@ Bergman

Welcome to a new *Situation Report* from **The First Bastion**. Before we begin, please make sure you’ve read the disclaimer, which applies to all our content. You can find it here: [Disclaimer](https://primal.net/bergman/Disclaimer-or2cwd) In short: **Not Financial Advice**. There seems to be a significant amount of confusion in the markets at the moment. Sentiment is almost bleak, particularly in the crypto market (excluding Bitcoin). Broader stock markets are also experiencing uncertainty, primarily driven by high valuations and elevated multiples on the S&P 500. For instance, the SPX is trading at a 30.3 price-to-earnings ratio and a 3.16 price-to-sales ratio. At the same time, bond yields remain relatively high, with former President Trump pushing for a reduction in long-term rates. Risk indicators, such as the High Yield Index OAS, is near all-time lows at 2.66%, while the delinquency rate on single-family residential mortgages is impressively low at 1.73%. Meanwhile, a troubling socioeconomic trend continues to unfold: many young adults, particularly those aged 25–30 (and no, we can’t keep calling them “kids”), are still living with their parents. This phenomenon is particularly evident in the Netherlands, though it may also hold true in the U.S. The cause? Housing affordability. Residential real estate prices have significantly outpaced the growth in real wages, leaving many unable to afford homes of their own. Inflation numbers released yesterday came in slightly higher than expected, triggering an initial sell-off. However, the market quickly rebounded within hours, likely due to seasonal adjustments and noise in the data tempering its impact. Amid all this, investors are anxiously awaiting what many are calling “The Big Print.” Market participants anticipate that the Federal Reserve will resort to more aggressive quantitative easing, injecting liquidity and inflating asset prices to new extremes. Yet, Federal Reserve Chair Jerome Powell (“Uncle Jerome”) continues to emphasize that no such measures are imminent. According to him, the economy is strong enough to stand on its own without additional stimulus. And let’s not forget the run on physical gold that’s happening right now—it’s a whole story in itself. So, in this type of environment, the key question remains: should you buy or sell risk assets? ## Framework As part of my learning journey, I’m building a framework to better understand the bigger picture. Think of it as an effort to “connect the dots”—literally. I’m still figuring out the best way to utilize this framework, but for now, I’ll be exporting the canvas as a high-resolution [**PDF file**](https://github.com/btsvr/tfb/blob/b152cc363534548450c5dbb3db3149ee4d4dbe01/202507.pdf). This allows people to zoom in and explore the data and charts directly within the canvas. Additionally, the embedded links are clickable, providing easy access to the original sources. The content will remain dynamic. My goal isn’t to pack in as much information as possible but rather to focus on the most critical and relevant data for the current narratives and issues. With each SitRep, I’ll reassess what information is still relevant, what can be updated, and what might simply be removed. For this week, I’m keeping the SitRep compact, as much of my time has been dedicated to building the framework itself. The most impactful factors right now are external, so this SitRep will focus on those key developments. ## Bitcoin By focusing mostly on exogenous factors later on, I’ll briefly summarize the key endogenous factors. In last week’s SitRep, I highlighted the 3-day chart and its tight consolidation range. This consolidation is reflected in the Return Analysis, which has reverted almost entirely to the mean, with the quarterly return nearing 0%. To illustrate, 90 days ago, Bitcoin was at $92,000, and as of writing, we’re hovering around the same level. https://blossom.primal.net/e3b97006f3bba849506f5c6ab030c845c97026badc9e4efb0a149d91261bb6c8.png Over those 90 days, we’ve seen spikes to as high as $108,000 and dips back to $92,000. Along the way, we witnessed some of the largest liquidation events in crypto’s history. This consolidation period, combined with the harsh liquidation wicks, has flushed out a significant amount of leverage from the market. https://blossom.primal.net/d53cf96fdd81ed8bbdd71792fb0ca5c75bb153f756f51fc6b3bc88b5b8fa6f32.png If I were to plot Bitcoin on a Speculation Profile, I’d place it in the lower-left quadrant of “balanced positioning,” characterized by a healthy funding rate and relatively low open interest. While open interest remains high on a nominal basis, it’s reasonable when compared to Bitcoin’s market capitalization. https://blossom.primal.net/bb5e1598012fe02a8e27bd9ad132e3e0be9a39abb9413a08fcf92ebf2d3a22cc.png I’d place Bitcoin in the same quadrant in terms of volatility. As noted earlier, the consolidation period has resulted