Bankless - Fed Rate Cut: Is It Too Late? | Macro Alf

Episode Date: September 18, 2024

Jerome Powell and the Federal Reset is about to cut rates, but the question on everyone’s mind is… What happens next? Alfonso Peccatiello, known as "Macro Alf," is a macroeconomic analyst and investment strategist and he’s joining the pod to help us figure this out. - Are these rate cuts just in time or too little too late? - Is the Fed cutting by 25bps or 50bps? - Will we get a recession or the soft landing the FED is hoping for? - What will happen to crypto assets? We discuss all this and more with Macro Alf, one of the top minds in macro out there. ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠  🦄UNISWAP | BROWSER EXTENSION https://bankless.cc/uniswap  ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    🗣️TOKU | CRYPTO EMPLOYMENT  https://bankless.cc/toku   ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/65?referrer=0x077Fe9e96Aa9b20Bd36F1C6290f54F8717C5674E  ------ TIMESTAMPS 0:00 Intro 5:41 The Fed is Behind the Curve 12:28 Why Haven’t Things Broke? 18:57 Bad News are Actually Bad News 24:17 Fed Rate Cut Prediction 30:43 Elizabeth Warren’s Letter 35:06 Market Reaction 42:55 How to Prepare 53:20 Probability of Recession 54:48 Debasement 1:05:06 Monetary Plumbing 1:09:09 Debasement Assets 1:11:46 Closing Thoughts ------ RESOURCES Maro Alf https://x.com/MacroAlf   Alf's Institutional Research Free Trial https://docs.google.com/forms/d/e/1FAIpQLSfzLZS_8sWjyuqzDgJb9OQC_pSAoOjz6GVgsB0UIGzLELMSFQ/viewform   The MacroCompass  https://themacrocompass.org/   Monetary Plumbing Chart https://x.com/MacroAlf/status/1834938859848634440   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠   

The Fed is late. The Fed is chasing. The Fed will do 50 basis point. Hold me accountable. We're recording one day before. Just joking. I mean, I'm right about 53% of the times. Might as well be wrong. But I think they will do 50. They have to do 50 to catch up. Welcome to bankless, where today we explore the frontier of the Fed rate cut. And we ask the question, is all this too little too late? This is Ryan Sean Adams. I'm here with David Hoffman. And we're here to help you become more bankless. Guys, at the time of recording, we don't know for sure how much Jerome Powell is going to cut rates. I mean, we are pretty certain he's going to cut rates, right, David? He's going to cut rates, right? Oh, my God. Imagine if he did. Assuming he does, then the question is, how much will he cut rates?

And shortly after this episode airs, you will know more than we do coming into this episode. But the question regardless on everyone's mind is, what happens next? Are these rate cuts just in time? Or are they too little too late? Will we get a recession or the soft landing that Powell and company are hoping for? And, of course, what will happen to our crypto assets if all of these things come true? We discuss all of this with Macro Elf. He's one of our favorite minds in Macro.

We talk about why the Fed has been playing with fire, how it might cost us, and the coming era of money printing that's become pretty much the new normal. I think many listeners like me are thinking that Fed rate cuts are synonymous with bullishness. and I think while that is true, I think macroel still kind of throws a flag at that and he says, whoa, whoa, whoa, not too fast. I think the bullishness that comes from this rate cut cycle happens over like a longer time frame that I think people might be used to,

especially when like a lot of investors' minds are kind of primed with like the rate cut cycle of 2019 into COVID flush with money printing. That's what we think of when we think rate cuts. Like we just flush the economy with money. and Macro-Elf doesn't necessarily think that that is what the most likely outcome here. So he gives a little bit more of a nuance take that this Fed rate cut cycle, while it is bullish, might not just be just uber bullish for risk on assets. So I think if many listeners have that expectation that they probably need to listen to this episode

because that's what I was going into this episode with, and I think he gave an alternative opinion, which I found useful. So let's go ahead and get right into this episode with Macroelpha. First, a moment to talk about some of these fantastic sponsors that made this show possible, especially Cracken, our preferred crypto exchange in 2024. If you do not have an account with Cracken, consider clicking. The link in the show notes getting started with Cracken today. If you want a crypto trading experience backed by world-class security and award-winning support

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with limited time campaigns from your favorite. projects. Empower your future with Arbitrum. Visit portal.arbitrum.io to find out what's next on your web-free journey. Bankless Nation, super excited to introduce you to Alfonso Pekatello, also known as Macro-Alph. He's a macroeconomic analyst and an investment strategist. He's the founder and CEO of the Macro Compass, which is a fantastic educational resource for those who want to make sense of the macro world today. And he's going to help us make some sense of macro, especially right as things begin to change with the Fed. And first, welcome back to Bankless.

