The Butterfly Touch

(Any views expressed here are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

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The seductive sensation of expectation permeates my body as the incipient bull market gently caresses my soul. As I jubilantly press the buy button, I know speculative excesses will propel my portfolio to new heights … at least until the maddening crowd awakens from its drunken reverie to reel in its optimism of a more glorious future and the physics of gravity reasserts itself over human financial markets.

The future, as foretold by the gaggle of cheerleaders this time around, is replete with AI agents running amok, producing a thought to be unlimited economic bounty. The new masters of the universe, American and Chinese tech bros, build a substrate from which AI emerges into existence. Ensconced in their silicon encrusted palaces in San Francisco and Hangzhou their companies hoover up all available capital to build heaven on earth, at least for their shareholders and The Party, and when capital becomes scarce berate the political class of this era to support the printing of dollars and yuan to further extend their prowess.

An orgy of construction focused on creating an AI utopia is not the only raging party. Another type of bro revels in the erection of a global edifice of death. Why should Pax Americana be the only purveyor of pain? Their glorious nation requires the most badass means to exterminate the enemies of the state because one cannot rely upon the mercurial permanently tanned emperor to rush to the assistance of his supposed allies. Therefore, it is essential to build bombs using printed money and conscript young men to face death for the glory of … I don’t know what.

And we are those unfortunate souls who under-invested in the production of the necessities of life but gorged instead on the debt and equity of the empire. Their dollar savings were ‌of dubious value when the arteries of trade became clogged as the dark durka towel heads misbehaved. The decision to outsource the production of life’s necessities will produce possible famine and social unrest. The plebeians shall seek redress in the streets by placing the heads of pompous politicians on spikes.

The politicians and their wanker banker lackeys have three valid, in their minds, reasons to support unrestrained money printing either by the central or commercial banks. Catalysing the decision to allow credit to flow faster than before is the ongoing war between America and Iran. The war, apart from being yet another sad episode of death and destruction between old men who have different ideas on how to rule their plebes, clearly shows that the use of AI and drones are the future of warfare and no nation can depend on the goodwill Pax Americana to defend the free flow of essential commodities around the world. Regarding AI, the view inside both America and China is that their nation-state must “win” the race to host the most machine intelligence within their borders or face a permanent defeat. Therefore, AI supremacy directly relates to national security. For everyone else, the ability to obtain food and energy under any circumstance requires the construction of redundant pipelines and other infrastructure paired with the stockpiling of fertilizer, food, and energy, not US treasuries and equities. The intersection of these themes, at least until the next US presidential election in 2028, will produce the political will to allow unchecked fiat credit creation. The bull market began in earnest when the US attacked Iran on February 28th.

Let this essay permit the bull in your soul to emerge out of its cocoon and fly towards a profitable future, even as many untouchables in the global south, because of the wartime disruption in the flow of essential commodities, starve to death in the shadows where mainstream media refuses to shine a light on.

AI Optimism

The CAPEX built out to support the training and inference of AI models and agents is unprecedented in civilized human history. Many argue that this investment in intelligence is different in terms of the value it will create for humanity than all other technological build-outs. I agree; however, as humans, we always overdo it. In this universe, infinity and perfection are unobtainable. Therefore, we can build too much in ‌anticipation of a future powered by machine intelligence.

AI-promoters invoke nationalism as a justification for spending insane amounts of money to build out AI capabilities by using the nation-state as a clever way to obfuscate the level of capital wastage. Patriotism should never have a price tag … oy vey. The presidents of America and China (Trump and Xi) both believe that AI and tech supremacy are integral to the survival of their fiefdoms. The tech bros in each squiggly line territory are more than happy to sell them a horror story of what happens to the glorious nation should the other side gain supremacy over machine intelligence. Objectively, both leaders witnessed how the proliferation of AI and drones can lead to victory on the battlefield, and bought into this fairytale hook, line, and sinker. As such, they will ensure that the number one goal of each country economically and militarily is to further the build-out of the most efficient machine intelligence instances within their nation-states. That means any backtalk from monetary policy makers about the inflationary effects of a massive expansion of dollar or yuan credit is verboten. Central or commercial banks will provide the capital the tech bros require.

In America, to date, most AI CAPEX has come from cash flow from operations of the most profitable software companies.

But the scale of current and future CAPEX spending now requires a growth in funding via the credit channel.

In China, Xi forced banks to stop funding the building of real estate and start funding tech.

Besides CAPEX related to data centers, both America and China continue to pump money into an increase in electricity generation.

This is not just a story of commercial banks doing their patriotic duty to lend to anything related to AI and data center build-out. Both the Fed and PBOC are creating more units of fiat, loosening financial conditions.

