Bounty: How may we crash?
We are in a crypto winter and I have been thinking alot about the economy and our times in general.
I am convinced that the issue with our economic system at this time is debt. I believe the fiat system in place at this time is sort of a pyramid and ponzi scheme that is unsustainable long term. I am not 100% sure that it has to collapse, but it certainly needs to contract.
Wall Street is aware of the debt problem
Shocking to me is that more and more regular Wall Street people are talking about this and identifying this very clearly.
Ray Dalio is a great example of this. He recently published a book called The Big Debt Crisis you can download it for free on his website.
But there are many other examples.
This week I watched a truly wonderful video of Druckenmiller
This Video was fantastic. Druckenmiller has a very clear view that many companies and maybe banks are over leveraged, which must lead to some sort of debt bubble.
Debt must collapse somehow
So to me it seems obvious that we are in a situation where this debt growth has to be addressed.
There are many charts on the internet showing that we have more and more debt every year. One way to deal with it is of course low interest rates. As it is easier to service debt when interest rates are low.
The issue of low interest rates produces is that more and more debt is created, and companies and people are over-leveraged and owe lots of debt, which in essence is a risk to every entity and the economy as a whole.
How this may resolve itself
I think Mark Yusko says is very well in this interview on CNBC
Too many companies are over leveraged, in fact he claims 14% of S&P companies cannot service their debt over the next 3 years according to their earnings estimate.
This is what Druckenmiller calls Zombie companies. When the economy slows down a bit, this means a lot of companies will go broke and default on their debt.
The slowing of the economy will happen, among others because of the tariffs by the US as well as tightening of monetary policy.
Here are some Cause and Effect relationships as I see them:
Central Banks Globally are tightening monetary policy
Trump is starting a trade war, which increases Tariffs and artificially slows down productivity and reduces corporate profits everywhere. It simply will be more costly to make stuff everywhere due to the very connected global economies and supply chains.
The Result of 1 and 2 is less investments due to less free money and less profits for companies and slowing down of the economy overall
This will lead to the weak companies going out of business and defaulting on lots of their debt.
These defaults will create a similar debt crisis as we had in the 2008, but this time every company that has or needs debt is affected. Private people will also be affected as they are also over-leveraged with student debt, housing debt and consumer debt.
This will create a cycle that slows down the economy which in turn will create more debt defaults etc.
What will be the result?
I have no idea how this is going to resolve itself. But there are a few things I am doing:
I am not just going to go long on stocks. Instead I will use a sort of trend strategy that forces me in and out of the market. I think it is imperative that when the market is crashing I have a mechanic that keeps me out. As a result I have moved my 401k into an IRA where I follow such strategy.
Having Cash is probably a great idea when things go down, however that too comes with risk as the debt crisis can cause a collapse of the Dollar
Crypto is imho the most likely winner of a potential Debt collapse, but it too will get sold when people are getting killed in the markets. I thus expect crashes to also be bad for crypto markets. So holding crypto is key for me
Because crypto will be very volatile and get hammered when people get squeezed, it is important to also short the crypto markets during bear cycles or hedge them. This can mean holding cash or even shorting and making more crypto as their prices go down in the short term.
Holding Gold and recession proof assets may be a good idea.
Fun times ahead!
What are your thoughts?
I would like some feedback on my model of how this is going down. Explain to me where I am wrong and what I need to adjust in my thinking.
Or if it is a good model, exlain to me why you support it.
I am giving out a Bounty for your efforts, which I will distribute to the answers that teach me the most.
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I mostly agree, here is what I have been considering
To sum up, I am holding a mix of enough fiat to survive some time. An equal amount of gold and some more stocks. Then the majority in crypto. Lets see how it works out.
Interesting! Thank you!
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Dear @knircky, it is very interesting what you are writing and it seems that the next crypto bubble can happen if traditional financial system will get a broken like in 2008.
That crisis generate Bitcoin, but now there are a lot of cryptos which can get benefit of another financial crisis.
I think institutional investors are keeping crypto market in the bottom thanks to their money power, but when they will no more able to keep this situation we will see another bubble but with more strong power than last year, this is my tought and your post is somehow give me a credit...
Thank you!
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I agree with your strategy.
One thing I read recently here on Steem is that the dollar has a lot of life left in it.
As more and more currencies begin failing, people will shift their funds to the dollar.