We had you on over two years ago, and it was a fantastic episode. Really excited to have you back. Long time, no speak. Very happy to be here. David, Ryan. Hi. Nice to see you guys. So let's go ahead and get right into it.

We are recording on September the 17th, right inside of the window where the Fed is expected to perhaps rate cut, cut their rates. Alfonso, you put out a piece on your substack, a fantastic substack, which is titled, This is a true regime change. And one of your first sentences in there caught my eye says, the Fed is behind the curve and it's playing with fire. These are pretty big words. Can you unpack what you mean by this?

What is the curve and why is the Fed behind it? So the Federal Reserve main task is to cancel recessions. Just joking. That's not their mandate, but that's what they're trying to achieve these days. These days monetary policy is set to make sure there is a put out there. There is a floor under the economy, basically. And the formal mandate is inflation around 2% and a healthy labor market. The reality is there is always a trade-off between the two.

And so at some point, the Federal Reserve set their policy only to fight inflation. But now that inflation has been moving down quite substantially, they realize that the labor market is showing cracks. And not only that, the overall economy is weakening. And so they run the risk of running behind the curve, which basically means you're late. You're not applying proactive policy. You're just chasing events and situations. And so if you think about it, what has happened over the last two years is that the Federal

Reserve had one mandate, stop inflation, stop inflation, stop inflation. And what they did is they brought real interest rate. So inflation adjusted interest rates to very possible. levels. So we had real Fed funds above 2% in positive territory, real interest rates above 2% for now 18 months and counting. And this matters because for the private sector, real interest rates are very important. They're important for investors and they're important for people who have debt. And actually they play two different roles, right? If you have positive real interest rate as a saver, as an investor, you're incentivized to put money in cash. I mean, you're rewarded

a nice, positive, real interest rates. So why would you do anything risky? You can just park your money in cash. And if you think about it, this slows the investment activity going through the economy. But that's even a bigger problem for people who have debt for borrowers. Because now all of a sudden, instead of paying negative real interest rates, which is what people have been used to before the pandemic, and actually during the pandemic either, now to sustain this growing amount of debt, you have to pay interest rates

which are positive in real terms. So you're effectively, you are facing a harder challenge as a borrower while you're facing an easier challenge as an investor. So all that does it slows the economy very aggressively because borrowing the creation of new credit gets slowed down aggressively because it's very expensive to do so. Look at mortgage applications. There are 30-year lows.

But on the other hand, as well, it slows down investment because people have a high reward on cash. So the Fed has brought these real interest rates at very positive levels. And effectively, the economy held up for a couple of reasons we can discuss. But there is a point at which these relationships are linear anymore.

They're convex. So basically, this is not an economy or the economic cycle in the Fiat system is not linear. It can easily become convex and very fast. And I think now we're facing the situation where we might see these comebacks lagged negative events occurring ahead of us.

Is your message, Alpha, that simply we've held interest rates at record high levels for simply too long. I remember just one of the big learning lessons post-COVID when we were raising interest rates is that they raise interest rates too late. It was too late after inflation had already had very strong indications of it being present. And the Fed just took forever to raise interest rates. And then they really had to play catch-up. Are we now just experiencing the other side of that where they're doing the same thing just on the other leg? I'm afraid so.

So it's the behind the curve, but inverted now, because instead of being too late in raising interest rates, they are now are probably too late again, but in slashing interest rates. And so the risk back in 2022 was that inflation was going to pick up too fast because the Fed was too slow to react, and indeed it did. And now the risk is that the economy is going to slow down too fast because the Fed hasn't been proactive in cutting interest rates,

but they have basically waited too long. And now these two risks are quite interesting, I think, because effectively if you have policy as tight as we have had it for the last 18 months, and just let's stop here for a second, people don't realize how tight monetary policy has been. Real interest rates at about 2% for 18 months in a row is a tighter policy than it was in 2006 and 2007. So the Federal Reserve has held interest rates at tighter levels

than before the great financial crisis. Now, I'm not arguing we're going to have another great financial crisis, but the level of policy restrictiveness is quite aggressive. And as it happens as well is that in October 2007, the IMF and the Federal Reserve held projections for GDP growth for 2008. And they were projecting the US economy to grow at 2% in 2008. Well, I remember something else happened. But I'm mentioning this to you because effectively,

