1/ This Decade in Macro
A thread on our predictions for the next decade.
A thread on our predictions for the next decade.
2/ I spend much of my time attempting to figure out what’s going on in the world, and then make bets based upon my assumptions.
Like in poker, I’m right more than I’m wrong, but I’m still wrong a surprisingly high percentage of the time.
Like in poker, I’m right more than I’m wrong, but I’m still wrong a surprisingly high percentage of the time.
3/ I’m just one person with extremely limited information relative to the information that is available, and who is highly aware there’s more that he doesn’t know than that he does know.
4/ Therefore, my success can be linked to two key principles: first, surrounding myself with the smartest minds I can find and doing what I’m great at: synthesizing information to draw conclusions and second, managing my risk like I learned in poker so that no one bet defines me.
5/ Over the past year, I’ve worked closely with my two partners, @leet888 and @0xGhostRider.
We’ve formed an investment team, where we share ideas and help each other screen for our biases.
Like a rock band, the sum of our parts is greater than what we’d be on our own.
We’ve formed an investment team, where we share ideas and help each other screen for our biases.
Like a rock band, the sum of our parts is greater than what we’d be on our own.
6/ The Current Macro Landscape
They say a picture is worth a thousand words, so let’s start here. It took more than 200 years for the U.S. debt to reach $7 trillion, and the past two to add another $7 trillion.
They say a picture is worth a thousand words, so let’s start here. It took more than 200 years for the U.S. debt to reach $7 trillion, and the past two to add another $7 trillion.
7/ Don’t be fooled by the smoke and mirrors. Inflation is caused when too much money is competing for the same amount of goods. You’re right to question my assumptions, so here’s Milton Friedman in layman's terms.
8/ Right now the FED is tasked with fighting inflation.
They do this by raising interest rates (making the cost of borrowing more expensive), which they have done several times already.
They do this by raising interest rates (making the cost of borrowing more expensive), which they have done several times already.
9/ It sounds pretty simple, and it is, but like most things in life, it’s not easy.
Why not just raise rates until inflation is back at their targeted goal of 2%?
Why not just raise rates until inflation is back at their targeted goal of 2%?
10/ Here lies the problem.
According to history, every time inflation has gotten out of control the only way we’ve been able to control it was by raising interest rates above CPI. (That would mean raising rates to more than 9%!)
Hence the FED's bind.
According to history, every time inflation has gotten out of control the only way we’ve been able to control it was by raising interest rates above CPI. (That would mean raising rates to more than 9%!)
Hence the FED's bind.
11/ Liking this so far? I write a curated newsletter with my thoughts on #crypto #bitcoin and markets to simplify the space for anyone to understand.
Subscribe here: alectorelli.substack.com
Subscribe here: alectorelli.substack.com
12/ What Comes Next?
Well, nobody knows. But the best part about macroeconomics is, like poker, it’s a huge puzzle with missing information that we have to try and put together.
And of course, we can bet on it!
Well, nobody knows. But the best part about macroeconomics is, like poker, it’s a huge puzzle with missing information that we have to try and put together.
And of course, we can bet on it!
13/ We believe the FED continues to tighten until inflation is perceived to be under control. That’s the current path of least resistance.
This doesn’t mean we have to wait until inflation will return to 2%, but rather what the public deems as an ‘acceptable’ level (3.5-4%).
This doesn’t mean we have to wait until inflation will return to 2%, but rather what the public deems as an ‘acceptable’ level (3.5-4%).
14/ During the unknown amount of time it takes to get inflation under control, consumer spending will continue to drop, and an ‘official’ recession will kick in.
We’re already seeing signs of this.
We’re already seeing signs of this.
15/ Unemployment will increase (it’s only 3.6%, still very low).
Companies are already anticipating a recession, and this is beginning to take effect now.
See here for just one example: linkedin.com/news/story/lay…
Companies are already anticipating a recession, and this is beginning to take effect now.
