March 29, 2023

Ah, what was this holiday on March 8 ...

We were at the epicenter of a perfect storm, a combination of market events in which reveals all the fragility global interconnected financial system,built on debt and financial engineering. COVID19 seems to have become the new "black swan" that has taken the world by surprise. The spread of the virus has led to a breakdown in global supply chains and disruptions in our global economy. The consequences of a broken supply chain, if any, should still hit markets in the next couple of weeks.

At the weekend, when the attention of the whole world wasconfined to quarantine in Italy and the spread of coronavirus in the United States, Russia suddenly came to the forefront and brought down the markets by releasing another black swan - unexpectedly breaking the agreement with OPEC to limit production, which had previously been extended quarterly to maintain oil prices. It is unlikely that this would be to the taste of Saudi Arabia, which immediately lowered the price of its oil and announced a significant increase in production. This led to a drop in oil prices by more than 30%, and WTI, temporarily sifting to less than $ 30 per barrel, was trading at $ 34.35 on Monday. This step of Russia should be seen as a blow to the production of American shale oil, which increased competition in global markets.

Oil wars, however, are difficult to nameunexpected phenomenon. For many years, non-OPEC countries have expressed dissatisfaction with the reality of the petrodollar, in which states are forced to pay for oil in US dollars, and declare the need to change the established order.

This led to the creation of oil contracts,denominated in RMB and ruble, and an increase in direct trade between Iran, Russia and China. The question that many have been asked over the past couple of years is: “When will we already see a complete reversal from OPEC to a more forked global oil market?”

Well, it looks like Russia finally feltconfident enough to send the oil cartel away and leave. It will be interesting to observe the indirect consequences of this bold move in the coming months and years.

Here is one of the most important graphs to follow.consider when oil wars erupt: the cost of producing a barrel by country. (Provided, of course, by our good friend @arbedout, who remains one of my favorite sources of information on this topic. I highly recommend that you read the entire cited thread.)

@arbedout: # 4:

As I said in the first tweet of this thread,the number of barrels per capita produced is an important indicator; but even more important is the cost of producing a barrel of oil. The cost of production in the United States is 21-23 dollars. The cost of producing a barrel of oil in the Gulf ranges from 8 to 10 dollars.

As you can see, Saudi Arabia and othersMiddle East manufacturers can survive this storm much more easily than their counterparts from other regions. Nevertheless, Russia decided to make it clear to the markets how low they can fall and how long they can withstand the survival war.

@DeltaOne: The Russian Ministry of Finance says that Russia can withstand oil prices in the range of $ 25-30 per barrel for 6-10 years.

If Saudi Arabia takes decisiveactions, trying to punish those who neglected the oil cartel, Russia is likely to have the hardest time: I expect that oil prices will fall below the line drawn by the RF Ministry of Finance. However, it will be even more interesting to observe how American producers of shale oil can (and will) survive the storm. But there are pluses: somewhere, finally, gasoline may finally become cheaper!

The collapse of the oil market provoked by Russia is nothe failed to reflect on the securities market, further exacerbating the situation caused by the spread of coronavirus. The perfect macro-event storm strikes stock markets after blow, revealing the fragility of the global financial system. This is very important to understand. The combination of coronavirus and the actions of Russia, once again starting to play by its own rules, may be a trigger for a recession in the market, but not the main problem, because of which such a recession in principle has become possible. The main reason is the fragility of the financial system, which directly depends on cheap debt. Bitcoin engineer James O’Bairn spoke in a much more eloquent manner:

@jamesob: The fact that the combination of the new virus and the dissolution of the oil cartel will bring down markets was not obvious. But what was * obvious * was that corporations with unnaturally low interest rates with a price / yield ratio at a historic high were not able to withstand unexpected shocks.

