Bankless - 118 - Raoul Pal | Should We Be Scared Right Now?

Starting point is 00:00:06 Welcome to bankless where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Chod Adams here and I'm with David Hoffman and we're here to help you become more bankless. Guys, the big question on our minds, to Raul Paul, the macro guy, the crypto investor is this. Should we be scared right now, Raul? That was our question for him. This is the Hold Me I'm Scared episode. It is.

Starting point is 00:00:35 And, you know, he didn't pull me. any punches. We talked about a few things to look for. Number one, all of the scary things going on in the world right now, inflation, recession, China COVID, stock market, crypto prices, even UST. And what's happening in the Terra ecosystem, we talked about the way we're actually going to get out of this. If there is a light at the end of the tunnel, I don't know if I should have used that phraseology. That's like when you die, right? But is there some hopeful blue skies ahead? That was our question for Raoul. And then finally, because he is a macro investor, how is he playing this market? Has he changed his crypto portfolio at all? Has he traded various assets for others? What that looks like.

Starting point is 00:01:17 So this is a great conversation with Raul. We're glad we had him. I think the timing of this was just perfect. We thought we might be going into this episode talking a bit about the upcoming ETH merge, but since the market has turned so dark lately in crypto and in the world this turned into a should we be scared episode. What were some of your thoughts, David? Yeah, it was actually pretty surreal having this conversation with Raoul as I was watching UST.S. DPEG. It was like trying to watch a train wreck while I was doing a podcast. I was trying to keep my eyes, keep my attention on the podcast with Raul while I'm watching the U.S.T. price just completely fall off of a dollar. So we had to talk about that. So that timing was

Starting point is 00:01:53 pretty crazy. But overall, just like Raul paints a really dark picture, not necessarily for assets, but just for the state of the economy. He's actually calling for bringing back stimmy checks, not because we have this COVID thing, but because we have a recession coming. And just the nature of the tight spot that the Fed finds itself in, he thinks that the people need to get money in their bank accounts in order to just live. And so this is not paying people to stay home because there's a disease out there. It's people need to receive money because they have bills to pay and they don't have the cash to do it. So that was a surprise to me, but Raul says that Europe is already doing this. And so he thinks that Europe is foreshadowing things to come for America. So he pays a really.

Starting point is 00:02:35 really dark picture, Ryan. Whether or not that translates into assets going up or down, it's a different story. I guess that was a dark picture, but that was actually part of his, like, way we get out of this picture because he said the Fed has not abandoned us. The safety net has not been taken. It's still there. It's just maybe a little bit lower than it used to be. And so the Fed will return and the way central banks get out of this is more printing of money this time in the form of stimulus checks. So it's dark at first, but he's not painting a... picture of the Fed and the central banks completely abandoning this market because he makes a pretty compelling case for why they actually can't. You have to listen to the episode and hear more of that.

Starting point is 00:03:15 David, I think during the debrief today, I want to talk to you a bit more about this Terra-UST thing and where you think markets are going, have a conversation about that. So that'll be fun. Yeah, and also Ryan and I are in debate as to we have some cash on the bank list reserves. And so we're in debate as to whether we buy now or buy later. So I think we'll finish that conversation in the debrief. Yeah. And so that's a good question. I think that's on everyone's minds is if you have some cash, and that's really where Raoul ends the podcast is, do you buy now or do you buy later? If you're a premium subscriber, of course, you can unlock the debrief where David and I are about to get into that heated debate. How much more east should we buy, David?

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Starting point is 00:06:32 like swapping tokens and staking. So if you don't have a ledger hardware wallet, go to ledger.com, grab a ledger and take control over your crypto. Hey, Rao. How's it going, man? What's up, Rao? It's a total fucking shit show out there. Wait, which part of the world are you talking about? I'm not too sure. Well, no, it's everything, right? This is just, we're starting the big liquidation phase in pretty much everything. I'm looking at stuff like galaxies down 25% today. Oof. Oof.

Starting point is 00:07:01 I mean, Nova can't be very happy about that. He probably has to send the keys back on his yacht or something. But it's a mess. You've seen what's going on with the Terra ecosystem as well. I mean, they're actively selling Bitcoin. You know, I hear jump in that whole equation is selling Ethereum. We've got, it's just liquidation of everything. And it's interesting because it's spilling out into the macro world as well, obviously.

Starting point is 00:07:25 It's like stuff like oil, which was like the last thing that was holding up the inflation narrative is starting to get. properly clocked. I think, I mean, everybody, I think in every position is about to lose money. Oh my God. This is a red, red day. Guys, we're just hitting the record on this button. Raoul Paul is joining us for a bankless podcast. Of course, we don't have to introduce Raoul. He's been on the podcast many times. He's the founder of Real Vision, one of our favorite voices in the space with Macrow. And it's been about nine months since we had you on last time, Raoul. And it was not a shit show. It was different then. Things were feeling a little bullish at that time. So I think we want to unpack all of this.

Starting point is 00:08:01 And I think, look, the theme of today's episode is fear. Is like there's some scary stuff going on. So I think we want to start there with some of the scary stuff, but then also want to pick your brain on like, how do we possibly get out of it? And also find out how you're playing this, whether you saw it coming, what's in the back of your mind? But can we start there with some of the scary stuff?

Starting point is 00:08:23 You're starting to get into it in the crypto ecosystem. But what about like the big macro scare that I feel like it's on everyone's mind, which is this inflation thing. So inflation, we've had this really complicated macro situation where we had supply chain shocks, which was people can get factories and ships sorted out because people were still in lockdown with COVID. There was a massive backlog of orders.

Starting point is 00:08:47 And this filtered through. And that raised prices. Because everyone, you know, if there's a shortage of goods, if you pay more, you get the goods, right? So that puts prices up. Then we start to see issues in the commodity sector that have underinvested. So everybody comes online again, everybody wants oil, gas, everything else. So commodity prices start exploding. Then we add on a Russia-Ukraine war and the penalties on Russia,

Starting point is 00:09:14 and that takes a bunch of commodities out of the market. So now we're in this perfect storm of prices rising. But people have also scrambling, like all of us, probably you guys as well, to try and hire people. So we're all bidding up wages. But wages, outside of some jobs, aren't rising as much as prices. So what we've got is the situation where wages have gone up, let's say, four and a half percent, and prices have risen eight and a half percent. So everyone's taking a four and a half percent or four percent haircut in then net worth. Now, that hit crypto. It started as soon as inflation happened because if you think of crypto as a ground swell movement, basically the dollar cost averaging by average people who are in the space had started drying up. We saw all the on-chain activity basically flatten out.

Starting point is 00:10:05 And we've been in this sideways sloppy range because we've seen no network growth across the entire ecosystem. Within crypto, we'll talk about that later. So that slowed down there. But we still had the kind of after effects of stimulus, people coming online. So economies were growing. But it now looks like all the forward-looking indicators are starting to roll. roll over and start to show recession because you've basically given everybody a income haircut. So discretionary spending is going down the toilet. We're seeing it in things like restaurants

Starting point is 00:10:37 spend. We've seen consumer credit going up so people are desperately trying to borrow money to maintain their expenditure plans. We've seen mortgages go up by the most in history as a percentage. I mean, they've absolutely exploded higher. We've seen two-year interest rates. with the largest one-year rate of change in all recorded history. So what we've got, if you add all of these things, and we've seen the US dollar going up fast, when you put these things together, what you've got is the fastest tightening of monetary conditions in history.

Starting point is 00:11:12 And we've seen it. The big tech companies are all starting to lay off staff. They're all like, holy shit. Even Amazon said we're overstaffed. So we've completely turned the economy from, oh, great, we're coming out of recession from the pandemic to, oh my God, we're going straight. back into recession, the market's tightened before the Fed even got around to doing it.

Starting point is 00:11:31 The market did its job and it stopped economic growth dead in its tracks. Europe's already in recession. China looks like it's in recession and is in lockdown again to complicate the picture. We don't know what that means for supply chains. So we might have these, I think inflation falls and I think the Fed pivot soon. It's like 2018. But 2018, the S&P was down. down 22%. It's only down about 15, 16 now. So I think there's more pain to come before the Fed suddenly realized that growth's gone. And the bond market will tell us that first. It always does. It will, yields will start falling. And that will be probably the signal, as we had in 2018,

Starting point is 00:12:15 crypto stabilises, the growth end of equity starts stabilising because they realize that some stimulus is coming. And sorry, there's a lot, it's a bit of a monologue, but there's a lot to get through. Now, if inflation is still high-ish, because it's going to take a while to come down, but I think it comes down pretty fast. But let's say it's still at 5%. And the economy is now headed directly into recession. What do the Fed do? Well, they're unlikely to purely stimulate because optically that doesn't look right. So my guess is they'll do what Europe's starting to do and Japan's starting to do, which is direct transfer payments that I've been talking about for a while,

Starting point is 00:12:55 which is basically MMT. So you give money to the people who need it to cover the costs of their bills going up, and you basically finance it by buying bonds. So I think we're going to see stimulus coming faster than people expect in certain parts of the economy. In Europe, they're doing it for corporations who've got high energy prices, and they're doing it to households. Japan's doing it to households as well. So it's coming.