grow, because the lags can be very long between applying monetary policy and seeing the results of monetary policy, there is a point somewhere like 12, 15 months down the road where people become very convinced that this time is different, that policy isn't tight, that the economy isn't going to slow down, and this tends to happen funnily enough, generally speaking, very close to periods where the lags are about to really kick in. Like it happened in October 2007 and a few months later, we had a big problem. In summer this year, if you remember, everyone, their mothers, their dogs, anyone was talking about a soft lending. It was a done deal. It's done. Like there is no discussion. The US economy can handle 5% interest

rates forever. The Federal Reserve was priced to cut rates never pretty much. Only a few cuts. We didn't need anything anymore. And now the job market is becoming to soften pretty aggressively and people are starting to worry. And I think that, look, the reality is that you have health policy at very tight levels. So with the lag, you are going to see, issues here. And we can talk about how long is the lag because it is quite long this time, this time for certain reasons, but the fact that legs are long doesn't mean that monitor his policy legs do not exist anymore. All right. So your message, Alpha, is that Powell has been flying far too close to the sun here. He should have taken some action many months ago. I don't know

what your time span is for that. But can I ask you the question that's in the back of my mind is if this is such a tight policy and has been almost like historically tight. I mean, I guess we've seen other times in history. You mentioned 2007 as like, you know, such a time. But how come things haven't broken yet? That's an excellent question, Ryan. So I think the lads are very long this time for a few reasons. Okay. So why is that normally you raise interest rates and an economy slows down? Let's talk about the basics here. Okay. You raise interest rates. And what happens is that the borrowers, so in our world, households applying for mortgages and corporations. that are using leverage and loans and bonds to finance their activities,

well, both of them are going to slow down, right, because you're making borrowing more expensive. So they're going to start borrowing less, okay? And as they borrow less, they're also going to be starting to spend a little bit less, right? They can lever their balance sheet less, therefore they're going to be cutting some discretionary spending, marketing and stuff like that. And then at some point, they will realize that cutting discretionary spending only is not really a strategy if those interest rates are high for long. So they need a plan, which is more long term, okay?

So they're going to start looking at trimming their more core costs. For example, labor, okay? They're going to take and they're going to cut off their temporary workers. If you look at temporary workers, layoffs, for example, it's one of the best leading indicators for the job market exactly for this reason, because companies tend to trim first, you know, the fat around, and then they move closer and closer to their core costs. Now, you do this exercise for long,

and at some point you have to cut your workers. And also you will have households that are not applying for mortgages anymore, which means the entire real estate market, housing market, and anything uncillary will also slow down. And that represents 10 to 15% of GDP. So you have less mortgages, which means you have less renovations, you have less building, you have less anything, right? And this is the mechanism by which slowly but surely you'll have corporate slowing down their hiring. People are going to get hired less, which means they're going to be less.

less prone to spending and therefore the economy slowly but surely declines. And then on the other hand, you're going to have households. And if households have to refinance their debt at higher interest rates, they also will think like, holy crap, I am making 4K a month or whatever, $4,000 a month. But now my mortgage installment is going up because interest rates have been increased and therefore they're going to be spending less. So this is generally the circle that slows down the economy. But let's discuss about what happens this time, okay?

because I talked about mortgage refinancing, and you look at the data, and something like over 90% of US mortgages are 30-year fixed. So when the Federal Reserve increases their interest rates, and the new mortgage rates are 7%, right? You immediately think like, holy crap, man, I mean, who's going to apply for a mortgage? And instead, no one is going to apply for a mortgage.

Indeed, that's correct. Nobody is applying for a mortgage. But that doesn't really slow down consumer spending, unless you can pass through these high rates to existing mortgage owners, to existing homeowners. And well, these guys aren't feeling it. They locked in mortgages at 3, 4%, 4.5%.

And they are not getting the pass-through because they're not variable rate mortgage. They're fixed mortgages. Long-term fixed mortgages do not suffer immediately from an increase in interest rates today. Contrary to 2006-2007, when a lot of these mortgages were variable. And so a variable mortgage means that when the income

interest rate is getting hiked by, when you get a Fed hike, basically, you immediately feel it. This month, you feel it already on a mortgage installment. This time, it is in the case. What about corporates? Same story. Look at Apple, look at Microsoft, look at also the biggest companies. They were very smart. In the period preceding the pandemic 2019, but also 2020 and 2021, they took the opportunity

to lengthen their debt obligation. So they went there and Apple issued third year bonds, for example. Same story. They behaved like households and they said, well, you want me to borrow for the next 30 years at 2%? Sure, I'll take it. So they lock their liabilities, which means, again, the Fed increases interest rates, but corporates are flush with cash and they don't care. They don't feel that pass through, right, of higher interest rates immediately.

