After ‘Red Friday’ Rout, Will The Fed Slow Their Roll?
“Black Friday” As Market Plunges
Last week, we discussed the weakness of the underlying market as “FOMO” had returned to the market.
“The only concern we have is the lack of breadth as of late. As shown, the number of stocks above the 50-dma turned sharply lower this week. Furthermore, they are well below levels when markets typically make new highs. The same goes for the number of stocks trading above their 200-dma’s.”
Chart updated through Friday.
Over the last couple of weeks, the market has been warning to the risk of a downturn, all that was needed was a catalyst to change sentiment.
That occurred as news of a new “Covid” variant broke, stocks marked “Black Friday” by plunging firmly through the 20-dma and support at recent lows. Notably, that downside break broke the consolidation pattern (blue box in the chart below) that began in early November. While there is some minor support around 4550, critical support lies at the 50-dma at 4527. That support level also corresponds to the September peak.
With mutual fund distributions running through the first two weeks of December, there is additional downside pressure on stocks near term. However, our “money flow sell” signal is firmly intact and confirmed by the MACD signal. Such suggests we continue to maintain slightly higher levels of cash.
Notably, the market is getting oversold near-term, with the money-flow signal depressed. Such suggests that any further weakness will provide a short-term trading opportunity. As discussed last week, the statistical odds are high that we will see a “Santa Rally” as most professional managers will position for year-end reporting.
Just remember, nothing is guaranteed. We can only make educated guesses.
Will The Fed Slow Their Roll
While “Black Friday” usually marks the beginning of the retail shopping season, the question is whether the new “variant,” which is flaring concerns of additional lock-downs, will reverse the current economic recovery. As Barron’s notes, it will be worth watching the Fed closely.
“Fixed-income markets are signaling that the Federal Reserve will have to increase interest rates sooner than expected, which could put a dent in the stock market.
The yield on the 2-year Treasury note has gone from 0.5% in early November to 0.64% as of Wednesday. The move suggests that investors expect the Fed to raise interest rates to combat inflation that remains higher than expected because of soaring consumer demand and supply chains that are struggling to match demand.
Indeed, minutes released Wednesday from the Fed’s meeting earlier this month show that members of the central bank are prepared to increase rates sooner than previously anticipated if inflation remains high.”
Of course, this was before “Black Friday” sent yields plunging 10% lower in a single day. Suddenly, the bond market is starting to question the sanity of hiking rates in the face of an ongoing pandemic.
While many pundits have suggested higher interest rates won’t matter to stocks, as we will discuss momentarily, they do matter and often matter a lot.
The surge in the new variant gives the Fed an excuse to hold off tightening monetary policy even though inflationary pressures continue to mount. But, what is most important to the Fed is the illusion of “market stability.”
What “Black Friday’s” plunge showed was that despite the Fed’s best efforts, “instability” is the most significant risk to the market and you.
More on this in a moment.
Time To Buy Oil?
Once a quarter, I review the Commitment Of Traders report to see where speculators place their bets on bonds, the dollar, volatility, the Euro, and oil. In October’s update, I looked at oil prices that were then pushing higher as speculators were sharply increasing their net-long positioning on crude oil.
We suggested then that “the current extreme overbought, extended, and deviated positioning in crude will likely lead to a rather sharp correction. (The boxes denote previous periods of exceptional deviations from long-term trends.)
The dollar rally was the most crucial key to a view of potentially weaker oil prices. Given that commodities are globally priced in U.S. dollars, the strengthening of the dollar would reduce oil demand. To wit:
“The one thing that always trips the market is what no one is paying attention to. For me, that risk lies with the US Dollar. As noted previously, everyone expects the dollar to continue to decline, and the falling dollar has been the tailwind for the emerging market, commodity, and equity ‘risk-on trade.” – June 2021
Since then, as expected, the dollar rally is beginning to weigh on commodity prices, and oil in particular.
While the dollar could certainly rally further heading into year-end, oil prices are becoming much more attractive from a trading perspective. The recent correction did violate the 50-dma, which will act as short-term resistance. However, prices are beginning to reach more attractive oversold levels.
There are also reasons to believe higher oil prices are coming.
Higher Oil Prices Coming
The Biden administration released oil from the “Strategic Petroleum Reserve,” attempting to lower oil prices. He also tasked the DOJ to “investigate oil companies for potential price gouging.” These actions are thinly veiled attempts to regain favor with voters but will not lower oil prices.
Oil prices are NOT SET by producers. Instead, speculators and hedgers set oil prices on the NYMEX. Think about it this way:
If oil companies are setting prices to “reap profits,” why did oil prices go below ZERO in 2020?
