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Notes from Camp Kotok 2021

Brent Donnelly is a senior risk-taker and FX market maker, and has been trading foreign exchange since 1995. His latest book, Alpha Trader, was published this summer to great acclaim (by me, among others!) and can be found at your favorite bookseller. I think it’s an outstanding read, and not just for professional traders. You can contact Brent at [email protected] and on Twitter at @donnelly_brent. As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security. In 2014, I got a phone call at work. On the other end of the line was a friendly, gravelly voice I didn’t recognize. The conversation went something like this: “Hi, Brent. It’s

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Brent Donnelly is a senior risk-taker and FX market maker, and has been trading foreign exchange since 1995. His latest book, Alpha Trader, was published this summer to great acclaim (by me, among others!) and can be found at your favorite bookseller. I think it’s an outstanding read, and not just for professional traders.

You can contact Brent at [email protected] and on Twitter at @donnelly_brent.

As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

In 2014, I got a phone call at work. On the other end of the line was a friendly, gravelly voice I didn’t recognize. The conversation went something like this:

“Hi, Brent. It’s David Kotok. How would you like to come fishing with a bunch of economists?”

“Oh, Hi David. … ummm… <long pause> … Well, I’ve never been fishing in my life… And… I’m not an economist… <cough>”

“Not a problem. You’re invited.”

“… OK. I’m in!”

Since that phone call, I have made the 9-hours-each-way drive to deepest Northern Maine on ten separate occasions. I have driven there seven times for Camp Kotok and three times to fish with my sons. It’s an awesome place.

This piece will cover what I found interesting at this year’s Camp Kotok, and offer a few takeaways for investors, economists, and/or traders.

What is Camp Kotok?

Camp Kotok is an invite-only gathering of prominent economists, policymakers, central bankers, traders, asset managers, and journalists that has taken place on the first Friday of every August for more than 20 years. It is part economics conference, part vigorous debate-o-rama, and part summer camp for adults who like to fish, drink wine, and play poker.

The group is composed of mostly smart, rational, curious and humble human beings and thus many conversations start with a question and go from there. Here are a few Qs and As from four days in Maine:

Why hasn’t the dollar collapsed yet?

Short answer: the premise was wrong and inflows into US assets remain relentless.

One year ago, historically loose fiscal and monetary policy in the United States looked like absolute manna from heaven for gold bugs and dollar bears. Now, gold is more than 10% lower than it was a year ago ($1960 to $1730) while the US dollar is sharply… Unchanged. Why?

The simple answer appears to be that when most major economies enact similarly large QE programs with rates at or near the zero bound, differential performance across currencies is minimal and the USD emerges unscathed. Meanwhile, standard measures of US exceptionalism (NASDAQ vs. EM equities, for example) continue to show that investors maintain a very strong appetite for USD-denominated assets.

We are in a similar FX regime to the 1998-2000 period when demand for dollars was relentless as money flowed into the Web 1.0 tech bubble. The NASDAQ peaked in 2000, but dollar strength lingered for another two years due to doubts about the stability of the newly-hatched euro. Eventually, the end of the NASDAQ inflows allowed the dollar to find a top and then reverse, big time. The USD was mostly in a serious downtrend from 2002 to 2007.

For now, the dollar remains supported by the never-ending flow of inbound cash. 

With America having unabashedly cut the cord that once connected taxation and spending, many think the dollar’s reserve status should be questioned. Thing is, the USD has no strong competition in the reserve currency game and as such its decline remains a slow, decades-long process. We have been talking about the decline of the dollar since at least 1968 and we will probably still be talking about it in 2068. See here for a timeline of dollar debasement worries as reported by mainstream magazine covers.

I don’t expect another currency to replace the dollar the way the USD replaced the GBP. Instead, I think the endgame here is one where a tripolar group of global reserve currencies (USD, EUR, CNH, plus their associated regional currencies) share the limelight with the dollar and the greenback slowly, slowly surrenders dominance. And a few central banks will likely end up holding some BTC as reserves, too.

Meanwhile, even as the dollar has been stable, concerns about fiat currency linger and total crypto market cap has gone from $350 billion to $1.9 trillion in the past 12 months. The idea of crypto purely as a speculative bubble looks less credible with each passing year.

… jpegs on the other hand… :]

What the h*ck is wrong with gold?

Short answer: It’s a barbarous relic.

In crypto circles, the “flippening” is the theoretical future point where Ethereum’s market cap rises above the market cap of bitcoin (those are the two biggest coins, by a large margin, see table for the Top 10).