Starting point is 00:13:21 So there's a lot. There's this transition from inflation, To demand destruction, to stimulus, that cycle is in play. And so how much of this is really just the equal and opposite response to the roaring 20s that were the meme in the early 2020s, where stimmy checks were getting put out, people had more cash on hand than they've ever had ever. And that's when the crypto markets win absolutely gangbusters. That's where Ether went from like $400,000, up to $4,000. Bitcoin reached all-time highs.

Starting point is 00:13:50 Are we just on the equal and opposite side of that? we're like now tech stocks, Amazon, like the NASDAQ, we're back down to where we were before we started doing all of these things. So is this just the natural consequence of just like what we committed to when we handed out stimuli checks and stimulus plans way back when? Or is this something more complicated than that? It's part that and part of the other issues. But I guess, you know, the equal and opposite was supply chains. There were, you know, we shut down everything and that everything comes back on stream. The best example I've got of this, a lot of people go back to the 1970s and say that

Starting point is 00:14:22 it's this all over again. But the 1970s was very different because it was driven by demographics as well. You know, you had all of the baby boomers coming into the workforce all at the same time and they bid up prices. This is actually more similar to coming out of World War II. So World War II, economic activity had shut down except for the war effort. It comes on. World War II finishes. We start the great rebuilding. What happens is that prices exploded. Economic growth plunged. And then prices went negative. Economic growth ends up stabilising. Bond yields stayed stable between 1 and 3% for the next decade and a half. Economic growth was very strong because of technology and stimulus. And that feels like a similar situation. Yeah, we've got this massive rebuild of infrastructure supply chains

Starting point is 00:15:12 need to come back to locally so they have to build factories in the United States. Okay, they're robots. They're going to hire people. But it's good for the economy. We've got this massive tech revolution going on. So we've got economic growth to come, I think, with relatively low inflation. But you're right. This is the equal and opposite effect of what we've just seen, which was the sharpest, fastest slowdown in history. We've now got the sharpest, fastest rise in history. And that will probably get unwound as well. So it's like dropping a rubber ball off the top of a building. Each one of these will get less. But I think we've got a few more of these cycles to get through. I'm just struck by how fast this is happening. And like, how

Starting point is 00:15:49 quickly the whiplash has been? And I'm wondering if we've seen that at any time in history, if this is a historic moment. So it used to be. So we've just come through what's known as the Great Moderation. So the Great Moderation basically started in about 1990. And that's when we start using interest rates as the main tool to manage the economy. And so what happened is we dampen the business cycle. So as soon as the economy got too weak, we would cut rates. And then when it got too strong, we would raise rates. But generally, the rate of interest was going down over time because of demographics and debt. But it drew out the business cycle. The cycles were longer, and they were less violent. Then we started the first aftershock, which was 2008. But we still

Starting point is 00:16:33 managed to moderate why, because we started the use of the central bank balance sheet. That was the next thing. Then the COVID shock came, and I think it broke all of this now. So we now really don't have any interest rates. I don't know what the Fed are going to get to. Maybe they get to two and a half percent. I don't know. But they're not going to get anywhere back to where they would like to have got to what's perceived normal. So we don't really have interest rates to use. And we've got the balance sheet, but we know the downside of the balance sheet. So if we go back to previous periods before the great moderation, the economic cycle used to be a three-year whiplash. And actually it was better because you had a market clearing event more often. So we didn't

Starting point is 00:17:15 build up the imbalances as much as we did from the great moderation. The great moderation basically meant that you could use assets as collateral for debt, because they were generally all low volatile, so the less volatile it is, the more you can borrow. This is kind of breaking some of that. So, you know, do we see a great de-leveraging? Who knows? I don't think we can afford to because it's gone too far, because that's the end of the entire system. So it's a really complicated picture. But I think we end up with negative real interest rates ongoing, onward use of stimulus, maybe in a more targeted approach, because we can't allow the debt bust, which is why the Fed will pivot soon. They'll have to. What do you mean by the debt

Starting point is 00:17:59 bust, Raoul? Well, so the world is the most indebted it's ever been as a percentage of world GDP. The U.S. is the most indebted country as a potential of world GDP of any country in all economic history. All of that is against the collateral. So you borrow money against something. So you borrow money against your shareholders. You borrow money against bonds. You borrow money against your house. So if you allow the price of those assets to fall too far, your debt gets liquidated. And we can't allow that because it's too big. I mean, these are hundreds of percent of GDP. So you basically could destroy everything. So that's why we need to be. super careful. That's why the central banks panic and buy things like, if you look at the,

Starting point is 00:18:44 in the pandemic, they started buying mortgage bonds and they bought corporate debt. It's because if you allow that stuff to go bust, the whole system's blown up. That's nearly what happened in 2008. So they can't allow it, which is why we're in this weird mess where they keep debasing the currency because that's the only answer they've got, which is one of the reasons that we all own crypto. So I want to pick your brain as to what you think this market actually has. hinges on. I think that most people think that the Fed is trying to thread the needle on reducing inflation while not triggering a recession. And so they're trying to find that gap to shoot.

Starting point is 00:19:20 Is that window even open? Like, is that even a thing that they can do? And if it's not, like, what is the consequence of that? I think the markets have done it for them. So the Fed have raised virtually nothing. And meanwhile, bond yields have absolutely exploded. So they've done all the tightening. So we all borrow in the real world. We don't borrow off the Fed. You know, so your mortgage or any debt you take out is going to be based on the actual market. So that tightening's happened. And the slowdown is coming and the Fed really weren't involved in any of this, which is kind of the free market working its own way. So it kind of did work. And there's no way of stopping it. It's just going to play out in the way that it has to play out, which is demand destruction, needs to stop the price of

Starting point is 00:20:06 commodities rising, which brings down inflation, which brings down interest rates that allows us to get back to normality. Last week on the weekly roll-up, we presented this graphic that illustrated the personal disposable income of the average person. And right, during COVID, it spiked to all-time high as never seen before. And right now, it's at all-time lows never, ever seen before. And so, like, I think that goes to what you're saying, where, like, demand has largely been destroyed. Like, everyone's broke. The stock market's down. Like, there's no cash. And so, like, demand is probably going to zero, which is what the Fed wants. And so in order to get out of this, in order to get out of this like bare market cycle, this cycle of pain, does the Fed just need

Starting point is 00:20:45 to realize that they achieve their goals? And then perhaps like we could hopefully see like the CPI not get any worse to give the Fed some sort of assurances that their goals have been achieved. That's exactly it. And I think the phasing of this is I think the oil market needs to break, because that's the headline inflation thing, that real rates have been following. And it feels like it's starting to happen now, but it needs to break a bit lower. And then, you know, if the oil market comes down to $70 or so, that's going to ease a lot of people's fears because this Russian fear is in everybody's minds, the oil market. So if that happens, I think that happens first.

Starting point is 00:21:22 The dollar is helping bring down inflation. The next part is the bond market will tell us. It always does. The bond market, much like 2018, there was that. final panic in 2018 in December 2018 where the equity market puked. We had higher inflation, the dollar was going up, then the oil market broke, and then finally yield started rallying. And that was the signal that the Fed were going to pivot because the bond market does the job for them. So if the bond market raised the rates, the bond market is going to ease them too.

Starting point is 00:21:53 But it's just not got there yet. So it's very close. And I think we'll see, so far we've been seen yields going up and equity's going down. And soon we'll see equities going down and yields going down. Then we've got to the signal that we've probably, that the market's going to start pricing in the other side of the cycle, which is the stimulus side. So, Raoul, you think basically, so, you know, maybe we need to see the oil markets break a bit more. But you think kind of the last sign that we really need to see is a bond market rally. Correct. And then when we see that, then the Fed's going to go, Powell's going to go, oh, cool, mission accomplished. We were successful.

Starting point is 00:22:34 I'm, you know, Paul Volker, and now we're going to kind of reverse course and start easing things again. Well, not. They won't start easing. They will just say, we're just going to watch the economic situation. Got it. That's the pause. It's on our hands. It first comes with the pores, and we're ready to raise rates if we see any sign, you know.

Starting point is 00:22:53 So they stay hawkish, but on pause. But the bond market will just say we don't believe. believe you because we know the economic demand destruction has happened. And what do you think the inflation rate will be? Do you think they will be able to actually break the back of inflation? Or were they sort of... I think it's probably broken already. It's broken already. Because inflation is a lagging indicator, right? So the year-on-year rate of change in oil has come down half what it was in the past. Of all commodities has come down significantly. So that's happening already. So it's already baked into the numbers

Starting point is 00:23:25 mathematically that the rate of inflation falls, it depends how fast it falls. And some of the forward-looking indicators that I look at suggest it comes down pretty sharply back down to, you know, 3% or so. Well, when we go back to 2008, we had inflation at 6.5% and the Fed were cutting because economic growth had collapsed. So we've got to get through these phases, but usually what happens for risk assets, particularly things that are influenced by inflation and interest rates, which would be crypto and growth tech, they tend to start to stabilize and outperform at this point once the bond market

Starting point is 00:24:05 turns. Because that's why they've been hit because of the future inflation expectations, because they're long duration assets. I think we want to talk about tech stocks in just a minute, but I feel like I have still a few fundamental kind of questions about the current state of macro in the market right now. Just one question that's just been lingering in my mind for quite some time. We had Dan Moorhead from Pintera Capital in the podcast, and he talks a lot about the bond market bubble. From your perspective, Ra, why is anyone buying bonds these days? It's something I haven't been able to wrap my head around. Who's buying bonds and why are people or institutions, maybe, let's say, buying bonds? So I think people get really confused around all of these topics.