Furthermore, would producers need to “hedge” current production against future delivery?
There are two drivers reflecting positioning by speculators and hedgers:
The expected supply and demand for oil; and,
The value of the dollar.
The more critical problem comes from the Administrations’ attack on production over “climate change” policies. As noted in Crude Investing: Energy Stocks & ESG (kailashconcepts.com):
“This isn’t rocket science. Look at the sharply lagging rig response to the rise in energy prices post the Covid crash. This is an anomaly.
According to history, there should be ~1,300 rigs in operation today based on current oil prices. With only ~480 rigs running today, oil’s prospects may be bright over the long haul.”
With output at such low levels, OPEC+ refusing to increase production, and “inefficient clean energy” increasing demand on “dirty energy,” higher future prices are likely.
If the economy falls into a tailspin, oil prices will fall along with demand, so nothing is assured. However, the ongoing decline in CapEx in the industry suggests production will continue to contract, leaving it well short of future demand.
Chart courtesy of Kailash Concepts
That is the perfect environment for higher prices.
Higher Interest Rates Will Lead To Market Volatility
Did “Black Friday’s” plunge send a warning about rates? Last week, we discussed that it isn’t a question of if, but only one of when.
I showed the correlation between interest rates and the markets. With the sharp drop in rates, it is worth reminding you of the analysis. It is all about “instability.”
The chart below is the monthly “real,” inflation-adjusted return of the S&P 500 index compared to interest rates. The data is from Dr. Robert Shiller, and I noted corresponding peaks and troughs in prices and rates.
To try and understand the relationship between stock and bond returns over time, I took the data from the chart and broke it down into 46 periods over the last 121-years. What jumps is the high degree of non-correlation between 1900 and 2000. As one would expect, in most instances, if rates fell, stock prices rose. However, the opposite also was true.
Notably, since 2000, rates and stocks rose and fell together. So bonds remain a “haven” against market volatility.
As such, In the short term, the markets (due to the current momentum) can DEFY the laws of financial gravity as interest rates rise. However, as interest rates increase, they act as a “brake” on economic activity. Such is because higher rates NEGATIVELY impact a highly levered economy:
Rates increases debt servicing requirements reducing future productive investment.
Housing slows. People buy payments, not houses.
Higher borrowing costs lead to lower profit margins.
The massive derivatives and credit markets get negatively impacted.
Variable rate interest payments on credit cards and home equity lines of credit increase, reducing consumption.
Rising defaults on debt service will negatively impact banks which are still not as well capitalized as most believe.
Many corporate share buyback plans and dividend payments are done through the use of cheap debt.
Corporate capital expenditures are dependent on low borrowing costs.
The deficit/GDP ratio will soar as borrowing costs rise sharply.
Critically, for investors, one of the main drivers of assets prices over the last few years was the rationalization that “low rates justified high valuations.”
Either low-interest rates are bullish, or high rates are bullish. Unfortunately, they can’t be both.
What “Black Friday’s” plunge showed was the correlation between rates and equity prices remains. Such is due to market participants’ “risk-on” psychology. However, that correlation cuts both ways. When something changes investor sentiment, the “risk-off” trade (bonds) is where money flows.
The correlation between interest rates and equities suggests that bonds will remain a haven against risk if something breaks given exceptionally high market valuations. The market’s plunge on “Black Friday” was likely a “shot across the bow.”
It might just be worth evaluating your bond allocation heading into 2022.
Sun, 11/28/2021 – 10:30
Daily Mortgage Rates Are Over 4% | January 22 & 23, 2022
The average rate on a 30-year fixed-rate mortgage crossed 4% this week for the first time since September 2020, ending the week at 4.019%.
The average rate on a 30-year fixed-rate mortgage crossed 4% this week for the first time since September 2020, ending the week at 4.019%. Rates for all loan categories ended higher week-over-week. The average interest on a 30-year refinance, for instance, moved up to 4.136%.
- The latest rate on a 30-year fixed-rate mortgage is 4.019%. ⇓
- The latest rate on a 15-year fixed-rate mortgage is 3.037%. ⇓
- The latest rate on a 5/1 ARM is 2.574%. ⇓
- The latest rate on a 7/1 ARM is 3.891% ⇑
- The latest rate on a 10/1 ARM is 4.135%. ⇓
Money’s daily mortgage rates reflect what a borrower with a 20% down payment and a 700 credit score — roughly the national average score — might pay if he or she applied for a home loan right now. Each day’s rates are based on the average rate 8,000 lenders offered to applicants the previous business day. Freddie Mac’s weekly rates will generally be lower, since they measure rates offered to borrowers with higher credit scores.