Corporate debt significantly increaseddue to the low-rate regime, which led to a massive wave of buybacks by companies, it will undergo serious scrutiny. Take a look at corporate lending markets. I'm afraid they have every chance of not coping with this stress. And the Fed seems to be experiencing the same concerns, judging by its readiness to increase the amount allocated for overnight repo operations by 75%, increasing the volume of one-day lending from $ 100 billion to $ 150 billion, and two-week financing from $ 20 billion to $ 45 billion

On the eve of the target of 17-18the next meeting of the Open Market Operations Committee as part of the Fed, all eyes are on Jerome Powell and the Fed. How much are they going to lower rates? Are they ready to resort to another decisive quantitative easing to calm the markets? This will only show the time and severity of the ongoing decline in markets. 50 bp decrease in recent weeks turned out to be completely ineffective. It seems to me that they will have to take more drastic measures to regain control of the situation in the markets.

Now, how has all this affected Bitcoin already, and will it affect in the future?

So far, Bitcoin is falling along with traditionalmarkets, being a risky asset, in which investors liquidate positions to receive cash, urgently needed in other places. Of course, Bitcoin is not yet a safe haven, in which many people position themselves. However, this is not surprising, given how young the protocol is and how badly most investors are familiar with Bitcoin. The status of a safe haven asset still needs to be earned, and Bitcoin's reputation is probably still too short for investors to consider it as such. And this tells you someone who is fully convinced that the narrative of the safe haven asset will ultimately come true and people will still seek salvation from the destruction of the traditional financial system, in a hurry to buy their satoshi.

Someone may ask if I am also a masochist in my mind.

Perhaps he will be right. Or maybe I just better understand the fundamental factors of the protocol, and as far as I can see, they only get better over time. Just on Monday, around 14:00 Moscow time, the difficulty of mining Bitcoin increased by almost 7% in order to keep the average interval between blocks equal to about 10 minutes. This means that over the previous 2016 blocks, a significant number of new hashing capacities joined the network. In addition, Bitcoin Core - the most popular full node implementation - has released a new version (v0.19.1) of its software, and this shows that the developer community is still interested in developing and improving Bitcoin.

And most importantly, the traditional system and authorities,seem to be losing control of the situation. I believe that we will face a crisis of confidence in the effectiveness of the Fed’s policies, the ability of the federal government to manage the United States at the micro level, and the dream that the traditional and financial media are selling to the masses.

I understand that making forecasts of this kind -the occupation is pretty stupid, and nonetheless. It’s hard for me to believe that the masses will once again buy the rubbish they’ve propagated by official propaganda, if we really encounter a great recession, which has been talked about since 2008. If the expansion of the money supply base and the sharp decline in rates did not work in the last crisis, why should it work now? Can a printing press and lower rates solve the systemic problems that appeared against the background of coronavirus and the decision of one country not to limit its oil production? I doubt it. The maximum that can be achieved with such a policy is a temporary delay, which will only further exacerbate the problem.

In fact, I would not even be sure thattheir policies will be as effective as before. The wounds of 2008 are still quite fresh in people's minds. Add to this the speed and effectiveness of information dissemination, which has increased significantly since 2008, and it will become even more difficult to believe in people’s willingness to buy official propaganda. The masses are now more educated than ever and are actively discussing current issues in social networks. Forcing people to feed the same policy this time will be much more difficult. And the supply of arrows in the quiver of the Fed to the current moment is noticeably depleted.

That's why I feel pretty confidentinvesting in bitcoin, even against the background of a falling rate. I believe that we live in one of the most crucial moments in the history of mankind. People all over the world are beginning to doubt the institutions that we have inherited from the industrial era and are having tough discussions in the digital space about what kind of future they want to see. Bitcoin will be the cornerstone of the digital age into which we are rapidly moving. We need system changes. To really solve the accumulated problems, we need to fix the monetary system, and, in my opinion, Bitcoin opens up the best opportunities for this in the digital era.

In the short term, I wondersee how the market will respond to the next wave of inevitable rate cuts by the Fed. If rates fall significantly, and markets respond by about 50 bp last week, then, I think, confidence in the authorities will begin to collapse much faster than people expect. If lower rates and quantitative easing provide some respite for the markets, then this design is likely to live a little longer.

But no matter what happens, I continue to accumulate my satoshi.