Our world is fluid. It always has been, and always will be. We are in a constant state of change. This is often referred to as the law of rhythm. These are natural changes that happen without (and often in spite of) efforts to change the outcome. Some people refer to the fluidity of the market as being cyclical, or “bubbles”. This is incorrect. A bubble implies “POP” and gone, a cycle implies we could have changed the outcome with inputs, but neither of these are the case and never have been as long there is manipulation at all.
Change isn’t always bad, nor is it always good. It’s simply a factor of life. Change is a learning opportunity, but rarely an opportunity to inform us of how we can prevent change from happening in the future. For example, we learn during weather cycles to take cover during tornadoes and wear hats in the summer. We do not learn how to prevent tornadoes or stop the sun from being hot. We’ve learned that during daily cycles we should sleep when it’s dark, not how to prevent the sun from transitioning. We learnt during a financial cycle in 2008 not to give mortgages to dogs and fake people (there might actually be something we can learn from here, I’ll bring that up later). The natural response to change is to take action, but we don’t often realize that those actions won’t do anything to prevent the change from happening in the future. In fact, when actions are taken they can often elongate or transition the cycle. Very rarely (if ever) does it stop or change what would be the natural effects of the cycle… it merely compounds. We need to learn to adapt to the inevitable change.
Over the last few months we have all undoubtedly read, listened and maybe even discussed a prominent change; the economy. This economic cycle has been molested for quite some time. It has had every action and manipulation thrown at it so as to create mini cycles within the macro cycle, we even call them boom and bust cycles. This is a cycle that has been centuries in the making; and it seems like we are in for the full, unencumbered, exponential wrath of the end of this cycle that the politicians of our grandfathers and great-grandfathers day started trying to eliminate. But, this might not be the worst thing. If we truly believe the thesis that cycles can only be elongated or transitioned then isn’t it our responsibility to prepare and endure the brunt of this cycle? Do we want to force it longer so as to continue passing the buck down to future generations? Is it not our responsibility to use the time we have on earth to produce? To produce in such a way that we empower the future generations? Maybe even thrive, rather than add to the burden of this one?
Of course, the economy being cyclical is a fallacy of the manipulators. The fact that we even accept (and expect) a market cycle rather than steady, organic growth from our production is offensive and akin to the Keynesian economic theory. However, this is the fiat standard. The abolishment of the Fiat Standard in favour of the Bitcoin Standard is the answer to the fallout of these cycles. This is the responsible thing to do. The logical thing to do. The only thing we should do if we dare look our sons and daughters in the eye and claim “I’m leaving this world better than I found it, for you”. We need to elongate our time preference and begin anew. At this point, the pain is unavoidable. Because matter can not be created or destroyed, because gravity always pulls at 9.81meters per second and because you can never trust a politician we need to endure some pain upon exiting the cycle of the Fiat Standard, and entering the stability of the Bitcoin Standard. But what does this mean for the public markets?
For the last few years the public markets haven’t been rewarding tangible value (production, cash), but rather the assumption that growth would yield value in the future. We were in a position of “growth at all costs” rather than “production within reasonable means”. This was the result of very cheap money. The future money (interest) became worth so little that it was better to pay a premium on potential future value of an organization than a premium for value that was created today. We were all encouraged to shop for moon-shots, and we did. Production fell and the promise of production increased. Rewarding growth for the intent (but not the guarantee) of future production rather than growth of guaranteed production today is akin to lending money out because “eVeRyOnE aLwAyS pAyS tHeIr MoRtGaGe” and those couldn’t possibly default. We ran our economy into the ground by giving away value (money) today for the promise of more value tomorrow.
The chart above shows the S&P 500 Price to Earnings ratio over the last 80 years. Said another way, how much a company earns compared to how much a company is worth in the eyes of the investor. The grey shadow vertical bars show the recession periods.
This chart shows interest rates. It’s clear and easy to see the logic that when money is more expensive, we are less likely to pay premiums for things that aren’t guaranteed. There is an inverse relationship between interest rates and PE ratios. We will likely see interest rates climb back to the levels we saw in the 70s and 80s, naturally we will see a lot more emphasis on value creation (likely represented by cash coming into the business) than promises to do so. As we shift towards an economy that favours cash (lower PE ratios), it will look like a weaker economy. This will look like a stock market collapse. And it will be in terms of quantity of paper value, because paper value is discounted to actual value. As money flows out of promises and into production we will begin to be able to calculate the rate at which we discounted it in the past; and it will be significant.
While it may look like a weaker economy, I do not believe this will be the case. We will have less inflated capital, at the cost of more production. This is not only a fair trade, it is a required trade. As we move through we will be forced to value cash differently. We will be forced to give a greater respect to cash and value it higher than the promises of cash tomorrow because of growth and production today. We will be forced to change our habits. If we revisit the charts above we can see that we have been above the trend line of the cycle since the early 1990s! We have not seen capital markets in the way I am describing them in over 30 years. An entire generation has been born, raised and come into the working world, and we have been above the trend line. The companies that are able to transition and flip on the production switch will be rewarded.
I urge my peers to produce. I urge you to look at your production levels compared to the rate you promise production. Act accordingly. The heroes of our generation will be able to perfectly balance the dichotomy of production and promises. They will be the ones that are able to grow within their means, and only borrow what is required. They will be the forefathers talked about when the looks back in a century, after the separation of money and state, and laughs at how foolish we once were.
And in that, to my two daughters and my two sons, I promise to do my part to lead my organization towards production. Bitcoin Well has entered a new stage, a new era. We have been growing at all costs, we have made promises to our customers, our team and our investors, and now it’s time to produce.
If you would like to join us on our journey, we are a publicly traded organization on the TSXV. You can book a meeting with me here and view our investor portal here and recent news releases here. I look forward to future-proofing money, and would love to have you along for the ride.