I’ve been posting pretty much weekly here in the newsletter, yet I slipped up again last week when I tried to overcomplicate things.
In my series on ego and how it makes us stupid, I had my next post lined up about anger. However, current events provide a wonderful perspective on some of the topics we have been touching on already.
Biased opinions
Three weeks ago I wrote about an arbitrary tweet thread full of different opinions and why everyone in it was wrong due to their own biases.
In the last two weeks, there is a giant version of this playing out on Twitter and all media.
It started with the banking palava (palava = British slang for a situation unnecessarily stressful or difficult)
…which may or may not be a banking crisis
…which may or may not lead to the entire upheaval of the US dollar as the world’s reserve currency.
This is extra interesting because it is not only a shouting match about what has happened. It is a meeting of prophets predicting the future of all our money and economies at a global scale.
Obviously, I went down every rabbit hole of every economic theory I could find and have had the time of my life geeking out. This was of course matched with increasing worries of how on earth I might put this all together.
Where I messed up
It was supposed to be a short post giggling at the biases in some different opinions people are throwing out there and I suffered minor work-scope creep leading to a fully charged attempt at working out how the entire world works.
What was also dumb is trying to write a long-term view piece about current affairs. When the situation is ongoing every day there are more pieces to add and just as you finish one thing the entire thing needs rewriting…
Curiously the only time in the 2 years of this newsletter that there was a major break in my writing was when the Ukraine war kicked off. I went in a spiral of researching the history of dictatorships.
I was fascinated by the psychology of the leaders, their citizens and how and why dictators keep emerging throughout history.
My idea for an interesting thought piece turned into three months of quietly revealing to myself that I wanted to write a book and then freaking out and not writing a book.
So before this spirals out of control again I decided to limit myself and post something.
Being passionate about a topic is great for a writer but the unwieldy feeling of trying to get on top of everything so you can create a perfect masterpiece isn’t.
“Perfect is the enemy of progress”
Now we’ve finished that quick lesson about my own neurotic pursuit of brilliance actually making me useless, let’s launch into trying to un-complicate things.
The plan
I’m not an economist so will start with the healthy opinion that I am not an expert. I am just here to work out:
Why any of the loudest voices are saying the things they are saying?
Why are they being listened to?
What are the opinions of things we aren’t hearing?
Who can we trust?
What if any of it is true?
That’s simple enough right.
The situation - Banks
Banks have been going under and people are worried about their money disappearing.
(South Park explains banks losing your money)
Five banks have collapsed or gone insolvent due to a mix of bad investments, mostly due to holding long-term government bonds at low interest.
Due to inflation from Covid (amplified by the subsequent war in Ukraine), and interest rates have shot up. These bonds are now worth less than was paid for them and the banks had some healthy billions missing from their balance sheets and owe more money than they have. The term for this is insolvent.
First collapse
Silicon Valley Bank (SVB) tried to claw some money back, in the process worrying investors which then lead to a bank run as all their customers tried to save their money before it collapsed.
SVB was primarily a bank for startups and VCs and was deeply embedded in the tech industry. As SVB was the first to go there has been a lot of blame on tech and VCs. SVB had riskier debts on average and the VCs worried about SVB raised alarms and helped drive the bank run.
Currently, it is thought about 160 other banks are also ‘insolvent’.
Is this bad?
To be fair 10-20 banks go insolvent each year so it’s not like the odd bank failure is that alarming.
SVB was the second-largest bank failure in US history and Signature bank was the third largest, which does make the context more concerning.
Charles Schwab is currently under scrutiny with $7 trillion under management (according to Wikipedia…)
With Credit Suisse failing in Europe it’s not just US banks, the German Deutsche bank is under severe stress.
Regardless of whether a bank is insolvent, no bank can actually survive a bank run if all customers try to withdraw their money. If that money is loaned out to other people they don’t have it. Hence central government banks provide debt facilities to banks so they can stay liquid.
(Robin Williams explains why bankers love of liquidity)
As long as your bank doesn’t make too many bad loans such as the mortgage crisis in 2008 and there isn’t a bank run then you should be okay.
(Simpsons explain bank runs)
There are further worries that many banks holding commercial property loans are going to get screwed because we don’t use offices half as much.
