Face First

Submitted by QTR’s Fringe Finance

In a couple of my previous articles, I pointed out that I thought cryptocurrency would wind up being the canary in the coal mine as it relates to the next stock market crash.

And by the looks of things, the warning signals may not be as difficult to take notice of as I once thought. I wish that was because more people were simply paying attention, but it’s not. It’s because the United States seems to be heading face-first into the crypto business, so it’ll be on every single person’s radar.

Since his inauguration, President Donald Trump has taken bold steps to position the United States as a leader in the cryptocurrency industry. One of his first actions was signing an executive order titled “Strengthening American Leadership in Digital Financial Technology,” aimed at fostering innovation while ensuring regulatory clarity in the crypto space. The order outlines protections for public blockchain networks, encourages the development of U.S. dollar-backed stablecoins, and explicitly prohibits the creation of a central bank digital currency (CBDC). To support this effort, a Presidential Task Force on Digital Asset Markets, led by venture capitalist David Sacks, has been established to draft regulatory proposals.

In addition to regulatory measures, President Trump has introduced a strategic initiative to create a national Bitcoin reserve. This plan involves the U.S. government accumulating Bitcoin, either through direct acquisitions or by utilizing cryptocurrency seized from criminal enterprises. The reserve is intended to strengthen the nation’s financial standing in a global economy increasingly influenced by digital assets.

Trump has also repeatedly called for the U.S. to embrace its role as the “crypto capital of the world,” emphasizing the importance of fostering innovation and providing a clear regulatory environment to attract investment and talent.

And now, the only question is whether or not this is an asset class that will actually serve a purpose over the long haul. As a result, will we just have to wait for the poor investments in the space to be flushed out—or, in the event that crypto turns out to be a big nothing—will we have to wait for the entire asset class to implode?

No matter which of these two scenarios occurs, I’m fairly certain one is going to take place. It’s only fitting that for a brand-new asset class, we have an unprecedented, brand-new market correction. I don’t think there has been an asset in the history of the world that hasn’t gotten out over its skis and eventually hit major turmoil. Everything from housing to metals to equities have crashed at some point, and crypto won’t be any different. The only question is to what extent, and when — and I’m not really interested in speculating enough to know, or care, when.

Here’s what I do know. My long-term readers know I believe it to be a mathematical certainty that the market is eventually going to grind to a halt at some point due to positive real interest rates.

Black: Nominal 1 year treasury, Red: Inflation rate (LTM), Blue: Real 1 year rate

Very slowly, these positive rates are slowing down the economy and will eventually grind its gears to a halt—the only question is how the stock market and prices will react. Stagflation seems to be the likely scenario heading forward, if I had to guess.

All the speculation around crypto—and equities—is complicated by the fact that President Trump now believes interest rates should be lower. Trump announced on Thursday plans to push for lower U.S. interest rates, challenging the Federal Reserve’s tradition of political independence. Speaking at the World Economic Forum, he linked the need for rate cuts to anticipated lower oil prices, which he said would ease inflationary pressures.

Whether or not he’s going to have an effect on the Fed’s Jerome Powell remains to be seen.

I think I understand his mindset, though: to blow the asset bubble bigger during his presidency and ensure that asset prices continue to rise under his watch. This is all good and well, except for the fact that the Federal Reserve is in an unprecedented position between a rock and a hard place. Inflation is still around 3%, not anywhere near the Fed’s 2% target, and lowering rates now would almost ensure that the Fed’s fight against rising prices will become more difficult. As you can see, inflation is once again ticking higher:

But as I’ve said for years, this was never a fight the Fed was going to win. I said a couple of years ago on Palisades Gold Radio that I was certain the Fed would have to settle for a higher inflation target, and I think that’s what’s going to happen. The result may prop up the nominal price of financial assets a little further, but sadly, cost of living will also stay high for working-class Americans. This is a serious step further toward the nation losing its creditworthiness and descending into a hyperinflationary spiral. It is letting the “inflation genie” out of the bottle further.

Gimmicks aside, nothing changes the fact that spending is going to need to be cut if we want to attack the national debt, as Trump says he wants to.

The only way crypto helps us attack the national debt is if we stake our claim in a bunch of bitcoin before many other global parties do the same and it becomes a good investment. Theoretically, other buyers in the market would then move the price higher, increasing the value of the bitcoin we’ve already acquired. At some point, we’d have to exit the investment (or use it as collateral) and use the gains to square up the debt—or at least part of it—if that’s what President Trump really wants to do.

Nobody is talking about the other scenario: what happens if other countries don’t follow our lead and decide the world is not going to adopt a bitcoin standard despite our attempts to lead the way? Then all we’ve done is make another bad investment.

Meanwhile, the bond market continues to send signals that rates need to be higher, not lower.

At the same time, equities are on a historic run, pushing valuations into territory only touched once before—during the tech bubble of 2000.

Shiller PE

If we continue along this trajectory, the market will soon be the most overvalued it has ever been in history. At some point, buying stocks will become a bet that they can continue to be the most aggressively valued they’ve ever been in the history of our stock market.

Look: eventually, this turns into a losing bet. I don’t know when, why, or how it will occur, but it will.

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And make no mistake, we’re not treading cautiously toward the next market correction. We’re ramming the accelerator to the floor, redlining the engine, and taking on whatever comes next face-first, simply hoping that through some sort of financial alchemy, everything works itself out.

On the positive side, the new administration seems to be making progress with foreign relations, both with our allies and with adversaries of the last administration. Crucial to getting our financial trajectory on a steady path is achieving some type of homeostasis with the rest of the world. Even if it boils down to the United States needing to engineer some type of debt jubilee, we would need the rest of the world to buy in. If we only have our allies, the BRICS nations could call our bluff by labeling any debt restructuring or jubilee for what it really is: a default.

However, if we achieve buy-in from the other side of the global financial aisle, there’s a chance for four more years of perceived financial prosperity—and at least avoiding total chaos.

In summary:

1. Trump is fighting the bond market (and the Fed) on interest rates

2. Crypto and 0DTE equity options are the tail wagging the stock market dog

3. Said dog is nearing all time highs for valuation

4. Real rates have the economy’s balls in a slowly constricting vice grip

5. Spending cuts need to happen to slow the national debt and return to surplus

6. Modest gains are being made on the foreign policy front

What a f*cking mess. Be careful out there.

QTR’s Disclaimer: Please read my full legal disclaimer on my About page here. This post represents my opinions only. In addition, please understand I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have been hand selected by me, have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author, reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author.

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