This free preview of The Block Genesis is offered to our loyal ...
This free preview of The Block Genesis is offered to our loyal readers as a representation of the highly valuable journalism our Genesis members receive daily. If you’d like to receive all Genesis content on our site and via daily newsletter, join here. This post first appeared in Ryan Todd's weekly column “The Interchange,” which is sent to Genesis subscribers’ inbox every Thursday morning.
If you spend time on Crypto Twitter, it’s hard not to go a few days without hearing about the “growing storm” of long-term macro tailwinds building for bitcoin at the moment (h/t Dan Hel...I mean @BMBernstein). It’s likely because of my Western echo chamber, but most of the touted bitcoin macro tailwinds I see promoted revolve around either perceived structural issues within US dollar market narratives (MMT theory, size of Fed Balance sheet, rates, entitlement driven deficits, etc.), or a negative rate environment in Europe.
Recently, Travis Kling, Founder and CIO of Ikigai Capital Management, wrote a contributor piece for The Block which describes the globally-coordinated QE policies over the past decade, with massive deficits on top of unprecedented levels of debt, as the world’s “grandest monetary and fiscal experiment.” Kling says,
“It would be naive to think this ‘experiment’ is going to end without significant market stress… The increasingly erratic U.S. president is yelling at an irresponsible central bank to act even more irresponsibly with its monetary policy, while running a $1 trillion deficit for the second year in a row.”
While I find these types of claims generally harmless, I can’t say I have any confidence some of these perceived US structural headwinds can be realized and actually drive meaningful tailwinds for bitcoin price appreciation — at least anytime soon. The biggest hurdle for me really comes down to time horizon, and the fact that relative to the rest of the world, the US economy — and the dollar — is still king.
If you’re buying Kling’s “bitcoin is a hedge against something,” thesis and looking out over the next 12-18 months for a global macro driven event tailwind for bitcoin, it actually might be worth paying more attention to what’s going on in China, rather than the US at this point.
I recently came across a Real Vision video with Kyle Bass, Founder and CIO of Hayman Capital Management, and notorious China bear (you can read some of his interviews describing his thesis here, here, and here). From the RV interview, Bass believes China’s RMB is riding on an unprecedented sized currency cliff, a scale that makes worries over the current US deficit and running up a $4.5T balance sheet pale in comparison.
In a decade, China has printed ~$30T worth of RMB, with over $48T worth of dollar equivalent RMB in circulation, against what Bass and his consultants now believe are only $2T in foreign reserves. Broader economic data integrity issues aside, considering data out of China is notoriously challenging to trust, Bass also believes the data significantly under reports real inflation numbers. Meanwhile, China is now running a twin deficit — a fiscal deficit that’s ~10% of GDP and a negative current account — amidst dwindling FX reserves and surging demand to borrow a lot of dollars (Bloomberg).
Bass believes the spark amidst this backdrop will come from global growth slowdown that could inevitably lead to a “proper” European recession (citing Australia and Germany economic numbers as leading indicators on this front) and inhibit China from being able to “sell themselves out” of a widening current account deficit. If any of this sounds interesting to you, I highly recommend checking out the video (it’s 45 minutes, and he even talks about bitcoin).
Bass presented a lot of various charts on capital flows, current account deficits, industrial production stagnation, etc.; but for our purposes the most interesting chart in relation to bitcoin tailwind considerations was his analysis on Chinese precious stone imports from Hong Kong since 2011.
Looking at the total % of Hong Kong imports to China, precious stones — diamonds, sapphires, opals — accounted for no more than 3% on average of total imports up until 2015. What’s fascinating is just after China’s 3% RMB devaluation in August 2015, precious stones accounted for more than 50% of all imports into China from Hong Kong, peaking at over 80% in early 2016. The kicker? This all happened while sales for jewelry fell by 4% during the same time period!
These precious stones were evidently used (quite aggressively to show up that strongly in the import data) as a store of value. Bass said as much,
“So how do you get money out of China? You get it out by over-invoicing if you run an import export company. You get it out by going to a bank like Minsheng Bank, and saying, I’ve got a billion RMB over here. How many dollars will you lend me against my billion RMB? And then you just don’t repay the dollar-based loan. Those are the ways you do it. But they charge you 30% to do that, so it’s kind of an exit tax. That’s how the billionaires get their money out, but the way the masses get their money out is they have to buy things. They can go to Hong Kong, because, as you know, CNH and CNY, there’s no limit to the exchange in Hong Kong. And so they buy watches, they buy jewelry, but more importantly, to get real money out, you buy really nice gemstones and bitcoins.”
Arguably even more interesting than the meteoric rise of precious stone imports was that its collapse actually coincided with bitcoin’s last bull-run in 2017. It also has recently started to soar back above 60% of total imports. Is another devaluation on the horizon?
Source: Hayman Capital, Real Vision
While Bass’ thesis is just one opinion, the data he highlighted aren’t issues to point to in 2024 and beyond, they’re happening now. Given the relative strength of the US economy and the dollar to the rest of the world, and recent historical precedent of Chinese precious stone imports as a hedge against devaluation, it might be worth spending some time developing a China thesis if you’re long a macro-driven “store of value” flight into bitcoin.
I'll leave you with some parting words from Bass,
“If the US dollar’s going to lose its reserve status, which currency are you going to own? You’re going to own the pound? Because if there’s a hard Brexit, it’s going to go to parity. Are you going to own the euro? Because if they have a recession, that’s going below parity. Are you going to own the RMB? No, you can’t really spend it. You might as well just go buy another Monopoly game."
source https://www.tokentalk.co/The Block/the-interchange-forget-mmt-and-the-fed-what-about-china-5cc347219c705dcd4f36cb3f
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