Putting the Recent Crypto Carnage Into Perspective

This week ended badly for everything, with the DJIA losing %1 on the day, 1.7% on the S&P500 and 2.55% for the Nasdaq, Zerohedge called it “Kamala Karnage,

“and boy was it an epic flush: everything – like literally everything – and certainly anything with a high beta or even a trace of momentum, imploded with a sheer violence that made Aug 5 look like amateur hour.”

Bitcoin, touched as low as $52.7K – a week ago it was flirting with $60K -prompting the usual no-coiners to gloat that Bitcoin was “imploding”, seemingly implying that everything else wasn’t tanking as well.

When August 5th Black Monday hit, the alert sent out to my Bitcoin Capitalist Letter readers said

My view is that this entire selloff in crypto is 100% a macro induced liquidity crisis and globally contagious margin call.

 

It has very little (nothing?) to do with Bitcoin, it has everything to do with a few chickens coming home to roost and a mad scramble for solvency.

 

Pretty well everything is down hard and the reason cryptos are down harder is because, as we all know, there are no circuit breakers or “plunge-protection teams” for Bitcoin or anything else in the space, and it all trades 24x7x365.

 

That’s why it tends to overshoot to both the upside and down.

Contrast this summer softness in Bitcoin with 2021-2022 crypto winter, which was 100% subject to the internals of the digital assets economy itself: Terra/Luna, 3AC, Celsius, and of course, the FTX debacle brought a well deserved purge to the space and the (some of) the most egregious offenders are where they belong: in prison.

Many look at the unrestrained volatility of Bitcoin and gloat, arguing that it makes it untenable as a store of value. (I wonder who was around during the Weimar hyperinflation who, looking at the volatility of gold compared to the rapidly disintegrating Reichmark said the same thing: “Too Volatile to function as a store of value”. That’s right, nobody remembers them).

You’ll often see charts from Weimar Germany of gold priced in the paper mark going parabolic.

What that chart doesn’t show is the sharp drawdowns & volatility that occurred during the hyper-inflationary period. Speculating using leverage got wiped out multiple times.$BTC 1/2 pic.twitter.com/tZhpP1KMS1

— Dylan LeClair (@DylanLeClair_) May 23, 2021

Something I’ve said since 2013 – when Mt. Gox imploded and everybody was calling it “The Death of Bitcoin”. This is what a free market looks like, no circuit breakers, no plunge protection team and even contrast to some of the cryptos, like Ethereum, no “do overs” in the form of hard forking your way out of a jam.

Because BTC is getting clobbered along with everything else, this is reminding me more of the COVID panic of 2020 more than it resembles the onset of the crypto winter, in 2021 (I think I launched The Bitcoin Capitalist Letter right at the top of that cycle, as luck would have it).

People point at the volatility as proof that Bitcoin is not a safe haven and it’s not a hedge – one prominent newsletter writer I’ve known for a long time constantly berates me that Bitcoin doesn’t move opposite to the dollar, as one should expect it to if it’s some sort of hedge against inflation or debasement.

Others say that “Bitcoin is basically Tesla” or that it simply moves with, and trades like just another high flying tech stock or the Nasdaq as a whole.

They’re not entirely wrong about Bitcoin’s correlation with high tech, but they’re not seeing the entire picture either.

Our current era is driven almost entirely by technological advancement, that idea isn’t controversial to most people – however they do fail to grasp the ramifications of the feedback loops technology creates and the accelerating pace of change that comes with it.

This is why the tech sector is moving faster and outperforming everything else and it’s why Bitcoin is outperforming the tech sector. My mantra, as laid out in The Crypto Capitalist Manifesto, is:

Bitcoin isn’t a trade. It’s a monetary regime change.

In Ferdinand Lips’ “Gold Wars” (cited in “Sound Money Makes for Short Wars“), he talks about how the global move to a gold standard happened without governments (or globalists) decreeing that it should be so, owing to gold’s superiority as a monetary metal:

By 1900, approximately fifty countries were on a gold standard. including all industrialized nations. The interesting fact is that the modern gold standard was not planned at an international conference, nor was it invented by some genius. It came by itself, naturally and based on experience. The United Kingdom went on a gold standard against the intention of its government. Only much later did laws turn an operative gold standard into an officially sanctioned gold standard.

This is exactly what’s happening today with Bitcoin, only the people who have been so wrong about it for so long are digging in even harder now, despite it becoming more obvious by the day that this is the direction things are going (I can imagine some future history teacher stumping her class with “You’ll never guess which nation state was the first one to adopt Bitcoin as legal tender, I’ll even give you a hint: It wasn’t any of the former US Republics”).

What’s so disorientating about it happening now is because where in the past, when the incentives impelled market actors toward a gold standard, it took place over decades or even centuries. For most people, in any given lifetime, the current monetary regime of the day was something that had been in place already the day they were born, and it probably wasn’t going to change over their own lifetime.

Those exceptional occasions when it did are where history books come from. Panics, wars, hyperinflations throughout the ages were once-in-a-lifetime or generational events. Today you’re seeing it unfold in your twitter feed.

Now, because of the technology curve and acceleration in the rate of change, they happen all the time, with increasing frequency and magnitude.

Most of the ridiculous bullshit people believe today

… and nearly all the policy blunders that are so catastrophically stupid as to appear to be intentional conspiracy

– are pure and simple Future Shock.

Go back and read the entire series.

Then you’ll get what’s actually… pic.twitter.com/9xGmhtnJJk

— Mark Jeftovic, The ₿itcoin Capitalist (@StuntPope) June 18, 2024

People like Peter Schiff (and my anonymized newsletter writer colleague) delight in seizing on any one-day squiggles where Bitcoin goes down and gold goes up as proof positive that “the Bitcoin trade” is over, and they trot out all the usual eulogies (“Tulips, backed by nothing”, “ponzi”, “NSA psyop“, et al).

It takes an act of concerted motivated reasoning to blot out the cognitive dissonance that just looking at the factual record of Bitcoin’s performance must induce in the skeptics:

I included Berkshire Hathaway here because it’s run by Cantillionaires that hate Bitcoin and frequently lauded as tried-and-true capital allocation machine  (despite its outperformance over the S&P being in a secular downtrend).

Also interesting to note that gold is barely keeping up with the expansion of M2 over a 10-year timeframe, and none of the Bitcoin-loathing goldbugs trash talking BTC on Twitter ever responds when I point out that gold still hasn’t surpassed it’s inflation-adjusted high from 1980.

Bonds are dead capital walking, “Return-free risk”, as they say. A cornerstone of my thesis is an eventual bond exodus that sees even a fraction move into Bitcoin (1% to 3% would put BTC somewhere in the high-6 or low-7 digits).

Bitcoin simply is the highest performing asset in absolute terms of all time.

At the end of the day, I’d be worried in the short term if there was something specific to the Bitcoin or crypto markets driving this pullback (like Tether finally being revealed to be a fraud,  which we covered in latest letter) – but so far that’s still just speculation and it hasn’t become an issue.

• The Bitcoin ETFs have not been dumping though the weakness. Many said they would, that the spot ETFs would make it easier to dump positions at the first sign of trouble.
  

  “Despite price volatility, ETF holders have shown resilience, with no major outflows since March. But overall inflow rates have slowed considerably post-launch” — via Ecoinometrics

  But as we’ve been saying over the last few issues, so far this cycle, it’s been all institutional – meaning, for most of the bull run this year (remember, Bitcoin is still up 22% YTD and 106% over the past year) so while institutions may prefer to garner their exposure via ETFs, they tend to take a longer term outlook and not to make sudden moves.

• I’ve noticed that miners have been accumulating meaninfully for the first time in this year:
• And finally, we’re pretty well in line with previous halving cycle years with the notable exception that Bitcoin put in fresh, all-time highs before the halving event in April, which is something that didn’t happen in previous cycles until several months afterwards.

In my mind, the major parabolic “up-only” move for Bitcoin is still ahead, perhaps dead ahead with the remainder of the cryptos to follow thereafter (except maybe Ethereum

The global rate hike cycle is over, the central banks are trapped between dilemmas of their own making, policy makers are openly espousing capital controls, wealth taxes, if not outright communism – it’s really hard to see a scenario where Bitcoin doesn’t continue to attract more capital and take its place as the ultimate safe haven asset in this modern-day Fourth Turning.

Sign up to the Bombthrower Mailing list today and get a free copy of the aforementioned Crypto Capitalist Manifesto – I’ll also send you my forthcoming e-book The CBDC Survival Guide when it drops this fall.

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(From “Notgeld” to Hyper-Bitcoinization in Under Two Decades)

“Just because something is inevitable doesn’t make it imminent”
— Douglas Casey

For a long time, anybody paying attention knew that central banks printing fiat money out of thin air, then lending it to nation states at interest and blowing it out into the economy would inexorably, eventually lead to such wealth disparity that the society would break down.

It would get to the point where popular revolts would threaten to overwhelm the position of the elite class; those Cantillionaires who lord over this phantasmagorical system that created value ex nihilo and caused, through inflation, the vast majority of wealth to accrue to society’s “capstone class”…

One of my personal favourite quips is:

Eventually always shows up sooner than everyone expects.

It’s been over three years since I released The Crypto Capitalist Manifesto, and in it I laid out my base investment thesis that “The Great Reset” wasn’t actually anything to do with climate change or any of the United Nations Sustainable Development Goals – what it really was all about, is the debt:

“YOU WILL OWN NOTHING, AND YOU WILL BE HAPPY.

The messaging coming out of global elites such as the World Economic Forum, The Party at Davos, the International Monetary Fund and even places as disparate as The Vatican and Hollywood are all riffing on the same theme: You, the middle class, the lower class, the masses – are going to have to get used to a lower standard of living.

 

The real reason why isn’t because of climate change, or even COVID. It’s because of the debt. The world has finally run out of runway from kicking the can down the road all those times the global economy threatened to backslide into recession or when previous monetary bubbles imploded. All those decades of collectively living beyond our means have finally hit the wall. This is it. We’re here.