Today’s 30-year fixed-rate mortgage rates
- The 30-year rate is 4.019%.
- That’s a one-day decrease of 0.031 percentage points.
- That’s a one-month increase of 0.366 percentage points.
The 30-year fixed-rate mortgage is the most popular home loan thanks to its long payback time, lower monthly payments and consistent interest rate. Compared to a shorter-term loan, however, the interest rate will be higher, which means you’ll pay more over the life of the loan.
Today’s 15-year fixed-rate mortgage rates
- The 15-year rate is 3.037%.
- That’s a one-day decrease of 0.037 percentage points.
- That’s a one-month increase of 0.479 percentage points.
The lower interest rate and shorter payback time of a 15-year fixed-rate mortgage make it an attractive option for some borrowers because they’ll save on interest. The monthly payments, however, will be higher than an equivalent 30-year loan, so it will not fit every budget.
The latest rates on adjustable-rate mortgages
- The latest rate on a 5/1 ARM is 2.574%. ⇓
- The latest rate on a 7/1 ARM is 3.891%. ⇑
- The latest rate on a 10/1 ARM is 4.135%. ⇓
Adjustable-rate mortgages will start with a low introductory interest rate that will fixed for a number of years. Eventually the rate will becomes adjustable, resetting at regular intervals. A 5/1 ARM will have a fixed rate for five years before it starts resetting every year, for example. An ARM can be a good option for someone who is not planning on keeping the home beyond the fixed-rate period. Keep in mind that once the rate starts to adjust, there can be a big increase.
The latest VA, FHA and jumbo loan rates
The average rates for FHA, VA and jumbo loans are:
- The rate on a 30-year FHA mortgage is 3.801%. ⇓
- The rate on a 30-year VA mortgage is 3.861%. ⇓
- The rate on a 30-year jumbo mortgage is 3.726%. ⇔
The latest mortgage refinance rates
The average refinance rates for 30-year loans, 15-year loans and ARMs are:
- The refinance rate on a 30-year fixed-rate refinance is 4.136%. ⇓
- The refinance rate on a 15-year fixed-rate refinance is 3.149%. ⇓
- The refinance rate on a 5/1 ARM is 2.871%. ⇑
- The refinance rate on a 7/1 ARM is 4.033%. ⇓
- The refinance rate on a 10/1 ARM is 4.278%. ⇓
Where are mortgage rates heading this year?
Mortgage rates sank through 2020. Millions of homeowners responded to low mortgage rates by refinancing existing loans and taking out new ones. Many people bought homes they may not have been able to afford if rates were higher. In January 2021, rates briefly dropped to the lowest levels on record, but trended slightly higher through the rest of the year.
Looking ahead, experts believe interest rates will rise more in 2022, but also modestly. Factors that could influence rates include continued economic improvement and more gains in the labor market. The Federal Reserve has also begun tapering its purchase of mortgage-backed securities and announced it anticipates raising the federal funds rate three times in 2022 to combat rising inflation.
While mortgage rates are likely to rise, experts say the increase won’t happen overnight and it won’t be a dramatic jump. Rates should stay near historically low levels through the first half of the year, rising slightly later in the year. Even with rising rates, it will still be a favorable time to finance a new home or refinance a mortgage.
Factors that influence mortgage rates include:
- The Federal Reserve. The Fed took swift action when the pandemic hit the United States in March of 2020. The Fed announced plans to keep money moving through the economy by dropping the short-term Federal Fund interest rate to between 0% and 0.25%, which is as low as they go. The central bank also pledged to buy mortgage-backed securities and treasuries, propping up the housing finance market but began cutting back those purchases in November.
- The 10-year Treasury note. Mortgage rates move in lockstep with the yields on the government’s 10-year Treasury note. Yields dropped below 1% for the first time in March 2020 and have been rising since then. On average, there is typically a 1.8 point “spread” between Treasury yields and benchmark mortgage rates.
- The broader economy. Unemployment rates and changes in gross domestic product are important indicators of the overall health of the economy. When employment and GDP growth are low, it means the economy is weak, which can push interest rates down. Thanks to the pandemic, unemployment levels reached all-time highs early last year and have not yet recovered. GDP also took a hit, and while it has bounced back somewhat, there is still a lot of room for improvement.
Tips for getting the lowest mortgage rate possible
There is no universal mortgage rate that all borrowers receive. Qualifying for the lowest mortgage rates takes a little bit of work and will depend on both personal financial factors and market conditions.
