In some sense viewing any and all combinations of pairs, e.g., cryptocurrency / Dow, gold / Dow, cryptocurrency / gold and U.S. Dollar / gold is a dated way of thinking. Some view pairs such as gold and Dow (stock markets) as moving in opposite directions by definition. This is also outdated and untrue. Rather than reopen some old debates, or advocate for one instrument or the other I'm more interested if looking at all of them together can tell us anything about where we are headed - not only in terms of the DJIA (which you could view differently based on whether you price it in the USD, gold or Bitcoin), but overall geopolitically. What follows isn't intended to be comprehensive or well-documented so consider it on that basis.
I have been wondering recently if developments in the cryptocurrency space, particularly decentralized finance (DeFi), say anything about the future of the stock market. Obviously, the stock markets of the world are orders of magnitude larger than cryptocurrencies and even larger compared to DeFi. One aspect of this is purely speculative. People can choose where to put their money. A small, but growing portion has decided to invest in cryptocurrency. A subset of that group has decided to invest in Decentralized Finance. DeFi can get pretty complicated and I don't want to get bogged down in too many confusing details. Basically, DeFi offers a way for holders of cryptocurrency to speculate in various ways. They can earn interest on their cryptocurrency. They can "stake" cryptocurrency - locking it in for a certain time period and earn interest or tokens that can be sold for fiat currency, held, traded for other cryptocurrencies, etc. This is sometimes tied to the rising Stablecoins -
A stablecoin is a new class of cryptocurrencies that attempts to offer price stability and are backed by a reserve asset. Stablecoins have gained traction as they attempt to offer the best of both world’s—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
Some Stablecoins attempt to maintain their value (essentially a peg) to the U.S. Dollar. One mechanism for doing so is to offer interest to those who will lock their Stablecoin up. Interestingly, you don't have to lock your Stablecoin up for days, weeks, or months. There are services which allow you to lock up your Stablecoins for whatever period you want. The drawback is that there are often costs to moving your Stablecoins in and out so it isn't always practical to move out too quickly as this can result in losing value.
While cryptocurrency overall has remained too technical for many to use and trust there is a growing number of people who are using it to hold stored value / wealth outside the traditional finance system. DeFi is offering some of those same people the opportunity to speculate outside the traditional stock markets, currency trading markets (Forex), and futures markets. While the United States continues to be more restrictive, there are also places where you can trade synthetic contracts for a mix of anything from currencies to indices and from cryptocurrencies valued in foreign currencies to precious metals. These are not big markets yet, but they crack open the door for the value currently stored in fiat currencies to potentially flow out of nations and traditional markets.
For years, some have considered gold to be necessary for the monetary system to be anchored to something of value. The United States has been part of a floating exchange rate system for decades. Martin Armstrong's perspective, if I am characterizing it correctly, is that the value of the U.S. Dollar hinges on the productive capacity of the American people and in the level of confidence that all holders of the USD have in it and the U.S. Government vs. private institutions. Personally, I am not someone who believes that reverting back to a gold standard is practical or desirable. The Roman Empire and many other previous empires have demonstrated that even gold and silver coins can be debased so, in the end, it all goes back to what confidence or faith holders of money have in the issuer. What that money is made of, backed by, or if it is virtual doesn't matter. If people don't believe the money is good it will eventually fail.
A similar situation exists where some portion of the advocates of gold as the basis for the monetary system view cryptocurrencies as having no real value. I tend to disagree. My Dad once said to me that a thing is worth what someone is willing to pay for it. Markets aggregate that value. So a cryptocurrency is worth what the market says it is worth. You can disagree, but that's the value. It's the same for gold, stocks, financial instruments or whatever else. Speculators can place bets that the current price of gold, the USD, stocks, cryptocurrencies, etc. is going to change based on technical or fundamental analysis. But disagreeing with the market value doesn't make that value wrong. For me, that is one of the fundamental errors that some supporters of gold make. They believe the market largely misprices gold. Some also believe that what backs a currency is the most important factor. I believe that the combination of who runs the system and whether or not people have confidence in those people - aka the system - is more important.
