You don’t invest for today. You invest for tomorrow. The stock market reflects expected circumstances at least 6 months in future. Bond yields and equity dividends are based not just on past performance but also on future expectations. Unexpected events can trigger instant reactions. These “black swan” events can shift expectations overnight.
Summary: This week’s article will discuss how unexpected disruptions, ‘black swan events’, can impact economies and markets, and argue that cryptocurrencies are a growing source of future black swan events.
Why investors should care.
Not many companies have survived more than a century. Even fewer have been able to sustain their dividend payments without halt or reduction for that long. Doing so is an incredible accomplishment given all the shocks and disruptions we have witnessed over the past century. Unexpected disruptions can cause profound changes in the trajectory of a country and in the performance of its economy.
Unexpected disruptions—black swan events—are the most challenging events for investors and companies alike.
For most people, the 2008 bank crash and the 2020 COVID crash were black swans. Few expected those events, and markets strongly reacted to the surprise each time.
Currently, most analysts expect the S&P 500 to rise in the coming year between 9% and 19%. Of the 16 research firms described in the link below, none expect it to achieve a third year of 20% plus increase as happened under Biden in 2023 and 2024. That kind of growth hasn’t happened since Bill Clinton in 1998 and 1999 (then came the tech crash). Only one research firm, Stifel, expects a significant correction, projecting the market ending down about 8% by end of the coming year.
Stifel notes that "in the span of U.S. history there have been few Great Disruptors like the incoming administration, which may have two years to cement its agenda, adding headline risk to the first half of 2025.” Kiplinger
I think Stifel has the source of the market drop correct. But I think they have underestimated the degree of disruption. I think Trump and cabinet will be among the biggest disruptors in US history.
No Senate Democrat should vote to confirm any of his cabinet nominees.
If they do, they will tar themselves with what will likely be not just epic failure, but epic corruption and mal-administration leading to one of the greatest economic disasters in US history.
Last week’s article discussed one of those great disruptors, Andrew Jackson. And it traced much of that disruption to his war on the Bank of US. It’s no accident Trump had a portrait of Jackson in the Oval Office during his first term. And it’s no accident Trump in his second term is considering all kinds of fiddling with financial regulators and the purchase of significant volumes of cryptocurrency.
I’m not alone in fearing another banking crisis due to Trump. See for example this post from Paul Krugman: the ghost of banking panics future
Don’t let disruption take YOU by surprise.
Many analysts apparently will be.
First, the context for disruption as an economic event: Expectations about the future set the basis for surprises when those expectations do not happen. Every quarter analysts release expected earnings of companies. Those that surprise to the upside (do a better job boosting profits than expected) rise. Those that surprise to the downside, and do it too often, drop in price. Disruptions can surprise markets, and surprises can disrupt markets until investors, companies or governments can figure out and fix whatever happened.
Expectations, in sum, are absolutely central to market dynamics.
As you saw in the Kiplinger article, only one out of sixteen market research firms expects a drop in the market. That is the classic setup for a surprise.
(Parts of this series, one, two, three, four, five, six and seven. Five is particularly relevant in terms of the global context which makes the “black swan” of a US market correction of epic proportions discussed in this article even more unsurprising.)
Expectations about the future show up in prices.
For example, if you look at a chart of the yields for US 10-year treasury bills CHART you can see that yields peaked at 15.8% in June 1981. In 1981, everyone expected inflation to continue at the high rate then prevalent. But the FED jacked rates sky high, unemployment soared and inflation plummeted.
The FED acted deliberately to change consumer, investor, worker and corporate expectations about inflation. It announced ahead of time that was its intention, and it announced how it was going to do it. It triggered the worst recession since WWII in 1982-83, until the Great Recession of 2008-09 and the COVID recession of 2020-21.
But, Reagan got re-elected by all but one state in 1984, proclaiming the dawning of “morning in America” after a long period of inflation and disruptions. He had credibility because he supported the announced actions of the FED and defended them as part of a necessary cure for inflation.
And by 1984 it seemed to be working.
Fast forward to our time.