 

Governments have spent beyond their means for decades, and now the bills have come due. The only way to pay them will include inflation and austerity. It will resemble a controlled demolition of the entire middle class. The easiest way to do that will be to turn them into a completely dependent welfare class via endless rolling lockdowns, Universe Basic Income programs and mandatory health passports.

 

However “The Great Reset” is basically at its core, a monetary reboot. A way to restructure the global debt overhang and turn “money” into technocratic lube for enacting grandiose social engineering projects: most of them geared toward ratcheting down the standard of living for the masses of the developed world and suppressing the standard of living for the so-called Third World.”

(If you want a free copy of the entire manifesto, just sign up for the Bombthrower mailing list and we’ll send you the PDF).

“The Great Reset” and “Build Back Better” attempted to lay the groundwork for the eventual (and still somewhat inevitable) pivot of fiat money into Central Bank Digital Currencies (CBDCs). They will almost certainly be fused with social credit systems denominated in carbon footprint quotas – and thus a mechanism to implement forced austerity across the debt-drowning economies of the world resulting in a kind of “monetary Apartheid”.

What I Got Wrong in My Manifesto

Aside from the fact that events I assumed would play out over decades happened within 18 months, there was another fundamental flaw in my analysis:

I first discovered Bitcoin during the Cyprus banking crisis of 2013 – when people began to understand that “as safe as money in the bank” didn’t quite mean what it used to anymore.

The Cypriots got hit with a 10% “bail-in”, but more ominously – bail-in provisions started showing up all over the place (from the Manifesto, again):

As the bail-in was being planned and executed in March 2013, Eurogroup president Jeroen Dijsselbloem told interviewers that Cyprus would serve as a template for future bank restructurings in the euro zone.

 

In April 2013, the idea of enshrining the framework for bail-ins surfaced in my home country of Canada, with the Conservative Harper government’s budget

 

The Canadian bail-in language was been preserved in the budget even after the Liberals under Justin Trudeau assumed office in 2015. In 2018 it officially became The Bank Recapitalization (Bail-in) Conversion Regulations. 

 

In Australia the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill of 2017 gave the Aussie government the power to facilitate bail-ins.

 

And in case you’re wondering, the USA was a front-runner for codifying bail-ins into legislation: the Dodd-Frank Bill that was passed in 2010, ostensibly to reform the banking sector after the Global Financial Crisis contains provisions for “Statutory Bail-Ins” to recapitalize any “systemically important” banks that gets themselves into trouble.

 

In fact, new supra-national bail-in laws took effect across the entire G-20 in 2014.

It was during the Cyprus bail-in that Bitcoin surged above $100 USD for the last time. It would never again trade at the double-digit level.

Even so,  I never thought Bitcoin would become the world reserve currency or even a component of whatever comes next after this post-post-Bretton Woods era we now live in.

My mental model for Bitcoin, right up until 2022 was as a kind of globally emergent “Notgeld” – a German term that came into being during their 1920’s Weimar Hyperinflation, and translates into English as “emergency money”.

In Germany, individual towns began printing their own scrip, during the Zimbabwe hyperinflation, people began using prepaid phone and gas cards. Every hyperinflation has its Notgeld, and until early 2022, that’s what I assumed Bitcoin was, on a global level.

Two things happened that changed my mind:

1. The US seized the foreign asset reserves of two nation states – it doesn’t matter who those states were or what they did to “deserve it”.
2. During the #FreedomConvoy, the Canadian government declared martial law and seized the bank accounts of truckers and any citizens who supported them.

The first sequence of events forever changed the calculus that nations would employ for deciding how to allocate and hold their sovereign wealth.

The second did that for individual citizens. It alone orange-pilled Robert F Kennedy Jr, who a year later would make Bitcoin a US election issue when he opened his historic keynote at Bitcoin 2023 in Miami with the words:

“I became a Bitcoiner when I saw what the Canadian Government did to the truckers” 

From that point on – Bitcoin shifted from being “Notgeld” – emergency money amid a slow-rolling, global hyper-inflationary event, and it became inevitable component of a future, successor monetary regime.

The Next President of the United States Has Been Orange-Pilled

No matter what you think of Donald Trump, whether he induces either type of “TDS” (Type 1 = “Trump Derangement Syndrome”, Type 2 = “Trump Divinity Syndrome”), or  you’re more dispassionate and objective, the fact remains that a Trump-led GOP landslide is all but baked-in come November 5th.

Like RFK Jr., Trump has firmly jumped onto the Bitcoin bandwagon. He’s been orange-pilled (props to David Bailey Bitcoin Magazine for doing so).

Trump declared that he “wants all future Bitcoin to mined in the USA”. Granted, it doesn’t quite work that way, but he went on to reiterate that, and the right to self-custody at: the Republican National Convention:

Donald Trump makes EPIC promise to US crypto holders: pic.twitter.com/LqCRtEZTbD

— Altcoin Daily (@AltcoinDailyio) July 19, 2024

The Big Announcement Will Drop on July 27th

This year Trump will be delivering the keynote address at Bitcoin 2024 in Nashville, Tennessee. RFK Jr will also be on hand. Both candidates firmly on board with Bitcoin, albeit one destined for the Presidency more than the other (I expect RFK will land somewhere within a Tump administration come January 2025).

The inside baseball is that at that keynote address, Trump is expected to announce his intention to create a strategic reserve of Bitcoin for the US Treasury.

HUGE BREAKING: Trump to announce a USA #Bitcoin strategic reserve in Nashville – Sources

— Dennis Porter (@Dennis_Porter_) July 18, 2024

Doing so could be as simple as a stroke-of-the-pen on inauguration day, as the US is already sitting on about $5B worth of BTC:

The next President of the USA should sign an executive order to convert the $5.5 billion held by the US Government into a strategic reserve at the US Treasury then use that reserve to back the dollar with #Bitcoin. pic.twitter.com/NYjcbCWXmV

— Dennis Porter (@Dennis_Porter_) July 18, 2024

Once that happens, we’re in a whole new ballgame. The Game Theory of Bitcoin will irrevocably change globally, and nation states will be incentivized to follow suit.

Regardless of how it plays out, Bitcoin has already crossed the Rubicon. It’s here to stay, it isn’t some kind of “emergency money” to temporarily sidestep the ongoing unraveling of the global fiat standard – it’s now part of the plumbing.

Read my special report on what a Trump presidency means for Bitcoin, and which companies stand to win big right here.
Join the Bombthrower mailing list and get a free copy of the Crypto Capitalist Manifesto here (and The CBDC Survival Guide once it drops)
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…and the Bitcoin Breakout

What we now call “The Cantillon Effect” was known far back as circa-1730, by at least one economist.  It hasn’t been taken very seriously in modern times, especially here in the fiat age.

Named after its author, Richard Cantillon, in his “Essay on Economic Theory” (“Essai sur la Nature du Commerce en Général”) — it is his only surviving work and was published posthumously in 1755, more than 20 years after he was murdered by a former cook whom he had dismissed from his household. The disgruntled ex-employee, returned by night, robbed his home, then set it ablaze, with Cantillon — and the rest of his manuscripts, within.

The Essay On Economic Theory had been previously circulated in pamphlet form, which is why copies survived to be published to the world, and lays bare the dirty secret behind all fiat monetary schemes:

In a nutshell, when money is created or added to an economy, the people who receive it first, benefit, but they do so to the detriment of everybody else.

The early recipients of new money were able to spend it on accumulating more of the productive assets that society had to offer. But this also increased the money supply, which diluted the purchasing power of everybody else’s existing money.

The wealthy got to invest new money.
Everybody else had to spend more of their existing money.

So, while the rich got richer, it made it more expensive for the poors to stay alive.

The elites invariably believe the system works great. From inside their bubble it certainly seems that way. But it is unsustainable over the long haul. As the dynamic iterates, it accelerates, and it increases wealth disparity. If there was a nice, meaty middle-class in the economic bell curve, it wouldn’t last for long as the productive assets increasingly get hoovered up by a rentier class using new money.

Eventually wealth inequality hits a breaking point, and when that happens, all existing social contracts – real or implied – break down.

The French Revolution may be the first example of the Cantillon Effect’s consequences, after Cantillon himself detailed its underlying dynamics.

The distortions introduced from currency debasement are far reaching and take a long time to play out. But the tempo intensifies toward a “quickening” as it enters the end game, much like compound interest and bankruptcy (“gradually, then suddenly”). The rich become more imperious, the poor more resentful and then, finally, after generations of silent theft and economic repression, something sets off a phase shift — and then it’s show trials and guillotines.

In France’s case, the monetary missteps that set it on a course to Bastille Day went at least as far back as Louis XIV, the great-great-grandfather of the Sun King who would be left holding the bag (and his head in a bucket) nearly a century later.

In Guy Rowlands “The Financial Decline of a Great Power: War, Influence and Money in Louis XIV’s France“, we are told of “dimunitions” which devalued the coin of the realm by decree, (nevermind that it was gold and silver backed)…

The government would typically prepare an augmentation by decreeing diminutions—or abatements’—of the coins in circulation, a decision that did not require coins to be restamped or re-created. This was not primarily so the king could pull in more coins through taxation (denominated in Livres),” as any such gain would be cancelled out: a diminution would in fact also force the king to compensate his fisco-financiers and bankers for losses on their contracts and on the coins they held at the time. ‘

 

The main reason was so there could be huge leaps upward in the value of the coins to the level decreed by the subsequent augmentation, thus bringing in more seigniorage to the king. The government also hoped that a diminution, generating fear of further diminutions, would flush coin out into circulation, particularly for lending to the fisco-financiers.

That is why diminutions were announced in advance, with weeks or even months before the new, lower values would come into effect. This gave people a window in which to lend out their assets. There were indeed often several diminutions in a row: prior to the 1693 augmentation, the values of the coins were diminished four times; and prior to the great recoinage of 1709, diminutions were announced in March and November 1708 and on 16 March 1709.

