Super interesting and informative--somewhat scary, too.
Cap, have you read "The Big Print" by Lawrence Lepard? He basically comes to a similar conclusion, but believes that the collapse of the dollar will cause a significant rally in Bitcoin. I imagine you think Bitcoin would be similarly susceptible to a major correction as you noted for gold and silver. Would love your thoughts.
I was wondering the same thing as I read through it...love to hear Cap's perspective. My thought is that btc would initially plummet along with risk assets as the crisis hit, but would go parabolic once the US gov responds with a liquidity injection.
Liquidity drives Bitcoin. More liquidity means more applied across the risk curve. Big falls, and big rises. It remains a risk asset, not a safe haven.
Excellent read as always! I don't doubt that the USD will breakdown to a lower stratosphere, but I am not convinced this happens before another strengthening event in the USD.
Despite flaws, no other currency matches the dollar’s depth, liquidity, and institutional backing. Alternatives like the euro or yuan lack credibility in a full-blown crisis. In a liquidity crunch, demand for dollars spikes as firms and governments scramble to service dollar-denominated obligations.
This is how I see it playing out: Phase 1: scramble for dollar liquidity → USD spikes. Phase 2: realization of policy-driven weakness → USD falls as investors rotate into other havens. Just in quicker fashion than before.
Great piece, also resonating with Brad W. Setser(on cross border capital flow) & Michael McNair(on his read of Miran's plan to rebanlance global trade)'s work.
Just want to flag that right now the confidence of foreign capital is boosted by AI concept and this has largely made the impact of weaken dollar negligible
1. If foreigners sell, what's the clearing mechanism? Does the dollar collapse to find domestic buyers? Does the Fed monetize? Does the Treasury shift issuance short-term?
2. What's the game-theoretic equilibrium? If China/Japan/EU know selling US assets tanks their own currency reserves and export competitiveness, what's their optimal strategy?
3. What triggers the shift from gradual to crisis? There is no clear catalyst that converts a slow grind into a 2008-style collapse.
4. How does the "exorbitant privilege" debate resolve? Structural dollar demand from trade invoicing, commodity pricing, and banking (Eurodollar system) creates a floor. Where is it?
I like q3. CF refers to a "shock" which acts as a force function for foreign equity liquidations but hasn't the administrations' $$-depreciation intent been telegraphed by now? Certainly, foreign equity holders lived through liberation day. Also, I'm sure they now take S Miran's paper v seriously given tariff implementation, his new position and expanding influence. If they weren't before, they're $$ hedged now. So, how will the shock come about?
Very very good. Been reading brad for years. I think either he or Matt klein pointed out weird inflows from korea recently. Brad did a whole bit on taiwan insurers a while back too. I'm into euro equities atm
Super interesting and informative--somewhat scary, too.
Cap, have you read "The Big Print" by Lawrence Lepard? He basically comes to a similar conclusion, but believes that the collapse of the dollar will cause a significant rally in Bitcoin. I imagine you think Bitcoin would be similarly susceptible to a major correction as you noted for gold and silver. Would love your thoughts.
I was wondering the same thing as I read through it...love to hear Cap's perspective. My thought is that btc would initially plummet along with risk assets as the crisis hit, but would go parabolic once the US gov responds with a liquidity injection.
Unlikely to benefit at all in that environment cause the surplus of dollar liquidity has been the primary driver of BTC.
Liquidity drives Bitcoin. More liquidity means more applied across the risk curve. Big falls, and big rises. It remains a risk asset, not a safe haven.
What about things like hyperliquid? Assuming everything falls?
What a banger report
Bless the maker and his works
Excellent read as always! I don't doubt that the USD will breakdown to a lower stratosphere, but I am not convinced this happens before another strengthening event in the USD.
Despite flaws, no other currency matches the dollar’s depth, liquidity, and institutional backing. Alternatives like the euro or yuan lack credibility in a full-blown crisis. In a liquidity crunch, demand for dollars spikes as firms and governments scramble to service dollar-denominated obligations.
This is how I see it playing out: Phase 1: scramble for dollar liquidity → USD spikes. Phase 2: realization of policy-driven weakness → USD falls as investors rotate into other havens. Just in quicker fashion than before.
Great piece, also resonating with Brad W. Setser(on cross border capital flow) & Michael McNair(on his read of Miran's plan to rebanlance global trade)'s work.
Both I very much respect. Also you, of course.
Just want to flag that right now the confidence of foreign capital is boosted by AI concept and this has largely made the impact of weaken dollar negligible
Questions for you CF:
1. If foreigners sell, what's the clearing mechanism? Does the dollar collapse to find domestic buyers? Does the Fed monetize? Does the Treasury shift issuance short-term?
2. What's the game-theoretic equilibrium? If China/Japan/EU know selling US assets tanks their own currency reserves and export competitiveness, what's their optimal strategy?
3. What triggers the shift from gradual to crisis? There is no clear catalyst that converts a slow grind into a 2008-style collapse.
4. How does the "exorbitant privilege" debate resolve? Structural dollar demand from trade invoicing, commodity pricing, and banking (Eurodollar system) creates a floor. Where is it?
I like q3. CF refers to a "shock" which acts as a force function for foreign equity liquidations but hasn't the administrations' $$-depreciation intent been telegraphed by now? Certainly, foreign equity holders lived through liberation day. Also, I'm sure they now take S Miran's paper v seriously given tariff implementation, his new position and expanding influence. If they weren't before, they're $$ hedged now. So, how will the shock come about?
Very very good. Been reading brad for years. I think either he or Matt klein pointed out weird inflows from korea recently. Brad did a whole bit on taiwan insurers a while back too. I'm into euro equities atm
Fucking banger
What an absolute master class on Global Macro. Cheers to you mate.
Staggering 😳 thanks for sharing 🤙
Great read and looking forward to the interview with Jared!
Very very interesting, thank you. But what will happen to bonds?
It’s unclear and path dependent of where inflation is and if a weaker dollar causes some stagflation.
Awesome report. One question - if the tariffs are declared unconstitutional, how would that affect your analysis, or would it? Thank you.
Doesn’t this argue to hedge with JPY since the carry trade unwind will flow back to yen. Should be superior to euros. @CapitalFlows - do you agree?
Awesome work thank you!
I understand you use Interactive brokers.
What risks does interactive brokers have or other brokerage houses in general have in this extreme situation.
What’s the changes of loosing our money in the account
I think IB is the best option
Thanks
Incredibly insightful. You did an incredible job tying everything together into one amazing report.