So you have this situation. This is lengthening the lags. It means that for interest rates to pass through to the economy, it just takes longer and longer. And on top of it, on top of it, you have. fiscal because what has happened is that Biden has done basically a big round of fiscal in 2023 that basically offset some of the monetary policy tightening. So not only the past true of interest rates was low, but on top of it, the government went in 2023 and said, yeah, you know, guys, here is $2 trillion of fiscal deficit, you know, just take it. And corporates

got, you know, the good positive tailwinds and households as well. They got tax cuts. They got good income coming in when the government does fiscal deficits, the private sector enjoys it. It's basically slash of taxes, its incentives, it's money lending on the bank account of households and corporates. There is a fantastic chart from the IMF that shows the pace of interest rate hikes, and this times with like 500 basis points, vis-a-vis the change in net wealth of households and corporates. And you would expect, and you can see that in the past, in every episode when the Fed hiked interest rates, well, the net wealth of the private sector goes down, right? I mean, they take a hit effectively because they have to pay more on that servicing costs. This time,

the Fed hiked 500 basis points, the net wealth of households and corporates went up. This is the first time in history, the combination of fiscal and these very long lags that are due to the structure of the credit system in the U.S., which is long-term fixed, rather than short-term variable, it's made it so that it actually is taking a lot of time for these hikes to feed in. To the point where people said, well, this time is different. The hikes don't count anymore. It's over. The U.S. economy can handle it. Forget about it. It's a new era. In reality, it's not a new era. It's the same old era. It just takes a lot longer, and we need to respect these legs and understand them. Yeah, it's interesting how maybe the Fed tools aren't working the way they think that they are working. And so you're sort of describing this kinetic energy potential.

It's almost like a wave that's building in the distance, kind of like a tidal wave, but it hasn't yet reached us and we can sort of maybe see it miles off the coast and it's coming our way. I don't know if in your post you use the word recession or not, but the regime change that you're talking about, you're talking about the Fed playing with fire, and this will result in a macro regime change. You summarize it this way, which, and I want to understand what you mean by this, self, bad news in this new regime, bad news is actually bad news. Okay. What does that feel like

when bad news is bad news? What regime have we been in? Are we just able, you know, currently and in the past a couple of years able to shake off the bad news? And in this regime change, now when bad news hits us, it will actually feel like bad news. Describe that. And is that essentially a recession? Is that what you're describing? So do you guys, remember actually when before the pandemic, you had to maybe a slightly weak number on the growth front, like a low GDP number or a weak labor market report and the stock market rallied? Can you remember that? Because it happened all the time. You know, effectively, you had bad news in the economy. And the stock market was like, yeah, sure, that's great. I'm going to rally now.

And you're like, what the hell is going on here? Well, things were just like inverted. be like the market was waiting for bad news to happen because it would imply that like rate cuts were coming and stimulus was coming it was imply that just like we're going to rain more money yeah and so there the thought process was well we are far from recessionary levels like the economy isn't so weak it's just weak right and so we are far from that danger level and on top of it we have the fed having our back we have the so-called fed put okay basically there is the federal reserve that says, hello guys, every time we're going to have a minor slowdown in economic growth, we are here, we have your back, don't worry, we have a put here, we're not going to allow the

market to sell off more, okay? So people have lived through that last decade, basically between 2013 and 2019, knowing that bad news is good news for markets, Ryan, and I'm now saying that bad news is actually bad news again. And there are two reasons why I'm saying that. So the first one is, look, when you get closer to that recessionary risk, you don't have any more so much margin. Margin for error, I mean. So when the economy weakens from an already weak level like it is today, and the US is not even able to create 100,000 jobs a month,

like where we are today is that the private sector in the US is creating about 100,000 jobs a month. They might seem a lot, but the US is an increase in labor supply of about 120, 130,000 jobs a month. So what it means is that the US must create every month about 120 to 130,000 jobs just to break even, just for unemployment rate not to explode higher. We have a big net immigration in the United States. It's increasing. That means there are more people entering the economy, more people eligible to work. You got to put them to work. And so the break even has now increased to about 120,000 jobs a month. So anything below that, well, the margin for error until you see unemployment rate spike in higher and you go into it.