in low daily volatility, though intraday fluctuations have been more pronounced. With 30-day historical volatility at 40 and weak directional movement, we’re currently navigating “slow waters.” https://blossom.primal.net/687294e901b3fc5c6aae6d6685a7ad1872ce9d12efc428832af6ba171671368d.png Looking at some key metrics, Bitcoin remains well above the True Market Mean (TMM), which looks at active coins and filter out the dormant coins. The TMM shows (unintended) the average of all price data, hence it's name . The 200-day moving average (200DMA) is gradually creeping up toward $80,000, serving as the critical support level for a bull market. With current prices hovering around $96,000, we’re approaching the Short-Term Holders Cost Basis (STH-CB) at $92,255. This level represents **The First Bastion** for bullish investors, defending the upward trend. If you believe the bull market will continue, the zone between the STH-CB and the 200DMA presents a compelling opportunity. https://blossom.primal.net/69efc46de294000c13841fb7625a9122fe5e5602ec79d07f7792689691928506.png This brings us to the STH Profit/Loss Profile. As the market price nears the STH-CB, unrealized profit has diminished to near zero. Recently, we’ve seen losses being realized—a dynamic that often provides alpha during bull markets. ## Man on a Mission President Donald J. Trump is a man on a mission. He talks a lot about winning, but to be honest, I don’t think he has the right mindset for the long term. Simon Sinek’s framing of The Infinite Game resonates here: if a game doesn’t have a definitive end, you shouldn’t play it as if it does. In infinite games, you’re either ahead or behind—there’s no “winning.” That said, Trump is moving fast. It’s clear he’s not a politician in the traditional sense. Having run a business, he’s now approaching the country’s leadership the same way. Unlike career politicians, who prioritize diplomacy and long-term consensus, Trump is focused on making deals and getting things done. This pace has left many traditional political leaders struggling to keep up. One of his ultimate goals is to bring the 10-year yield down. On paper, it sounds simple—but in practice, it’s anything but. It’s a monumental task. One shortcut would be to push the Federal Reserve toward Yield Curve Control—creating artificial demand for 10-year notes by buying up everything on the market to force yields lower. However, this approach is fraught with risks and would backfire in more ways than can be imagined. It should never be implemented except as an absolute last resort. https://blossom.primal.net/7c9b1b0229432eb67064557205cb4090e388a4731238a0739429e7c5793dfd33.png The right way to achieve this goal is the harder path: sustained effort and real progress. In the SitRep canvas, I’ve outlined some of Trump’s policies that align with this objective. However, many of these also intersect with the Federal Reserve’s dual mandate of controlling inflation and ensuring a healthy labor market. Some of Trump’s policies, like onshoring manufacturing and imposing tariffs, are inflationary, while others, such as increasing oil production and attempting to end the war between Russia and NATO in Ukraine, have deflationary effects. https://blossom.primal.net/13886c1cc6781f1ea5494614e0aeb6df3ff8db52d047c41b8ceedf700c5360d8.png This duality also applies to the Federal Reserve’s labor market mandate. Trump’s push for a more efficient government could reduce unnecessary jobs, shrinking the supply of available positions. Simultaneously, his efforts to reduce immigration and deport undocumented immigrants restrict the labor pool, further tilting the equation toward fewer people who are able and willing to work. Ending the war in Ukraine would bring significant benefits on a global scale. First and foremost, it would save lives and halt the destruction of cities. Beyond that, it would reopen efficient trade routes for transport and energy, reduce spending on weapons and military efforts, and stabilize markets. These developments would create positive ripple effects worldwide. As Eric Wallerstein recently pointed out, these efforts could bring the 10-year yield down significantly, potentially to a level of low 4% ## To Print or Not To Print Let’s revisit the question I posed in the introduction: is the current environment one where you should lean more heavily toward risk assets, or should you focus on safe-haven assets like bonds or gold? Bonds could rally again if Trump succeeds in his mission to lower long-term yields. Similarly, the prospect of the war in Ukraine ending and global trade returning to a more efficient state would benefit corporate profit margins, thereby boosting stock valuations. Meanwhile, gold continues its remarkable run toward $3,000 per ounce. As I wrote last week, gold serves as a hedge against two risks: defaults and monetary inflation. The recent surge in gold prices appears to stem from a reshuffling