Being a total loser I read an entire 50-page research paper on credit risk in commercial property. It was totally not worth it but apparently, when the world isn’t switching to remote work we see 5.5 times more banks defaulting when interest rates are at 5%.
(So if commercial property is more unpopular I guess even more banks fail..?)
If banks continue to suffer losses and then bank runs government will be forced to prop up their bad loans by paying out to their customers. We could end up with trillions of dollars being printed leading to further inflation combined with a recession.
The last weeks saw a massive reversal in Quantitive Tightening and a cheeky 0.5 trillion of dollar printing to ensure that depositors don’t lose their money.
The other situation - The media divide
Media loves a crisis. Shocking news is much more interesting than a few facts about current affairs.
Those launching theories into the social sphere of doom are of course being rewarded with viral views and listeners. People are interested in hearing what they want to believe and this is only easier for them to find.
The explosion of content creators being rewarded by saying whatever get’s views leads to more and more people finding whatever makes them feel right.
As we get more and more used to hearing things that agree with our world view we find things that oppose our ideas increasingly bonkers. It’s as if we are in a world of idiots.
Ideas that push our own views further away from the centre attract our reinforcing the effect of turning us into a lunatic in the eyes of everyone else…
The US and the world at large is more divided by how easy it is to isolate our own thinking as righteous. Just look at Brexit or the current French pension chaos and Dutch farmer’s party surprise.
The other other situation - Bitcoin
Bitcoin has been steadily growing in presence over the past decade based on the theory that money should be independent of governments and banks. To it really become a world currency that would require a global upset to occur.
So any theories on world upsets are delightful for the Bitcoin community. They are waiting, somewhat impatiently for everything to descend into chaos so that they can finally be rewarded with Bitcoin taking its rightful place on the moon. Of course, this would also make them crazy crazy rich.
If nothing else they are really good at making memes. (which given the attention economy of late is a solid plus for the Bitcoiners compared to the bankers or the FED…)
The other other other situation - World currencies, debt cycles and economic divides
The biggest world power has been the controller of the world’s reserve currency for many hundreds of years. Each power typically lasted 75 years (+/- 25) before a major shift occurred and a new world currency came about.
This shift is really a once-in-a-lifetime event so every time it happens it appears like all hell has let loose. Yet this is actually a totally regular thing. Those of us alive today have only ever known USD as the world currency and so we are used to the fact that whenever there is a global upset everyone relies on the reliable USD.
The current levels of debt have never occurred before in human history and at some point, something needs to be done about it…Right?
Not only are we more divided politically we are divided economically.
Of the people alive today there is more inequality than we have ever seen and with social media, people can feel this directly every day as they have a close-up view of a life radically different to their own.
So unlike my post three weeks ago about people offering biased views about one graph, we have a little more information to deal with here.
Now that I’ve brought you all up to speed let’s look at what people are actually saying.
Who says what
Ray Dalio - He published his theory on the rise and fall of empires 2 years ago.
“The Changing World Order: Why nations fail and succeed”.
According to him the power of the world will continue to shift in a natural cycle that it has done for centuries. Here we see Spain an China as world powers give way to the dominance of the Netherlands and then Britain and then the US.
He predicts that the US is in the decline phase and has been for a while. Increasing debt will become make the economy more fragile and political divide and upset will lead to it’s inevitable collapse as the currency falls into inflation and it’s trust is lost.
Since he published the book, Covid happened as well as BLM and then the war in Ukraine which continues to drain the US of finances. Ray talks about 5 types of war:
trade war
technology war
geopolitical war
capital war
and of course military war
He avoids stating anything specific about events in the next weeks or months beyond saying we are close to the end of the cycle for the US. His piece here on the SVB collapse and the position of the FED is worth a read.
With Russia recently agreeing to switch its currency for international trade to Chinese RMB wherever it can (Asia, Africa, South America) there are increasing signs of the dollar facing a real crunch point.
Can you trust this guy?
Ray has studied economics his entire life and is a fan of his home in the US and doesn’t seem politically motivated.
Obviously publishing a book that predicts a potential doomsday for the US might seem like a way to make money (although it hardly drew mega attention at the time). Compared to just running his successful investing firm it would be a very odd choice for him to make money.
Personally, I get the vibe that he just enjoyed geeking out putting all his data together and came to a worldview he thought was really worth people knowing about.