Starting point is 00:24:46 people confuse inflation and debasement, for starters. So inflation is the rate of increasing prices, and debasement is the devaluation of the purchasing power of a currency. What most people are observing is debasement, generally we've been observing. That doesn't affect the bond market. Does the US go into default? No. Does it increase the headline rate of inflation? No.

Starting point is 00:25:11 The rate of inflation goes up because of what's just happened with supply chains, or in the 2000s, it was because of China coming on the market. It's a demand shock. That's what really changed inflation, because structurally we've got this aging population and high debt. So you tend to get lower inflation over time. So I don't think it's a bond market bubble. It is a financialization bubble, i.e. a debt bubble. But I think that drives interest rates lower, not higher, because what happens is you lower the trend rate of growth of the economy because of debt. So each dollar of debt you take out, the less increase in GDP you get for it. So that's an over-leveraged economy with a bunch of old people.

Starting point is 00:25:51 You can't generate that kind of thing. You can't generate that kind of growth. So I don't think that we're in a bond market bubble. I think we're in a debt bubble. That's a different thing. Is the US going to default on its debts? Well, they're going to do it not by not paying them. They're going to do it by debasing the currency, which is a whole different issue.

Starting point is 00:26:12 Yeah, so I don't agree with Dan. I don't think that the bond market becomes unhinged because the central bank just buys it. And they just lower the value of their own currency. So Japan has been doing that. Japan has been buying its bond market to stop yields going too high. And what happens is the end collapses. What about another piece of the puzzle here is why is the dollar so strong these days? Can you fill us in on that?

Starting point is 00:26:36 So the dollar is a game of musical chess. It is a world. massively in debt in dollar terms. Most trade is done in dollars. So most borrowings are done in dollars. In fact, most of the world's lending is done by the euro dollar market, which is the offshore dollar lending markets, generally driven by the European banks, the Japanese banks and some of the Asian banks. It's a game of musical chairs because the moment that growth slows down or growth is too fast, Generally, it's when growth slows down. When growth slows down, people need dollar financing.

Starting point is 00:27:16 And there's less dollars in the system. If the Fed are withdrawing liquidity right now, there's less dollars. So you're taking a few chairs away. First one was Sri Lanka. They're like, where's my chair? Gone. Right? And you'll see one country after another.

Starting point is 00:27:28 We're now seeing China starting to devalue its currency. It's because part of their chair has been taken or one of the chairs has been taken out of the room. So that's what happens is there's too much dollar borrowings and in a slowdown, people need more debt. And there's not enough debt being given out because the Fed are taking supply out of the market. In the other side, the dollar goes up. The dollar's got a smile. So if the world is growing, generally the U.S. has been the kind of leading world economy in terms of where you want to put your capital. So in a growing world, the dollar tends to do pretty well.

Starting point is 00:28:03 The dollar does very well in a slow world. The dollar does terribly in a kind of muddle through reasonable growth world. That is true, of course, because, you know, so much the worldwide debt is denominated in dollars because the dollar has the world's reserve currency status. When these cycles play out, can that erode the position of the dollar over the kind of the longer-term time horizon? How do you see that playing out? Does this sort of, you know, shock to the system diminish the dollar's long-term?

Starting point is 00:28:33 term power as? It's actually rebalances the system decently, right? It's the shock absorber. Because if the dollar goes up, it stops other nations excess borrowings of dollars. So it reduces the liabilities in dollars. Now, you might have defaults to deal with, but it does that. It also slows down inflation because the dollar itself is the denominator of all commodity prices. So if the denominator is going up, then the price of the commodity goes down. So it actually works as a balancing effect in many respects. The flip side is people like China and Europe get pissed off with it, because everybody's a function of the US liquidity. And the dollar is used as a therefore economic weapon that's not in anybody's control, which is why both China, Europe and others

Starting point is 00:29:23 have started to try and push back on the dominance of the dollar. The dollar is so incredibly dominant. It's like 80% of world traders in dollars. And they want it back to, you know, a more reasonable level that better represents the size of the US economy in the global picture. So the US economy is, what, 25% of the global economy down from about 40% due to the rise of China and India and others. So the dollar should be 25% of global trade. Now, it's the reserve currency. So maybe 50% would be the right number, but it's too much.

Starting point is 00:29:57 And people just don't like that reliance on the dollar because it breaks other people's economies when something's going on in the US. I mean, macro is fascinating stuff, right? There's a lot that goes on. Yeah, I mean, yeah, it's definitely tricky. But can we go back to equities for a minute? Because tech stocks were absolutely flying, like during COVID, of course. And now Amazon is back to April 2020.

Starting point is 00:30:19 Netflix is back to 2017 prices. Tech stocks have absolutely taken a beat down. The NASDAQ is back down to where the COVID dumps happened in March. So the whole entire market is at the bottom of the market. Just gave it right back. Here you go. We're giving it back to you. But you seem to indicate that there might be some hopeful future for stocks after we get

Starting point is 00:30:39 through some of these next steps with Powell and with the economy. So it's technology specifically that I'm looking at. We're in a period of the, you know, we know it from crypto, but it applies to a lot of technologies that I bunched together as the exponential age and, you know, a lot of what Kathy Wood looks at or a whole bunch of other people. These are these technologies like AI, electric vehicles, green energy, space, robotics, genetic sciences. You don't put the genie back in the bottle just because you raised interest rates. The technology keeps moving forwards.

Starting point is 00:31:22 So what happens is they actually get cheaper over time if they're trading even sideways. So much the same as crypto, you need to put them into a nice logarithmic channel. And things like Amazon have been in a perfect log channel since it launched. And it sometimes gets two standard deviations oversold and maybe three standard deviations oversold. And that's usually the sign that you've had a capitulation unless the network is failing. So Netflix right now, we're questioning, is Netflix a network? Or is it just a broadcaster where it's on-demand broadcasting?

Starting point is 00:31:55 Now, if Netflix developed a community and had a two-way relationships with its customers and maybe a marketplace, it would be valued differently. So maybe this is an S-curve moment where everybody questions, is this going to survive or not? And then it changes its business model, or it fails. But is Amazon going to fail here? Literally zero chance. So what we're saying is because of inflation, these stocks are going to get cheap. because of the interest rate backlog, they're getting cheap. But the ongoing adoption of technology is relentless.

Starting point is 00:32:29 So therefore they're getting cheaper every day. So we should be looking at entries exactly the same we do with crypto. We look at these markets and if you've got spare money, then you want to be buying this kind of stuff and not selling this stuff because it's the same adoption model. This network adoption models everywhere. And if you stack all of these things on top of each other, all of these technologies and there's a whole bunch of these things,

Starting point is 00:32:51 including crypto, what you've got is a whole bunch of Metcalf's laws piled on top of each other, which is what's called Reed's Law. And it's the fastest pace of change the human race I think will ever go through. I mean, it's an extraordinary period of time. And you don't want to get knocked off that game because of what's the volatility in markets. You know, these things are inherently volatile. These logarithmic channels and network adoption models are volatile. But you can't get knocked off your game for this, because you'll,

Starting point is 00:33:21 missing the big picture, which is why it's so important not to use leverage in these network adoption models because you don't want to get washed out at the wrong time. So with the state of the equities market right now, like I said, the NASAC being basically where it was in the depth of the worst part of March in 2020, now we're back there. But the difference is we're not going to get the same sort of like boost from the Federal Reserve. We're not going to get the same level of like support from stimulus checks because like, well, now COVID is largely over where like, back then in March, people couldn't go to work. Now people can actually go to work now. Right. We actually have like a path forward to repairing the economy. And now the equities

Starting point is 00:34:00 markets is back to kind of where it was. And so we had like these roaring 20s where tech stocks and non-debt assets really did really, really well. But now we're kind of back into that place where we hoped we would have been had there not been a pandemic. As in like we can actually move forward. People can go back to work. And now like now the prices are back to the bottom of the 20. 20 depths, like we can actually start to move forward now. So this kind of seems like the markets actually resume and like life kind of resumes at this new level now that we've suffered all of this pain. Is that right? Yeah, but we're going to lay a bunch of people off as well. Right. So you say they go back to jobs. I'm not entirely sure. Sure. Yes. But at least like the economy

Starting point is 00:34:40 can operate as normal, right? There's not a pandemic in the mix. And so like the markets can finally clear. Is this all a fair take? Yeah, I think so. And I think the point you raised right at the beginning about we're just going to unwind everything that happened after the pandemic and then kind of reassess from there. And that should be, you know, we are going to have a recession. It's pretty clear that that's going to happen. How much has that's been priced in? Well, I just did, you know, the year on year rate of change of the S&P, I just put it up on Twitter, basically is a predictor for the ISM, which is the predictor for GDP. And the S&P is already pricing in a recession, pretty much, as are many things. So it's kind of happened.