Check your credit score and credit report. Errors or other red flags may be dragging your credit score down. Borrowers with the highest credit scores are the ones who will get the best rates, so checking your credit report before you start the house-hunting process is key. Taking steps to fix errors will help you raise your score. If you have high credit card balances, paying them down can also provide a quick boost.
Save up money for a sizeable down payment. This will lower your loan-to-value ratio, which means how much of the home’s price the lender has to finance. A lower LTV usually translates to a lower mortgage rate. Lenders also like to see money that has been saved in an account for at least 60 days. It tells the lender you have the money to finance the home purchase.
Shop around for the best rate. Don’t settle for the first interest rate that a lender offers you. Check with at least three different lenders to see who offers the lowest interest. Also consider different types of lenders, such as credit unions and online lenders in addition to traditional banks.
Also. take time to find out about different loan types. While the 30-year fixed-rate mortgage is the most common type of mortgage, consider a shorter-term loan like a 15-year loan or an adjustable-rate mortgage. These types of loans often come with a lower rate than a conventional 30-year mortgage. Compare the costs of all to see which one best fits your needs and financial situation. Government loans — such as those backed by the Federal Housing Authority, the Department of Veterans Affairs and the Department of Agriculture — can be more affordable options for those who qualify.
Finally, lock in your rate. Locking your rate once you’ve found the right rate, loan product and lender will help guarantee your mortgage rate won’t increase before you close on the loan.
Our mortgage rate methodology
Money’s daily mortgage rates show the average rate offered by over 8,000 lenders across the United States the most recent business day rates are available for. Today, we are showing rates for Thursday, January 20, 2022. Our rates reflect what a typical borrower with a 700 credit score might expect to pay for a home loan right now. These rates were offered to people putting 20% down and include discount points.
More from Money:
- Best Mortgage Lenders of 2022
- Mortgage Calculator by Money
- How to Get the Lowest Mortgage Rate: A Step-by-Step Guide
- How to Get Preapproved for a Mortgage: A Step-by-Step Guide for Homebuyers
- Is Now a Good Time to Refinance My Mortgage? A Decision-Making Guide
Lithia Motors, Inc. (NYSE:LAD) Shares Sold by Deutsche Bank AG
Deutsche Bank AG trimmed its holdings in Lithia Motors, Inc. (NYSE:LAD) by 33.0% during the third quarter, according to the company in its most recent…
Deutsche Bank AG trimmed its holdings in Lithia Motors, Inc. (NYSE:LAD) by 33.0% during the third quarter, according to the company in its most recent filing with the Securities & Exchange Commission. The institutional investor owned 5,461 shares of the company’s stock after selling 2,695 shares during the period. Deutsche Bank AG’s holdings in Lithia Motors were worth $1,732,000 as of its most recent SEC filing.
Other institutional investors and hedge funds have also made changes to their positions in the company. Rockefeller Capital Management L.P. raised its position in shares of Lithia Motors by 330.0% in the 2nd quarter. Rockefeller Capital Management L.P. now owns 86 shares of the company’s stock valued at $29,000 after purchasing an additional 66 shares in the last quarter. Berman Capital Advisors LLC raised its position in shares of Lithia Motors by 88.5% in the 3rd quarter. Berman Capital Advisors LLC now owns 98 shares of the company’s stock valued at $31,000 after purchasing an additional 46 shares in the last quarter. American National Bank acquired a new position in shares of Lithia Motors in the 3rd quarter valued at approximately $32,000. Fifth Third Bancorp raised its position in shares of Lithia Motors by 40.6% in the 3rd quarter. Fifth Third Bancorp now owns 135 shares of the company’s stock valued at $43,000 after purchasing an additional 39 shares in the last quarter. Finally, Financial Management Professionals Inc. increased its holdings in shares of Lithia Motors by 24.4% in the 3rd quarter. Financial Management Professionals Inc. now owns 194 shares of the company’s stock valued at $62,000 after acquiring an additional 38 shares during the last quarter. 91.43% of the stock is currently owned by institutional investors.
Shares of LAD opened at $289.12 on Friday. The company has a market cap of $8.75 billion, a P/E ratio of 8.58, a PEG ratio of 0.39 and a beta of 1.67. The stock has a fifty day moving average price of $294.20 and a 200 day moving average price of $324.66. The company has a debt-to-equity ratio of 0.57, a current ratio of 1.41 and a quick ratio of 0.49. Lithia Motors, Inc. has a 12 month low of $274.03 and a 12 month high of $417.98.