Everything is well-researched and it feels like he is publicising an important economic theory that modern financial systems expect no longer apply because America is too great to fail. Just like Britain was before that and so on and so forth.
The banks message
Goldman Sachs expects rates will go up and stay up for a good amount of time and slowly the economy will get back in line so we can start growth again and avoid a giant recession.
J P Morgan admitted there are conflicting issues with stopping inflation by raising interest rates versus risking the banks’ exposure to debt.
However, they do not believe we are between a rock and a hard place. Ultimately inflation won’t be too bad and it’s not like the banks will fail so the FED is between a rock and a soft place. They reckon people should stop panicking and catastrophising things.
Can we trust them?
So according to the banks, everything is fine and we should carry on giving them our money.
Well they need our money to survive so it would be unwise to really take what a bank says too seriously beyond any factual statements about their assets.
They could be right but it would be wise to see some external evidence.
Economists
I listened to the Economist and Debunking Economics who both are fairly trusted sources for becoming wise about economies.
They conclude that banks are in a tight spot as they can’t trust government bonds. Equally can’t afford to be making as many loans and have a squeaky bum feeling. Reduced loands is then bad for business.
They predict a very realistic scenario of a recession being triggered by a collapse in the faith of banks along with bankers’ collapse in bond faith or their ability to make loans.
These seemed like reasonable conclusions from people that know more than me and didn’t seem to be selling anything. I don’t know about their funding sources or real experience.
Economists in general relying on principles of modern monetary theory have spent their entire lifetime with reliance on the US dollar. So their lack of acknowledging potential wider issues is concerning. Many nations lately have fallen into debilitating levels of inflation such as Ghana, Argentina and Egypt but the global reliance on the dollar during times of stress hasn’t happened in the way we would expect.
They also didn’t consider cryptocurrencies in their assessments which leads to the next big theory.
Balaji and his Million dollar Bitcoin bet
Balaji S. Srinivasan has been a growing popular figure over the last few years with his forward thinking thoughts on technology and humanity. He expects a lot more banks to collapse and be backstopped by the FED leading to hyperinflation and trashing of the USD.
He thinks that USD as the major reserve currency is over and that investors should move to Bitcoin before it is too late.
He has bet a million dollars that Bitcoin will be worth 1 million dollars within 90 days.
Here is his bet and the accompanying evidence of the issues with the banking sector and the FED
Strangely he has put 1 million USD into the bet and if he wins he gets one Bitcoin. So basically he is buying a single Bitcoin at 1 million dollars today which seems a little deranged.
However, this bet can be considered marketing towards the urgent issue he claims as Chinese RMB becoming the world currency and people being stuck with valueless dollars. A further issue he is worried about is the US state launching a monetary system that exerts ultimate control over citizens using CBDCs (central bank digital currencies).
He is raising the ‘alarm’ and hoping to get attention from anyone and everyone to buy Bitcoin and put it in cold storage before it is too late.
Like Ray Dalio, he also has a book “The Network State” that seems relevant right now. (Bonus - its available for free).
The basic premise is that in our digital world, new nations can be formed digitally and rely on their own rules and currencies. Just because we are terrestrial beings born in a given land doesn’t mean our lives should be dictated by that when our virtual selves can join a new state. In the long run, this virtual state could buy physical land.
Ideally, this virtual state would use cryptocurrencies like Bitcoin as its currency which cannot be controlled by any state or subject to inflation.
So the current world events could serve as a trigger for his world theory to kick off.
Can we trust him?
It is possible that he is hoping to push people into a system he would prefer. He also holds bitcoin himself so if it goes up a lot it could pay out his bet. Equally, it’s a very embarrassing bet for him to make to potentially lose all his credibility.
He is certainly more successful and smarter than me with an impressive history. He has put himself into a very verifiable position with this bet. We will all know if he is wrong.
He has never made big claims before on the future except for that time in January 2020 when he predicted that virus in China would cause a pandemic and a series of accurate ideas on long-term trends like face masks, remote work and countries 180 reversing on decisions…
On the subject of Covid, this graph below looks disturbingly like the Covid graphs of spikes in cases followed by deaths (but instead we have debt followed by bank failures).