The state never brought the coin values back down to the level they bad been before the previous augmentation, and this was important to ensure the public did not think the bottom of the valuation had been reached.”

Does any of this sound familiar?

Cantillon on steroids: The Fiat Era & Stakeholder Capitalism

“Let them eat brioche” — Marie Antoinette, 1789

 

“You will eat bugs, own nothing, and live in a pod” — The World Economic Forum, every day.

With the fiat era, starting in 1971, new money was no longer limited by the supply of gold, or whatever else was backing a currency. You could print the stuff right out of thin air now – which meant that instead of ostensibly enriching all members of society, with its “targeted inflation” for expanding the money supply, it would just accelerate the rate at which the underclass was being impoverished (which for a long time could be papered over with “hedonic adjustments” when reporting on it).

The Global Financial Crisis in 2008, followed by over a decade of ZIRP, NIRP, and QEternity, overclocked that process, and then Covid hit, when it went literally parabolic:

On its own, this may look like just another hockey stick graph. Most people don’t make the connection on exactly how this manifests in the real world (especially central bankers).

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
— John Maynard Keynes 

(Even fewer people realize that Keynes was a Marxist and his economic prescriptions, which form the basis of conventional economic theory to this day, would  lead to socialism. This was intentional. Especially once you understand what socialism really is.)

This graph is just real estate, and as of 2020. That was before COVID, before lockdowns, before small businesses got shut down by decree while big box stores and Amazon stayed open and the Fed bought their bonds.

Let’s look at a couple of inflection points:

The graph above is from Pew Research. In 1971, the start of the Fiat Era, middle income households earned the bulk of the income pie at 62%. Along comes Nixon, who closed the gold window (“temporarily”), and it’s all downhill from there. All kinds of wealth inequality drivers can trace their genesis to that event in 1971.

Then when the bankers blew themselves up (again) in 2008, the bailouts happen (again) and we hit another inflection point: the era of ZIRP, NIRP and QEternity hits, and this is exactly where upper income households crossover the middle income earners. Again, this graph stops short of the Covid Era, at which point all of these trends accelerated. 

Where does it leave things?

The bottom layers of the economic stratum are looking like a cross between Mad Max and a  Zombie Apocalypse. Even worse, is that thanks to plunging income mobility, the underclass is growing.  The middle class are falling into the poverty more often than ascending into wealth.

This Visual Capitalist chart looks at the number of people earning more than their parents by generational cohort. Remember, because of inflation everything is getting more expensive, but if each generation is earning less than their parents, they’re losing ground:

Unless you’re already wealthy – then everything is fine because your share of the pie is getting larger…

All Cantillon Schemes Require a Totalizing Ideology

As I mentioned recently in my article on how abandoning sound money perpetuates Forever Wars,

If there is a far-reaching, multi-generational global conspiracy – it is one that brainwashes the masses into trading their time, wealth and property for meaningless chits backed by nothing. Who needs global Communism?

In pre-Revolutionary France, it was By Divine Right. The king was chosen and appointed by God to govern the kingdom. This belief was used to justify the absolute power of the monarch and his authority over all aspects of French life. And the masses went along with it until the economics became so asymmetrical and unsustainable that the peasants revolted. They had no choice, the alternative was to starve to death.

Today’s totalizing ideology is a kind of euphemistically wrapped Technocratic Marxism. Klaus Schwab calls it “Stakeholder Capitalism”, George Gilder, perhaps more accurately, termed it Emergency Socialism in his latest book, Life After Capitalism.

It’s called “Stakeholder Capitalism”.
(…and you aren’t a stakeholder ) pic.twitter.com/pjyU37SL2o

— Mark Jeftovic, The ₿itcoin Capitalist (@StuntPope) July 27, 2023

Gilder only uses the phrase out once or twice in the book and never really expands on it.

Allow me.

Today’s Totalizing Ideology is that you, dear peasant, must ratchet your standard of living downwards. You will have to take up less space. You will have to consume less resources, you will have to pay more for everything and you must accept ever worsening living conditions because if you don’t, the world will end.

And nobody wants that, right?

In the meantime, your betters, the people who have it all under control and everything figured out, will continue to re-imagine your life, and the lives of your children, so that they can forestall the implosion of the global monetary system and finish hoovering up the remaining 5% of the global wealth that they don’t already own.

“The peasants have no bread”. “Then let them eat bugs”.

Scene at Versailles as elitists who think you should own nothing, go nowhere & eat their processed crickets prepared to feast at taxpayers’ expense.#vampireelite pic.twitter.com/zSeKw7KcqO

— Nick Griffin (@NickGriffinBU) September 22, 2023

Which brings us to… Bitcoin.

If only there were some mechanism that was not only immune from dilution via inflation, but could actually reverse the Cantillon Effect.

Sure, there is gold – the age old monetary metal. I like gold and have been invested in it for nearly 30 years.  Silver too. Everyone should have an allocation to gold and have some silver, including junk silver to have on-hand for sundries if (or when) your national currency collapses.

But Bitcoin, as distinct from other “cryptocurrencies”, is a very unique monetary asset, backed by energy, decentralized, hard-capped in supply, and largely impervious to capital controls in a way that is distinct from all other monetary assets.

If only there were some mechanism that was not only immune from dilution via inflation, but could actually reverse the Cantillon Effect.
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To top it all off, Bitcoin exhibits a reverse Cantillon effect. Because Bitcoin is deflationary, it is becoming more valuable.  It is increasing its purchasing power, as more wealth flows into the system and it does so for everybody hodling it. The difference between Bitcoin and Cantillonism is that  the purchasing power isn’t declining as the currency units flow outward from the central spigot. It’s increasing for all units, at the same time.

Most people can’t wrap their head around this. Even the aforementioned George Gilder, concludes that Bitcoin can’t become the new global monetary standard because it is deflationary. And he did it in the chapter of his book called “Bitcoin Capitalism”. Heartbreaking.

But history has shown deflationary currencies not only work, economies thrive under them (see again, Sound Money Makes For Short Wars) – and Detlev S Schlichter wrote an entire book on why that’s the case.

“A monetary system with a money commodity of essentially fixed supply will experience secular deflation. A growing economy, with an entirely inflexible money supply will exhibit a tendency for prices to decline on trend, and for money’s purchasing [power] to steadily increase.

 

But the key question now, is why should this be a problem? We have already seen that historically secular deflation was rather minor and that it certainly never appeared to present any economic difficulties. No correlation between deflation or recession or stagnation is evident under commodity money systems. [T]here are no reasons on conceptual grounds to consider deflation to be a problem”

If there is any disparity, between time and value with Bitcoin, then it’s front loaded. People get into Bitcoin at the price they deserve, but there’s nothing stopping anybody from getting in whenever they want. With the Cantillion Effect, you have no control over new money creation, but yet you still have to live with the declining purchasing power instigated by other people.

With Bitcoin, even if you enter later, you are still on the escalator up, having your sats gain in purchasing power as more capital moves onto a Bitcoin Standard.

We may not have to fire up the guillotines in order to exit this particular episode of Cantillonism, (although we may fire them up for other reasons).

As more people exit the fiat system, the only people left to for the elites to dilute will be the remaining serfs who will get stuck inside the coming CBDC system.

More on that in a future post…

My forthcoming ebook The CBDC Survival Guide will give you the tools and the knowledge to navigate coming era of Monetary Apartheid. Bombthrower subscribers will get it free when it drops, sign up today.

The Bitcoin Capitalist: For Today’s Sovereign Individual provides actionable intelligence on the macro forces shaping Late Stage Globalism and a tactical toolkit for growing your wealth as it plays out. Try it today here.

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Berkshire Hathaway was built atop a system that Bitcoin was created to destroy

The Oracle of Omaha’s second banana has pronounced judgement on crypto. It was even more unhinged than previous attacks (“rat poison”), as Munger applauded communist China’s technocratic dictatorship as a sensible ideal we should be following here in the West.

“the communist government of China recently banned cryptocurrencies because it wisely concluded that they would provide more harm than benefit…What should the U.S. do after a ban of cryptocurrencies is in place? Well, one more action might make sense: Thank the Chinese communist leader for his splendid example of uncommon sense.”

The fact that Munger is able to aggrandize a communist police state that maintains concentration camps, engages in organ harvesting and forced labour with impunity is a testament to his insular position (not to mention the lopsidedness of our political zeitgeist).

Munger is a Cantillionaire – after Richard Cantillion who wrote one of the first economic treatise in the eighteenth century describing how proximity to the monetary inputs of a society confer special advantages at the expense of wider populus.

Munger’s crocodile tears for those who lose out in the economic game of life are ironic, given that Berkshire Hathaway’s mantra (and Westco, Munger’s sidecar conglomerate) for decades has been to buy often distressed businesses that are out of fashion but have a “durable competitive advantage ” or “moat”.

Those are euphemisms for monopolies, and both Buffet and Munger love owning them. Despite their branding as folksy, avunculars, they don’t seem to mind if their vast empire includes monopolies that draw rentier like returns from monetizing low income housing or opioid addiction.

Munger and Buffet’s dynastic wealth was built on the crest of three structural tailwinds:

If there is such thing as “structural inequality”, it has more to do with the way the monetary system is constructed to benefit people who are already super-wealthy than anything else. “Fix the money, fix the world”.

The first of these pillars below is more of a dynamic than a structure, and one that there’s nothing wrong with, actually.

But it seemed odd to hear Munger, a man who made his fortune exploiting valuation gaps in publicly traded companies, singing on the virtues of  England’s “bann[ing of] all public trading in new common stocks and kee[ping] this ban in place for about 100 years.” .

That happened back in the 1700’s when Richard Cantillon was figuring out that the monetary system was structurally rigged, even then.

So while Buffet and Munger’s investing acumen is not in dispute, these three forces acted as the lubricant, if not steroids, for their astonishing returns over the decades:

1) Value investing

…is the foundation upon which Buffet (and Munger) built Berkshire. It is buying companies or assets below their perceived intrinsic value.  The fact that other investors have lost money on it is a prerequisite, otherwise they wouldn’t be “value plays”. “All this wild and wooly capitalism”  that Munger is ruminating about in his WSJ op-ed is what created the valuation asymmetries that Berkshire Hathaway has exploited ever since the duo took it over, in 1965.