Starting point is 00:35:18 So therefore has the damage been done in the stock market already? Possibly. And so therefore the next side of this is the easing cycle, as I keep saying. Now, it's not going to happen instantaneously. We're going to walk in. The Fed are like, oh, we're just going to print another $5 trillion. But over time, they're going to have to stimulate again because the economy's brought back to where it was.

Starting point is 00:35:39 As you said, the whole thing has been unwound. And that's the same thing as the prices and equity markets. There was a investor that I follow Eric Peters, whom you probably know. but I read his newsletter over the weekend. And what he said was what we're seeing is the market pricing out the Fed put. We're all on our own now without a safety net. It's a sobering reality, a little bit like trading crypto. Do you think this is just the market sort of feeling like the Fed doesn't have our back anymore?

Starting point is 00:36:07 The Fed puts gone. There's no safety net, at least for some period of time, until Powell and the Fed sort of reverses course and adds that safety net back. Everyone had this exact conversation in 2018. And guess what? The Fed put came back really quick. So, you know, we don't know what level of pain, but we're getting close to the level of pain where the Fed go, well, I'm not sure about this any longer.

Starting point is 00:36:33 The thing here... So you believe there's always a safety net. There's never not been a safety net. Because of the point that I raised before, you cannot allow the clattral to get destroyed because then the whole fucking thing goes under. So you can't. So which is why I've pivoted my way of thinking about the world from, I was always looking for the rally to sell the bear market to trade. And I actually think of the bull market to buy, you know, the bear market to buy into because of the structure of how this is, which is they can't let it go fall apart because that's the end of the banking system, the pension system, everything.

Starting point is 00:37:11 So it can't happen. So they have to panic at some point if it goes far enough. Usually it's the credit market that freaks them out the most. So, you know, keep your eye on things like H.YG. You know, those kind of things. That's what worries they're Fed. The equity market's doable. You know, you can go down 40% and not blow up all of the leverage.

Starting point is 00:37:33 But the credit market, that's where it all lies. So, yeah, I think the Fed put has to be there because if not, it's the end of the world. Well, if debt is 400% of GDP, I mean, that's just gigantic. How do you pay anybody back? Can you explain like I'm fine with that? Obviously, like debt to GDP ratio is relatively simple. So I'll just explain it. It's just like how much money does the economy make versus how much debt does it owe.

Starting point is 00:38:03 But can you explain why like if the Fed put isn't there, how that would blow up everything? Well, it's again, it's about if you think it in simple terms is you go and buy a house. house and you get a mortgage. The mortgage is against the house. The house is the collateral and you put some cash down. Now, if the house price goes down enough, in the US, you could just walk away from your mortgage, right? You hand the keys back and it becomes the bank's problem. In Europe, it's actually your problem. The debt follows you. So if you can't afford to pay your debts, then you've got a huge problem. And if your collateral falls too much, some of you, comes to you and says, you need more collateral to cover your debt. So if suddenly you're,

Starting point is 00:38:47 you've borrowed a million dollars against a house and your house was worth a million dollars, and suddenly it's worth $500,000, the bank's going to tap you on the shoulder and say, we don't have enough money against this, collateral against this loan. That's the issue with collateral. So if it falls too much, then there's a mass liquidation. Now, if you think of the collateral of the system, the biggest collateral of all is the US Treasury market. Well, that blew up. Then it's the credit markets, and they're kind of starting to move. And then the equity market less because it's more volatile. It's hard to borrow a lot of money against volatile assets, as you guys know from crypto.

Starting point is 00:39:25 You can't borrow as much leverage as you can against a treasury bond where you can get kind of almost infinite leverage. So you just don't want these things to blow up because then everybody has to ask for their money back and there's no money to pay for it. And who comes collecting? Like, is it all of the other central banks, basically? collecting on the Fed? Well, it's the market. You know, don't forget, it's the bank that lent you money. Their risk manager is saying, well, we had this against it, and now we need some more collateral. You need to liquidate. It's much like, you know, leverage in the stock market or in the futures market. At some point, if your collateral's not enough, they liquidate the position.

Starting point is 00:40:01 It's the same in crypto. So it's not liquidated by some masterful force scratching his beard saying, I'm today, I'm going to liquidate everybody. It's just the cumulative effect of everybody who's lending money to the system does that. Now, the Fed is kind of doing it themselves, right? By reducing the balance sheet, they're saying, we want to take liquidity out of the market. So they're reducing the liquidity that's causing all of these ramifications. And it's because the system is so levered that you can barely raise interest rates

Starting point is 00:40:29 without everything falling apart. So outside of the Fed, and I guess the U.S. economy, when we look to kind of the globe, how about events like you mentioned COVID lockdowns in China, you know, move towards a zero COVID policy even still, which is somewhat perplexing to people who are looking in the market, but that seems to be going on. Also, we have the Russian-Ukraine conflict, and that continues to rage on. How much do these things impact world markets right now in the macro picture? A lot. So obviously, the Russia-Ukraine had ramifications because, A, Ukraine is a large producer of grains and other foods, and the economy is basically shut down right now.

Starting point is 00:41:10 And Russia got penalized and they are the world's largest. They have more commodities than any other nation on earth. So you take some of those commodities out of the system. So that is what was driving prices higher, which is causing demand destruction. So that's, you know, this cycle of rising prices and then falling economy that goes with it. The China situation is more complex. So China is obviously the second biggest economy on earth. You've now shut it down again. So that's destroyed demand from the global situation. But they're also the, largest supplier on earth. So now we've got a lack of supply. So could this feed into more inflation again? This is the thing I'm scared of is what happens if this causes another rise in

Starting point is 00:41:52 inflation? Inflation doesn't come down. We're kind of really screwed then. And this is when I don't think the governments have any choice but to start giving handouts to people who are worse off. You know, they'll kind of sacrifice the rich, but they'll going to have to save the poor. and we're going into a U.S. election. The Europeans are already doing this, as are the Japanese, is they're going to have to say, if you earn less than $100,000 a year, we're going to give you a grand a month to help you pay your bills.

Starting point is 00:42:22 That's a stimulus check. But unlike the COVID stimulus check, you're not at home with nothing to spend it on, so you punt it on Robin Hood. You're actually going to do it to pay your bills, your electricity bill. I mean, you definitely want to talk about the way out here, and it sounds like you're talking,

Starting point is 00:42:37 about the way out that many of these governments will take is going to be more stimulus, direct to individual stimulus. I want to talk about that. But while we're on the subject of, I guess, scary things that are going on, I feel like we've covered macro sufficiently. We've covered, you know, China. We've covered equities. We've covered the Fed and the economy. Can we talk about scary things in crypto right now? Oh, God. And actually, I think we want to start with this, because as we're recording, you know, David has been monitoring this all morning, but it's actually Yeah, Ryan, if you're going to, I'll take over here. Yeah, it's UST, which we talked about earlier.

Starting point is 00:43:11 I just interviewed Doe this morning, by the way. Oh, my God. My goodness. Well, let's talk about that because. But he didn't give a lot away. What's happening with UST price? And Raoul, I don't know if you want to pull up a chart too. Yeah.

Starting point is 00:43:21 Raoul, when you hopped into this recording room, UST price was at 98 cents being defended. Do you know what it is right now? No. It's at 92 cents. Yeah. So that's a billion dollars of stable coin market cap that's gotten a race in the last 30 minutes. And as I'm monitoring Twitter right now, and the Luna Guard, the Luna Foundation that

Starting point is 00:43:41 has the BTC has just sent their BTC outbound. So they are probably in the process of liquidating their Bitcoin. So they liquidated 500 million yesterday. I don't know. But yeah, you're the one that talked to Doquan more recently. Yeah. So they liquidated 500 million yesterday. Jump trading, who is the market maker, I think we're liquidating ETH. And look, I don't know how much LFG have, but I think it's, what, $3 billion of Bitcoin? Well, what's happened is that never made it onto the curve because they weren't set up with the forepull that we're putting on curbs. So they're just having to liquidate the position in the meantime.

Starting point is 00:44:19 So the market's always going to test this stuff, right? This is what the markets do, is you want to test the fragilities. And this is an S-curve moment for the entire algorithmic stablecoin idea. I mean, all of them have failed so far. So let's see whether they survive it or not. I mean, I hope they do because it would be nice, but it's not sure, right? Yeah. Do you have any opinions on just like the systemic nature of Terra in its whole ecosystem? Because they're using non-tera assets like Bitcoin and Avalanches also in their portfolio to defend the peg.

Starting point is 00:44:50 So like the concerns that people are having is that they are going to dump the rest of the market before they have to dump their own assets. Well, this is the margin call I talked about, right? It's exactly the same thing. And so what's happened is they're now getting asked for their collateral back. I mean, it's exactly what I talked about, and it's going on. This is what you expect to see at this phase. This is a liquidation phase, and that's when somebody taps you on the shoulder and say, I want your collateral back, and you have to sell it.

