Making Sense of Everything (The Everything Code)
The Everything Code and Macro Thesis:
Liquidity is increasing at 8% per year globally, which is the hurdle rate for all investments. With inflation, the hurdle rate is around 12%.
The two massive secular trends are cryptocurrency (e.g. Bitcoin) and the NASDAQ, which are both exponential trends based on adoption curves and capital flows.
The "magic formula" is that GDP growth equals population growth + productivity growth + debt growth. Slowing population and productivity growth is offset by increasing debt.
Debt ends up being monetized through currency debasement. Global liquidity follows an exponential trend like Bitcoin and NASDAQ.
Demographics explain economic trends - slowing birth rates and labor force participation drive the debt and liquidity cycle. Government debt is inversely correlated with labor force participation.
Central banks use liquidity injections to offset the demographic trends and allow governments to service debts through currency debasement. This drives asset prices higher.
The Liquidity Cycle and Business Cycle:
The ISM Purchasing Managers Index follows a predictable 4-year cycle based on the debt maturity and liquidity injection schedule since 2008. This matches the presidential election and Bitcoin halving cycles.
The 4-year cycle can be broken down into annual "seasons" - spring, summer, fall, winter - based on liquidity injections and withdrawals. Asset prices follow these seasons.
Forecasting the ISM cycle and liquidity allows for forecasting of asset prices, especially for liquidity-driven assets like NASDAQ and crypto. Models suggest a potential peak in ISM in June 2025 and liquidity peak in Sept 2024.
Asset Allocation and the Business Cycle:
The business cycle, measured by the ISM, is the key driver of asset prices across equities, commodities, credit, and crypto. Different assets have different lead/lag times to the ISM.
A framework of leading and lagging economic indicators can be used to track phases of the cycle.
The cycle can be broken into "four seasons" based on the growth and inflation mix: Spring (growth accelerating, inflation falling), Summer (growth and inflation accelerating), Fall (growth falling, inflation accelerating), and Winter (growth and inflation falling).
Each season favors different assets e.g. Spring favors tech/growth/crypto, Summer favors commodities and cyclicals. Late 2022 was the transition from Winter to Spring.
The current environment in mid-2024 is showing signs of moving from Spring to Summer, with a broadening of cyclical and commodity outperformance.
Crypto Cycles and Outlook:
Crypto prices move in cycles around the 4-year halving cycle, with the next major peak expected in 2025 based on historical patterns.
The crypto market cap is expected to go from $2.5T today to $10-15T in this cycle, potentially $100T by 2030, based on a continuing exponential adoption curve.
Bitcoin can be thought of as a large cap and tends to lead the cycle, while altcoins are like small caps and tend to outperform Bitcoin later in the cycle once the trend is established, similar to how small cap stocks lag the ISM.
On-chain data and technical analysis suggest the crypto bottom is in and the bull market is resuming after the 2022 bear market. Altcoins in particular look poised for major outperformance in the months ahead.
The Supermassive Blackhole and Opportunity:
Cryptocurrency is the single best-performing asset class in history, far outpacing even the NASDAQ. It is an "alien" asset class in terms of returns.
All other assets are being devalued relative to crypto over time due to fiat currency debasement. The "supermassive black hole" means that any money that leaves crypto for another investment is losing value in real terms.
The combination of technological adoption s-curves and the liquidity cycle argues that staying invested in the crypto secular bull trend is the best way to preserve and grow wealth in real terms.
The "banana zone" is the period in late 2024-2025 when liquidity, adoption, and cyclical tailwinds should combine to produce spectacular returns, potentially a "blow-off top".
Overall, crypto represents the single greatest macro opportunity investors have ever seen, and the goal should be to participate in this trend as much as possible.
In summary, understanding the interaction between demographics, debt, liquidity, technology, and the business cycle is crucial for constructing a macro thesis and asset allocation. Cryptocurrency is the asset most leveraged to the mega-trends of technological adoption and fiat debasement. The goal is to participate in the crypto secular bull market in order to preserve and grow wealth in real terms.