2)  Fiat currency debasement

The Cantillon Effect makes inflation acutely pernicious, widening wealth inequality as the asset values of the ultra-wealthy get higher, it drives up the cost of living for everybody else.

Buffet and Munger have been playing inflation like a fiddle for decades. They both know that all fiat currencies are headed for zero, so they gravitate toward “inflation proof” assets with “pricing power” and “moats” (…because inflation-proofing goes better with monopolies.)

Then when things run too hot, they can play the populists and urge government to raise taxes on the wealthy (suggesting tax structures which would barely impact themselves, if at all) and chide the central bank to “reign in inflation, even if it causes a recession”. Like nearly all super-wealthy elites, they love to make policy recommendations that impact everybody else, yet put them in a position capitalize on the second-order effects: Recessions cause unemployment, bankruptcies and a plethora of valuation asymmetries where they can reload on durable assets and businesses at discounted prices.

3) A 40-year decline in cost-of-capital

At the age of 52, Warren Buffet’s net worth was 0.3% of what it is today, and the correlation of Munger’s personal wealth to Buffet’s is basically 1.

That was 1982, which marked the beginning of a bond super-cycle that saw the cost of capital decline to zero by the end of it.

Real rates are still negative today, and all of this compounded with the fiat currency debasement that lifted Buffet and Munger’s boats and accentuated their returns for decades.

I’m not saying that currency debasement and secularly suppressed cost-of-capital are the sole factors for Berkshire Hathaway’s success.

But they were indisputably beneficiaries of the fiat system structure over decades. Also during periods of dislocation, like when it was weaponized against the plebes during lockdowns and the Fed started buying up Berkshire’s debt (along with every other billion and trillion dollar juggernaut) while lending rapidly devaluing dollars to small and independent businesses (that is, if they weren’t simply banned from operating).

Berkshire Hathaway was built atop a system that Bitcoin was created to destroy

Many years ago I found myself sitting in a Bay St. conference room at one of Canada’s “Big Four” banks. There was a representative there from three of those Big Four, plus an Entrepreneur-in-Residence from the Business Development Bank of Canada (BDC) who shall remain nameless, and had organized the meeting at the behest of another BDC contact.

We were there to talk Bitcoin.

He told me a story. More of a parable. Maybe it was just the facts of life.

He said, basically this (paraphrasing),

“when a new disruptive technology comes along, you want to be out front with big investment money behind you, you want to engage with government, the banks and policy makers right away, from the start – and you develop your relationships and your platform, all the while you are engaging with policy makers and the system incumbents to develop the rules.

When the government finally moves on regulating the new space, you are already there and you are on the right side of it, because you helped shape the policies.

Then the regulatory hurdles keep getting higher, and you’re always on the right side of it, while all the later entrants are playing catch up or falling behind.

In other words (and I remember this exactly, along the with the big, smug smile he had on his face when he said it):

You get to turn around and pull the ladder up behind you!”

I left that meeting not sure what had just happened and nothing more ever came of it, at least with me.

But Bitcoin is more than a disruptive technology. It’s a decentralized counter-attack against a structurally unsustainable and predatory financial system.

Whenever I hear Buffet, Munger, Jamie Dimon, Larry Fink or any other High Priests of the Gerontocracy complaining about Bitcoin specifically, or crypto-currencies in general, I feel like that’s what I’m listening to: a bunch of super-rich Sith Lords frantically  trying to pull up the ladder behind them.

Because the last thing they want or can fathom, is to wind up back on a level playing field.

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Buffett and Munger Pillory Bitcoin and Rationalize Cantillon Mercantilism at Berkshire AGM

There is nothing sadder than watching those who inspired you on your journey into contrarianism degenerate into mummified shills for a morally bankrupt status quo.

The Berkshire-Hathaway AGM was this past Saturday, and Warren Buffett and Charlie Munger didn’t sugarcoat their animus toward Bitcoin, saying

“Whether it goes up or down in the next year, or five or 10 years, I don’t know. But the one thing I’m pretty sure of is that it doesn’t produce anything,”

Munger went further, calling it evil, ultimately headed for zero and a problem “because it undermines The Fed”.

Obviously, Buffett and Munger are hitting back at the hordes of laser-eyed barbarians for being labeled part of The Gerontocracy by Peter Thiel at his keynote address to Bitcoin2022 in Miami (I was there, it was epic).

The AGM happened after I had already sent the month-end Crypto Capitalist Letter to the editors so it was too late to cover it there.

It does warrant some comment, because there’s arguably some cognitive dissonance: The Crypto Capitalist covers publicly traded crypto companies. We don’t do technical analysis, we don’t do charting or Elliot Waves anything like that. Buffett is the patron saint of value investing, and I got into crypto stocks because I saw them as value stocks. For real.

Discovering the Crypto Value Play

The year was 2020, the world had completely lost its shit overreacting to a not-cataclysmic COVID pandemic, our brilliant (unelected) technocrats imposed lockdowns across the entire world and so, like many people, I decided to use my time as productively as possible, deciding to double-down on my investment education. Loading up on books like The Joy of Compounding, The Book of Value and listening to endless Value After Hours podcasts (love that show), I  started combing through nanocap and microcaps looking for value plays.

I’d always been value oriented. I’ve got the Warren Buffett shareholder letters, dog-eared and underlined from several passthroughs. I’ve got two copies of Bevelin’s “Seeking Wisdom from Darwin to Munger” because one of them is signed by Munger and I wanted another copy to mark up and underline. Despite everything I’m about to say about Buffett and Munger, I’m still currently reading Adam J Mead’s Complete Financial History of Berkshire Hathaway. It’s fascinating stuff.

Over the course of immersing myself in the craft of value investing during lockdowns it turned out I kept finding it in a peculiar place: crypto stocks. With Bitcoin hitting all time highs, you would expect all the crypto stocks to be screaming higher at expanding multiples to nosebleed levels even more extreme than the underlying cryptos themselves. You see this in gold bull markets, in fact gold stocks typically lead the metal (both on the way up and the on the way down).

Not so in cryptos. At least not in the latter half of 2020. With Bitcoin, Ethereum and everything else ripping higher to fresh all-time highs, I was finding Bitcoin miners who were trading for less than the value of the Bitcoin on their balance sheet, with no debt. That would make them honest-to-God Ben Graham style net/nets.

It just seemed very asymmetric so I started loading up on names like Hut8, Hive, Bitfarms, Fortress Technologies (now Cathedra), Neptune Digital and this tiny little crypto-conglomerate nobody was paying attention to called Galaxy Digital.  There were a couple of stinkers in there too, but overall it didn’t really make a difference. I was finding genuine value in an entirely new and ascendent asset class. Buffett would be proud! Wouldn’t he?

Buffett and Munger loathe Bitcoin. If Bitcoin is “digital gold” (it is), Buffett has never liked gold either. There was a lot of excitement in goldbug circles when a Berkshire-Hathaway 13-F revealed they had bought a chunk of Barrick. The BRK-fanboys dissected the trade religiously and wondered out loud if that was an actual Buffett trade or one of the inner-circle who were being groomed for succession.

It didn’t matter, because barely a year later, Berkshire had exited the trade anyway.

Buffett and Munger eschew monetary assets – like cash, or gold, because they are unproductive. They don’t generate any yield and when you can own a business that does generate returns, it doesn’t make any sense to keep anything on the sidelines. Especially when you can pick ’em the way Buffett and Munger can.

Yet they have also been known historically for steering clear of tech in general (despite now holding numerous tech investments which they entered far later in the respective companie’s lifespans).

Buy it now, or buy it later

Back in the dotcom boom, Buffett famously avoided tech stocks because he deemed them outside his circle of competence. He was ridiculed at the time as being out of touch, but he was eventually vindicated when the dotCom bubble imploded. Still, he could have bought Apple for a song in the wreckage, at (split adjusted ) prices ranging from under $1 to $2.50 or so up until mid-2006. It wasn’t until 2016 that Berkshire Hathaway backed up the truck and loaded up around the $100/share mark (pre 2020 split). By the end of 2021 nearly 40% of Berkshire’s portfolio was Apple!

But Apple wasn’t by any means the first transformative tech company Buffett eschewed at first. In 1968 Bob Noyce, was leaving Fairfield Semiconductor to start a new company Integrated Electronics and was raising an initial $2.5M seed round. Both Buffett and Noyce were trustees for Grinnell College’s endowment fund. Buffett signed off on an investment for the college, but declined to put any of Buffett Partnership’s capital into “Intel”. He wouldn’t be invested in the behemoth until 2011, and even then, he was out within a year.

Despite the general aversion to the tech sector, Buffett never called integrated circuits, personal computing or the internet “rat poison”.

I believe the reason for the visceral hatred toward monetary assets, like gold or Bitcoin is because on some subconscious level, Buffett knows that one of the major tailwinds of his stellar investment career has been the destruction of the monetary base layer and The Cantillon Effect.

Uncle Warren, Poor Charlie and Cantillion Mercantilism

Buffett and Munger’s belief is that the only reason for owning gold (or now Bitcoin) is in the hope of selling it to somebody at a higher price in the future. Yet, in Buffett’s own words, he likes to own businesses he understands when he

“like[s] the price at which they’re selling relative to their future prospects, and thinks 10 years from now that they’ll be worth more money” 

There is a strange kind of tunnel vision here. All investment seeks to either preserve or accumulate wealth, and everybody does a variation of the same thing: deploying capital where they feel will hold or gain value in the future.

Buffet, who’s “favourite holding time is ‘forever'” should perhaps think more deeply around why he would rather hold his wealth in productive businesses rather than unproductive gold, or even the ostensibly risk-free asset that is cash.

John Maynard Keynes once said of inflation:

“By this means the government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.”