Notes from Camp Kotok 2021

But perhaps we should be talking about the macroflippening. The macroflippening is the day the market cap of crypto surpasses the market cap of gold. The current market caps are around $10T for XAU and $1.8T for crypto, but I don’t think it’s impossible to imagine gold at $1,000 and bitcoin at $100,000 in a few years. That would get us close to the macroflippening.

There is clearly a big substitution effect out of gold and into crypto going on this year. As new money floods into BTC, ETH, and NFTs, the cries of “It’s not backed by anything! It’s a Ponzi scheme!” etc. are more and more the province of the older generations. Meanwhile, young people who already own plenty of virtual goods like Fortnite skins and Roblox hats have no problem making the intellectual transition to owning virtual goods as financial assets.

The metaverse is coming. Everything will be digitized.

I think it’s important that for the first time in generations, a plurality of global citizens under 50 years old has realized, all at once, that fiat money isn’t real. Questions are being asked. Until 2010 or so, money was just money for most people. We didn’t think about it. It was the air we breathe, the water we swim in as ignorant fish.

Now impassioned talk of money and monetary systems is everywhere. Whether you believe in crypto or not, you can at least acknowledge society’s views on money have changed radically in a short time.

Behind the wild price swings and Lambo-video silliness, the massive build-out of crypto infrastructure continues and more and more skilled sales and trading experts on Wall Street are crossing over from legacy firms into fintech and defi.

Sure doesn’t feel like a fad anymore.

Who would like to join the Global Society of Rational Bayesian Crypto Agnostics?

Nuanced views are permissible in crypto: you don’t have to be a hater or a HODLer. The overall vibe at Camp Kotok was a mix of crypto-haters and crypto-agnostics with a few more aggressive bulls also in the house. There was some discussion about whether a dedollarizing central bank or two might announce that they have added BTC to foreign reserves in the next few years. I don’t see why not.

In general, I tend to find all-or-nothing opinions unpalatable (because they are usually rigid, and mostly wrong) and I am going to work hard to represent Team Crypto Agnostic going forward.

We are not going to the moon and we’re not going to zero.

I was bearish bitcoin through most of 2017/2018 because that move had every feature of a speculative bubble. I wrote a bullish piece on February 14, 2019, after the bubble burst because of the historical tendency for bubbles to deflate almost exactly 85% before stabilizing. This 85% number was true with XLF and home builders in 2008, NASDAQ in 2002, the post-bubble Nikkei, and even the 1929/1930 stock market crash. After that bullish call, I didn’t write much about bitcoin, though I recently put out a bearish note a few days before Elon went on SNL because that was the most obvious “buy the rumor sell the fact” set up in financial markets history.

Overall, I am bullish on crypto as an asset class and agnostic on the price of individual coins, including BTC. The more I read and understand, the more insanely interesting the future of crypto looks, especially DAO and ETH-type projects. My goal going forward will be to maintain flexible, open-minded thinking.

Crypto sometimes feels like a world where everyone just picks a team and cheers for it. I have chosen to be a fan of the sport, but I’m not picking a team.

Do CBDCs pose a threat to bitcoin?

Short answer: No.

Central bank digital currencies (CBDCs) are inevitable and offer a host of fascinating and possibly dystopian policy options, but they are hardly a direct competitor or substitute for mainstream crypto. CBDCs could eventually compete the stablecoins out of existence, work as a global payments and settlement tool, and possibly disintermediate the banks… But they will not challenge BTC’s role as a low-yielding, limited-supply store of value and portfolio diversifier. And they will not challenge ETH as the leader of the DApps / smart contract / blockchain ecosystem. The use cases are completely different.

On the other hand, here are some policy options that CBDCs may permit:

  • Exploding money. Digital dollars with a nearby expiry date. This can channel fiscal dollars directly into the economy by eliminating saving as an option to achieve juicier fiscal multipliers.
  • Microtargeted fiscal stimulus for specific industries or regions via currency that can only be spent at a specific type of business. For example, digital dollars that can only be spent at restaurants. Detroit dollars that cannot be spent outside Detroit, etc. If you think there is too much central planning of the US economy now… Just wait a few years.
  • Surveillance. This is a feature and a threat in all countries, not just totalitarian ones.
  • Deeply negative rates and a ban on cash. It’s not as wacky/fringe as it sounds. Former Fed Nominee Marvin Goodfriend discussed it in this 2016 paper. Here is the key quote:

The most straightforward way to unencumber interest rate policy completely at the zero bound is to abolish paper currency. In principle, abolishing paper currency would be effective, would not need new technology and would not need institutional modifications. However, the public would be deprived of the widely used bundle of services that paper currency uniquely provides—a generally accepted paper medium of exchange providing transactions services especially for low-value transactions; a readily accessible, safe liability of the central bank; a store of value; a degree of privacy in financial management; and the option to hold money outside the banking system and to withdraw deposits at par as paper currency in times of financial stress. Hence, the public is likely to resist the abolition of paper currency at least until mobile access to bank deposits becomes cheaper and more easily available, ATM charges for access to paper currency become excessive and/or electronic currency substitutes become widely available.

Why are we not catching any fish today?

This question only came up on the last day of the conference as we trolled for salmon instead of casting for smallmouth bass. One thing I learned pretty quickly after I started fishing is that the object is mostly just to hang out. Catching fish is secondary.

Unless you’re 10 years old. Then catching fish is the only thing that matters.

Here is me, happy:

Notes from Camp Kotok 2021

Is Long COVID a threat to future US labor force productivity?

Short answer: nobody knows.

Two of the attendees at Camp Kotok were COVID experts: Andrew Racine (pictured), the Chief Medical Officer of the Montefiore Health System, and Pierce Nelson from the CDC Foundation.

Notes from Camp Kotok 2021

On Saturday night, there was a chat out on the deck as everyone gathered to talk Long COVID and watch the shimmering, nectarine-colored sunset:

Notes from Camp Kotok 2021

The discussion varied in intensity as some felt Long COVID could be a major disability that puts a significant part of the labor force on disability while others felt it doesn’t rank extremely high on their list of most important inputs for judging the US economy. The disagreement boils down to the fact that we don’t yet have enough information on Long COVID to know whether it might affect 3 million or 30 million people. We don’t honestly even know if that is the right range in which to make an estimate.

This is an issue that will be important to human beings and economists but that I don’t think will matter for markets. You can read more on the topic here:

Mauldin:     https://www.mauldineconomics.com/frontlinethoughts/covid-consumer-headache#long

CIDRAP:    Studies elucidate poorly understood Long COVID

MIT:           Longer-Run Economic Consequences of Pandemics

How will capitalism look post-COVID?

A topic of some on-the-water conversation was the emotional, economic and societal impact of COVID and how it will impact the evolution of capitalism over the next 25 years. When I was a kid, consumerism and capitalism declared victory over communism in the 1980s and the result was people driving around with bumper stickers that read: “He who dies with the most toys wins.”

This overconfident debt and consumption-driven capitalism powered on through the 1990s but hit a medium-sized speed bump after dotcom and a large-sized wall after the GFC. COVID is another hit for overall confidence in the current economic system as the already-problematic issues of late capitalism go from upward-sloping to parabolic.

Issues about inequality, winner-take-all, and externalities all seem to have been made worse by COVID. Now, we are left to wonder whether trends like rising wages, tech regulation, and ESG finally turn the tide in how we split the spoils of capitalism between capital and labor.

Every assumption we used to make about the basic structure of how our economy works (9-5 in an office, 5 days/week, hospitality workers are cheap and easily replaceable, commuting is necessary, nationalism vs. globalism, etc.) is up for reexamination.

Heavy stuff.


Those are some of the most interesting parts of my trip to Maine. Let me close with a non sequitur, a two-part question I found myself asking in the midst of a random conversation that took place as we sat around the cabin late one afternoon, waiting for dinner time.

Wet hay spontaneously combusts? What are you even talking about … ???

Sam Rines and Dave Nadig both grew up on farms and both confirmed this conversational factoid to me with 100% certainty. Wet hay spontaneously combusts. Somewhat regularly. See proof here.


Thanks for reading these thoughts and thanks to David Kotok, Jill Fornito, and everyone else who poured so much energy into the diabolically complicated logistics of the event.

Enjoy the rest of your August and I’ll talk to you in September.

Click here to buy my new book, Alpha Trader

This essay was written by me, Brent Donnelly, the individual. It represents only my personal views. It does not represent the views of my employer(s) present, past or future.


Note 1: For the record, Keynes never called gold a barbarous relic. He called the gold standard a barbarous relic, not gold itself

Note 2: Fun fact… It is the 50th anniversary of the end of the gold standard. See here for some fascinating charts that imply all sorts of spurious causation: https://wtfhappenedin1971.com/

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