The combination of the political will to win the AI race and the financial will to fund the build-out with printed money and bank loans produces the perfect environment for crypto. There will be vastly more units of fiat tomorrow than today, and the rate of change is accelerating due to rapidly increasing yearly AI and electrification CAPEX expenditures. As the cost per unit of intelligence declines, the complexity of models and tasks performed by AI agents increases. Which means the consumption of compute increases exponentially; this is the essence of Jovan's Paradox. Add to that, the Red Queen Effect, which describes how AI CAPEX spent by one company depreciates rapidly as the model efficiency and complexity of their rivals increases. This results in a race to further increase CAPEX to create better frontier models to beat your competition, which renders their hundreds of billions and soon to be trillions of dollars spent obsolete as well. Because of these reasons, AI CAPEX spending will expand indefinitely unless checked by an exogenous market event.

When does the orgy end?

There are two events that I believe will occur almost simultaneously and produce a change in opinion about the necessity of spending trillions of dollars on an AI build-out. The first is an IPO or mega merger in the US or China related to tech and AI that is so big and financially irresponsible that the market cannot digest it. This will snap the market out of its manic phase. Folks will finally start asking whether greater machine intelligence is worth the amount of money being spent developing it. Once enough humans ask questions, the jig is up. The second event will be the rhetoric of the Team Blue Democrat challenger in the 2028 US presidential election. The inflation that this mega AI build-out causes in raw materials, labor, and most importantly electricity is not very popular in many parts of America. Also, 90% of Americans don’t own a lot of stocks, so they will not benefit from the surging share prices of AI and AI-adjacent companies. Politically, it is easy to run on an anti-AI platform focused on bringing back value to human labor and curtailing the inflationary impacts of the AI CAPEX build-out. Whether a Democrat wins is irrelevant; the popularity of this message will make capital allocators ponder a future where ‌credit stops flowing to AI by government mandate and regulations on AI dampen the future profitability of companies in the space. 

But in the here and now, dollar and yuan liquidity will continue to rise. And Bitcoin and crypto will benefit.

Every Nation-State for Itself

Trump bombed Iran with no care for the impact the war would have on the global economy. Maybe he does care, but the assumption of a speedy victory over Iran in this year's special military operation proved wildly optimistic. America possesses a Christian god given bounty of dead dinos and fertile farmland. Stuff might get more expensive, but no American will starve if months from now the Strait of Hormuz remains partially shut. They’ll starve if the politicians decide to spend more in Fallujah than on food stamps. The plebes in Europe, Africa, and most of Asia ain’t so lucky. But unfortunately for these nation-states, their political elites erroneously believed that American politicians would take their food and energy poor predicaments into consideration when deciding whether to start yet another middle eastern war which threatened to stymie the flow of essential commodities from the region to their global customers. 

These nations, trusting America had their back, made investment decisions that meant they saved their surplus in dollar financial assets rather than build pipelines, trade routes, or stock essential commodities for a rainy day. 

Marco Papic from BCA Research put it best:

This is a big problem for the rest of the world as the entire planet is – quite literally – wired for American hegemony. Let’s look around the world: 

Why is German defense against Russia inadequate? Because… America.

Why do most GCC countries have barely any energy transportation infrastructure with which to avoid shipping barrels of crude through Hormuz? Because… America. 

Why is so much of global manufacturing centered on China? Because… America.

Why does Australia get its kerosene from South Korea? Because… America. 

Why does so much of Canadian infrastructure rely on US demand? Because… America.

The physical infrastructure of the planet – energy, defense, transportation, manufacturing, etc. – is quite literally built with American geopolitical hegemony in mind. And this is not just about the US maintaining its massive current account deficit – a vestige of its Imperial magnanimity, which treated Canada’s, China’s, and Costa Rica’s imports the same (Chart 12). It is also built on the assumption that US defense spending is enormous because it underpins the globe’s geomacro context (Chart 13). In other words, the world is as it is because America desires it and will fight to defend it. 

That Bangladeshis are going to starve to death because of a smaller harvest because of lack of fertilizer shipped to them from the Persian Gulf, or the Australian Prime Minister had to get his eagle on in Singapore to obtain jet fuel after their only supplier, China, stopped exports, or Euro-poor-eans now import expensive US refined petroleum products and LNG rather than cheaper Russian or Qatari hydrocarbons, means that sovereign investment decisions will change drastically. There is no point in owning a US treasury or S&P 500 ETF when you cannot obtain food and energy because of a war you didn't start and with which you disagree. To rectify these inadequacies, in the future sovereign nations will, on the margin, liquidate dollar assets to spend their capital on infrastructure, defense, and the stockpiling of essential commodities.