recession is not very high. So the closer you get to that, you know, to that convexity point, actually, to the point where from weak growth, you start having recessionary vibes, the more bad news is actually bad news. So now every time you see a bad economic print, you also see the stock market selling off. And that's something strange. That's something people aren't used to anymore. And that's something important to understand. When was the last time we felt like this? Like, when was the last regime in investors' memory, like bad news being bad news? 2008, I think. So in 2008, you saw the first banking crux,

and then you saw the first unemployment rates moving higher, and then people were like, okay, so now if you get a bad number again, there is nothing to celebrate here. It means that the recession is approaching closer and closer. So you have to go back all the way to 2008 to see a regime like that. And what I think it's happening right now

is this situation where the bond market is sending a signal as well by having a negative correlation to stock markets. This is so important. So basically you now have a situation where you got a bad economic data, the bond market rallies. So you have bond prices moving higher and yields moving lower, reflecting the Federal Reserve, being forced to do something about it, right? But then the stock market sells off. So what the market is trying to tell you here and the new regime I'm talking about is a regime

where the Federal Reserve is behind the curve, they're late. They're not proactively easing. They're late. And every time you get a new information that points to weaker economic growth, the bond market is going to try to pressure the Fed to do more, to do more easing, but it's not proactive easing. It's reactive easing. It's late easing.

And that late easing doesn't help the economy stabilize. So you have a situation where bad news is actually bad news for markets. And I don't think that people are accustomed to a regime like that. Al, we are on the eve of potentially the Fed cutting rates. And I think the part market is or people are talking about 50 basis points. I think that is kind of like status quo. Some people are asking for more. Some people are predicting less.

I'm wondering, what is your prediction? And do you have a prediction that is just different from what the market is looking for? Not anymore, but 12 days ago or two weeks ago, if you would have asked me, I would have said 50 basis point. I was completely out of consensus. Now the market is pricing in 56% chance. So we're basically coin flipping. I think the Fed is going to go 50.

And I think there are a couple of reasons. First, well, they go 50, not necessarily to panic, but because as Ryan said before, they should have cut interest rates in July already. So basically they missed the window there. They made a mistake. Now they see the economy deteriorating. What's the sense in being stubborn and not catching up?

to basically the cut that you missed in July. Now, people tell me, yeah, but that's because markets are going to panic. Well, it depends how you communicate about it. If you say, look, this is a 50 basis point cut because we need to start and get started properly because we basically made a mistake in missing July. We're honest about it. Now we think we cut by 50 and we make up for it. And then going forward, we're going to observe the economy.

We know it's weakening. So we're going to have your back, basically. We're going to try and ease proactively rather than waiting. I think the market's going to be fine with it. The other thing is the next meeting of the Federer. is in November. So now if you cut only 25 basis points after skipping July

and the economy weakens further, holy crap, man, you have to wait all the way until November to be able to cut again. And it's a few days after the elections as well. I mean, if I were them, I would just try to put the 50 basis point in and then, you know,

have some insurance cuts being basically done. And then in November, observe what the outcome of the elections is. And, you know, effectively, I don't see any big reason why the Fed should go 25 at this point. It's just probably not very smart risk management from my perspective,

but again, I'm a macro investor, and from my perspective, it doesn't matter what I want the Fed to do. The Fed doesn't give a crap, what I think they should do. So it's always about reading their incentive scheme, what is that they want to do, what is their objective?

And that objective right now has moved from slowing inflation to making sure the labor market doesn't crack completely. So they are in insurance mode. They're late, but they're understanding they need to do insurance cuts,

They need to come in strong to try and put a floor under the economy. They need to come in strong. So would you say a 50 basis point cut? Would you characterize that as like, you know, moving with haste, like a kind of on the more aggressive side, whereas 25 bips might be just a little on the timid side? How would you like kind of, if we do see the 50 basis points cut, how would you characterize like how immediate and like action bias the Fed is being? I would characterize it as trying to repair the mistake of not cutting in July pretty much. And so that's the least the Fed can do. They should do 50 basis points.

They should communicate. They understand the economy's weakening and they're ready to do more, easy incoming. Look, the bond market is already doing the job for them, guys. So they need at this point, I think, to fulfill what the bond market is asking them to make sure the stock market doesn't tank. Right. And so you should understand global markets are always interconnected, right? It's not like the stock market is a brain and the credit market is another and the crypto market is another. It's all one thing, you know, it's a big, big, giant puzzle and investors look at different asset classes.