Lithia Motors (NYSE:LAD) last issued its quarterly earnings data on Tuesday, October 19th. The company reported $11.21 EPS for the quarter, topping the Zacks’ consensus estimate of $9.30 by $1.91. The firm had revenue of $6.17 billion during the quarter, compared to the consensus estimate of $5.75 billion. Lithia Motors had a return on equity of 26.99% and a net margin of 4.67%. The firm’s revenue was up 70.4% on a year-over-year basis. During the same period in the prior year, the business earned $6.89 EPS. As a group, research analysts anticipate that Lithia Motors, Inc. will post 38.39 earnings per share for the current year.
In other Lithia Motors news, Director Shauna Mcintyre sold 270 shares of the business’s stock in a transaction on Wednesday, December 15th. The stock was sold at an average price of $277.53, for a total transaction of $74,933.10. The sale was disclosed in a document filed with the Securities & Exchange Commission, which is available at the SEC website. Insiders own 3.00% of the company’s stock.
A number of equities research analysts have recently weighed in on the company. Morgan Stanley lowered their price target on Lithia Motors from $335.00 to $303.00 and set an “underweight” rating for the company in a report on Wednesday, November 17th. Seaport Res Ptn reiterated a “buy” rating on shares of Lithia Motors in a report on Friday, October 22nd. Zacks Investment Research upgraded Lithia Motors from a “hold” rating to a “strong-buy” rating and set a $324.00 price target for the company in a report on Tuesday, December 21st. Finally, Wells Fargo & Company assumed coverage on Lithia Motors in a report on Tuesday. They issued an “overweight” rating and a $345.00 price target for the company. One equities research analyst has rated the stock with a sell rating, one has issued a hold rating, five have assigned a buy rating and one has assigned a strong buy rating to the company’s stock. According to MarketBeat.com, the company has a consensus rating of “Buy” and a consensus price target of $401.29.
About Lithia Motors
Lithia Motors, Inc engages in the operation of automotive franchises and retail of new and used vehicles. It operates through the following segments: Domestic, Import and Luxury. The Domestic segment comprises of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors, and Ford.
Read More: Economic Bubble
Want to see what other hedge funds are holding LAD? Visit HoldingsChannel.com to get the latest 13F filings and insider trades for Lithia Motors, Inc. (NYSE:LAD).
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The Actual Impact Of Bitcoin On War
The Actual Impact Of Bitcoin On War
Authored by Matthew Pines via BitcoinMagazine.com,
The impact of Bitcoin on war will not simply be the…
The Actual Impact Of Bitcoin On War
The impact of Bitcoin on war will not simply be the eradication of violence, a problem of humanity since the dawn of time…
As bitcoin has appreciated and seen increased global adoption, it has emerged as a macroeconomically relevant phenomenon. This has turned formerly theoretical debates into live, practical questions on how Bitcoin will affect geopolitical relations. The current balance of global power is defined by complex arrangements of military alliances, trade flows, ethnic and religious affinity, cultural influence, linguistic agreement, and, of course, national borders.
In this author’s view, it is hubris to expect Bitcoin to singularly override or sweep away the accumulated weight and historical inertia of this tightly-bound matrix of interlinked forces. Of course, it is tempting to smooth over this irreducible complexity and hypothesize a “saved” world, where bitcoin is that “one weird trick” to fix all that’s wrong with human civilization. This temptation to “immanentize the eschaton” is common among totalizing belief systems and becomes an emotionally attractive picture of the future, especially in an era where formerly trusted verities of common belief are losing their stabilizing force. And yet, we can still, and increasingly must, analyze the question of violence – especially state violence – in a future world order where Bitcoin is a major, if not the dominant, economic and political force.
Some reason that Bitcoin will positively adjust the calculus of violence by which states decide how and where to project power and secure their respective interests. By shifting a large portion of national wealth from easily seized and vulnerable tangible assets into digital form, the incentives to violent conflict – as a means of confiscating this wealth – are substantially reduced. This moves the locus of inter-state conflict from the battlefield to the global, competitive mining market. Real wars become hash wars, and the negative externalities of the former (death and destruction) are replaced by the positive externalities of the latter (energy efficient computation and power generation).
While this is well-reasoned and accords with the likely directional influence of Bitcoin on state competition, it is overly simplistic and incomplete. For human conflict exists on a spectrum: from soft power influence and psychological operations (psyops), gray zone subversion, and deniable covert action or sabotage to more overt forms of military violence via stand-off strikes, large-scale invasion, and (in the escalatory limit) all-out nuclear war.
To claim Bitcoin will usher in an era of enduring world peace is to argue that it will eliminate all of these long-enduring sources and methods of human conflict. It is possible it will, but there are contrary forces at play that must not be overlooked. Considering the full set of relevant factors, a more reasonable thesis to hold is one in which Bitcoin may constrain certain forms of large-scale, expensive conventional war, but may not (on net) materially reduce human conflict or substantially constrain state violence.