Starting point is 00:45:18 So in this case, it's the Bitcoin. So is it buy time? Is the message here, as in like if we're interested in being the counter trade on here, is this just a buy indicator, or is that too simple? Well, depends who else has got to get liquidated. Somebody asked me this question. It's like, okay, so this is the known one. What are the liquidations? I mean, obviously, the market says, do we need to go and test micro strategies?

Starting point is 00:45:41 I don't know, but that's a long way down. I'd rather that didn't happen, but, you know, who knows? You know, because the markets seek these pain points, you know, they always take the path of pain. And it's when everybody's max bearish and fearful of everything as the market screams higher and nobody believes it. You know, this is just how psychology works. So I don't know whether we're there yet, but we're in the end phases. You know, I kind of feel like ETH, gets back down to 2000. But, you know, all well and done. If you stand back from the drama of the markets, ETH and Bitcoin put in their low, well, Bitcoin might make a new low, but Heath put in its low, when was it, June, July, last year. And we've thrown eight and a half percent inflation, an oncoming recession. We've thrown all sorts of stuff in the market, didn't

Starting point is 00:46:27 make a new low. So it's this sloppy sideways range. The internal, ETH economy has been pretty good, as we know from NFTs and other stuff, defy's been a bit quiet, but NFTs have, you know, been active. So the ether economy itself's been good, but the ether economy has not been growing.

Starting point is 00:46:43 I know new participants have come in. But I think we're close to the final liquidation. In the technical indicators I've got, I think we've got another month to go, however, and it can get ugly. So it's interesting because this has been much of the talk of the previous weekend is what would happen if,

Starting point is 00:47:00 you know, Tara had, and UST had kind of a meltdown moment. And your perspective seems to be, well, they're just like any other participant with collateral that's underwater and the markets have to flush. We've got to flush this out of the system. And then your markets go down and then we kind of move on. So what is your take on that? Because some people are very fearful of a massive meltdown.

Starting point is 00:47:20 And we should say it's not clear that UST will kind of fail. But there's only $3 billion to liquidate. So that's it. It's just another big whale market participant, $3 billion. It's not massively systemic risk. to the crypto system or to defy in your mind? No. I mean, does this change the anchor protocol?

Starting point is 00:47:38 I don't know what the knock-on effects are. You know, as you said, maybe there's more knock-on effects in Avalanche. I don't know. It's a very complicated ecosystem, terror, so I don't really know it inside out. Much like, you know, try and pick apart the Ethereum ecosystem. It's immensely complicated. Nobody really knows where the fault lines lie. Who's got the leverage?

Starting point is 00:47:56 Who hasn't? But, you know, markets like this, this is what they do. They find the weakest hands and drive it into the strongest hands. I mean, that's just always the way of the world. What the clearing price is, I don't know, because I don't really know how much leverage is or margin. Because this wasn't so much leverage as just the kind of margin, the collateral of this system being asked back. Doquan just tweeted out deploying more capital steady lads. So this is kind of the moment, right, where like, do they have enough ammo in the reserves to defend the peg or is it all going to get depleted?

Starting point is 00:48:29 I don't know if it's $3 billion or not, but, Ra, you sound more informed than me. but like can the crypto markets, can get Bitcoin markets, like accept $3 billion of liquidation? It depends on how fast it happens, right? It's possible and we don't know who the buyers are. Sorry to cut you off. 1.4 billion. It just got sent out of the Bitcoin Luna Reserve wallet. No, no, like obviously they can choose to sell that at any rate that they want, but $1.4 billion is the number. The Layer 2 era is upon us. Ethereum's Layer 2 ecosystem is growing every day and we need bridges to be fast and efficient in order to live a Layer 2 life. A cross is the fastest, cheapest, and most secure cross-chain bridge. With Across, you don't have to worry about the long wait times or high fees to get your assets to the chain of your choice.

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Starting point is 00:51:19 enabling you to get liquidity on your stake. If you want to stake your ETH, Terra, Sol, or Matic, and get liquidity on your stake, go to Lydo.fI to get started. That's LIDO.fI to get started. You know what's kind of funny to me as we're all talking about this is the fact that we get to see this all play out on chain, the data in real time. Like, well, this has to happen all of the time in traditional markets. Just, of course it does. The public doesn't see it. We're not talking about on Twitter. You do see it sometimes, right? We saw it like at the European debt crisis. That played out in real time on our screens. But a lot of the time you don't. Not the play by play. Normally you don't because it's some bloke at a bank calling up and saying this morning. But sometimes it happens

Starting point is 00:51:59 on a gigantic scale, which was like grease blowing up and Italy and Spain. And here it is in the crypto market. Yeah, it's just a very interesting world. So regardless of what happens, we'll see if crypto can sustain it. But this is definitely the time where all of these protocols get tested. We'll see if this latest algorithmic stable coin can hold. The bigger question is, is let's assume that this is a ship show and that this continues. And there's other leverage to come out of this system from some of the defy ecosystem. What does it mean for regulation? Yeah.

Starting point is 00:52:32 I mean, so this is in my question. So part of, we've had Tara on before and the folks kind of the bull in the bare case for Tara. And part of our sentiment has been like, hey, let's not screw it up, guys. Like there are regulators, there are legislators like Elizabeth Warren who are already biased against our industry. And we'll be looking for operations. opportunities to scapegoat the entire industry and point out when things go haywire. And this is a

Starting point is 00:53:04 concern I have about kind of more centralized algo stable coins. And I'm wondering what your take is on this. So let's assume this is a shit show. It may not be. Hopefully things come out on the other side. It doesn't go in that direction. But let's assume it goes in a negative direction. What do you think the regulatory impact might look like? I think it's going to towards, and I've always thought this is no governments want unregulated stable coins. They want central bank digital currencies, whether they're private sector or state sector. I think there'll be a blend. Nobody wants this.

Starting point is 00:53:41 So they will use this as an excuse. And, you know, it's probably good for people like Paxos and it's probably good for people like Circle and it's not so good for tether and it's not so good for terror. And, you know, the problem is, is if we are using borrowing somebody else's currency, then we have to play their game, whether we like it or not. It's their currency. You know, so anybody thinks that, oh, just because we've got some algorithm, it's not the Federal Reserve's currency, smoking crack. I mean, crypto is importing the unit of account of the dollar, right?

Starting point is 00:54:22 And so I do understand that day. I mean, it's like the SEC quashed anybody trying to do synthetics. I mean, this goes back to the role of a Bitcoin or an ether, like a monetary asset that doesn't have an analog to the real world and the value of having that in the crypto system and keeping us more resilient that way because in these cases, we are not borrowing the unit of account from any central bank. Exactly. And I don't have an issue with stable coins.

Starting point is 00:54:49 I mean, I think they're very useful because we need to integrate from the sovereign systems we live in to these digital web thrift. free world. And that's an integration tool and it works very well. So I have no issue with that. But the key point is, yeah, if you own Ethereum or Bitcoin or others, you own them. It's not somebody else's liability. It's not their asset. I mean, the dollar, it became absolutely clear to the Russians that they thought they owned dollars as their own asset. They didn't. The US had lent it to them. It's like, you know, you've got to realize what game you're playing here. And that's why I think the stable coin industry, as is, is going to shift towards the highly regulated.

Starting point is 00:55:30 And I don't really have a problem with it. Sure, we're all utopians and we'd love this other world. But we also need to be pragmatists. If we want this world to win, we need to realize there's some battles we will fight and others that we can't win. I do still think it's a net win, even in that world of you get regulated staple coins, because what are they ultimately settling on? It's crypto rails.

Starting point is 00:55:52 Exactly. And we're just the value accrue. it accrues to crypto. It's not a ban of ether, Bitcoin, or anything. If anything, like, the assets that are underlying the stable coin system become these more base crypto-native assets. So it's still a win, even in that zone. I totally agree. As we zoom out a little bit with the crypto markets, again, we talked about how, like, a lot of the equities, the NASAC are back down to their COVID depths. But crypto is definitely not. Like, ether hit $80 in March of 2020. And now in 2022, it's at $2,200, $2,300, and Bitcoin has similar levels of performance. And so, like,

Starting point is 00:56:28 where parts of the traditional market are back down to their lows, the crypto markets are over 10x, like, you know, 15, 20x, their previous lows. I mean, granted, some of this should be expected, like the NFT industry has completely boomed. The fundamentals are so much better. There's been a lot of growth in the last two years. But Raoul, would you say that the performance of crypto assets in the last year since the Fed has begun to tighten? It's a monetary policy starting kind of in January or so, the resilience of the crypto markets. Has that surprised you at all? Yes.