See here for just one example: linkedin.com/news/story/lay…
16/ The markets, and risk on assets will continue to suffer.
We believe the crypto markets are amongst the most ‘risk on’ in the world, are highly correlated to equities, and are therefore a leading indicator of the market’s appetite for risk.
We believe the crypto markets are amongst the most ‘risk on’ in the world, are highly correlated to equities, and are therefore a leading indicator of the market’s appetite for risk.
17/ Stocks were next, and we’re part way through the unwinding of the everything bubble.
RE is next, and we’re seeing very early signs of an increase in supply coming onto the market.
That’s the last domino, something I’ve been saying for a while.
RE is next, and we’re seeing very early signs of an increase in supply coming onto the market.
That’s the last domino, something I’ve been saying for a while.
https://twitter.com/AlecTorelli/status/1536378477431205895
18/ The pain will increase.
People will demand more subsidies like they always do.
Is Powell delusional, wrong or will things just change?
We’re not sure, but we can tell from Covid that the FED is reactionary so they will likely be late to the party.
People will demand more subsidies like they always do.
Is Powell delusional, wrong or will things just change?
We’re not sure, but we can tell from Covid that the FED is reactionary so they will likely be late to the party.
19/ There comes a point when the FED pivots their stance.
Right now their primary focus is fighting inflation, but we soon reach a situation where there’s so much carnage, poor economic outlook and public outcry that Jerome Powell can no longer continue to tighten.
Right now their primary focus is fighting inflation, but we soon reach a situation where there’s so much carnage, poor economic outlook and public outcry that Jerome Powell can no longer continue to tighten.
20/ We can’t know for certain when this happens, but September is a rough estimate for when we’ll see the last rate hike.
21/ This is another stance I’ve been vocal about since the FED announced it was tightening.
Nobody agreed with me then (read the comments). I believe my prediction has a higher probability of playing out now than before.
As always, time will tell.
Nobody agreed with me then (read the comments). I believe my prediction has a higher probability of playing out now than before.
As always, time will tell.
https://twitter.com/AlecTorelli/status/1484035962279587840
22/ This pivot likely happens when the credit markets freeze up and people stop lending and the system is at risk of not having its grease.
The FED will need to stimulate demand and spending.
Pivots happen in stages, but begin with a pause.
The FED will need to stimulate demand and spending.
Pivots happen in stages, but begin with a pause.
23/ The market is always looking for reasons to flip bullish, especially of late, and perhaps this is the sentiment shift they need to give us one last bear market rally.
24/ Furthermore, with most everyone already on one side, and with investors having record levels of cash, if the FED gives investors a reason to flip, that’s a ton of pent up capital that could pile into risk on assets to drive this mania into a blow off top relatively quick.
25/ Regardless of whether we have one last hurrah or if the bubble has already burst, we’re eventually in for a world of pain.
We’ve lived through the longest expansion in history, and there’s only one way this inflated bubble unwinds.
We’ve lived through the longest expansion in history, and there’s only one way this inflated bubble unwinds.
26/ While inflation is our biggest fear now, this could flip to deflation during an economic bust that could last a year.
When the market suffers enough, ~80% off the ATH, they will do what everyone has in history before them: print.
An ungodly amount.
When the market suffers enough, ~80% off the ATH, they will do what everyone has in history before them: print.
An ungodly amount.
27/ The problem with a debt based system is it requires an ever increasing amount of debt to elicit the same effect.
It’s like taking in caffeine/alcohol every day and expecting to get a buzz. One needs to keep increasing the dose.
This happens on an exponential scale w/ debt.
It’s like taking in caffeine/alcohol every day and expecting to get a buzz. One needs to keep increasing the dose.
This happens on an exponential scale w/ debt.
28/ Putting It All Together
This time they need more juice for the same effect, so they print like never before and we end up with stagflation: a stagnant economy and persistent inflation, or perhaps we reinflate the bubble one last time.