Buffett is of those men, saying:

“Inflation swindles the bond investor … it swindles the person who keeps their cash under their mattress, it swindles almost everybody,” 

The most important word in this sentence is “almost”. Inflation swindles (steals, defrauds) almost everybody. But there are a few people whom inflation doesn’t rob, but actually enriches. Those people are Cantillionaires. Buffett and Munger, as skilled as they may be in investing,  belong to the Cantillionaire class.

Richard Cantillion, the British Irish-French entrepreneur who wrote one of the earliest economic treatise was the first to formalize how expanding the money supply is experienced in two different ways within an economy:

The elites who have direct proximity to the new money experience it as rising asset prices, making them wealthier, and giving them the ability to further compound their wealth by buying up even more of society’s assets.

Everybody else, the plebes, the rabble, the permanent underclass, they don’t experience it as rising asset prices, because they can’t afford to acquire any assets. They live on a permanent treadmill that keeps accelerating while the incline constantly increases… Euphemistically characterized by policy makers as “inflation”.

When you see the picture that lays out how the dynamics of Cantillon Mercantilism works, it makes more sense why the uber-wealthy like Munger and Buffett might rationalize hard money assets such as gold as “unproductive” and Bitcoin as “rat poison”. It’s because that magic money printer at the center of their world can’t print hard assets.

But it can and does print cash which even though they know it decays, and the more the machine prints the faster it decays, they also know that they’re first in line to get it.  That means they can use it to inflate the value of their own assets before it hits the outer fringes society where it inflates the cost of staying alive.

In the 2008 Global Financial Crisis: Berkshire-Hathaway didn’t receive bailouts directly, but at least four of their holdings did, to the tune of nearly $100 Billion USD (Wells Fargo, American Express, Bank of America, and Goldman Sachs).

During the COVID Panic: The Fed directly purchased Berkshire-Hathaway bonds (along with those of numerous other companies, all of whom were worth over $100 Billion USD).

Bitcoin Fixes This

Bitcoin, when widely adapted as money and a store of value puts an end to the Cantillon Effect. Because it is an inelastic, deflationary and asset based money, it gains purchasing power over time (volatility aside, which I expect to smooth out over the coming years).

For those who feel running an economy on deflationary, inelastic money is impossible I would suggest reading, Nik Bhatia’s Layered Money, Saifedean Ammous’ The Bitcoin Standard, or Detlev Schlichter’s Paper Money Collapse first edition of which came out before Bitcoin was barely on anybody’s radar (2011).

There is no barrier to entry for asset accumulation with Bitcoin, because you can start with a microscopic amount and watch it gain purchasing power over time. It enables savings and capital formation.

Ordinarily, enlightened capitalists like Buffett and Munger should be on board with this. But they instead recoil from it with every fibre of their being. Perhaps, without being consciously aware of it, they understand on some level that  Bitcoin presents a direct assault on Cantillion Mercantilism.

On the surface, Munger and Buffett bring living example to the famous Upton Sinclair quote: “It is impossible to get a man to understand something whose livelihood depends on them not understanding it”

However, being as they are among the few who recognize inflation for what it is (wealth destruction for everybody else, asset compounding lubricant for themselves), they probably understand Bitcoin more than most no-coiners, and what it represents.

What amplifies the dissonance around their posture toward crypto-currencies is that this is one of the few sectors of genuine value in the equities markets right now. In other words, right now, in Q2 2022, crypto stocks are value stocks. Granted, it’s been widely acknowledged that Buffett (and Berkshire) ceased being value investors a long time ago, optimizing more for “growth at a reasonable price”. It’s hard to find value at the scale BRK operates at.

Were Buffett to retrench to his value roots he could buy up Galaxy Digital ($4.6B), Silvergate Bank ($4B) and Coinbase ($30B) and still not really move the needle. This shows just how early it still is in the Bitcoin and crypto story.

Size matters, and sometimes not in a good way: BRK’s outperformance has been in secular decline for decades….

It would be fair play should the likes of Buffett and Munger simply dismiss crypto-currencies as outside their circle of competence thus uninvestable for them. They’ve done that continually throughout their career and it has served them well and been a great lesson in discipline for all aspiring investors.

But the venom with which they demonize Bitcoin smacks of “methinks doth protest too much”

People who understand #bitcoin buy it. People who don’t understand #bitcoin talk about it.

— Michael Saylor (@saylor) May 3, 2022

Maybe, on the other hand they understand it all too well.

I write about the decentralized revolution and the rise of crypto-currencies on Bombthrower.com, get my investment thesis free when you sign up for the mailing list here. Follow me on as @bombthrower on Gettr or on Twitter here. The Crypto Capitalist Letter covers global macro as it pertains to Bitcoin with a tactical focus on crypto stocks. 

We hear a lot of talk in financial and economic circles about “reversion to the mean” or some variation: reversion through the mean or that reversion typically overshoots the mean. If you believe in cycles or oscillations, when you see something get wayyyyy out of whack, you may not know how much further out of whack it’ll go (“the market can remain irrational longer than you can stay solvent”), or when it’ll stop. But the typical belief, based largely on historical observations, is that when a move to an extreme finally exhausts itself and begins the countermove in the other direction, it will revert to, and then overshoot the mean.

How far will it overshoot the mean? To the extent whatever you are measuring had extremely overshot to one side, or the upside, it is generally expected to overcompensate to a comparable extent in other direction. Most of the time when we talk about this, we’re thinking about financial markets and it is most poignantly reflected in The Hype Cycle or some other variation of the wild gyrations between Irrational Exuberance and Maximum Pessimism.

To the shrewd speculator or contrarian investor, you can become exceedingly rich if you just know when everything has either peaked or bottomed. But, of course, that’s easier said than done.

There are people who think gold and silver, with investment portfolios holding somewhere around 0.5% globally and near universally reviled by the financial press, are in a bubble.

…and then there are people who think that TSLA, at 1000X carbon credits “earnings” is some kind of bombed-out value play.

Warren Buffet is credited with saying to be fearful when everybody else is greedy, and greedy when everybody else is fearful. I always thought he was channelling Jesse Livermore, who said as much back in the 1920’s….

“The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. ” – Edwin Lefévre, Reminiscences of a Stock Operator

“It is a human trait to to be hopeful and equally so to be fearful, but when you inject hope and fear into the business of speculation, you are faced with a very formidable hazard, because you are apt to get the two confused and in reverse positions” – Jesse Livermore, How To Trade in Stocks

Where are we today? Well like I said, that’s hard to say exactly, and it’s been hard to say for a long time.

Another old expression is that “the graveyards of Wall Street are littered with the skulls of those who were too early.” Betting against the extreme sentiment of these last few years hasn’t gone well.

Me: trying to short tech unicorns… pic.twitter.com/ItiIXZoit2

— https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpg E. Jeftovic (@StuntPope) August 31, 2020

We are obviously somewhere out the extreme sentiment side of something, but the point of today’s piece is to make the case that it’s not just stonks that are teeing up for some kind mean reversion. Central banks think inflation has been too low for too long, and for most of that time interest rates have been squashed at zero, in some places negative. Trying to go long volatility has been the widowmaker trade for years, while value guys have entire podcasts devoting a lot of airtime to how lousy value has been doing. While entertaining, I feel bad for them.

I look at all this and wonder what the world looks like if all of this snaps back other way in some kind of cascading Great Reversion.

Extremes in finance brings extremes in side effects: including things like hysteria, alarmism, political intolerance, media concentration, partisanship and just overall hypocrisy and hypernormalization. Although these are all difficult intangibles to measure and quantify.

I’ve cited the Pew Research on political polarization before, where they show how it is no longer possible to gain a plurality in the middle – centrism is dead and moderates are reprobates. The result would be a pendulum beat between ever increasing extremes – far left, hard right, until the centre literally cannot hold.

In Ronald Baily & Marian L. Tupy’s “Ten Global Trends Every Smart Person Should Know”, they distinguish between extractive and inclusive societies and make the case that an exogenous shock to one, like The Great Depression or a global war, would finish off an extractive society while inclusive ones weather the storm and perhaps even grow stronger.

An extractive society is one where a cadre of elites operates the system in a manner that strips wealth from the wider population and concentrates it within the ruling class. A lot of people are writing about this dynamic lately and I’ve long suspected the structure of the monetary system and the Cantillon Effect as being the primary driver of it. Contrast with an inclusive society, which they don’t mean in a “woke” sense but rather:

“Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few,…They include democratic politics, strong private property rights, the rule of law, enforcement of contracts, freedom of movement, and a free press. Inclusive institutions are the bases of the technological and entrepreneurial innovations that produced a historically unprecedented rise in living standards in those countries that embraced them”

To me, that sounds like a pretty good framework for free market capitalism. Something Charles, Jesse and I were trying to articulate in our last AxisOfEasy podcast. When Jesse contrasted what I call capitalism with “Neoliberalism”, I wondered afterward if there was a enough of a distinction between the two terms. But since I started reading Ten Global Trends I realized the significance of this distinction between inclusive and extractive societies.

If what we call (free market) Capitalism is inclusive, I would argue that what we Neoliberalism (or Globalism) is extractive.

And the reason I mention it all here is because I think this is another axis along which we are out on the far end of the tail, and we may even have a way to measure it. Central Bank intervention and monetary policy has transformed our society from an inclusive free market capitalist one into an extractive, neoliberal, globalist one.

Many people quibble over when this started, looking at the creation of The Fed in 1913 or Nixon’s shutdown of Breton Woods in ‘71, I think even those developments didn’t necessarily make this swing from inclusive to extractive inevitable until we started making bail-outs the expected outcome every time a bunch of banksters and  financiers over-extended themselves and blew themselves up.

With the bailouts of 2020, when innumerable small businesses were ordered closed, by edict, many of whom will never reopen, while central banks directly support superhuge businesses, and lucrative government contracts are awarded to cronies, what was a slow, seemingly inexorable slide into this extractionist regime was suddenly and dramatically pushed into overdrive.