In Christmas 2019, those yields hit a low point barely above 0.3% (yes, that’s about a third of one percent). People questioned whether interest rates would ever turn positive again. The rate of 0.3% was well below the low rate of inflation (i.e. was ‘negative’), and everyone expected rates to stay there.
Then COVID hit.
That black swan event collapsed supply chains built up over decades of growing global trade. The pandemic shattered expectations about “just in time” manufacturing and shipping on known timelines among WTO (World Trade Organization) members.
That black swan event changed everything.
Then along came another.
COVID had barely begun to recede when Russia invaded Ukraine and disrupted global energy supply chains and investments into Russia and Europe. China’s support for Russia prompted more US reaction in the form of increased tariffs and restrictions on national security related manufacture (especially computer chips). Investors globally poured investment into the one economy large enough, predictable enough, and liquid enough to seem safe, and US stock markets soared. As described in an earlier article, Part Five (link above) , the vast bulk of global equity investments (nearly 70%) are in the US stock markets, despite a GDP that represents only 27% of the global economy.
That fact alone should be a reason for concern to investors largely invested in the US stock markets. If global equity flees, US equity prices will fall and could stay down for a long time in real terms.
Inflation as a measure of expectations
Trump’s election with its clown car parade of reality-detached appointees—much less his own chaotic decision making—makes disruption on a daily basis a growing concern for businesses around the world. How long will confidence in the US markets hold up? Remember, even most MAGA believers thought much of Trump’s dark threats were just rhetoric. Already it is beginning to dawn on the unenlightened and skeptical that maybe, just maybe, Trump wasn’t kidding, or just exaggerating to make a point.
Markets are already reacting.
Right now the yield on 10-year treasury bills is around 4.6%. The yield was trending down until September, when it hit the low point of the year at about 3.6%. Yields have been rising ever since. Yields rise because the people buying treasuries, which are government debt, expect inflation to increase. So they demand more interest on their money before loaning it to the US government.
The surprise is that these yields have gone UP when the FED rate has gone DOWN.
That doesn’t happen often. OK, it almost NEVER happens.
That is the key point here: Lenders are concerned about Trump’s handling of the economy and are pulling back from holding longer term treasuries. Trump wants to increase spending, but lenders are increasingly reluctant to lend.
Trump does not like being in thrall to any checks on his actions.
So what will he do about those restraints? He wants so badly to extend “his” tax cuts and make them even bigger.
Bloomberg is already carrying articles about a debt crisis; unfortunately they are behind a pay wall. Bitcoin news, a source that can’t fully be trusted because of a strong bias toward encouraging investors to buy crypto, describes what would happen. financial analyst predicts massive debt crisis for US economy in 2025 The Center for American Progress, a more Democratic Party friendly research center, sees the debt crisis more broadly and probes signs of stress from debt among businesses and consumers as well as governments. It also predicts the disaster capitalists of Wall Street would use a debt crisis to make a killing.
Credit card defaults hit a peak this last quarter not approached since the Great Recession of 2008-09. FORBES
There appears to be a brewing debt crisis, affecting both the private sector and the public sector.
Why, you ask, are loaners expecting inflation to rise if it looks like we might have a debt crisis? Hasn’t inflation been falling?
Wouldn’t it fall if there is a recession?
Yes, inflation has been falling since it peaked in 2022. Until September the market clearly expected Harris to win, and expected Harris to continue Biden’s general reduction of the deficit. In 2020 Trump left a $3.1 trillion budget deficit. By 2022 Biden got it down to $1.4 trillion, but it crept up in 2023 to $1.7 trillion and will likely hit about $1.8 trillion by year’s end.
Economists project Trump’s many budget busting promises to roughly double that deficit. Remember, much of Trump’s already historic increase in the deficit occurred when interest rates were incredibly low. Now, they are high, and rising. Trump’s budget busting proposals now come in a time when increased rates enormously increases the cost of carrying that debt.
In 2023, the interest on the national debt was around $500 billion dollars a year. In 2024, that cost rose to around $600 billion. That’s a 20% leap in interest cost in just one year.
Make sure you read that: A 20% jump in interest costs in one year for the US Federal budget.