And so today, stock markets are still doing okay. They've had a drawdown, but they're still doing okay. Why? Because they're relying on the cuts that are priced in the bond market. And right now, we have 250 basis point of cuts being priced for the next year. That's a lot. That means slashing rates from 525 to 2.6. It's a much more friendly rate, 275 in one year.

Now, if the Fed doesn't fulfill this, well, I think stock investors can get nervous because all of a sudden they see deteriorating data, but they don't see the Fed fulfilling what the bond market is pricing in. So here the Fed has to tread the needle very carefully and come in in a convincing way, telling people, you're right, guys, bond guys, you're right. I understand what you're trying to say. I see the economy's lowering. I need to basically cut interest rates.

The bond market is suggesting the Federal Reserve what they're supposed to do. And I think here, given the constellation of macroeconomic data, I talked about the labor market, but there is more under the surface going on. Also global economic data. I mean, look at China, guys, frankly. It's the second largest economy in the world.

They're imploding. They're basically imploding. And you watch them and you're the Fed and they are your biggest trade partner. They are imploding. Your own domestic economy is slowing down. You have rates. at 5.25%. It's really high. So it's more about risk management and insurance here. And the Fed should come

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Toku can connect you with the best attorneys if you need them to make sure that you have the best advice and Toku can help to optimize your taxes so you pay the least possible amount of taxes while still maintaining legal compliance. With Toku's guidance, you can concentrate on building your company while Toku handles the logistics. Token launches don't have to be complicated. Talk to Toku today to get a free initial token valuation. Okay, so maybe 50 is the new, you know, 25. You like that? The 25 was, I guess, 12 days ago when you started to predict it. But the bond market is not the only organization group that is sending messages to the Fed.

Elizabeth Warren is literally sending messages to the Fed. She wrote a letter yesterday, and she's calling for higher rate cuts. she's calling for 75 basis point rate cut. And this is closed in a letter. It's very interesting because the Fed, of course, is supposed to be, like, apart from the, like, Congress and the government apparatus sort of unbiased by that sort of function. They're supposed to execute their strategy independently of these things. But here is a senator writing a letter basically saying some of what you were saying,

honestly, Elf, which is, you know, Powell has been late to this. And so he better get a move on. and I'd like to see a rate cut of 75 basis points. Do you think that there's the potential of 75 basis points? And what do you think is the context for this type of a letter? Is this a signal that Powell listens to or can this be just like noise that he ignores? No, this is bargaining, I think. Just good old political bargaining.

So you shoot high 75 bibs to influence them to do 50. That's probably what's going on here, right? If you know that they can't do 75 because that, you know, look, the Federal Reserve is a very, I would say, heavy political communicator. They're not a political entity, but they communicate very, very carefully. So listen to this,

because this is the world we live in, okay? Now the Fed is in blackout. This means that formally they cannot communicate anything. None of the Fed speakers can go to the wire and say anything, okay? So what happens now? At some point, 10 days ago, when the blackout period started, you had the bond market pricing only a 10% chance

of a 50 basis point cut. But internally, they might have been discussing, holy crap, guys. I mean, maybe we really need to do 50 here because look at the economy. Now, the Fed does not like to surprise markets. They don't. Because, again, we are in a business model

where we are basically trying to avoid recession, avoid market panics. We try to control everything very carefully. And a small intermezzo, Heimann Minsky, somebody much smarter than I am, once said that artificial stability actually breeds instability. And that's what we're trying to do.

We're just trying to create this artificial stability, kill the business cycle, kill market volatility, kill everything, just control everything. And the Federal Reserve is communicating along the line of that. And so in blackout, look at that. They cannot communicate anything. They cannot communicate that they want to do 50, or they're considering doing 50.

So what do they do? Well, they communicate through our friend Nick Timiraos from the Wall Street Journal. So Nick is a very good journalist, who's known to have the year, or actually to be the year of Federal Reserve speakers during blackout periods.

In 2022, when the Federal Reserve hiked 75 basis points, do you remember when inflation was increasing rapidly, at some point they came in with a 75 basis point hike, the market was surprising that. They were in blackout, and so they sent him it out with an article that said, Fed officials are considering hiking 75 basis points. And this was their messaging,

to markets. Hello guys. We should adjust to 75. They use him to prime the markets. Yeah. Correct. To massage this idea. And now last week, during their blackout, they sent again our friend Timiraos to send out a couple of articles that said, yeah, you know, it's a really tight call between 25 and 50 basis points, which is their way to say, hello, we are seriously considering 50 base points, guys. Did you get the message? 50 years on the menu. It's ridiculous. It's ridiculous, but this is the way that markets work. And, And unsurprisingly, the odds of a 50 basis point cut have moved from 10% to 55% as we speak because Mr. Timiraos has spoken to the world.

