have most of the assets, so only the officials or the 7 or 80 year olds need to transfer their wealth.
Michael: If Bitcoin finally succeeds, what does this mean for the rest of Crypto? One of the difficulties of investing in Bitcoin actually comes from psychoanalysis, that is, when it goes up, a token like Dogecoin goes up even more. So, what do you think about other Tokens in the Crypto ecosystem, such as how Ethereum will develop in the future, and what will happen to other Tokens?
Jordy: I’ve written a bit about this, and I’ve brought up a tragedy of the commons, which is that, as you said, there will be more beta. If people just see the rise of Bitcoin, see the wealth of the digital ecosystem, see the market cap of digital assets rise from 1 trillion to 3 trillion, then they will want to take advantage of the situation, and then the whole system will take care of itself collapse. In the long run, the people who own Bitcoin, the people who actually get rich, are not going to be the ones chasing the gambling stories, or the ones trying to change that in 10 years. I’m pretty confident that we won’t have that effect anymore, because by then the people who own Bitcoin will be the ones who are good at saving, thus retaining their purchasing power and not engaging in high-risk activities. Ethereum is going through huge changes and eventually it will become a macro asset. If enough people use Ethereum every day, it could become a currency, but that’s pretty far off. If the price of block space drops and people can send transactions cheaply, Ethereum has the potential to become a commodity. Not only that, the Crypto space needs many other things, first technology, then L1 and cross-chain bridges, and reliable wallets. The next stage should be to design super applications, like Facebook is used by billions of people, to expand the use of Crypto around the world.
Michael: The last thing I want to know is, what is your forecast for asset prices next year?
Jordy: At present, we cannot implement a free economy now, but we need to intervene in the economy as necessary. However, we don’t currently have the right people to implement these policies, so we have to try different approaches first, a soft landing and then a hard landing. However, if these measures are not handled properly, large-scale riots are bound to occur. In my opinion, asset prices will not rise significantly for at least the next year, but will only fluctuate like a sine function, and each strong rebound in the period will prolong the cycle of inflation. On the debt issue, due to fiscal policy and official revenue and expenditure, bond yields will be controlled, so no one will be willing to buy U.S. Treasuries anymore, so only the elderly or banks can do so. So I would say that there is still room for bonds to fall and at some point in the future we will have a crisis on the long end. I think Crypto will outperform the stock as it has more return potential. I do think that, tactically, you can do well in Crypto, but it’s hard to pick the right token. I ask myself every morning if I have FOMO right now, like if I’m worried that if I don’t spend money on ten bitcoins today, I won’t be able to buy ten bitcoins in a month. If that’s the case, then I should do something, but right now I don’t feel any FOMO. I think we’re going to have more dips and more trouble ahead, so until there’s a real sense of FOMO, I think Crypto will remain the status quo, though there’s also the potential for a jump in the future.
Thank you, Jordy, that’s great advice. However, while I would like to continue chatting with you for two hours, we have to end here first. If people want to know more about you, they can follow you on Twitter.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/selini-capital-cio-no-matter-how-big-bitcoin-is-the-central-bank-will-not-accept-bitcoin-as-an-asset/
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