One can argue that all property claims, when it comes down to it, are enforced via violence or the threat thereof. (Bracket off for now the strong anthropological evidence, especially in human prehistory, that it is possible for communal social arrangements to endure with group-rights to “property,” though it remains an open question how durable these arrangements are as populations scale and cultural heterogeneity erodes the informal norms and coherence of group identity which mitigates violent dispute.) If Bitcoin succeeds in transposing most property claims from a vulnerable physical form to a more easily protected digital bearer asset, then one may argue that bitcoin removes one potent locus of physical violence from the world: physical property. However, even if one holds that all physical property claims are inherent or latent sources of violence, this doesn’t imply that all sources of human violence (namely, war) result from conflict over physical property. So even if Bitcoin succeeds in reducing one driver of war, one may not feel confident in the claim that Bitcoin fixes all, or even the dominant, drivers of war.
I) Bitcoin reduces the state budget for war … but warfighting technology improvements will give states (and everyone else) “more for less” (partly because of bitcoin).
One important, and little remarked-upon, factor is a corollary of Jeff Booth’s thesis (well-articulated in his book, ”The Price Of Tomorrow”) on the deflationary impact of technology. Much recent technological progress – especially in computational hardware, machine learning/artificial intelligence, resilient network communications, quantum computation, robotics/unmanned systems, 3D manufacturing, biological synthesis, propulsion systems, novel energetics, space launch and surveillance , among others – is being driven by and for military applications. The implication of Jeff Booth’s thesis (which has been borne out to date) is that just as technology drives exponential progress in consumer goods and services getting better and cheaper, so will the warfighter get “more for less.” More problematic, however, is that this will likely result in a proliferation of advanced technology that “democratizes” violence and distributes powerful capabilities to a broad range of human actors, with their use increasingly unconstrained by rules of engagement, Geneva Conventions, or deterrence considerations.
One can imagine a world that has fully adopted a Bitcoin standard, but in which zero-day exploits in critical enterprise software and industrial control systems are found and deployed by teenage Minecraft players, autonomous drone-swarms are built and launched by hobbyists for a few hundred dollars, a disaffected postdoc cooks up synthetic viruses in his garage laboratory, and AI-bot armies execute continuous psyops campaigns against target populations. Further, as Jeff Booth has argued, Bitcoin’s natural alignment with these deflationary forces may accelerate technological progress, which while certainly positive for civilization at large, will likely have these kinds of spillover effects.
At a different scale, once bitcoin becomes a globally-adopted neutral reserve asset, protection of domestic mining operations tightly integrated into energy grids becomes a national security issue. While mining firms within each nation will likely be regulated into coopetitive arrangements that dissuade disorderly sabotage, no such constraints will exist between states. In the zero-sum battle for the next nonce (and assuming the combination block reward and fee reflect the state of global adoption), the incentive to undercut one’s global competition will be large.
This will manifest first in sophisticated corporate espionage and sabotage operations, likely involving the same sorts of firms which now hire armies of ex-intelligence and military professionals to conduct all sorts of unsavory activities around the world. As is the case with strategically important industries today, these types of activities tend to fuse with state intelligence services. Bitcoin mining may become a strategically important industry, if not the most important such industry in the most geopolitically powerful and relevant nations.
Thus, it should not be surprising if we come to see state intelligence agencies brought into service to protect domestic mining operations and develop offensive capabilities to threaten their global competitors. Given the interconnection of these mining operations with regional energy production and grid networks, this will compound the existing risks states face in protecting against cyberattacks and disruption to critical infrastructure.
States (and/or their deniable proxies) will find and exploit vulnerabilities in each other’and national Bitcoin operations, which may range from executing sophisticated supply chain attacks that compromise competitor ASICs, to outright physical or cyber-enabled sabotage. This will set off an increasingly expensive game to relocate and protect one’s domestic mining infrastructure. However, the lessons from the current spate of cyber-incidents is that the offense is inherently advantaged over defense in these types of digital environments. It could be the case that the direct, substantial incentive that Bitcoin provides energy owners to protect their networks will finally focus attention on basic cyber-hygiene, insider-threat mitigation, and effective business continuity activities, but this is more a hope than a rational expectation.