This time they need more juice for the same effect, so they print like never before and we end up with stagflation: a stagnant economy and persistent inflation, or perhaps we reinflate the bubble one last time.
29/ Whatever effects we had before will be dwarfed in comparison to what comes next.
The FED will panic, and extreme, unimaginable public pressure will compel them to act.
They will throw everything they have to try and stimulate demand, including helicopter money.
The FED will panic, and extreme, unimaginable public pressure will compel them to act.
They will throw everything they have to try and stimulate demand, including helicopter money.
30/ We printed $7 trillion in 200 years, another $7 in the past two. How much will we need to print to have the same effect as last time?
IDK, but it will be enormous, perhaps $20 trillion.
Like always, they’ll be reactionary. By this point, the inescapable damage is done.
IDK, but it will be enormous, perhaps $20 trillion.
Like always, they’ll be reactionary. By this point, the inescapable damage is done.
31/ Eventually, people will feel comfortable enough to start spending again because we’re ‘out of the woods’, but we aren’t.
This brief relief and sentiment shift is temporary, and will turn its wheels to inflation once again, only this time the genie is out of the bottle.
This brief relief and sentiment shift is temporary, and will turn its wheels to inflation once again, only this time the genie is out of the bottle.
32/ All of that newly printed currency needs a home and inflation is nothing compared to what it could be.
In the late 2020's, we could have a return to a 1980’s environment, w/ inflation is back above 15%!
Saving grace = exponential improvement of tech is deflationary).
In the late 2020's, we could have a return to a 1980’s environment, w/ inflation is back above 15%!
Saving grace = exponential improvement of tech is deflationary).
33/ Velocity of money picks up and inflation will rear its ugly head again, much worse than ever before.
Ultimately, the FED has a choice between controlling inflation and boosting the economy through loose monetary policy, which really means sacrificing the dollar.
Ultimately, the FED has a choice between controlling inflation and boosting the economy through loose monetary policy, which really means sacrificing the dollar.
34/ Both are painful paths, but if history has taught us anything, it’s that, without fail, the least painful path of the two is always to print more.
Like being tempted by the power of ‘The Ring’, in Lord of the Rings, it’s an uncontrollable urge too great for man to pass up.
Like being tempted by the power of ‘The Ring’, in Lord of the Rings, it’s an uncontrollable urge too great for man to pass up.
35/ Ultimately, the FED sacrifices the dollar and attempts to print its way out of this mess.
Our belief is that a society would rather tolerate more employment and higher prices than being out of work and stuck in a depression.
Our belief is that a society would rather tolerate more employment and higher prices than being out of work and stuck in a depression.
36/ The FED will do whatever it can to avoid the latter, even if it means destroying the value of the dollar.
In our experience, things move slower than most pundits predict, so this probably takes 7-10 years to play out fully.
In our experience, things move slower than most pundits predict, so this probably takes 7-10 years to play out fully.
37/ What Happens Next?
That’s a story for another blog, but honestly, we’re not entirely sure. Let’s let one thing play out at a time.
That’s a story for another blog, but honestly, we’re not entirely sure. Let’s let one thing play out at a time.
38/ We highly recommend the work of @RayDalio and The Changing World Order and Principles for Dealing with the Changing World Order, as it’s the single best piece of reading on this subject that we’ve come across.
Here’s a video summary.
Here’s a video summary.
39/ We’re nearing the end of a 75 year long term debt cycle that plays out at most once in a lifetime, and b/c of that, most people have never experienced it nor are prepared.
Being caught off guard can lead to ruin, so educated is the single best way to protect yourself.
Being caught off guard can lead to ruin, so educated is the single best way to protect yourself.
40/ Typically this time period is characterized with restructuring of the world order, debts and the monetary system, which sometimes happens only after wars and revolutions.