I mean, this is the world we live in. This is the world we live in. And actually, as I said, it's nice to criticize all this, but the reality is as investors, our job, I think, is to understand the rule of the game and then to try and navigate them in the safest possible way with tight risk management. And so what I see here is a Federal Reserve that is trying to come. communicate, they will do 50 basis points. And I think also if Elizabeth Warren is asking for 75 BIPs, they can't give 75 Bips if Elizabeth

is asking for it. That's too easy. Like that's too political. He knows that to you, I bet. I think the next question is like, okay, so maybe everyone has, now expectations are at 50 bips. Maybe they cut 50 bips. But now the market is always going to price in some frontier of like, well, what happens next? Like, what happens beyond? 50 bips. So like maybe tomorrow they come out, they cut 50 bips. And now the market's like, well, when do they cut 50 bips again? What do you think is like the reaction to this? Like one, one, I know like markets are like a hall of mirrors. Like they think this, who thinks that,

who thinks that? But like say let's get beyond tomorrow. They cut 50 bips. Market reacts in one particular way. How, how, what's the next step in this like analysis? Well, I think the next thing that is going to happen is that the market is going to be trying to price, a good probability that the Fed will need to do another 50 basis point either in November or in December, which, by the way, it's already somehow priced. So let me open my screen right now so I can give you the actual correct number. So as we speak, we have about, for September, we have about, well, oh God, we have like 60% of a cut of 50 basis point cut in and priced in. And then by November, we have basically, oh, look at this.

This is fun. So by November, we have a 25 basis point because, you know, it's after election. So they don't want to be seen as doing something political, you know, can't be 50 basis point. But then by December, 50 basis point is actually the base case. Oh, wow. So this is interesting, right? So the market's right, okay, you're probably going to do 50 now. Well, if you don't, you're going to do 50 in December for sure.

So I got you. You have to do a 50 cut either in September or in December. If you do this one in September, in November, you're going to do 25. because, you know, you don't want to be seen as political. And then in December, we're again 50-50 for a 50 basis point cut. So the bond market is basically, David, already knocking on the door very aggressively, not only for September, but also for another 50 basis point cut in December. And again, at this point is more about how the economy reacts to the cuts.

That's what's going to be important. Because all the Fed can do to stabilize the market and the economy here is actually to fulfill these cuts, to rapidly go to this two and a half. to 75% Fed fund next year. That's what the least effect can do to try and stabilize things. The question is, will the economy react to it

or will the economy just experience the negative lags from prior tightness in monetary policy? Because remember, the lags exist, well, not only from the past to now, but also from the easing you do now, the positive effects you're only going to be seen them

in a year or two, minimum in a year or two. And so again, there is a passage of time. And that's why the monetary policy They shouldn't be reactive. It should be proactive. It should accompany a recovery or it should a company slowdown. And instead, what the Federal Reserve has done has just been late. They have been too late in raising interest rates.

And so it has taken quite a while for inflation to come under control as a result. And now that the economy has been slowing down for a while, they've been just watching it. So again, the G state is the Fed is behind the curve. And when the Fed is behind the curve, bad news is bad news again. And so people should be looking at their portfolios having this regime change in mind. So you said that the Fed is going to respond to the way that the economy reacts. I'm wondering if the Fed is also going to respond to the way that the market reacts. I know that DGens exist in crypto, but they also exist in the traditional markets as well.

And like risk on assets just have DGens in them. And I think there's one possible scenario where it's like we firmly enter the world of the Fed rate cut cycle. And then risk on assets just go wild. They go nuts. That's kind of like, I think the base, why bankless listeners are probably listening to this episode, it's kind of the question that I have is like, are my risky crypto assets going to go up if the Fed firmly like cuts rates by like one or two percentage points over the next six months? That's kind of like the main interest in this question. So say that that does happen.

Risk on assets do go to the moon. Will that then impact the Fed's next decision calculus? about further rate cuts? Let me first reflect on your first assumption because interest rates cuts are supportive for risk assets in general or degen assets, let's say, mostly when they're seen as a proactive stabilization

of the economy. So when the economy is doing fine, but the Fed is having your back and they're cutting rates, oh, that's the best environment ever. So for example, 2021, 2021 is an economy where we are reopening, nominal growth is all over the place. We're booming actually, okay, by the end of 2021. And the Federal Reserve is keeping rates at zero.