He certainly was better at understanding the potential of a virus and working out where a graph would lead before the rest of us became experts…
That all said he is coming under heavy criticism for not understanding the bank industry from people who probably know more than me about banks. So I wouldn’t ape all your money into Bitcoin just yet!
(This was a good video [1hr20] of him having his theories grilled by people that know about banking industries. They largely appreciated his arguments but didn’t really believe him. At the end, they did say that despite not believing his bet on hyperinflation they do now all have cold storage wallets and a slightly increased Bitcoin allocation.)
Nassim. N. Taleb
The king of ‘Black swan’ events and making money out of a crisis. His books on economic theory and building an antifragile portfolio are widely regarded as some of the best thinking on trading and not making mistakes.
He is quite certain Balaji is bonkers and doesn’t understand a single thing about banking and that Bitcoin will go to zero.
Since day one he has hated Bitcoin and hasn’t changed his position.
When it comes to banks having an issue according to him they are probably fine and going to make money.
So should we trust this guy?
He is a genius who has outperformed most traders due to his ability to understand how a crisis impacts the world.
Yet he is also as stubborn as a bull and on Twitter seems to prefer trolling people to engaging in healthy conversation.
I loved his books but find his Twitter account to almost be like a parody version of his opinions. It does seem like he prefers to shit on people than even engage with any part of the truth they might say.
Worth heeding his advice but just the way he behaves is off-putting.
Robert Kawasaki
The author of Rich Dad, Poor Dad and a celebrity money advisor. He ran some emergency podcasts regarding the situation.
The first podcast stated that the main banks will survive whilst community banks are screwed.
The second stated that BRICS (Brazil, Russia, India, China, and South Africa) are coalescing to change the major world currency and we will see the dollar collapse.
So do we trust him?
Now what’s interesting here is that I don’t like him and I never have because he gives me slimy vibes.
I like to take the stance that all humans aren’t as clever as they think they are and that I don’t know that much either. I like to teach the things that I know to people who haven’t quite worked them out yet in a way that I’m sort of on their level but happened to see something first.
He goes for more of the self-professed genius who tells people they are dumb for not making money and that they can make money easily by following him. Ewww. Even though I agree with 80% of his economic principles I still just, ewww. Like he has MLM scent about him…
So anything he says gives me instant alarm bells.
Yet he is in agreement with Balaji and Ray Dalio on their bet the USD will collapse and I am hard fangirling them lately. Yet when it is him saying it I’m 10,000x more sceptical.
(So instead of proving how biased others are I seem to be proving how much of a biased idiot I am.)
He certainly has a great network of smart people he brings onto his show and if I get over myself he has helped a lot of people and probably wants to get as many facts and useful predictions to people as he can.
Publishing ‘emergency’ updates is certainly a good time for anyone in media and if he is actually just looking at facts for these updates then good for him.
What is media saying?
Well up until yesterday not a lot. They commented on the bank failures as they happened of course but others genuinely minimal coverage about the idea of the dollar collapsing.
Four days ago on the BBC news site 2 of the top 3 articles were cute animal stories.
And the most promoted “must-see” was a zebra trotting around Seoul…
This left me wondering if I had suddenly become one of those weirdos who gets hard into conspiracy theories.
Or was the media hiding all of this? I mean Duuuuude.
I’d read the books, I’d listened to all the podcasts, I’d watched the YouTube videos. I’d started writing a blog that was turning into a monolith….
I have 10 other sections analysing the FED, politicians, VC’s other leading tech moguls. But I’ll save you from all of that because this is getting too long…
Balaji tweeted this and I was like yea - I don’t get what’s going on…
And then yesterday this happened on various major news sites.
Fox news talk about the potential of Saudi and Iran joining Russia in using Chinese Yuan for international trade
CNN ran this thought piece from their reporter, Fareed Zakaria, on the potential that the dollar is going to be undermined. The US has been weaponising the dollar as their last great power and it is going to backfire on them. Actual CNN.
And my favourite.
The President of Kenya casually gave out some free advice to his citizens to sell all of their US dollars before it’s too late (like in a few weeks it will be too late)
The FED and US gov
Obviously, they have been scrambling to prop up the banks whilst also saying the banks are fine.
At the same time, they have started a witch hunt on crypto filing lawsuits against the publicly listed CoinBase and then today taking on the world’s biggest crypto exchange Binance.