41/ We believe a peaceful transition is possible if we work together toward a common goal and remember that the problem isn’t each other but rather that we have a system that isn’t working for us.
42/ All countries who can print, will print, and therefore follow a similar path to the U.S., although we subscribe to the ‘Dollar Milkshake Theory’ that it’s through the strengthening of the dollar that other fiats collapse.
See @SantiagoAuFund for more.
See @SantiagoAuFund for more.
43/ Put another way, the dollar is the best of the shitcoins in the fiat system.
Although we expect the USD to ultimately underperform hard assets, in the short term we believe there is at least a 30-50% chance of a liquidity crisis causing forced selling
Although we expect the USD to ultimately underperform hard assets, in the short term we believe there is at least a 30-50% chance of a liquidity crisis causing forced selling
44/ If this happens, the USD is poised to appreciate versus virtually all assets.
This will be short-lived however as the Fed’s response, printing more money, will cause hard assets to rise again at the expense of the dollar.
This will be short-lived however as the Fed’s response, printing more money, will cause hard assets to rise again at the expense of the dollar.
45/ As fiat currencies begin to collapse worldwide, we can finally opt out of the system by buying #Bitcoin, taking self-custody, and storing our wealth in an asset which cannot be debased by government manipulation (which is an invisible form of time theft and tax).
47/ What Are We Betting On?
When it comes to investing, it’s crucial that one's time horizon matches their thesis.
Since this is a long term macro view, investments we believe will perform well during this part of the cycle are hard assets whose supply cannot be easily debased.
When it comes to investing, it’s crucial that one's time horizon matches their thesis.
Since this is a long term macro view, investments we believe will perform well during this part of the cycle are hard assets whose supply cannot be easily debased.
48/ Commodities, including gold and silver should do well.
For a higher risk, more leveraged bet on the same narrative, miners are promising.
For a higher risk, more leveraged bet on the same narrative, miners are promising.
49/ Cash is great so long as we’re in a bear market because the decline happens faster than the money bleeds to inflation.
Overall, this leads to an increase in purchasing power, which is really what matters.
Overall, this leads to an increase in purchasing power, which is really what matters.
50/ As I’ve come out with before, it’s the best asset to own during a bear market.
51/ Right now we’re mostly in cash, with some small exposure to gold, silver and miners and Bitcoin and Ethereum.
52/ When we hit the influx point and it looks like a FED pivot is in sight, either because inflation concerns have subsided or the market cries mercy and the FED is forced to pivot, we believe this is a generational opportunity to profit from scarce assets, most notably #Bitcoin.
53/ Alts act as leverage on the market and move faster than Bitcoin, both on the way up and the way down.
Understanding market sentiment and the larger macro picture is crucial to timing the crypto market.
Otherwise, one holds the bag when alts drop 95%, as most have done.
Understanding market sentiment and the larger macro picture is crucial to timing the crypto market.
Otherwise, one holds the bag when alts drop 95%, as most have done.
54/ Our focus is to use our market expertise and apply a macro overlay to #crypto and ride the wave of a tech being adopted faster than the net.
We thrive in uncertainty/pressure, and love the #poker component of managing risk & fun of looking for the next asymmetric bet.
We thrive in uncertainty/pressure, and love the #poker component of managing risk & fun of looking for the next asymmetric bet.
55/ @leet888 and @0xGhostRider and I are launching a crypto fund, Double Up Capital, which will bet on and intraday trade blue chip assets, to layer-1 smart contract protocols, play to earn gaming, decentralized finance (DeFi), metaverse, and early-stage token opportunities.
56/ We’ll be sharing more details in the coming weeks and months.
Follow @AlecTorelli to be alerted when we have some updates.
What are your thoughts on the markets?
Follow @AlecTorelli to be alerted when we have some updates.
What are your thoughts on the markets?
57/ Also, if you enjoyed this post, please share the original tweet!
https://twitter.com/AlecTorelli/status/1544329088181145602
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