(Note that 4 of the 5 billionaires depicted in this info graphic own companies whose bonds are being purchased by The Fed as part of the SCCMF)

When the types of things that are too far out the extreme end of the tail snap back it won’t just feel like another financial crisis, because this time I think, all the underlying factors that baked in the next crisis will also revert, including this reaction against our newfound extractionist overlords.

What would mean reversion and overshoot look like?

While some of it is financial and economic and would look like a meltdown, these other aspects are cultural, even geopolitical. When it all snaps the other way it will affect economies, financial markets, but also system fragility, supply chains, social cohesion, even living standards.

I just think things have gotten so fugly, and so polarized, contentious to the point where being a centrist is considered an extremist position in itself, that it’s all going to snap back in the other direction so fast and so hard it’s going to rip everybody’s faces off. It may be so disorderly it will even disorient those who were presumably positioned on “the correct side” of the move.

We are at a kind of hinge moment in history, just imagine where things will have to go for you to remember recent years as some kind of bygone era. That’s where The Great Reversion will take us. Nobody can say for sure what it will look like, or when it will happen, but I do fear one thing in particular.

The reversion, will be mean.

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Heretical Judge Rules that Uber Can’t Externalize its Labour Costs

As I briefly covered in my AxisOfEasy tech digest this week, Uber and Lyft were bracing themselves for a ruling by a California judge that threatened to force them into treating their wage slaves drivers as employees. Lyft said if the ruling went against them it would cause “irreparable damage”. Uber CEO Dara Khosrowshahi penned an op-ed in the New York Times that just so happened to run Monday, pining for a fair shake for gig economy serfs workers.

Khosrowshahi, whose compensation package last year clocked in at $45,000,000 USD, waxed pensively, ‘There has to be a “third way” for gig workers.’ . Ideally one in which Uber wouldn’t be on the hook for their benefits and would be able to continue apace as a Silicon Valley unicorn: posting billions of dollars a quarter in losses and jockeying for Federal bailouts. Meanwhile the early stage backers, the VC’s and the private equity funds, would continue to live large off of financialization, not having to worry about the consequences of being the driving force in a race to the bottom for everybody else (even Uber’s lümpenvestors who bought into the IPO are still underwater).

As it turned out, Judge Schulman ruled that these gig economy workers are to be treated as employees in the State of California, and sure enough, Uber is now threatening to pick up their ball and go home.

People following my writings may be surprised that I’m not approaching this as yet another government inflicted wound against capitalism, like how laws mandating higher minimum wages actually increase unemployment. It’s a fair point.

But we’re not talking about countless mom-and-pops and other main street businesses having their costs jacked up by economically illiterate career politicians. Even in a climate of government mis-micromanagement and overreach, the so called “free enterprise” participants should be competing under the same conditions. If an independently owned and operated driver service in the state has to operate under onerous taxation and terms, then being a Silicon Valley unicorn shouldn’t exempt you from suffering the same conditions.

In this case we’re talking about Cantillonaires who feel entitled to special privileges and exemptions but the reality is this:

These companies were never intended to be economically viable.

Uber and Lyft started the year with $11.3B and $2.8B in cash on their balance sheets respectively. They posted TTM losses of $10B and$ 2B respectively.  They are valued around $54B and $9.2B

The only thing that mattered from the outset was to cannibilize the entire market, driving down prices and wages while operating at a loss so that they could garner the next financial event, be it a series D, E or F up-round and then eventually some monster acquisition or IPO. Within truly un-manipulated, free market competition, Uber and Lyft would have either had to compete, viably, with numerous entrants and competitors all fighting under their own steam, or else be snuffed out by economic reality.

The truth is that you can’t actually build a business where every transaction and input is subsidized, ultimately by central bank stimulus, while  all normal course responsibilities of operations, like expenses, are externalized.

With the Everything Bubble finally looking to pop, and pent up reality s-l-o-w-l-y beginning to reassert itself, these Unicorns will have to face the same situation that every other non-unicorn, non Silicon Valley funded business has to face: Whatever your “boil-the-ocean” big idea is, you’re gonna have to do it in an economically viable way, or it’s not going to happen.

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On Cantillionaires, Sycophants and Losers

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”

— Henry Ford

“The ultimate crisis will occur when the situation is so thoroughly perverted that the defenders of the status quo can no longer resurrect confidence in the system”

— Vincent LoCascio, Special Privilege: How the Monetary Elite Benefit at Your Expense

Over several previous blog incarnations I’ve been writing about a couple of core themes. When I started writing about artificially low interest rates and the bad outcomes they would produce, I didn’t even know the economic terms for some of the things I was writing about.

But I knew keeping interest rates artificially low, or even negative would act like a type of event horizon that would be impossible to normalize from. I knew keeping interest rates too low for too long would force fiduciaries and capital allocators out the risk curve in search of yield, and that the most vulnerable among us, such as senior citizens, were the least able to absorb the inevitable drawdowns that would entail.

I also realized early on that hot money and credit expansion would spur an explosion of money losing unicorns, who would suck up all the oxygen in all the markets cannibalizing entire markets at a loss in order to get that Series E or F up-round. That one became apparent to me when I started seeing billboards for one of my largest competitors every 1/4 mile across the entire city of Toronto on my daily commute, and every other place else I ever travelled to in North America. I knew that they were losing about $300,000,000 a year at the time. They also had some pretty kick-ass Super Bowl commercials.

I only learned about Richard Cantillon and his early economic treatise a couple years ago and since then I’ve never been able to shut up about The Cantillon Effect, which is what all this describes and what I think is the single most divisive, corrupting and toxic dynamic shaping our world today.

Max Keiser recently coined the phrase “Cantillionaires”, and that’s an accurate demarcation line between the elites and everybody else. It isn’t “the 1%”, it isn’t white privilege, it isn’t capitalism or managers vs labour.

This helps the trend of ‘taking America private’ in a multi-trillion LBO by a few PE firms.

Before neo-feudalism can begin, the S&P must be delisted and controlled by a few cantillionaires.

Cloaking these PE firms in darkness will speed up the process of neo-feudalism https://t.co/xaIDsUQF4Y

— Max Keiser (@maxkeiser) July 17, 2020

It’s this:

When the Fed, or the ECB or the JCB or any other central bank prints money out of thin air, and then deploys that “liquidity” into the market, are you, or the firm you work for, among the first, second or third order recipients of that fresh injection of money? If so, then you’re a Cantillionaire.

And the rest of us? We’re losers. Remember this old Hugh McLeod ditty? It was priceless….

Let me correct it to depict the capital structure of the world.

An odd kind of reverse alchemy occurs as the newly created “money” flows downward toward the masses.

At the top we have the capstone class, the Cantillionaires, the superrich politicians and the Uber-rich financiers and conglomerators.

After this is the “The Sycophant Class”. In this layer are the spin doctors and support apparatus of the überclass of the Cantillionaires. In his book “The Coming Neo-Feudalism”, Joel Kotkin called them The Clerisy and described them as “the New Legitimizers”. Their job it is to hone the narratives that rationalize why this cap table makes sense for the losers below, as well run the actual infrastructure that perpetuates it.

As the newly created “money” flows down The Global Cap Table, it undergoes that inverse alchemy and the nature of the newly created money experiences a state transition.

The nature of the change is this: After it gets a few iterations out from the money spigot at the top, it stops boosting asset prices and starts raising the cost of living. At the top end of the funnel it makes everybody in proximity wealthier, and then down at ass end of the funnel, where the rabble resides, it makes it more expensive to stay alive.

That’s The Cantillon Effect and I’ve been searching for ways to explain it so more people would understand it for quite some time now. But lately, I came across a pretty stark manifestation of it that should, I hope, finally make this clear.

The epiphany occurred as I was reviewing the Federal Reserve disclosures listing the recipients of the SCCMF Program. The SCCMF is the Secondary Corporate Credit Facility to buy up corporate bonds in an effort to shore up the credit markets:

“The Federal Reserve established the Secondary Corporate Credit Facility (SMCCF) on March 23, 2020, to support credit to employers by providing liquidity to the market for outstanding corporate bonds.”

It later expanded the program to add junk bonds.

The SMCCF is supposed to be some mechanism to preserve jobs in the wake of the economic meltdown, but when you look at the companies whose bonds are being purchased, they don’t exactly look like they were in danger of going under throughout the course of 2020:

Berkshire Hathaway (three seperate entities), Cisco Systems, Exxon Mobile, Fox Corp, Halliburton, Intel, IBM.

All companies that are worth billions, Billions. With “B”s.  You can see a full list is here. 

Then what really got me was seeing Amazon, a company worth over One Trillion Dollars, a company whose business is up so much over 2020 that they had to hire 100,000 more people to keep up with demand, and the Fed is out there using a program justified as a job saver by buying Amazon bonds (some of which actually trade at a lower interest rate than US treasury debt was wrong, it’s narrower spreads – mjr) under the SMCCF?

AMAZON.COM INC Consumer Cyclical 023135BP0 0.400 06/03/2023 4,000,000 $3,994,878

The thing about Amazon that hit home for me, is that among other things, Amazon is also a domain registrar, and Amazon is a DNS provider, which means that Amazon is a direct competitor to my own business, easyDNS.

So not only am I competing, head-to-head, with literally the world’s biggest company, the Fed has to put their thumb on the scale by buying their fucking bonds?

But wait, there’s still more, as I perused the list I found other companies I have to compete with, directly, head to head:

MICROSOFT CORP Technology 594918BA1 2.375 02/12/2022 5,500,000 $5,678,039
MICROSOFT CORP Technology 594918BP8 1.550 08/08/2021 3,000,000 $3,040,837
MICROSOFT CORP Technology 594918BQ6 2.000 08/08/2023 5,000,000 $5,228,349
MICROSOFT CORP Technology 594918BW3 2.400 02/06/2022 3,000,000 $3,098,973
MICROSOFT CORP Technology 594918BX1 2.875 02/06/2024 2,000,000 $2,157,622

easyDNS competes with Microsoft’s Azure. The Fed is buying Microsoft’s bonds.