Starting point is 00:56:58 Well, no, it was what I was hoping to see, which is that the more mature the network gets, the less volatile the price becomes. So I was expecting, and yet to be proven out, that each time we go through a bare market, that we see lower percentage falls. So Amazon is, I use this as my best example of network. adoption models. It came out of, it went public. It fell 96% in 2001. It then rallied back. It fell 65%. Then it fell like 45%. And then the sell-offs were 30%. And then was even less. So that's because the network gets more mature as more and more people join it. So it becomes less

Starting point is 00:57:42 volatile. So that should be true of Bitcoin and should be true of Ethereum. And I think that's playing out. So what ordinarily would have been maybe at this point down 70% has now been the sloppy down 50% sideways range. Okay, that's a whole new thing we haven't seen before. So it's interesting. Now, it's yet to be proven out. You know, who knows what plays out. Where do you think we end? I'm just looking at percent down from all-time highs and I'll read a few assets out for us here.

Starting point is 00:58:12 So Bitcoin, we're now at about 55% down from all-time high, from Bitcoin's all-time high. Ether were about 53% down from all-time high. Other assets, Solana, it's more in the alternative layer one space. It's 74% down from all-time high. Cardano, 80%. Terra is hanging out at 60% at this point in time. Dogecoin, 85%. Avalanche, 70%.

Starting point is 00:58:41 Where do you think we end up with maybe, let's start with the Bitcoin and Eth? Do you think that's like 60-70% down all-time? I'm higher? Do you think we get even, you know, higher than that? It depends what else happens. I'm going to look at the chart of Ethereum and I'm like, you know, this could be a head and shoulders top, in which case we go significantly lower. You know, we go back down to 1500. Who knows? Or what's more likely is I think is we're forming another sort of wedge and that therefore 2000 is the low. I just, you know, I don't know. These are volatile assets. But you know, you know,

Starting point is 00:59:18 that the early adopted, so Solana should be what Ethereum was in the last cycle. How much was Ethereum down in the last cycle? 95%. Well, it's going to be somewhere around that, right? And we've seen that play out that kind of

Starting point is 00:59:34 you know, Ethereum, well, Ethereum's been slightly different because it had so much adoption in this cycle. But generally speaking, they kind of looked like each other at early stages, like the Amazon. So the early ones look like Amazon and they become less like Amazon over it's, you know, they become less volatile over time. So Bitcoin and ETH seem very similar these days

Starting point is 00:59:52 in that kind of volatility structure. But, you know, Solana, Terra, all of this needs to be proven out. It also took a long time for that to play out, too. I mean, this took 2018. It wasn't until 2019. And then, of course, we had COVID in 2020 where we saw the ultimate low for these assets. But that COVID drop aside, I mean, this was a kind of a multi-year bear market. From a time frame perspective, do you think something like that is? ahead? Or do you think now that we're playing with kind of the, I guess the Fed, I don't know what you call it rubber band or something where we're slingshotting back and forth, do you think that maybe this bear cycle in crypto is faster than 2018, 2019? Yeah, it feels structurally different.

Starting point is 01:00:34 But, you know, it's very difficult when markets like this, when everything looks absolutely terrible, you know, it's very easy to extrapolate the worst. But generally speaking, it feels that it's going to be shallower and shorter, because I don't think it's driven by the halving cycle any longer. I think this is driven by the macro. This is a pure macro event. And I think as Ethereum has become a more dominant ecosystem over this cycle, its own kind of triple halving or whatever we're going to call the ether two merge is going to be another factor within this market. So I think the structure of the market's changes, and that's just. just the network maturity that we talked about before. It's just how things evolve over time.

Starting point is 01:01:19 So I think the structure has changed. I think it's going to be shorter because we think the macro cycle is shorter. I think we all kind of agree that that feels like that that's where we are. So it's short and brutal, but it's not been as brutal as the past ones because the past ones were crushing bare markets. Don't forget, this time in 2018, we talked about 2018 a lot in this chat is at that stage, 2018, we were down huge. I can't remember what we were down in Bitcoin. by the 2018 Fed pivot. But that was the low. That was the low for Bitcoin, yes.

Starting point is 01:01:50 And you mentioned the merge. And so I kind of want to pivot the conversation towards things that we can be optimistic about. Yeah, let's get happy now. That was all the scary stuff. Things to look forward to on the horizon. Yeah. And so the last time we had you on roll

Starting point is 01:02:01 was about the merge trade, the ether trade. We're still burning an insane amount of ether on a weekly, daily basis. And the merge is closer than ever, even though it keeps on also getting kicked out. It's also closer than ever. And so I'm wondering if you buy in

Starting point is 01:02:14 to the triple-havening thesis, and if your opinions on this has changed since we last talked, because Ether historically has always bled more than Bitcoin previously up until now, whereas in the last like three to four months, it's actually tracked Bitcoin, which has never been seen before. And so like is leaning into some evidence as just to Ether the asset, structurally having a lot more faith by investors in this part of the cycle. So I'm wondering what your position is with, Will the Merge save us, Raoul? Listen, first I want to go back is I've done a lot of work on what drives network effects, right? Because people look at transactions, people look at on-chain stuff.

Starting point is 01:02:51 Most of it doesn't matter. There's actual two key drivers. When you combine them, pretty much explain price. One is the total value transacted in, let's say, US dollar terms of a chain in, let's say, a month or a week, whatever we want to use, use a monthly basis, versus the number of active users, times the number of active users. Essentially, that is what explains almost all crypto, all digital assets kind of work in the same way. And the market's actually very efficient at pricing those two things. What's interesting is that Ethereum is over fair value

Starting point is 01:03:28 because of the burning, which is a different source of demand that doesn't appear in the Metcast law kind of models. I think that's interesting, and that has been why Ethereum has done very differently. Now, if that increases because of the triple halving effect, then that should further lead to the outperformance of Bitcoin, which I've been watching for an extended period of time, and that seems to be ongoing. So barring any change in anything, it should outperform over time, unless something

Starting point is 01:03:58 dramatically changes with volume structures. Now, and we go back to earlier, what I said is when I look at my analysis, Ethereum is going no way. We've got no new participants and Bitcoin's going nowhere. But Ethereum has had luck because it's had NFTs and they've burnt a shit ton of tokens. And that's been because Ethereum ecosystem is vibrant within it. It's just not growing, i. People are not coming into it. Let's talk about some of the other, I guess, ways out of this or things that might save us.

Starting point is 01:04:32 So you're saying even with the prospect of a crypto bear market and just an asset bear market in general, the merge should help dampen the blows to ether the asset, though not completely avert them. It lowers the volatility over time. It helps support. But if prices turn up and we get demand back in the system, okay, then it supercharges everything. It starts to supercharge things. Well, can we talk about that? What do you think happens to maybe another element that's still been relatively hot, even in Q1 of this year and into Q2, is the NFT market? Do you think, think there is some salvation for crypto there? Do you think that remains hot? Or, you know, our NFTs kind of voodoo and like no one knows which way they're going? NFTs are a meaningful,

Starting point is 01:05:19 culturally significant thing. And what we see of NFTs now is not what NFTs necessarily be, but we'll be using them for every ticket we purchase. We'll be using them for so many things. You know, insurance contracts, derivative contracts, they all suit NFTs. So the genies out of the bottle. sure, we start with monkey pictures, but those have actually morphed into communities and into media companies. And there's a lot going on in that space. And it's really important. So I think that is big. And I think the social token market, which I've been talking about for a while that, you know, I'm about to go public on a business that I've launched with a bunch of kind of well-known people on that. That is coming as well. That's tokenizing communities. And you guys were very advanced in that.

Starting point is 01:06:02 You've had your own social token. And, you know, I don't think the world is yet. ready to understand what that means. So the sources of future demand are stacking up every day. So it's this period of time that we're talking about is where we know the technology is growing. It's in an exponential trend, but the market's been trading sideways. We've just raised, what, $42 billion in VC money for the space. That is going to be, A, spent on marketing budget, B, it's also going to be spent on developing new cool stuff. And everybody kind of knows that we need consumer-facing applications. If not, we're just selling stuff to each other in the Ethereum ecosystem, and that is not how to get this network adoption model. So I'm incredibly positive about the

Starting point is 01:06:46 space, incredibly positive with the amount of stuff that's being built, who's doing it, how much money's gone in. So crypto completely survives this down cycle that other VCs may struggle with and other tech companies will struggle with because everybody's fully funded. So that means, that, you know, people just build over this period, and we come out the other side with a whole set of other opportunities because the last building period gave us defy and NFTs. What's the next one going to give us? So over time, in a network adoption model, these big pauses that are bare markets are just kind of fuel for the next stage. And I'm particularly optimistic because how much money flowed in. 42 billion came in over 15 months. And how much has that has been deployed? I mean,

Starting point is 01:07:33 not that much. So another way to ask this question is, do you think any of this, any of this action, any of the, like, you know, maybe the future of bull market, do you think any of that changes the fundamental thesis for the space or the fundamentals of the space as a whole?

Starting point is 01:07:49 The only way that can change the fundamental is if adoption stops. So how does adoption stop? People don't find a use for it. That's pretty difficult to think that that's going to happen now. And again, considering how much money's gone into the space and what's going to be developed on top of it. So the only way of stopping that is regulation.