of gold inventories, with significant movement from the London LBMA to the New York Comex. This highlights a persistent logistical challenge with gold—it is cumbersome to transport due to its weight and the security requirements. However, it’s not just about location; there’s also a mismatch in quantity and format. Much of the gold held by the Bank of England is stored in 12.5-kilogram bars, which first need to be sent to Switzerland to be melted down and recast into 1-kilogram bars before they can be distributed. This added friction in the settlement of physical gold has led to higher premiums for faster delivery. Rumors are swirling that there isn’t enough gold to meet demand. This brings us back to one of the oldest and most controversial questions in modern finance: is there really enough gold in the vaults? Before deciding on the most probable market outlook—which I’ll address later—it’s essential to consider the mechanics driving potential outcomes. Many investors are waiting for what’s been dubbed “The Big Print,” expecting the Federal Reserve to respond with massive money printing akin to 2020’s response to COVID-19 and the subsequent lockdowns. However, these investors may be “fighting the last war,” often a mistake when the battlefield changes over time. What I’m getting at is this: if you believe the most likely outcome is a stock market rally driven by aggressive Federal Reserve money printing, you may be setting yourself up for disappointment. Jerome Powell has been clear that quantitative easing will only return if interest rates drop to zero—a scenario far from the current reality. ## Expected Outcome When assessing the most likely outcome, it’s essential to objectively evaluate the data currently available: * The labor market is holding steady with 4% unemployment, which is remarkable considering the recession signal triggered by the Sahm Rule last summer. * Inflation hasn’t returned to the 2% target, but it’s not soaring either. Yesterday’s inflation print came in hotter than expected, but one swallow doesn’t make a summer. Some of Trump’s policies may reignite inflation, while others could suppress it. * The ISM Manufacturing PMI has climbed back above 50, signaling potential growth and the start of a new business cycle. If one were to lean toward a portfolio more heavily allocated to risk assets, my guess is that it shouldn’t rely on the Federal Reserve unleashing an “easing bazooka.” Instead, liquidity may emerge from the private sector. A new business cycle could trigger a fresh credit cycle, leading to an increase in M2 money supply. This would represent a more organic form of credit creation, driven by commercial banks and businesses regaining an appetite for risk. This scenario becomes more plausible with lower rates—President Trump’s primary objective. So where might liquidity come from, if it does? * Federal Reserve: Not likely. * Public Sector: Scott Bessent recently criticized Janet Yellen for favoring the issuance of more short-term bills while leaving the long end relatively untouched. In the last Quarterly Refunding Announcement (QRA), Bessent indicated that this course would continue for several quarters. Based on his previous comments, it’s unlikely he will ramp up the issuance rate of short-term bills. * Private Sector: More likely. Another possible scenario is the creation of a Plaza Accord 2.0. If the Federal Reserve keeps rates where they are while the European Central Bank (ECB) lowers rates further—due to years of poor aggregated policy decisions, particularly in Germany—the euro could serve as the release valve, driving the dollar index (DXY) higher. Meanwhile, China is grappling with its enormous real estate issues, with millions of vacant or unfinished properties. An estimated 60% of Chinese household wealth is tied to real estate. A Plaza Accord 2.0 could benefit all three regions: 1. The U.S.: It would help Trump alleviate the pressures of the Triffin Dilemma associated with the dollar’s status as the world reserve currency. 2. Europe: It could help mitigate the consequences of a decade of mismanagement. 3. China: It could provide relief from their ever-growing real estate bubble. The losers in this scenario would be those holding currencies or currency-related assets. The winners? Those holding scarcer and more desirable assets such as stocks, gold, and Bitcoin. The likelihood of a Plaza Accord 2.0 was negligible before Trump took office. Such a deal requires a skilled negotiator—someone unafraid to take the heat. With Trump in office, the odds have improved, but they remain slim, in my opinion. Markets are forward-looking, so much depends on what investors anticipate will happen with tariffs and the situations in China and Europe. For now, Europe’s stock market appears to be showing signs of recovery. Trump doesn’t necessarily need a Plaza Accord 2.0—he just needs to get the 10-year yield down. Stay sound, J.M. Bergman