The Coming Crisis
Deficit spending usually stimulates the economy, but it also can and usually does increase inflation. In this case, deficit spending could trigger much more than just inflation. It could trigger a debt crisis. These have happened often in other countries, but not since 1971 has the US had such a crisis.
That one saw the US abandon the gold standard.
The 1970s were a period of great economic disruption and change globally. I remember it well. I entered the job market from high school the year the Nixon shock was inflicted. I got married the year wages for blue collar workers peaked in real terms, not to be matched even to this day. And I went to college and grad school all through the two oil shocks of 1974-75 and 1979-80 and the wild inflation they triggered. I was also living in Asia during the 1997 Asian Currency Crisis.
I can recognize a debt crisis when one is brewing.
I think we are again stumbling towards a debt crisis, at least a crisis for the current system of finance and currency management based on the US dollar as the world’s reserve currency. A crisis where the US can no longer pay the interest on its debt, or refuses to take the steps needed to pay it, and where no one wants to hold that debt at any price (at any rate of interest).
At least as long as it is denominated in rapidly inflating dollars.
This may seem unimaginable, or so far off as to not yet be a concern. Most Americans alive today haven’t seen a debt crisis up close and personal like I have, twice. But as discussed above, black swan events happen when the unimaginable and unexpected becomes very suddenly all too real.
Political leaders have historically had five options when they are no longer able to pay interest on their debt:
- Devalue the currency and inflate their way out.
- Restructure the debt with the assistance of entities like the IMF. This option is not open to the US – no such entity is big enough to absorb the cost of refinancing our debts.
- Renegotiate the debt, such as asking lenders to accept lower interest rates or asking for a longer period of repayment (e.g. transforming 10 year T-Bills into 30 year T-bills).
- Repudiate the debt, where they just say they’re not going to pay any debt back.
- Increase taxes and/or cut spending so they can afford the interest payments.
But now, Trump has a new idea: to “write a little crypto check” to pay the national debt.
His plan, if such a thing can be called a plan, is to make the government invest in a cryptocurrency ‘strategic reserve’ under the assumption that its value will increase at such a pace that the reserve eventually outweighs the debt and can be used to pay it off.
If that last gambit sounds like a con to you, well, you have a good nose.
There are numerous problems and risks with this scheme.
In fact, there are too many for me to cover in this article, so I will have to cover some here and the remainder in next week’s article.
This is a case of, how problematic can it possibly be?
Let me start counting the ways. And that counting is gonna take awhile.
Problem One: Some Minor Logic Issues (minor my foot!)
Currently the only way the government acquires cryptocurrency is by seizing it from criminals. This ad hoc method of acquisition will not be sufficient to build a meaningful ‘strategic reserve’ so ultimately some other method will be required. One potential method is to permit people to pay their taxes in cryptocurrency, though a lot of people would have to be paying that way to build up the ‘strategic reserve’ at a useful pace. Another likelier method is for the government to purchase large volumes of cryptocurrency with borrowed dollars.
Even more borrowed dollars, that is.
However, either method could hasten on the very debt crisis this crypto scheme is supposed to solve. If implemented, the government will either have significantly lowered its tax receipts and/or taken on a lot more debt to pay for the ‘strategic reserve’ and so would be in even more dire financial straits than before.
Regardless of acquisition method, it may occur to you to wonder how much cryptocurrency this ‘strategic reserve’ would need to make a dent on the debt. And here we encounter another “minor” logic problem; the current US debt is over 35 trillion dollars, while the current market cap (value) of all cryptocurrencies put together is just over 3 trillion dollars.
Even if the US Treasury bought a trillion dollars in bitcoin rather than the $100 billion likely to be proposed, and it doubled in value, then doubled again, then doubled again it would still fall far short of paying off the debt, especially since interest alone on the borrowed dollars to buy the crypto would have driven the national debt into being much, much larger by time that doubling, doubling again and doubling yet again took place.
And who could it sell it to without crashing the value?
Make sure you answer that question.
So even if the government bought every last cryptocoin on the market, it would still need that ‘investment’ to have returns of over 1000%. Such returns have occurred before in crypto markets – but only on a relatively small scale.