Starting point is 01:08:11 Interesting. How much could you slow network growth by massive regulation? That's always been the risk, right? We know it. You do kind of wonder what the regulatory appetite might be against crypto in a bear market. It seems like the regulators get more concerned when there are bull market things. But maybe this changes in the bear market if things are blowing up and investors lose. money and that sort of thing. But let me ask you the big question. But also don't forget, a lot of the

Starting point is 01:08:38 fragilities are not in the U.S. The U.S. is the kind of global regulator of concern and Europe. There's not a lot of these ecosystems that are there because the U.S. doesn't allow much leverage in crypto. So it's kind of okay in some respects. That is true. That is true. Let me ask you the big question. It seems to be throughout this episode, you've talked about the thing that's going to break the bear markets back and sort of reverse course. have the Fed reverse course is this idea of a stimulus. Did you call it a direct deposit earlier? You called it sort of an MMT. Direct transfer payments. Yeah. So what is that? And how does that happen in each country? And do you think this is sort of an act of legislators or do you think this

Starting point is 01:09:19 is coming out of the central bank? Sort of describe this scenario for us. This is the Stimmy check. The way out. The Stimmy check was a new thing that we'd not really used before as a monetary tool. So the issue is with just printing money is it makes the rich rich because the nominator falls and the value of the assets go up. So people who own assets make a fortune. And the people who don't earn assets get poorer. So that's creating this issue with polarization in the population, populism. But if you give it directly to people, politicians love it because you buy votes without having these pork barrel things that you get in the U.S. where people get their defenses fixed by the government because they refuse to sign a deal unless it's done.

Starting point is 01:10:07 That goes away. You kind of bypass all of the political system and you give it directly to people. It actually helps people who need it. So it helps with the disparity between rich and poor. It is kind of a bit of the welfare state that the US could never implement while most other countries have it. So it's a way of kind of doing that. by the back door. So I don't see a world with which this does not get used, particularly when there's some complexities of the macro,

Starting point is 01:10:40 which is prices are high. You know, if we seem to be stimulating by cutting rates, people are going to accuse us of stoking inflation. So why not just give people money directly? Do you think debt forgiveness of the U.S. is talking about, like debt forgiveness, is this an element of the same thing you're talking about, same energy? Right.

Starting point is 01:10:57 Absolutely. And I've been talking about this for, I don't know, six, seven years. Yes. When you've got a world so much in debt, if you can forgive debt, you will. Because A, most of the it's never going to get paid back anyway. And secondly, you win votes. Does this cause the problem that we started with, though, that we're trying to solve in the first place, which is inflation? So if we start cutting stimulus checks or some basic income, debt forgiveness, that sort of thing, does this get us back into the cycle that we're in right now, which is like verging on double-digit inflation? No, because all you're doing is allowing people to pay their bills. So you're not

Starting point is 01:11:35 increasing incremental demand. In pandemic, you're increasing incremental demand, which is why we have such a wild effect. This is actually trying to get people back to flat. So I don't think it does that. So I don't think it drives inflation. Now, it depends what the central bank does. Do the central banks start monetizing some of that, i.e. by buying government debt again, more QE. If that's the case, then that debases the currency and assets go up again. Now, I don't think governments can afford to hand out stimulus checks at infinitum without going cap in hand to the central bank and saying, please, sir, can have some more. So what do you think will be the rationale for stimmy checks in this day and age where there's not a pandemic?

Starting point is 01:12:24 to justify it. Are we able to do that politically? Like right now, because there's no monster to be issuing Stimmy checks against like there was with COVID. Yeah. Don't forget, real wages, real disposable income are the lowest. They've collapsed. We've never seen people with such negative incomes. Now, it's all right for you and I. We've all got sources of income. We've got assets. We've got savings. But if you're just the average dude, you're screwed. You can't afford. to pay your electricity bill. So if that's not a crisis, well, not worse than the pandemic,

Starting point is 01:13:00 but at the same kind of magnitude for certain people, then, yeah, I don't have a problem with it. Right. Okay, so, I mean, it's just like, I've never heard the Stimichek's conversation in the last, like, six to nine months, right? And so like...

Starting point is 01:13:12 Well, it's happening in Europe. It's happening right now. Because you're saying it's coming to America. This is the cost of war. We've got war here. The sacrifice we need to take is we are not going to, rely on Russian oil and gas, and therefore, we're going to have higher prices for a period of time,

Starting point is 01:13:30 and we will help you deal with those higher prices because we understand it hurts you economically. Japan has done exactly the same. So I think it's coming to the US, too. So we're using the actual war in Europe as like foreshadowing for what's coming to here to America? Yeah, because the price of everybody's cost of living has gone up, and they can't afford it. Now, it feels a bit weird now, but wait until in a recession and GDP's down 3%. Everyone's going to be begging for it. And so this is largely going to be disconnected from the actual price movements of equities and

Starting point is 01:14:04 like the crypto markets, right? Because people are going to feel the pain on their personal income, their personal expenditure independently of whatever like the NASDAQ does. And so like this Timi-check conversation, the recession conversation can be independent of asset prices. Well, yes. Don't forget there's two groups of people here. the kind of asset owners and the worker classes,

Starting point is 01:14:25 the work classes are going to have to get bailed out if this continues. The rest of us are all taking a fucking massive haircut. You know, if you want to calculate your net worth, it's not a good look, right? Everything's gone down. Every single thing you own has gone down. So, you know, everybody's taking some pain here. And that's what recessions are about. Everybody takes some pain.

Starting point is 01:14:45 I mean, I do think that's like there's an element of like the asset class has benefited massively from the run-up, the asset price run-up and the monetary policy for the last decade or so. So I totally understand where the sentiment is coming from and where some of this action is coming from. Let me ask you this, Raoul, do you think there's anything to the used to be a narrative that Bitcoin, hard assets like that, cryptocurrencies, would provide a hedge against inflation of some sort? Now, here's inflation. It's the thing, to be fair, the crypto community has always said, would happen. Like, the crypto community has always anticipated that inflation was sort of right

Starting point is 01:15:25 around the quarter asset price inflation, but an actual CPI inflation. Now, here it is. Do you think crypto will provide a hedge against it in any way? Everybody is completely confused between what inflation is. The thing that crypto is all about is the debasement of fiat currency. That is the printing of money. The printing of money has proven not to be inflationary in Japan and Europe and the US, there's no correlation. Inflation is a different thing driven by the supply and demand of goods. It is not everywhere and everything a monetary phenomena that was taught to the monetarist back in the 1970s coming out of the Chicago school.

Starting point is 01:16:07 It doesn't work because velocity of money doesn't pick up. So people have been the gold crowd. The same is like the inflation. Well, what a gold do? It didn't protect against that. Because gold actually protects against debasement of currency and not the inflation. Inflation, nothing protects you. So you think that the narrative has been wrong from the start, that crypto has never has been,

Starting point is 01:16:32 never will be inflation insurance resistance. It's debasement resistance. That's the real narrative. Correct. It's a long duration asset. Long duration assets get discounted by the rate of inflation. So it gets killed. So no, it can't be.

Starting point is 01:16:46 it's debasement. So it's the value, the purchasing power of currency. That's the thing. And people confuse the two because they assume that printing of money causes CPI to rise, which it does not. It causes the denominator to fall, which causes asset prices to optically look like they've gone up in price. They haven't. They've maintained. So if you look at, you know, over these periods, if you look at the relationship between gold and real estate and equities, they've all remained roughly consistent. And it's the actual factor was the Fed and the other central banks printing money, lowering the value of the currency, purchasing power terms against scarce supply assets. So something that there is more of goes down in value versus things that are scarce, which is the whole crypto industry built on this one premise as well. And that is right. Well, I want to pick your brain as to how you're actually playing this right now. As we're looking at the crypto markets, there's definitely some blood on the streets. Not too bad, but could definitely get worse. But also, there's definitely blood on the streets. And same thing with the equities market, as we said, like the equities back down to the pre-COVID levels.

Starting point is 01:17:46 So what are you up to you right now? What are you doing? Are you sitting on your hands? Are you starting to deploy? What's going on? I haven't done anything. I've not sold a single thing. I've not done anything. I've started to average in on the really growthy tech stocks for the reasons we talked about. Because into the carnage, if I'm right, and this is a super trend and a super cycle, then you want to be owning this stuff for the long run. Now, which companies are going to succeed or fail? We don't know. So you buy kind of baskets of stuff, you know, much like you might do if you wanted to capture the movement in crypto. Crypto is the same is, you know, You've got to be, if you believe that network adoption continues, then this is when you should be buying. Right. Right. But, you know, it's just not everybody has endless amounts of cash to keep putting in. That is a problem. We wish we did.

Starting point is 01:18:38 That's right. So I'm curious, how is your crypto portfolio changed all since last time we spoke? I think last time we spoke, you had some Bitcoin for nostalgia sake, I think. But you definitely had some Bitcoin. You had a heavy ETH position because you were in. the merge, the triple happening, that sort of thing. You had a portfolio of other alternative layer ones and other kind of long-tail crypto assets. Has that changed at all in this world? No, because I'm trying to capture the overall space. So I haven't moved around, you know,

Starting point is 01:19:06 as ever, you know, a bunch of the more speculative end of stuff always feels terrible in the bear market. And who knows what's going to survive and what's going to work. But, you know, that's the thesis and that's why you buy a basket and it's only a small part of the overall thing. Since then, what trades have I done? I had a go at buying calls on ETH to say, look, if the previous pattern kind of held out, then we could have seen a run in December through to March, which failed to happen. But, you know, I stuck like 5% of my ETH in some call options, or I added 5% in call options and that didn't work out. Well, it's bizarre. People like, pick on me for doing that. It's like, it's a mitigated risk, good upside opportunity.