At this point, I have no idea what’s going on and would be dumb to pretend I understand their positions when they know a tonne more than I do.
Given the recent collapse of Terra Luna system and the FTX Exchange and BlockFi it is possible that they are trying to protect their citizens from further exposure.
CoinBase from all accounts has played everything by the book since day 1 to be legal and accountable to their customers so it seems odd.
Naval Ravikant, another tech mogul and thought leader who built AngleList doesn’t have an optimistic outlook for them.
Should we trust them (or Naval)?
By this point, you should probably get the idea that we shouldn’t trust anyone or ourselves. Just add more data points to our shit-pile confusion and remain trustless.
Voices not heard
What’s interesting is that people with middle-of-the-road opinions aren’t really being heard and often do not bother to say much anyway.
I’ve spoken to a few friends who are older and wiser than me and with a lot better record of building their portfolios. They largely think the US will survive and some stocks and banks will go down. We’ll have high-interest rates for a while but in a few years, it will settle down.
China has never led innovation and only copied.
Certainly, a boring view that doesn’t get any clicks or attention in a world that only cares about doomsday or cute animals…
Who am I to claim to know more than them or anyone else here..?
Summary - What fudge do I do now?
So there were a lot more voices and ideas I wanted to put in this that would just get a bit silly.
There is of course the other situation around Trump and then the mind-boggling things AI has just been doing.
The question is what do you do next? Do you throw all your money into Bitcoin or Chinese Yuan or something else?
So who is correct?
Ultimately like the post a few weeks ago found, there is no such thing as a right answer. This is especially relevant when predicting the future.
Even if someone predicts a result correctly they might not be correct for the reasons they think. There is a scenario where good thinking gets a bad result and bad thinking gets a good result. (see my post about thinking in bets)
Give yourself a shot at luck
I interviewed Ben Hunt-David who won a gold medal in the Olympics. He wrote an entire book about his strategies to win based on the fact he wasn’t a brilliant natural rower but he could out-think and out-train his competition.
I asked him if he rowed his Olympic final race 100 times and how many times he would have won.
He said optimistically 30 times.
He could have had an accident or mistiming of a stroke. A competitor could have just had a better day.
Even with every ounce of his decade of training to prepare for that moment, he wasn’t truly in control of his future as it unfolded and was a gambling man as his approached the start-line. It so happened luck was with him.
Will the dollar collapse and will a recession even happen?
There is a scenario where more countries drop the dollar. More banks fail and more money is printed and inflation gets worse. More countries drop the dollar and so on and so forth.
There is also a scenario where things work out. Customers trust the FED will protect their money so don’t bother running on banks and we all ride out inflation safely.
There are plenty of more bizarre scenarios in the same way Covid came out of nowhere. A volcano or an asteroid could devastate China and its economy for all we know…
Until something happens all we have is theories and statistical probabilities of each theory.
I have a few ideas on what will happen for another post but I guess we should talk about what to do with your money when you aren’t an expert.
What to do with your money?
Warren Buffet heralds his success on not being dumb and never losing much money. Most of his growth came from a few patient but very lucky decisions that really paid off.
If you are young then you can afford to make some risky decisions around what you believe and maybe crypto isn’t a bad shout.
If you are older then you probably don’t want to put all your money into bitcoin…
In times of crisis assets that don’t depreciate such as gold and property are wise.
But we might not even be in a crisis so perhaps whilst people panic it’s a good opportunity to buy the things that are going down for no good reason…
De-risk
How much you risk or move depends on how much probability you allocate to a prediction of what will happen. Balance that with what you think is a good way to hedge against it.
As always a diverse strategy that gives you exposure to upsides whilst managing your downsides is the best thing you can do.
When you accept there is no “right thing” to do you can at least make progress on avoiding too many wrong things and not worry too much.
And on that good luck and hopefully, everything is fine and there is no world war 3.
hah, this was an epic piece Sam! super curious to see where this all goes. I'm particularly interested in what you think the effect all of this USD collapse will have on the rest of the world? like, what are some of the ground-level impacts we'll see?
also, does the US losing it's power of the USD mean it loses a lot of its sway politically and through trade? is this China's "in" to overtake the US?
Super super interesting (and scary?) times.