There just aren’t enough speculators and degenerate gamblers in the world to inflate a bubble big enough to float Uncle Sam.
Problem Two: The Hastening of Dedollarization
Since the US dollar is the global reserve currency used in most trade transactions, there is steady demand for US dollars among nearly all foreign countries. But many countries want to replace the US dollar as the medium of trade exchanges, or ‘dedollarize.’ See article five in this series for details at the link above.
Cryptocurrencies could, in theory, become a rival to the US dollar and hasten the dedollarization of the global economy. They are already being used in trade, particularly by countries that do not like to use the US dollar. This becomes more plausible if the US itself is lending credibility and liquidity to cryptocurrencies by buying huge volumes of them with dollars.
If dedollarization were to occur the American people would experience severe negative consequences.
In other, rather crass words, we would be screwed. Or as the French put it, hoisted on our own petard.
Demand is the source of value for any item. Scarcity does nothing if no one wants that scarce item anyway. If demand drops for the US dollar, what then happens to its value (in this case, purchasing power)?
That’s right. It drops.
And when the value of the dollar drops, the cost of all imported goods goes up and the relative value of dollar-valued assets and dividends drops.
And that means yet more inflation for US consumers, and more incentive for foreign investors to pull their capital out of US equity markets.
That’s the negative spiral you hear about sometimes. Another name of that pulling out is panic.
And a third? A black swan event.
Problem Three: Achieving the American Libertarian Dream
Libertarianism has been the driving force behind the Republican Party’s increasingly radical dismissal of government as a regulatory agency of any kind, particularly in its potential to curb the excessive concentrations of wealth and power favored by Republicans and their billionaire backers.
Libertarianism was also the economic theory behind the invention of cryptocurrencies. They were designed from the beginning to be difficult if not impossible for governments and regulated banks to monitor or control. As Paul Krugman noted:
“If you go back to the 2008 white paper by the pseudonymous Satoshi Nakamoto that gave rise to Bitcoin, its main argument was that we needed to replace checking accounts with blockchain-based payments because you can’t trust banks; crypto promoters also tend to preach libertarianism, touting crypto as a way to escape government tyranny. Now we have crypto boosters demanding that the evil government force the evil banks to let them have conventional checking accounts.
What’s going on here? Elon Musk, Marc Andreesen and others claim that there’s a deep state conspiracy to undermine crypto, because of course they do. But the real reason banks don’t want to be financially connected to crypto is that they believe, with good reason, that to the extent that cryptocurrencies are used for anything besides speculation, much of that activity is criminal — and they don’t want to be accused of acting as accessories.”
https://paulkrugman.substack.com/p/crypto-is-for-criming
Governments try to stifle black market activities because they are full of fraud and are avenues to escape taxation. Effectively, black markets are very costly to government, and if they are allowed to proliferate, thrust more of the tax burden onto honest people. Criminals gain relative wealth, being untaxed, and thus gain power and leverage over government officials.
It's no accident Steve Bannon is a big crypto and libertarianism promoter.
And a convicted crook.
And it’s no accident that crypto promoters want to cripple, if not abolish, the regulatory system for the US and hence global financial system. The more effective international sanctions are on criminal behavior by governments and criminals, the more the criminals want to end the regulatory regimes that make such sanctions work.
Now you understand why Trump and his billionaire buddies are targeting our regulatory agencies, and why Putin and every other international crook backed Trump’s campaign with, you guessed it, really dark crypto money.
British authorities recently disrupted a money laundering scheme in which cryptocurrencies played a key role. As Krugman noted in the same substack article above: “Howard Lutnick, Trump’s choice for Commerce secretary, has close ties to Tether, the company that is at the heart of the scheme the UK just uncovered and is rumored to play a large role in money laundering in general.”
If Trump manages to legitimize unregulated cryptocurrencies then a long sought dream of Libertarians will be achieved: fraudsters, tax dodgers, money launderers and more will finally be free from the oppression of having to obey the law. The ability of the People to use the apparatus of their collective will, their government, to rein in the depredations of the crooks and the ultra-wealthy will be greatly weakened.