The U.S. Stock Market is often measured against gold, the USD, cryptocurrencies, other markets, etc. One of the points that Martin Armstrong has wisely pointed out time and time again is that you have to look at markets in context of the flow of capital around the world. So, while we are looking at cryptocurrency, gold, the USD and the Dow, we also must somehow consider all of them in context of how money is moving around the world. For example, if we just look at US markets, we might conclude that our economy and political system are a mess, therefore the price of the DJIA should eventually drop. On the other hand, we can't just look at the United States a though it is isolated. Capital - aka money - can move around the world in an instant. The stored value of money doesn't just have to sit in a bank account in Germany, the UK, France, etc. If a person thinks their money will earn more in the U.S. they can invest in the U.S. through markets. So, the US political system and economy might look like a mess to me but to someone in Europe our economy could look better than their economy. An influx of foreign money can make the U.S. Stock Market rise. So, it isn't as simple as comparing the U.S. Stock Market to some other alternative U.S. investment. Every investment is competing against every other investment everywhere.
Let's say we agree that all investments compete against all other investments everywhere. You still might not be convinced that the relatively small cryptocurrency market poses a significant threat to the U.S. Stock Market or USD. But, what if a foreign government were to start its own cryptocurrency to circumvent the current international finance system, make it easier to move money, avoid sanctions, and attract capital? We don't have to wonder because that is exactly what China is doing with the e-RMB. While it is only in the testing stages currently, China's effort to create an electronic version of the Renminbi could offer them a way to settle international payments without using the USD. Over time, that could reduce international use of the USD and undermine it as the global reserve currency. At the same time the e-RMB would allow China to sidestep the IMF, SWIFT and the U.S., making the enforcement of international monetary sanctions difficult to impossible.
Going back to our original idea of the various pairs and comparing them, e.g. cryptocurrencies vs. the USD or gold vs. the Dow, they aren't useful comparisons, in my opinion, because they don't represent fixed correlations. In some circumstances gold and the Dow can move up together. At other times the stock market can drop and gold can rise. This simply demonstrates that what Armstrong has said about looking at markets within a larger context applies at all levels. You can't simply look at the U.S. markets in isolation from the rest of the world. Within the U.S., in turn, you can't just look at one instrument vs. another. Everything moves within the context of the entire world. While some in the U.S. are debating about the value of the Dow relative to gold or whether cryptocurrencies could be the nail in the coffin for the USD, China is testing the e-RMB which could ultimately supplant the USD, competing cryptocurrencies and - over time - tilt the balance of power away from the U.S. and toward China. As we consider the value of the DJIA and whether or not it moves upward to 30,000 and beyond or tests the recent 18K+ lows, we can't effectively do that without considering the broader context of what is happening around the world.
The competition between China and the U.S. has intensified over the years and it appears this trend will only continue into the future. There has been speculation that the U.S. might not be able to hold together in its current form and might eventually split up. China has a history of looking outward and turning back inward, sometimes in response to internal struggles. What will happen in the future in either country is not yet known. Humans often tend to simplify and engage in either-or kind of thinking. We sometimes focus on one thing as the root cause of something else that happened. For example, the news might say the DJIA dropped in price today because of increased U.S. - China trade tensions - as if the news knows with some degree of certainty why hundreds upon thousands of stocks moved in a given day. What we can understand is that broad systems and interactions influence what happens. There are going to be moments when one or a few factors will account for much or most of the change. But we live in a very complex world. Even if we think we know all of the important elements in a system and how they work, more than likely there will be something we have missed. However, if we attempt to widen our field of vision we can see the broader picture and may even discover something new we hadn't thought of previously. That new thing might just be the thing that helps us make a better decision.
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