Geopolitical Instability Fuels Inflation Risk, Dockworkers Strike Hits Supply Chain, VP Harris Makes Positive Comment on Digital Assets
News Block #56 (10/03/2024)
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Geopolitical Instability Fuels Inflation Risk
JPMorgan’s Jamie Dimon might not understand Bitcoin yet, but as the CEO of the largest bank in the United States, he does know a thing or two about the state of the global economy, and he’s worried.
Last week, when asked at a Georgetown University event about his chief concern today, Dimon said that “geopolitics are getting worse.”
And when you look out at the world, it’s hard to argue with him. Whether it's the escalating conflicts in Israel, Iran and Lebanon, the Russian-Ukraine War, or increasing tensions between China and the United States, things seem to be unraveling wherever you look.
The implications of this rising global instability on financial markets are profound. Not since before the fall of the U.S.S.R. has the world looked so unstable and the future so uncertain.
Dimon mentioned that this is one reason why he believes inflation may not be as under control as many people believe.
Now, we talk a lot here about how monetary and fiscal policies –aka money printing–are the underlying cause of long-term inflation, but that doesn’t mean that the supply side of the equation doesn’t impact things too.
Outside of increased government spending, geopolitical risks can also cause persistent inflationary pressures by fragmenting global trade and disrupting global supply chains. This results in the rise in prices of things like oil, gasoline, food, and other commodities.
A perfect example of this is the Great Inflation of the 1970s. In the early 70s, the Fed lowered interest rates and expanded the money supply while the government ramped up its spending on large social programs and the Vietnam War.
Consequently, inflation began to rise. But it didn’t really spike until 1973 when the Yom Kippur War broke out, and an oil embargo quadrupled oil prices in the U.S.
In response, the Fed started to tighten monetary policy, and inflation fell back down, only for it to come roaring back in the late 1970s when the Iranian Revolution once again sent oil prices soaring.
I’m bringing all of this up because I think there are lessons to be learned from the 1970s on how geopolitical instability can lead to the disruption of global supply chains and cause supply shocks that refuel inflation.
This could be one reason why billionaire investor Stanley Druckenmiller recently said in a fireside chat in New York that he is open-minded about inflation re-igniting like in the 1970s and that he is short bonds due to the fiscal deficit.
James Lavish mentioned the inflation “double spike” of the 1970s in the latest Coin Stories interview that also featured Larry Lepard. Give it a listen to hear if these macro legends see a similar dynamic potentially playing out in the market today.
But – back to the global risks and ongoing conflicts today – look no further than the Israeli invasion of Lebanon this week, followed by the Iranian missile strike. Oil prices surged more than 5% in response to the news, echoing the 1970s.
This reminds me of a passage from an excellent book I recently read, “How to Listen When Markets Speak” by Lawrence McDonald.
In a chapter, the author recalls a conversation he had with the founder of the largest investment bank in Brazil on the topic of inflation. As a Brazilian, the man was all too familiar with inflation, and here’s what he told Mr. McDonald,
“There’s always been a strong connection between geopolitical tensions and inflation. The last thirty years have been a walk in the park, nicely controlled by the U.S. The markets were on an almost uninterrupted bull run…The key word is ‘access.’ It has to do with the international security of trading routes. It’s what makes trading possible. It lowers the costs of shipping goods all over the world. As geopolitical tensions drop, the ease of overseas manufacturing increases, along with offshoring labor costs. Exporting commodities is a breeze…In the end, it’s not just easy money that causes inflation. It’s risky geopolitics.”
Just as globalization and relative peace allowed the U.S. to enjoy low levels of inflation for the last thirty years or so, it only makes sense that more conflict and deglobalization will have the exact opposite effect. I don’t think it’s a coincidence that gold rallied 1% in the wake of the escalation in the Middle East and is hitting record highs this year amongst the chaos.
But Bitcoin dropped on the news, which confused some people. Isn’t it supposed to be a safe haven like gold?
Today, Bitcoin is widely viewed as a risk asset, but those who really understand it see it as a way to protect themselves in a world of more uncertainty and inflation. In fact, BlackRock made this exact argument in a recent piece on Bitcoin, arguing that Bitcoin’s adoption is “driven by concerns over monetary and geopolitical stability” and highlighted how Bitcoin has recently outperformed other assets like gold and stocks after major geopolitical events.
In this more unstable world, it’s becoming more important for individuals to think about how to protect their wealth from inflation because, as the Brazilian bank founder said, “Inflation is a very tricky phenomenon. When it arrives, it gets under the rug. It hides under the seat cushions. It’s one of those things that has a way of sticking around for years.”
Dockworkers Strike Threatens to Cripple Supply Chain
War is not the only thing that can potentially disrupt supply chains, as we learned this week, labor strikes can also do the trick.
A historic strike is underway across the U.S. as dockworkers from all major East Coast ports, from Maine to Texas, have walked off the job. This has the potential to bring global supply chains to a standstill.