For Bannon and Musk and their associated band of tech bro crooks: Objective achieved.
Problem Four: The Greatest Fool Theory
Aside from black markets and the occasional international money transfer, the primary basis of cryptocurrency value has been speculation, or “the Greater Fool Theory” of investment. But one problem that crypto ‘billionaires’ have faced is not having enough Greater Fools. Which is to say, you can have billions of dollars-worth of bitcoin, but if you try to sell all your coins at once that could crash the value of bitcoin and you might get only a fraction of your paper wealth. You can only convert your crypto wealth to dollars at a relatively slow pace, as new Greater Fools bring their dollars into the market.
They have already discovered that the MAGA herd are not rich enough to satisfy their desperate need for bigger yachts.
But then along comes the Greatest Fool of All: the US government, with pockets deep enough to instantly turn all the crypto bros into real billionaires and not just ‘magic bean’ billionaires.
Donald Trump has made a career of enriching himself by putting other peoples’ money at risk, and now he wants the government to buy crypto.
We should be suspicious.
Very, very suspicious.
I mean, really, deeply suspicious.
I fear this cryptocurrency ‘strategic reserve’ may just be a mechanism to transfer vast amounts of wealth to the crypto bros and their Trump inner-circle allies. By forcing the government to pay dollars to buy up crypto from those people, that would enable them to realize and monetize their enormous speculative gains and transfer the downside risk of their cryptocurrency to the US taxpayers and bondholders.
Yep. That means we’re left holding the bag (of magic beans, as it were).
Even worse, if they can get the government to accept taxes on those realized gains via crypto then it’s even more beneficial for them – they get the government to buy their magic beans and pay the tax on the sale in magic beans too.
But then the government would be stuck with billions in highly speculative and illiquid assets, and if (when?) the bottom falls out of the cryptocurrency market the American public would be left holding nothing in the “reserve” that remember, was supposed to pay off the national debt. Far from solving the debt crisis, if the wealth transfer (theft) is large enough this could precipitate and deepen the crisis.
Now, THAT would be a real black swan.
Do something purported to be the solution to the national debt, only to have it all come crashing down and making the debt far far worse—and with foreigners so spooked by Uncle Sucker’s stupidity that they lose all confidence in the United States Dollar.
Then who would hold our debt for 4.6%, or even 46% for 10 years?
But at least Trump, Peter Thiel, and the Winklevoss twins would each have their third or fourth private islands, right? I’m sure they would quickly take all those US dollars they got from selling their crypto currency to the government, and squirrel it away in some other country’s currency less stupidly led than ours.
And, with the US dollar rejected and replaced as the global reserve currency and our economy shrunken by the crash in confidence, we would no longer have the power to coerce those foreign banks into disclosing their secret bank accounts.
It’s like robbing the bank, then shooting the sheriff in both knee caps.
Or Brexit. On steroids. And the Russians win another one for Putin. The Anglo-American dominance of the global economy—a dominance that is over two centuries old, harkening back to the Napoleonic Wars—would be over.
Yes, I think the research firm Stifel significantly underestimates Trump’s potential for disruptive surprises.
Happy New Year, people. It’s likely going to be a memorable one.
Next Week: More risks of cryptocurrencies, and implications for investments.
Disclaimer and disclosures:
I am not a CFA (chartered financial analyst). This article and comments are not investment advice from a fiduciary. They are discussions among investors with varying levels of experience. For over 30 years I taught state-market interactions at under-graduate and graduate level, focusing mainly on economic history and thought as well as specialized classes on international trade structures (WTO) and dynamics, and public administration as it relates to economic policy making, taxation and regulation, mainly in China. I was an area political-economic risk analyst for a decade for an internationally known risk assessment firm. I have technical degrees (and experience) as well as academic degrees, including a certification in Military History from West Point which would have let me teach ROTC classes if I had not gone overseas. I also started two small businesses (one a B-corporation type) and currently farm (organically and sustainably) in WA state. I have managed my own investment portfolios for at least 25 years. All advice is offered freely and from this context.