Essentially ... the ships are sinking. As the weakest ones go, their value will shift to the strongest ... the dollar. This will prop the dollar up for an extended period of time ... and maybe even give it an upward price pressure (literally or relatively) ...
Additionally... I don't know how much longer Bitcoin can be held under water until more and miners are forced out of business.
We will see.
The economic crash will come - no doubt. Everyone know that it comes more or less regular.
In Sweden a lot of economicmagazin is telling us "The crash will come soon" and of course - the psycholigical of that is that the crash comes earlier. People are more afraid to hold.
Personaly I think a economic crash will also strike hard at crypto . It is a high risk and Investors will try to find low risk.
Some people think that a economic crise will be a benefit för crypto. But I do not agree. Thoose idealist that like the freedom idea with crypto are to few. If we do not get big Investors- the value will not go up.
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I agree, the thing that a downturn will create is liquidity issues. Everyone will need money so no-one will invest into a risky asset.
The system was designed to collapse, ever since 1913 (the fed reserve).
Central bank fiat has no other end destination.
It's mathematically impossible for any other result.
The trick is in how much of real assets (anything tangible) can be transferred from people, to the wealthy few - before the crash happens...
But it will happen , it has to.
There is no other option.
This has nothing to do with free market capitalism..
I am not entirely sure about that. While the system works like a ponzi scheme the difference is that there is a lender of last resort, which translate to a machine that can print money at will that can feed the ponzi scheme. This is different to you and me if we were to start a ponzi, we would need dollars or bitcoin or some form of currency we don't control or cannot just create.
For instance the FED can rescue any loan it wants, simply by buying it up, using freshly printed money. As a result the system can be develeveraged without collapsing if the FED wants to. This would lead to extreme unfair wealth distribution, which may cause political issues but technically this is the only ponzi i know of that does not need to collapse.
Money is issued ( with interest) by the fed.
That then needs to be repaid .
There is never enough money to repay the debt because the interest part of the money has never been printed.
The fed can buy debt, thus it can always feed the pyramid. Thats the difference. So i think because of this texhnically it does not need to collapse.
What am i missing?
It has to collapse.
With further increased printing of money it becomes worth less and less each year..
...eventually the money will become worthless - people will not buy government bonds. Countries will stop buying it or using it (see the current transition away from the petro dollar over the last few years - and the US invasion of iraq and libya? - both governments stated they were coming of the petro dollar and using other currency).
When those dollars come back to the US - bang!.
You can keep printing until it has no value - as it what must happen when you charge interest on money that doesn't exist..
Interest on money loaned, doesn't exist.
How can you ever pay it back - if it doesn't actually exist?
Hence the fed res ponzi scheme set up in 1913 (jekyll island).
I t was designed to collapse - coming off the gold standard in the early 70's put off the inevitable, as the bail out of the banks on 2007/8
It has been put off for so long as possible - to try and transfer more real assets to the rich - but the end will happen - as sure as the sun coming up tomorrow.
The near identical thing happened in Rome all that time ago - they started putting less and less silver (printing more money) in their coins as social welfare systems - and the military - had to be paid for...
Eventually people walked away from Roman currency,...and the rest is history, as they say...
Yes i agree mostly, but the fed can also reduce money by increasing interest rates. That would lead to many defaults which would collapse the whole system. But the fed can then buy up bad debt from institutions it wants to survive and thus allow parts of the system to collapse while keeping it alive. As such i think it does have to collapse technically.
This would of course lead to other issues.
This market is a value play and traders market for next 1 year. i called Q3 selling way back in Jan 2018. I am was calling recession Q3 2019 and well into 2020 (unless fed stop rate increase and a new Washington stimulus ).. This was my call last week. the only thing changed is Fed kind of stopped the rate increase surprisingly. I still stand by the fact end of next year we see a recession
I agree with your solutions and consider that one aspect that will lead to the collapse is the fact that the government and its agencies are doing all they can to provide a facade of a strong economy as we continue to see low unemployment and GDP growth. The longer term consequence will be inflation that they are currently manipulation as well given the buying of assets to suppress interest rate and the manipulation of commodity prices. However, once other common input costs and wages demand start to increase, they will be little to stop inflation which will lead to higher rates and unsustainable fiscal debt levels that will force a global devaluation of fiat to be worth the paper it is printed on.