While beyond the scope of this essay to fully analyze, it is plausible that bitcoin, if adopted as the primary global neutral reserve asset, will constrain (but not eliminate) most forms of national debt finance. Note that it is likely that before it reaches equilibrium adoption as a unit of account (which could be a very long ways away), bitcoin will spend a substantial period of time as a reserve asset (taking increasingly dominant share of similar assets) in its store of value function and somewhat as a medium of exchange vehicle to settle large balances between institutions and governments and in jurisdictions which have adopted it as legal tender.
In such a period, there are reasons to believe that large states will still find willing creditors for their national debt (denominated in local currency or, more likely, USD), subject to collateral conditions relating to that nation’s (provable) bitcoin reserve. Such creditors will assess the default risk of such sovereigns in a similar manner as today (and as throughout history), and will take the nation’s bitcoin reserve, its taxing ability, fiat currency acceptability, and extant geopolitical position as factors to consider when lending out their own bitcoin to help these governments’ finance expenditures beyond their existing fiscal balance.
Note that this will likely be a much more constrained form of debt finance than we currently see, though it is hard to estimate this precisely. It most likely would not be sufficient to enable states to debt-finance large-scale, conventional wars involving mass mobilization, extensive heavy armaments, and protracted deployments, let alone decades-long occupations or “nation-building” imperial misadventures.
Even if one doubts the above argument and believes that Bitcoin will absolutely bind governments to self-fund entirely via tax arrangements subject to revised social contracts delimiting the scope of such spending, war likely won’t disappear. This is because war (especially in the form near-future technology will enable) may not be that expensive to prosecute. As we saw above, the exponential effect of technological deflation (partly enabled by bitcoin shifting investor time preference and raising the hurdle rate for productive capital investment) will accelerate the trend already underway to radically cheap, but asymmetrically effective weapons.
National defense strategies (among the most geopolitically significant states) will plausibly evolve towards a barbell strategy that combines irregular warfare capabilities with nuclear deterrence. The most expensive parts of national defense budgets derive from having to pay, train, equip, supply, transport, and provide medical benefits to human soldiers, and to construct manned platforms (e.g., aircraft carrier battlegroups) to project violent force. The next few decades will see a shift towards autonomous and unmanned weapons systems and cyber-enabled electronic warfare to deny, disrupt, and destroy similar adversary systems. Humans will be reserved for the special operations and irregular warfare activities in the broadening “gray zone” of state conflict that sits just below the threshold of overt peer-on-peer war. One perverse effect of the very power of nuclear weapons is the creation of deterrence voids for non-nuke threshold conflict, especially in deniable or gray-zone domains.
As the capabilities to cheaply execute effective operations in these domains increases, the incentive to do so, while knowing the nuclear threshold sits high above, will be strong for many states. One can imagine revanchist regimes or those disposed to take special advantage of newly affordable weapons systems to prosecute long-awaited grievances or secure what they may see as marginal, and increasingly perishable, military superiority. For example, the 2020 Nagorno-Karabakh war saw Azerbaijan combine drone technology and long-range sensors to direct precision fires that dominated the battlefield and decisively tipped the scales in a decades-long conflict. These capabilities would have been out of reach just a few years ago, but were made affordable to such a small state by the deflationary impact of technological progress.
It’s possible that even the relatively minimal costs of sustaining these forms of asymmetric capabilities will outweigh their benefit (priced in bitcoin, even). But this seems unlikely, especially if the technology deflation continues to make them ever cheaper, and while the world remains a contested, finite geography riven by historically embedded lines of division and political heterogeneity.
II) States will likely continue to sustain and expand world-ending nuclear capabilities, even under a Bitcoin standard, merely as a result of the locked-in logic of deterrence.
The one military technology where states are likely to be less cost sensitive are nuclear weapons. Despite the hopes of disarmament activists decades running, this particular genie isn’t going back in the bottle. The existential consequences of nuclear weapons will continue to hang like a sword of Damocles over humanity until we reach some (as yet unenvisioned) plane of enlightenment that ushers in enduring global accord. Until that time, we will require that states invest whatever is necessary in order to maintain extremely secure and reliable nuclear command, control, and communications (NC3) systems.
It isn’t too much of a stretch to call the U.S. government (to take one example) as a form of nuclear monarchy. While our constitution vests the Commander in Chief (CiC) executive powers over the armed forces, it formally remands the authority to declare war with the Congress. While presidents have found various ways around this particular constraint, they still feel compelled to come to Congress to receive the political dispensation offered by “authorizations to use military force.”
The time-scales of nuclear war, however, render all of that moot. Given the precious few minutes between launch detection and detonation, the CiC is given sole and unchallenged authority to issue counter-strike orders, able to select from a menu of pre-selected target packages (defined in the Single Integrated Operational Plan). This nuclear SIOP is designed explicitly to convince our nuclear adversaries that a devastating retaliatory strike is guaranteed, a deterrence logic captured by the dictum of mutually assured destruction.