Pax Americana requires financial tribute from foreigners to balance its books.

This is a problem for Pax Americana financial markets because of the large foreign ownership. Left unchecked, the slow liquidation of dollar assets will cause markets to fall. And given that the empire finances its gargantuan current account deficit with foreign capital, it creates the possibility of an acute financial crisis.

US Treasury Secretary Buffalo Bill Bessent and other monetary policy makers understand this. The two popular policy options to ameliorate the situation are to encourage the use of dollar swap lines and or alter banking regulations to nudge them into holding more treasuries on their balance sheets. 

If a friendly nation requires cash to invest in the necessities I described earlier, the Fed or Treasury can lend it to them via a dollar swap line. Now, said nation doesn’t have to actually sell any dollar assets and dampen the market; they just borrow against them. The UAE used these arguments why it deserves a dollar swap line. These lines of credit, when used, expand the amount of dollars in existence.

Bad Australia - They sell treasuries to buy jet fuel.

Good Australia - They borrow dollars from the Fed and buy jet fuel.

If the US markets require more juice to counter the persistent selling of sovereigns, banking regulations can be altered so that they can hold larger balances of treasuries and US stocks for a given amount of equity capital. The relaxation of capital charges on various types of financial securities pursuant to the eSLR is a step in this direction.

The best practice of saving economic surpluses in dollar assets began in the 1970s with the petrodollar arrangement between the US and Saudi Arabia and moved into hyperdrive after the Asian Financial Crisis in 1997-1998. But today, owning a dollar asset doesn’t ensure you can obtain a shipment of fertilizer or oil. You had better have invested in production at home, or financed the construction of infrastructure in neighboring countries to obtain the essential commodities of civilization. Just-in-time logistics is dead, long live just-in-case. This is a structural secular trend that will be with us for decades. Which means that whoever is in charge of Pax Americana’s monetary policy must on the margin leave financial conditions looser than they otherwise would have to plug the hole of foreigners ploughing their savings into physical infrastructure and commodities rather than fugazi dollar financial assets.

Higher for Longer

War is inflationary, and the US-Iran special military operation is no different. AI CAPEX and just-in-case infrastructure buildout and commodity stockpiling is the excuse for increased central and commercial bank lending. The politicians support this money printing out of real and perceived necessity. That is why Bitcoin post-February 28th is outperforming the other major risky assets such as gold and US tech stocks.

Post-war performance of Bitcoin (gold), Nasdaq 100 Index (magenta), IGV US (white), gold (orange)

Bitcoin bottomed earlier this year at $60,000, and with a tailwind of trillions of dollars and yuan yet to be created at its back, retaking the $126,000 is a foregone conclusion. Many haters will refuse to participate in this Bitcoin rally because it underperformed tech and gold substantially over the last twenty-four months. Many cannot fathom why Bitcoin is even relevant anymore as a hedge against wanton money printing. But it will demonstrate its sensitivity to an expansion of fiat liquidity. I expect the rally to intensify and the haters to cower in the corner as Bitcoin’s upward price trajectory turns explosive after punching through $90,000 where many call over-writers will rush to cover as their strike gets taken out. I have no fucking idea how high Bitcoin can go, but I will take Maelstrom’s portfolio to maximum risk ‌unless anything drastically changes. The politics in the US will turn very nasty towards AI and inflation going into the November mid-term elections. This might be a slight speed bump in the rally. But riddle me this: higher oil prices don’t hurt Trump as much as people think. MAGA was always going to lose in California where their fucked-up energy policies create some of the highest gasoline prices in the nation. But $100 crude oil and the rebuilding of infrastructure in the Venezuelan and ‌Middle Eastern suzerainties benefit the oil and gas sector in states where Trump’s base resides. Polymarket puts a Democrat sweep of control of both houses of Congress at 50%, but even with a nonsensical war against Iran, Trump still has time to win over the median American to vote Team Red Republican if more money is going into their pockets. So, drill, baby, drill, and S&P 500 to 10,000!

It’s time to shitcoin. Apart from Hyperliquid ($HYPE) and Zcash ($ZEC) where our position is large enough, my next favourite shitcoin is $NEAR. My next essay will explain our thesis on why the privacy narrative combined with Near intents will create a positive cash flow situation for the protocol. This will flip the script on the disastrous price performance of the token and create an opportunity to bag some serious pump to the upside as the token quickly marches towards its all-time high from many years ago.

It’s a bull market; close your eyes and press the button. There will be a time to sell, but it ain’t right now. Don’t fuck this up. Let’s degen.

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