ORACLE CORP Technology 68389XBB0 2.500 05/15/2022 2,000,000 $2,066,967
ORACLE CORP Technology 68389XBK0 1.900 09/15/2021 8,000,000 $8,133,006
ORACLE CORP Technology 68389XBT1 2.500 04/01/2025 4,000,000 $4,275,958

Oracle owns Dynect, who easyDNS competes with directly again. The Fed is buying Oracle’s bonds.

And from the June 29th disclosure I saw that the Fed was buying Google’s bonds, and Google is also in the DNS and domain registration business, yet another head-to-head competitor.

It’s tough enough running a small business when you have to compete with an 800 lb gorilla in your space. Especially when there’s a half dozen of them now and since everybody else who has to compete with these companies (not a single one with a market cap under 100 billion dollars) doesn’t get propped up by a central bank, printing up money out of thin air, it puts all other companies at a clear competitive disadvantage.

Isn’t this a little bit like picking winners and losers?

One might point out that small businesses were eligible for Federal funds as well. They sure were, they were eligible for loans and although loans and bond issues live on the same side of the balance sheet, the resemblance ends there.

In the US, any PPP loan over 25K is full recourse, and anything over 200K requires a personal guarantee. It’s similar up here in Canada. It means the business owner has to collateralize the loans, most often with his or her principal residence, and they have to be able to demonstrate that their business has been materially impacted by the pandemic.

I doubt Jeff Bezos has to personally guarantee those Amazon bonds, and if the Fed had a similar requirement to demonstrate business impairment to qualify I don’t know how Amazon would be able to make that claim with a straight face having just hired those 100,000 additional workers just to keep up with increased demand.

This is another example of that inverse alchemy we see as the new money trickles down the Global Cap Table:

At the top, it props up non-recourse bond issues and buoys the corporations who issue them. And when those bonds come due they can probably just do what every corporate behemoth does and roll them over.

At the bottom, the small business owner has to pledge his house and his personal assets as collateral and then those loan payments get added straight onto the monthly nut.

Referring back to the Global Cap Table, above The Loser Line megacorps can externalize their bad outcomes and in many cases, literally lose money for a living. Everybody up there makes their money on financial events

Below the loser line reside all the small businesses. The ones every politician says “are the backbone of the economy!” yet they enact policies that make it harder for them to remain open and as we’re exploring here, cultivate policies that make it near impossible to compete.

If all this wasn’t bad enough, everybody knows where this is headed next, once this economic depression asserts itself over the current blow-off top in stocks: eventually the Fed will probably step into the equities markets and prop those up too. So not only is the Fed buying my largest direct competitors bonds now, down the road they’ll be buying up their shares.

…with money they pulled out of their ass.

Does it make a mockery so-called free markets when the smallest businesses have to deal with the vagaries competition while the largest ones get propped up with the full faith and credit of the central banks?

This isn’t capitalism. I used to call it “crapitalism” or you sometimes hear it called “crony capitalism”, but extending Max Keisers’ label of “Cantillionaires”, I finally know what this is and what to call it. What we have here folks, is your good ole fashioned, centrally planned Cantillionism.

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After the 9/11 terror attacks, when our privacies were permanently revoked, and we entered into “a war which would never end in our lifetimes”, Bush II proclaimed “They hate us because of our freedoms”.

Some critics thought that was an almost nonsensical statement to make, while the credulous took it at face value. It framed whoever perpetrated the attacks as some inhuman “other” that despised happiness itself. It was unthinkable anybody could have an actual foreign-policy derived reason for doing it, and anybody who suggested as much was usually hounded out of the public eye.

However I always thought that utterance did have a kernel of truth to it. If you looked at the United States as a global empire, and that the freedoms “they” hated were not actually the ones to assemble, or worship or to vote, as Bush intimated, but rather the ones where America acted unilaterally in its own interest observing American Exceptionalism as a type of infallible axiom, then Bush would have been closer to the substance of the matter.

Here was world hegemon who claimed the freedom to overthrow governments, the freedom to bomb or invade any country it pleased, the freedom to support brutal dictators, assassinate enemies, interfere in elections and basically do whatever it wanted. Seen in that light, then yes, the 9/11 attackers did hate our “freedoms”.

But from where do those “freedoms” derive? How did the US become so powerful? The recurring theme throughout a lot of my writing has been echoing some criminally obscure writers (such as Stepehen Zarlenga and Vincent LoCascio) who have documented in their works how whoever controls a society’s monetary system, controls the society.

On the world stage it follows that whoever controls the world reserve currency, effectively controls the world.

In this era that means that under the current monetary system where the USD is the world’s reserve currency, it’s the USA by and large that controls the global stage.

As long as the USD is the global reserve currency, the USA will enjoy “freedoms” that enable it to impose its own rules based order on the entire world.

And it is that structure that affords every single American,  a type of systemic, structural, unearned, privilege.

The most divisive privilege going is Dollar Privilege.

Dollar privilege is what enables nearly every single person in America to access a standard of living that for the majority is vastly beyond the means of their own productive or economic capability, and light years beyond what nearly half the world’s population has to maintain itself on.

It’s why zombie companies can borrow money at artificially low interest rates to buy back their own shares trading at all time highs, and why barstool prophets can follow the momo simply by plucking stock tickers out of scrabble bags.

$RTX comes out of the scrabble bag. Smush letters and buy it. Give it a try Ron, you might not bankrupt your clients. #DDTG pic.twitter.com/semLRi6yBF

— Dave Portnoy (@stoolpresidente) June 19, 2020

Dollar privilege is why almost half of US households can receive some form of subsidy from the government and still have flat screen TVs, refrigerators, stoves, mobile phones, internet and quite possibly, cars, while the bottom half of the global population lives on less than $2.50/day.

It’s why every single congressman and senator is a millionaire.

It’s why American’s for the most part don’t save. Why should they? When they can borrow money to finance their lifestyles, instead of working, investing and earning in order to fund their lifestyle, and when savings pay zero or negative rates anyway, what’s the point?

Dollar privilege subsidizes Silicon Valley and every money losing unicorn in it and every money losing service each one of those unicorns “provides” on every single money-losing transaction you do with them every day. Dollar privilege is why those same companies can successfully exit via IPO and why legions of Robinhooders can make money trading them.

Dollar privilege is what enables legions of petulant, empty-headed permachilds to run up student debt at over-priced universities to major in phantasmagorical non-topics.

Dollar privilege is the secret sauce that every Marxist and Democratic Socialist must possess before they can bemoan capitalism from their iPhones and MacBook Pros.

Dollar privilege is what every blue check journalist on Twitter gets paid with from their woke-and-broke media outlets.

All of that is privilege, all of those unearned advantages and perks, that entire, elevated standard of living is derived from being citizens of a country who gets to mint the world reserve currency out of thin air, as much as they want, in ever escalating amounts.

None of this is to deny that there is injustice and vestiges of bigotry and intolerance here in the West. Rather, this is all to point out that what enables us to tear ourselves apart over it from the comparative luxury of digital communications, well stocked refrigerators within modern-day housing is this dollar privilege, the institutional ability to print “value” out of thin air, that the rest of the world then uses to backstop their entire currency systems.

What has changed, why people are more sensitive to the consequences of privilege, is because the periphery of dollar privilege (the “Privilege Perimeter”) used to circumscribe the entire country, and we simply externalized the marginalization it caused overseas. The US military enforced the dollar supremacy globally and the rest of the world essentially traded their wealth and labour for US debt.

After the end of Bretton Woods, when Nixon closed the gold window (temporarily) in 1972 (it’s still closed), the Privilege Perimeter began an inexorable process of constricting.

It crossed a kind of Rubicon after the Dotcom crash, when the policy choice was to blow up a housing bubble, and then it entered the endgame after the 2008 GFC, when the banksters were bailed out.

None of the bailed-out financiers here at #Davos2016 who live in Greenwich & collect Lamborghinis can understand why US voters are unhappy.

— Rudy Havenstein goes brrrrr. (@RudyHavenstein) January 21, 2016

The result is that now, in the USA, the middle class is finding themselves for the first time outside  of the Privilege Perimeter. This is especially acute now that policy makers are literally picking economic winners and losers, with the winners usually being well connected,  albeit often insolvent zombies, and the losers being small businesses, independents, and anybody who works for one.

The Cantillon Effect, which I’ve talked about before, of newly created money benefiting those who are closest to the spigot, turns out to have a reciprocal effect of constricting the circle of beneficiaries over time. It’s like a black hole for economic value.

Eventually black holes collapse in on themselves

Once all the economic value has been leeched away from everybody outside the Privilege Perimeter, once all future prospects have been monetized in the here and now, the blackhole of financialization begins to collapse in on itself. It doesn’t feel like a financial crisis as much as it may present as civil unrest, internecine fighting amongst competing factions of elites and external brinksmanship reminiscent of early 1914 Europe.

It feels like that’s where we are today, in some weird quantum superposition between Maximum Pessimism and Irrational Exuberance. 

So to all of you who detest privilege and structural inequality, fear not. That era is coming to an end.

But I dare say that most of you don’t recognize the exact nature of the kind of privilege that is ending, and I think once you do understand the epochal change that is underway, you aren’t going to like it.

It means the vast majority of Americans are going to have to endure a massive reduction in their standard of living. At the same time, as long as “The Establishment” holds together, they will continue their breakaway trajectory of opulence, and wealth accumulation, plundering the last of the privilege to go around.

Eventually it will break, but it won’t be just, it won’t be fair, it won’t be inclusive or equitable.

It’ll just be ugly.

If you don’t want to get run over by this tectonic shift in history, then save money, buy gold, earn crypto, eliminate debts, invest in income producing businesses and assets, and sign up for Out Of The Cave.

This is part 4 of the Jackpot Chronicles: Four Post-Coronavirus Scenarios. Read the series here, or sign up for Out Of The Cave here.

“In the future there will only be one occupation: managing one’s wealth. And the majority of the population will be unemployed.”

– Me.