The dockworkers want a more than 50% increase in their pay as well as job protection from the threat of automation. After negotiations failed, they’re now flexing their power by threatening to “cripple the country” as Harold Daggett, the head of the International Longshoremen’s Association put it.
It’s reported that 40% of total “containerized goods” which consist of everything from cars, to medicine, to oil, food, and other raw materials come through these ports, so it’s easy to understand why a prolonged strike could wreak havoc on the economy.
In short – this strike could strangle the flow of trade in this country, resulting in supply shortages and you guessed it…higher prices for Americans still reeling from years of elevated inflation.
The good news is that many experts believe that this strike should be over in around a week. The real risk is that it goes on longer.
Big picture though…this is just another echo of the 1970s, where strong labor unions demanded higher pay to offset the rise in the cost of living. Major worker strikes were the norm in the 1970s, and over the last couple of years, we’ve seen the number of workers involved in major strike activity increase by 280%, according to the Economic Policy Institute.
Higher wages mean higher costs for businesses, and typically, these businesses pass on these higher costs to consumers in the form of higher prices. On top of that, when workers receive higher wages, they have more money in their pockets to spend, leading to increased demand for goods and services, further driving up their prices. This is the dreaded wage-price spiral.
Ok, to be clear, we live in a very different world compared to the 1970s, but all of these similarities just go to show that one thing hasn’t changed much over the years – human behavior. One would be wise to study history and look at what investments performed well back then when inflation raged to better understand how to protect yourself today.
VP Harris Makes Positive Comment on Digital Assets
With the election about a month away, let’s end this News Block with a story from the political front. After months of campaigning, many Bitcoiners feel that it’s become clear that Republicans are the pro-Bitcoin party, and Democrats are the anti-Bitcoin party.
But now, with so many votes and super-PAC money on the line, Democrat Presidential candidate Kamala Harris is trying to change that tune. Last week, she finally said something positive about the broader crypto industry at a fundraising event saying, “We will partner together to invest in America’s competitiveness, to invest in America’s future. We will encourage innovative technologies like AI and digital assets, while protecting our consumers and investors.”
Some people are framing this as a sign that Harris is embracing crypto but I’m not buying it. In my opinion, she’s intentionally being vague here by saying “digital assets” which can entail anything from stablecoins to central bank digital currencies to tokenized treasury bonds. I’m going to continue to judge her based on her actions and track record as one half of an administration that has been consistently hostile towards the Bitcoin industry.
But remember, it doesn’t have to be this way! There are SO many reasons for progressives to be pro-Bitcoin and some Democrat officials are trying to convince their colleagues about all the benefits that this new technology could bring to the country and the world.
One of them is Representative Ro Khanna, who spoke onstage at Bitcoin 2024 and whom Nat recently had on the podcast. I hope Harris gives the episode a listen because I think Representative Khanna makes a convincing case for all the reasons why liberals should support Bitcoin too.
I can’t stress this enough, Bitcoin is not a partisan issue. It doesn’t care if you are blue or red – Anyone can use it and anyone can benefit from it.
When you get down to the bare bones of it, Bitcoin is a neutral, apolitical technology that provides everyone with the ability to save free of debasement and send money free of censorship, and I think that’s something, eventually, everyone can get behind.
Until next week, keep stacking.
- Sam & Nat
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NEW: James Lavish & Larry Lepard: Financial "Train Wreck" Coming, But There's a Massive Bitcoin Bull Flag
In this episode with macro legends James Lavish & Larry Lepard, we discuss:
- The financial 'train wreck' that both James and Larry forecast is ahead
- Why the Fed is trapped: a debt bomb is ticking
- Why Bitcoin will outperform gold
- Will the Fed allow a recession?
- Bitcoin to $100k in Q4 2024?
- Trump vs. Harris
Make sure to listen to my latest Coin Stories episodes, including U.S. Rep. Ro Khanna, Jim Bianco, and Mark Moss.
Listen on Fountain and Earn Bitcoin: Click here
Listen on Apple Podcasts: Click here
Listen on Spotify: Click here
Listen on YouTube: Click here
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Links to Items Mentioned in this Issue
Oil Prices Soar After Conflict Accelerates in the Middle East
Jamie Dimon Concerned About Geopolitical Risks"How to Listen When Markets Speak" by Lawrence McDonald
Gold Rallies in the Wake of Middle East Escalation
BlackRock on Bitcoin as a Hedge Against Geopolitical Risks
Port Strike Could Wreak Havoc on Supply Chains
Strike Shuts Eastern US and Gulf Ports, Threatening Economy
Dockworkers Launch Strike at Ports From Maine to Texas
Major Strike Activity Has Increased by 280% in 2023
Harris Embraces Crypto in Overture to Young Men
VP Kamala Harris Vows to Aid Crypto, AI Sectors
Coin Stories Interview with U.S. Representative Ro Khanna
Coin Stories Interview with James Lavish & Larry Lepard
I don’t know if it’s just me but the apple podcast embed is not showing up for me.
Great post as always. Thanks