We get used to the present situation easily over time and use the current logic to predict the future – Ray Dalio, Bridgewater Associates

U.S. stocks plummeted with the Federal Reserve’s announcement of interest rate decline, gold assets quickly became the new favorite of asset allocation. All of which seems to confirm that the new paradigm shift cycle coined by Ray Dalio, has officially begun.

Gold May be Key, Bloomberg

In Tony Tao’s previous article, An Observation on Crypto Cycles | Is there still a Future for the Token Economy after Entering the New Cycle, we see that the global economy has entered a stage of hedging in the cycle. Rising risk aversion has changed the overall investment landscape, which has also affected the digital currency sector.

Before explaining how the world is entering the risk aversion cycle, we need to think about these questions:

  1. What caused this cycle? What are the characteristics of the cycle?
  2. Which stage of the cycle are we currently at? How do we deal with it?
  3. What role does Bitcoin play in this cycle?

Cycle: Pendulum and Positive/Negative Feedback

To further understand the cycle, let’s first talk about the financial market. The financial market is like a mirror image of the world, in which we continuously experience cycles of different sizes.

The financial market is always in the process of two types of feedbacks – positive and negative. Positive feedback drives market expansion, while negative feedback inhibits its development. These two forces are in an eternal play, which makes the state of the market oscillate periodically, and us in a cycle of greed and fear.

Greed and Fear, Cagle

Many people in history have focused more on the description of cycles, whether it is the Keynesian Economic Cycle Theory on prosperity and recession, or the more technical Eliot Wave Theory and Dow Theory. Certainly, descriptions can present to us the history, but finding the cause and effect of the cycle will bring us the essence of it. This will allow us to make predictions confidently and take appropriate actions based on the cycles.

Hence, Howard Mark’s Pendulum theory and Soros’ Reflexivity theory are precious here.

Howard Marks’ Pendulum

Pendulum is a very vivid way to describe cycles.

For the first time in his book “Mastering the Market Cycle, Howard Marks, the founder of Oak Tree Capital Management, systematically describes the interaction process of positive and negative feedback forces in cycles.

Mastering the Market Cycle, Money and Markets

Compared to directly using the term “cycle”, such description emphasized two important features:

  1. Excessive rising and excessive falling have reciprocal causal effects: excessive rising causes excessive falling, and vice versa;

By linking the pendulum effect and negative feedback process, we will discover that at the highest point of the swing, the object remains relatively still, and has the highest potential energy. In Howard’s view, this is when the cycle reaches an extreme and starts to move in the opposite direction.

  1. Price will not stay still in the middle axis. Price recovers to the middle axis after excessive rising, and immediately enters into the process of excessive falling, and vice versa.

From the perspective of positive feedback, when it reaches a state of “just right” (the middle point of the pendulum), momentum is the largest because people realize the benefits of this state. Hence, such state will continue to be pushed into the other extreme. “Just right” means that the risks are not exposed.


Such positive feedback process is best explained by reflexivity.

Soro’s Reflexivity: Positive Feedback Process

According to Soros, changes in participant’s perceived situation (“cognitive function”) will lead to a change in the participant’s action (“participating function”). At the same time, changes in the participant’s action (“participating function”) will lead to a change in the participant’s perceived situation (“cognitive function”).


The illustration above shows that our cognition will further reinforce itself due to the positive changes in the results. Further, our behavior will further reinforce itself through the positive reinforcement of the cognition.

Now let’s analyze pendulum cycles. When we do not see any drawbacks (that is, when we are in the value center), our cognition does not receive any signal that “excessive behavior will be problematic”. Hence, we will tend to reinforce our current thoughts. The behavior that this will lead to is, of course, to keep moving forward.

Reinforcement, Simply Psychology

Extending such behavior to the group level will result in a participation bias, inevitably leading the group to the other extreme.

It is only when our intrinsic cognition is terminated by a more objective law (i.e. the impact on our cognition by external factors), can our new understanding break away from the process of positive feedback and enter into the period of negative feedback.

In this way, will people not give up until all hope is gone?

In fact, there is another way, such as to draw lessons from history. History allows us to feel how insignificant we are, and to temporarily get out of the dilemma of dealing with reality so that we can truly look at our own situation.

Great Historical Cycle: Globalisation and Deglobalisation

Extending the positive and negative feedback law of the financial market pendulum to a global perspective will unfold a large cycle based on the global economy before us.

The Heyday of Globalisation Has Ended

The rapid development of the blockchain industry is inseparable from global cooperation. Globalization brought about many benefits, such as the rise of multinational enterprises, ample opportunities, diversification, openness and exchanges, etc.

However, what comes with globalization is not just benefits. While people enjoy the convenience it caused, drawbacks such as protectionism and economic inequality are constantly exposed as well.

Benefits & Drawbacks of Globalisation, The Daily Star

Even prior to the US-China trade war, countries had quietly sparked the trade war. From November 2008 to October 2016, members of the G20 implemented 5,560 trade protectionist measures. From 2011 to 2016, the growth rate of global trade in goods and services measured by trade volume was continuously lower than that of the world economy’s growth.

In light of globalization, the problem of unfair distribution of resources in society and unbalanced development among countries has become more and more prominent. The problems of globalization are accumulating gradually. This year’s US-China trade war has further intensified trade protectionism and people’s reflection on the trend of globalization.

Trade Protectionism, China Daily

Thomas Piketty responded to the issue of globalization in his book “Capital in the 21st Century”, emphasizing that the rate of return on capital, which represents the rich, has been significantly higher than the global economic growth rate for a long time. With the rapid development of the Internet and the prosperity brought by globalization, the wealth gap has not been shrinking as expected by the Kuznets curve. Instead, it has begun to move away from the Kuznets curve (or the inverted U curve). Economic inequality is facing the risk of widening further and faster.

Capital in the Twenty-First Century, JSTOR Daily

This imbalance in wealth distribution does not occur only in specific countries. According to the World Inequality Report 2018, most countries show an increasing trend of income disparity, especially in the United States and India. More detailed data shows that the income of the top 1% of the world’s wealth grew rapidly between 1980 and 2016, much faster than that of the middle-income group.


The World is Turning into a Deglobalization State, and It Seems Inevitable.

Deglobalization Has Begun

People may feel that globalization, as a product of years of development and a world trend by itself is an irreversible process. However, scholars who study globalization generally acknowledge the fact that globalization is reversible.

Globalization and deglobalization is a long historical big cycle.

The last cycle began in 1850. The first industrial revolution has been completed, and the second has quietly taken place. The gold standard established in the 1970s guaranteed the stability of the international payment system. This resulted in the growth of global trade to be faster than the growth of the world’s income after the 19th century. Kuznets estimates that by the eve of the First World War, the value of world exports accounted for 16-17% of global income, which is already quite high even by today’s standards.


With the outbreak of World War I, the world trade system has been strongly impacted, and globalization has stopped and retrogressed. More so, the Great Depression of 1929 made protectionism the mainstream of the world.

From 1929 to 1937, the annual growth rate of world trade fell by 0.4%, equivalent to half of the world’s economic growth rate of 0.8%. Such a deglobalization cycle lasted until the end of the Second World War, and only then did the restructuring of the global trading system recover gradually.

Through these 200 years of history, we can see that globalization and deglobalization are like pendulums, swinging from one end to the other, and then back again.

From 1850-1914, it went from deglobalization to globalization, and back again from 1914 to 1950. Subsequently, the world economy entered the period of globalization again.


Each cycle lasts for a century. If the Subprime Mortgage crisis of 2008 symbolizes the beginning of deglobalization, then this cycle has just begun, and the pendulum is still accelerating.


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