The original working title for this installment of The Jackpot Chronicles was “Mandatory Pollyanna”. That’s the one where central planners and bureaucrats manage to “save” the global financial system yet again, but at a cost of undertaking an LBO of the entire economy and running it as a centrally planned utility.

I’ve decided to rename this scenario “The Great Bifurcation”, because should it come to pass,  I think the the inevitable result  would be the emergence of an even more pronounced and starkly divided Two Tier Society.

It is arguable that the groundwork for TGB was laid as far back as the adoption of central banking and fiat currency, which gave asymmetric advantages to the class of elites closest to the monetary spigots: This was known as far back as the late 1700’s when Richard Cantillon wrote his treatise on Economic Theory…

“An 18th century French banker and philosopher named Richard Cantillon noticed an early version of this phenomenon in a book he wrote called ‘An Essay on Economic Theory.’ His basic theory was that who benefits when the state prints a bunch of money is based on the institutional setup of that state. In the 18th century, this meant that the closer you were to the king and the wealthy, the more you benefitted, and the further away you were, the more you were harmed. Money, in other words, is not neutral. This general observation, that money printing has distributional consequences that operate through the price system, is known as the “Cantillon Effect.”

Why Wall St. Gets a Bailout and You Don’t, by Matt Stoller

Today it’s not the King’s courtiers who benefit, it’s who is in closest proximity to The Fed: primary dealers, investment banks, hedge funds, private equity, venture capitalists and corporate monopolists. Even in Cantillon’s day, when he enumerated the various ways new money could come into the kingdom, it was all the result of actual money entering via conquest, trade, mercantilism, or taxation. The choke point then under any scenario was the sovereign, and those in court tended to do well whenever the money supply increased.

Now, imagine having the ability to print “value” out of thin air, and then exchange it for equity stakes in the means of production, the way central banks can today. Imagine being able to do that for the world’s reserve currency. Then try to imagine that power and wealth diffusing through society equally and proportionately. You can’t, because it doesn’t. It won’t. It never has.

So today we’re hit with this pandemic, which I’ve said before isn’t the cause of the economic dark age we’re now entering but a catalyst of it. This unidirectional wealth transfer has to be spun in a way that the marks (the subjects) don’t understand they are being robbed blind. They have to want to be leached into poverty. They have to demand it.

This is the underlying logic of ideas like Universal Basic Income, and descriptive rationalizations like Modern Monetary Theory. To the rabble, it looks like the government finally set aside any silly notions of fiscal prudence in order to further build out the welfare state for the good of society. There is an entire segment of the population who is now taking home more money from government stimulus and bailouts than they were when they were “working” for a living.

What is really happening however, is that the fiat currencies which are being printed into existence and distributed to the underclass in the form of various stimulus and aid packages are essentially being transformed into a kind of “company scrip”.

Company script of yore was only redeemable for living essentials at the Company Store. In our era, it’s more of a company platform: a fast emerging, digital, ubiquitous, cashless banking system, where all purchases and transfers are tracked and logged. With the digitization of  this next generation company scrip, (“smart scrip”?) which has the veneer of a currency, policy makers will have much needed ability to fine tune economic activity under extenuating circumstances. Consumer behaviour can be tightly monitored, modified, coupled with “immunity passports”and other parameters deemed necessary, including having purchases curated or rationed.

All the while the elites, the financiers, the political class and the kleptocrats continue to inexorably accumulate the lion’s share of the equity and productive assets of the global economy.

On the other end of the scale are the corporate behemoths, who have shifted their business models from normal course operations to financialization:

Companies today are borrowing money at artificially low rates to buy back their own shares, which are trading at or near all-time highs. The value investor in me finds that kind of stupid.

When I wrote this, the major indices were putting up a string of all-time-highs (but the underlying technicals like the advance/decline and insider selling look awful). But what a lot of people don’t realize, because the media doesn’t give it very much coverage, is that most of the earnings gains in the S&P (said earnings gains supposedly driving the p/e multiple expansion which is propelling it to new highs) are coming from stock buybacks.

In Q2 2016, share buybacks accounted for 72.9% (!!!!!) of the trailing 12 months net income of the S&P.  Read that again. That’s not 72.9% of the earnings gains; it was 72.9% of the earnings. 72.9%! That means nearly ¾ of the earnings are all financially engineered, and most of the funds used to buy back all those shares are borrowed because of these ultra-low, artificially suppressed interest rates and credit expansion.

Out of the 500 companies in the S&P500 in 2016, 146 of them spent more on buybacks than they actually made in “earnings”.

That’s financial engineering. It cannot go on forever, but it will “work just fine” until eventually, it doesn’t. When that moment comes, it will be disorderly and there will not be enough chairs to go around when the music ends.

I wrote that back in 2016, in the inaugural post for Out Of The Cave. Now that eventually has finally arrived, we’ll see how corporate welfare plays out in the Jackpot. For those companies that blew their wads on buybacks over the last decade, the Great Bifurcation scenario would see their bail-outs come with conditions that they restructure their operations in alignment with the imperatives of The New Normal: such as enhanced pre-flight screening for the airlines, and sundry social justice initiatives that bring  a centrally planned economy, controlled by the State closer to reality.

What will the Great Bifurcation look like?

Aside from permabulls pining for a V-shaped recovery in stonks, the subtle drumbeat being relentlessly pounded by policymakers and corporate media is that things have changed forever and there will be no return to normalcy as we would have understood it just a few short months ago. Nor should there be, if you take the advice of super rich celebrities softly singing “Non á un Retour á la Normale”

Under this scenario’s new rules, which will include enhanced tracking and surveillance, monitoring, government interference into every aspect of our lives and necessary restrictions on free speech to curb “misinformation”, we will notice one thing over and over again:

The New Rules for The New Normal will only apply to the rule followers, not the rule makers or the rule tellers.

Spot the difference:

• When Shelly Luther, a Texas salon owner defied a court order to close down her hair salon, citing that she had to keep working in order to feed her family, she was sentenced to 7 days in jail.
• When Almeda County, CA issued workplace shutdown orders, Elon Musk simply ignored it and the county “entered into negotiations”. with Musk in order to garner compliance.

The difference here, other than one is one is a self-employed solopreneur trying to keep her head above water and the other is a self-absorbed solipsist douchebag with a private jet, is that the former gets paid in company scrip (fiat coupons called “dollars”) while the latter is a lynchpin in the financialization juggernaut that makes its return on funding rounds, IPOs, secondary offerings and any other transaction that generates fees for underwriters.

For everybody else, how many of us will be able to simply refuse to comply with government ordinances when they are decreed from on high? Whether it comes to receiving mandatory vaccines, rolling travel bans, permanent restrictions on social distancing and assembly, or to close down our businesses again, will we then be able to enter into “negotiations” with our respective authorities regarding the finer points of whether we actually have to comply? Somehow I doubt it.

Spot the difference:

• Various jurisdictions around the world are imposing jail terms and fines for violating lockdowns, including numerous US states , Canada, India, Saudi Arabia (mildly surprised they’re not beheading them) and others too numerous to mention,

vs

• Canada’s Prime Minister traveled to his vacation home for Easter after lecturing Canadians to stay home over Easter
• Ontario Premier Doug Ford traveled to his cottage while advising everybody else not to
• NYC Mayor Bill Di Blasio, who set up a snitch line encouraging citizens to report each other for not social distancing, had no compunction about hitting the gym in Brooklyn
• Neil Ferguson, the man behind the botched computer model that factored into the global lockdown, breaks quarantine for a dalliance with a married climate activist, gets off with an “awww shucks” and a  slap on the wrist.

https://twitter.com/DowdEdward/status/1257545327080427520

The difference here is between mere rule followers and the rule makers. Imagine these same disconnects across every aspect, every social strata, every economic sphere of society.

The Great Bifurcation will be baked in so that:

The underclass will be under the never-ending spectre of lockdown and quarantine, social distancing rules, restrictions on travel, events and diet, while the elites jaunt about in private jets, holding emergency sessions aboard super yachts and convening at Davos to reimagine the (your) future.

Wealth inequality will be even more starkly exacerbated as global currencies wither into money-like coupons and food stamps, redeemable within approved digital ecosystems on curated transactions.

Contact tracing, immunity passports and other “health initiatives” will morph into social credit frameworks worthy of China, from which the political class will almost certainly be exempt.

The people who decree and implement these measures will enjoy a life of comparative plenty and freedom.

And yet, it all has a certain logic to it…

Why should you have any liberties left?

If the Savior State is going to incentivize you to not work and eventually ends up paying you a basic income every month for staying home, then the logic does follow that they should be able to protect their property investment by setting the allowable parameters within which you should be permitted to operate. After all, you’re living your life on their dime scrip.

Under The Great Bifurcation scenario, humanity drifts apart, H.G Wells style, into two separate races. The capstone class will be our patrician overseers who have The Science, the models and the economic toolkit to deftly guide society through The Jackpot. The other will be a much larger underclass of comparatively childlike simpletons who believe #fakenews, have negative equity and no assets, and generally can’t be trusted to be left in a room alone with sharp objects. They’ll need shepherding, and the newly ascendent  social credit system will give them the right dopamine hits at the right time to do it.

Between these two races will exist an impenetrable membrane of norms, culture, narrative and even law that enforce a social divide reminiscent of a Dickensonian steampunk tale. Normally I would posit that were this scenario to prevail, it would take generations to dumb down the populace to the point required to pull it off. However given the exigencies of The Jackpot, and what I expect to be a never-ending state of compounding emergencies, the timeframe may be greatly accelerated.

Remember the recurring theme of The Jackpot: The next 20 years will not be a linear extrapolation of the previous 20.

In the next edition of The Jackpot Chronicles, our final post-crisis scenario looks at The Deglobalization Scenario. That’s the one where reality sets in and is not only acknowledged but embraced. Businesses and policy makers get religion and realize that financialization and globalization have ultimately failed and in order to achieve long term viability, the entire paradigm has to be “reimagined”. I also discussed this recently in the AxisOfEasy podcast with Charles Hugh Smith and Jesse Hirsh.

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