Starting point is 01:19:50 didn't work out. I mean, 5% is like the bid off a spread on the daylight today. So who cares, right? So I did that. And then I bought some NFTs. I got involved in the board eight thing because I loved the not that bothered about the board eight community itself. It's a vibrant community. It's good. But it wasn't, you know, I'm not, I don't really like to be members of clubs because, you know, I don't like to be pigeonholed. But I love what Yuga was doing because that's the playbook that's been in my head, which is, you know, you know, you're You build engagement, utility with NFTs, and then you build a social token around it, and then use that. That's been the playbook that I'm building a business around as well.

Starting point is 01:20:28 And I saw that. The moment I saw the eight coin was actually coming out and saw what they'd done with Labelabs, I thought I need to get in and I want to own part of this ecosystem and hold it for the long run because this is something very interesting. And I bought some other NFTs because I was interested in them just to have a feeling like an MFer, just because that was a kind of vibrant community. The CCO model is quite interesting. I also wanted to own a little bit of art-based stuff. So I was interested in Damien Hearst because he was an artist I grew up with, and he's experimenting with the currency where they're either going to burn the art or burn the token. You get the choice and you don't know which one's going to be more valuable.

Starting point is 01:21:05 Just a fascinating experiment. And, you know, Damien Hearst is a cultural English icon. And then I also bought one of the ex-copy, Max Payne and Friends, because I think his art is amazing, but I'm not going to stump up the full cash needed for a proper ex-copy. So I bought a few NFTs just to get my toes in the water and just be involved. Well, you've mentioned the social token kind of idea, this business that you're launching. I don't know if you can tell us about that at all or reveal anything, but it sounds very intriguing. A little NFT, a little social token. Is there anything you can say about that?

Starting point is 01:21:39 Or when is going to be the next update from you? So I think that culture is becoming an asset class and the world's largest, cultural communities, music, sport, fashion, film and movie and TV franchises. Those things are all going to get tokenized. Right now, everybody is tokenizing from the ground up, building small communities. I think we're going to tokenize at scale, top down, the world's biggest communities. That's what I'm working on. Cool.

Starting point is 01:22:12 Without giving too much away. That's cool. This, I think, is, if we don't fuck it up, the, best chance we've got for mass scale adoption. We would love to have you back when you plan on releasing that. It'd be a lot of fun to talk about. Well, it's soon as well. We'll be able to talk about it soon.

Starting point is 01:22:28 Amazing. We can't really talk about the first client and stuff like that. It's all pretty secretive, but I'll be able to reveal more about the whole thing very soon. Awesome. Well, you know, NFTs are good cope through the bear market. You know, when I'm like looking at the price of my tokens, I just, you know, tend to go to the NFTs and the art still looks good. and, you know, the culture is still there, and it makes me happy again. Yeah, and you don't notice that your eth's fallen 50%.

Starting point is 01:22:52 Exactly. It's still at 5th. It's fine. Exactly. It's all priced in eth, which is the nice thing. But, you know, I think this is fascinating, and I think it's underappreciated, is, and I mentioned it a few times in this, is how vibrant the ETH economy is. So if you think of ETH as a country, there's a ton of trade going on in the country itself. there's just not much exports and imports going on.

Starting point is 01:23:19 Right. So that's been the most interesting thing I've seen that I haven't seen elsewhere is ETH is really its own sovereign state right now. Its economy is definitely not, like if there's a recession going on in the real world, you don't really see that manifest on chain in Ethereum. Like you see the liquidations, but that's only in U.S. dollar liquidations. like the native economy, the purely digital only, NFTs, eth only, those are completely immune from the external forces. Yeah, I think it's fascinating. I've never seen that before. It's really, really interesting. Well, for first timers, for unicyclers that we like to call them, the people that haven't only been through the crypto markets one time, they're probably pretty scared right now. I remember my first cycle watching Ether go down by like 50% and be like, well, it can't go do that again.

Starting point is 01:24:06 And then it did it like three more times. for those people that like they learned crypto as their first like foray into money in finance and they got really bullish so they have a lot of it and so now they're feeling their first waves of pain like what advice would you have for this cohort of listeners it depends what your pain tolerance is so you know i put money into the ecosystem well i'm just not really going to look at my p and l because i want to be in it for a longer haul is that the right move because In the cycle in, which one was it? 2013, I bought Bitcoin early 2013 and sold it into the rally in 2018, but too early.

Starting point is 01:24:50 And then I didn't get back in until the lows. That worked too. So you don't have to hold on. So if your pain tolerance is I could do something else with this money or just keep it in stables, do that too. That's okay. But I've just kind of thought, well, if I just write it off, and just don't think about it. Then I can just leave it there and I can add to it.

Starting point is 01:25:13 I learnt this trick with wine. So I collect a bit of wine and stuff that I bought, I write off immediately and I try and forget what I paid for it. And then I stick it in storage and 10 years later, I don't have the, oh my God, I can't open that thing. And you just forget about the value of it. And what you get is at the end, you've get this amazing wine at the end of it that you can drink and you don't think about it. With crypto, it just allows you to be in it. So I look at the

Starting point is 01:25:42 price chart all down. I've got like five fucking crypto charts next to me in real time on my Bloomberg, but I don't look at my P&L. I will do, I'll have a peak at highs and I won't at lows because I'm not going to do anything. I'm not going to sell it. And really all I want to do is, you know, if I can generate small cash and my wife stops buying stuff, I could then put it just more into crypto because my belief is in the network adoption and the space overall. And this is one of the biggest fundamental change to both the financial economy and business models that we will ever live through or have ever lived through and to not participate is stupid. So Raoul's advice is to take your ledger hardware wallet and stick it the wine cellar for 10 years if you have to. Don't touch it.

Starting point is 01:26:28 Don't worry about it. Raoul, it's been a lot of fun having you on. Maybe just to end with this question. It's kind of the question we started the episode with. But is this, should we be scared right now? Like, should we actually be scared to be in crypto, to be in assets? What's kind of your concluding thoughts on this? Bare markets and recessions are scary. They don't feel good. You come in every day unless you're short.

Starting point is 01:26:52 And I used to always trade these from the short side, so I loved these. But now I'm kind of looking it from the other way around, and then I feel as good. And I prefer the bull market. But this is how. The world always plays out. Is there a structural change in the economy that means things don't recover? It is a non-zero chance. There's a decent probability that we could structurally change how markets and the economy

Starting point is 01:27:15 works. So that would be more scary because then you don't get to get your money back. It just kind of dwindles on the vine. But generally speaking, I think that central banks and their magic bullet drives up asset prices over time. So if you remember that, just make sure you own some of those magic bullets when they come. And that is owning some of these assets. So it shouldn't be scary.

Starting point is 01:27:41 If you've got any cash, then you can buy more at great prices. If you haven't, then you need to make a decision is how secure is your income? That's the key to everything. Income is everything. Assets are nothing. Is your income secure? If your income is secure, you can just write it out. If your income is not secure, then liquidate your assets and give yourself some cash.

Starting point is 01:28:01 And in that situation, a friend of mine, early on in my career, gave me the great piece of advice, which was he who has cash in a recession is king. Because that's when you can buy everything on discount. You know, that's when you can book any restaurant you want. You can buy anything you want. So that's the key. So just if you can keep that in the back of your mind, yes, it feels scary. But maybe you can take advantage of it. There's opportunity here and great advice to end it on.

Starting point is 01:28:31 Raoul, thanks so much. It's been a pleasure to have you. Where can people find out more about what you're doing with Real Vision and everything you're up to, Raul. Yeah, so obviously on Twitter at Raul, R-A-O-U-L-G-M-I. And on Real Vision, you know, if you love the crypto stuff that you guys do, which I'm a huge fan of. We've also got a ton of really interesting stuff like the interview of Doquan is out on Friday. That's just realvision.com forward slash crypto or realvision crypto.com either way, gets you the same place. And it's free and it's all there. There's tons of great stuff supplementing what you guys do as well. Amazing. Fantastic stuff on Real Vision. Bear markets are always the best opportunity to educate yourself and see what the opportunities are and get ready for the next bull run. Raul, it was fantastic to have you on. Thanks so much for joining us.

Starting point is 01:29:12 Yeah, it was perfect, timely conversation. So thank you, guys. Yeah, I think this is the question in a lot of people's minds is should we be scared and what happens next? Hopefully we answered that for you, Bankless Nation. Of course, as always, risk and disclaimers, none of this has been financial advice. ETH Bitcoin, they're all risky assets. So is defy. You could lose what you put in. But we're headed west. This is the frontier. It's not for everyone.

Starting point is 01:29:35 But we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - 118 - Raoul Pal | Should We Be Scared Right Now?

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