The fraught stability of this system courted catastrophe several times during the Cold War, and that era was comparatively simple from a game-theoretic perspective. As more (and less stable) states continue to nuclearize, the dynamics of multi-party deterrence becomes dangerously unpredictable. Further, technology is pushing the capability envelope, from dial-a-yield “tactical” weapons (e.g., the U.S. B61 bomb) to mega-weapons (e.g., Russia’s Status-6 unmanned nuclear torpedo with a potentially 100MT payload), as well as novel delivery platforms like hypersonic glide vehicles and fractional orbital bombardment systems (like that recently demonstrated by China).
Now, you may be asking why this excursion on nuclear weapons. Well, if the question at issue is the degree to which Bitcoin may constrain state violence, and war in particular, it seems to me absolutely imperative to recognize the deeply embedded present system of nuclear deterrence. Such a structure – which places the power of world-ending violence in the hands of individual political leaders – isn’t likely to change anytime soon (no matter what happens with Bitcoin). Humble Bitcoiners must reconcile themselves to this unfortunate reality, and hope that the enlightened Bitcoiner leaders of the future will dedicate themselves to reinvigorate the failed non-proliferation, denuclearization, and arms-reduction efforts of our current politicians.
III) Bitcoin fixes a lot of things, but war is unlikely to be one of them (at least for the foreseeable future).
More fundamentally, human conflict isn’t always (or even mostly) motivated to directly seize monetary wealth. We fight each other for many reasons, including over scarce assets (e.g., water rights, agricultural land, minerals, rare earth metals, oil, and natural geographic features like ports, navigable waterways, straits, etc.), ethnic, tribal, or religious enmity, national pride or honor, domestic political wagging-of-the-dog, or just because of some individual leader’s mania or even group collective insanity.
While humans are capable of some wondrous things, our capacity for violence and destruction (especially against our own self-considered and “rational” interest) is legion. In the “long-run,” one can, possibly, envision a utopia of abundance where all conceivable axes of human conflict have been eliminated or mitigated. But this seems so far off as to distract from the more likely practical scenarios we must navigate in the decades ahead.
Bitcoin as a bearer asset presents immense benefits as well as security challenges for individual holders. These will scale with the scale of adoption. It will be hard to steal a nation’s or a large corporation’s bitcoin, but not impossible, and the incentives to try will be large. Right now, national governments substantially invest in securing domestic critical infrastructure – especially the financial system and its centralized, interconnected digital ledgers – from cyberattack, insider exploitation, theft, sabotage, and natural hazard disruption. Bitcoin’s ledger needs no such protection thanks to the geographic distribution, scale-free self-healing network structure, and endogenous incentives of miners (bracket off the 51% attack arguments here), but our keys do.
If you don’t believe the combined intelligence and defense capabilities of the world’s (remaining, likely most powerful) states will not invest in forms of violence, compellence, theft, sabotage, and manipulation to undercut their rival’s economic stability, I encourage more “adversarial thinking.”
The precise outlines of the future state of geopolitical competition in a Bitcoin standard are hard to foresee. Exactly how the incentives of Bitcoin mining and national reserve adoption may affect the calculus of inter-state violence is unknowable. Still, we can reason and explore the parameter space of possibilities given present conditions and projected trends. There are good reasons to believe that Bitcoin may reduce the incentive for large-scale, conventional war and imperial-style occupations. At the same time, such forms of state violence may become outmoded regardless of Bitcoin due to the dramatic improvement in weapons technology to asymptotically project power with relatively little cost. Further, the posture of nuclear forces – and the taught logic of deterrence we rely on to prevent their use – will likely be entirely unchanged by Bitcoin (at least for the foreseeable future).
Where does this leave us on the question of Bitcoin and war? Unfortunately, I’m not optimistic that it will fundamentally alter the strategic balance of geopolitical forces in such a way as to substantially reduce the likelihood of destructive state conflict. This is no fault of Bitcoin, which promises a great reformation and improvement in many critical aspects of our civilization. Rather, this is merely a statement that, for all its power, Bitcoin is unlikely to change (in our lifetimes, at least) inherent aspects of the human condition, existing as we are on a finite planet, burdened by the frailties of nature and our fraught history.
Bitcoin is a net good for humanity, and especially good for those states that recognize its virtues before others. Bitcoin fixes a lot of things, and these should be explained clearly and proclaimed proudly, to all who wish to hear. For all its promise however, Bitcoin is unlikely to fix war. Until it does, stay humble and stack sats.
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