Yeah, that's that's Nirvana for Dgen assets, okay? But now, now, or for example, 2019, in 2019 you have had the Federal Reserve cutting interest rates. The economy was lowing, but it was far from recessionary, okay? And so you as well had the NASDAQ rolling 30% in a year, okay? Something like that. So this is good. Yet, if you go back in the past and you look at episodes where the Fed is cutting interest rates,

not proactively, but it's cutting interest rate trying to catch up to a weaker economy. That doesn't help. That doesn't help at all. Because that's not a proactive stabilization of the economy. That's you trying to catch up to weakness. And so the first assumption is something very important. Fed cuts not always coincide with roaring stock markets and roaring risky assets in general. It really depends from the nature of this.

cuts. Are these proactive cuts? Is it a Fed put? Is it the Fed supporting markets? Or is it the Fed panicking and catching up to weaker economic activity? So, for example, something else I can use, I think, as an example there. So if you take, for

instance, something along the line of Japan, Japan in the 1990s, okay? And then you take Japan in the 1990s and you realize that they were having a real estate bubble. Okay? So they were bursting the big bubble that they had in the late 80s when the, I think the Royal Palace of Tokyo was worth

more than the real estate of California put together. Wow. Just ridiculous. Okay. Real estate bubble at the top. And then in the early 90s, the Bank of Japan decided to hike interest rates. They said, well, the hell, guys, we should slow down here. So they hiked interest rates.

Well, if you hike interest rates in a highly leveraged real estate bubble, you know what happens. It bursts. Now, what did Japan do? Well, immediately the Bank of Japan said. No, no, no, no, sorry, sorry, sorry, sorry. We're slashing interest rates. 10-year Japanese bonds moved from 9% to 1% in five years, from 9 to 1. It was a fast, fast-cutting cycle.

You want to try and guess what the NICA, the Japanese stock exchange did in these five years? It lost money year after year after year after year. So did cutting interest rates solve anything? No, because it wasn't the bank of Japan accommodating policy. It was the banked Japan panicking trying to catch up to economic weakness. And that's a situation where stock markets don't enjoy cutting interest rates. In 2001, the Fed cut rates from 5.5% to nearly zero in one year. And in 2001, the stock market went down 15%.

So again, it's not a must that cutting interest rates are supportive. Cutting interest rates are supportive if the economy is holding on. So this is important to understand. Okay, well, then let's talk about that because I think bankless listeners at this point in time are trying to figure out how to position their portfolios if what you said is, you know, going to come to pass, basically, where we are in this regime change. And I mean, the summary for me, it looks like that the Fed may be cutting rates too late. And that is not necessarily a good situation for risk on assets. And by the way, we recently had Robbie who leads digital assets at BlackRock, and he's basically saying, hey, you know what, crypto is making sort of a narrative mistake here in that it's kind of trying to go for investors in this narrative of being a risk on an asset. And what it should be instead is sort of a money printing resistant asset, something a bit more like gold so it can weather these storms.

Anyway, that aside, if we are cutting rates and getting into kind of degrowth territory, recessionary territory, what is the impact on risk on assets, on equities, on bonds? How do you position to weather this type of storm elf? Yeah, that's a great question. So, look, unfortunately, I have to agree with the BlackRock person you interviewed because, look, crypto had this beautiful property, I think, in multi-asset portfolio. which was it was quite uncorrelated for a while to main asset classes. It was doing his own thing, okay?

So it has special properties and special features, which were mostly monetary related, okay, or monetary policy related in general and fiscal as well. So this was amazing. It was a great, great asset to have, a bit like gold to a similar fashion, I would say as a feature of properties. But it has changed.

It has changed quite aggressively. It has become much more prone to be correlated to certain specific equity factors. and certain specific equity market behavior. And I think this is also because of the institutions that are participating now in the crypto market to a much larger extent than before. You can also see that in the volatility of crypto,

realized volatility of crypto, which is way, way lower than before, which means the option market around crypto has evolved, which means there are players that are dampening ball as well. It's becoming a much more institutional asset class, which is good, but it's also to a certain extent bad for the nature of what crypto is, I believe, as an asset class, or it could be as an asset class.

And so what you have right now is if crypto keeps behaving like some sort of a proxy for risk on assets, okay? Unfortunately, it's going to go down if you get this situation where you have a recession because it's going to be used as a asset to raise cash from. Okay, so think like, think together with me now. many investors are out there use something called risk parity as an approach to investing. So this approach says that you shouldn't invest, if you have $100 million, you shouldn't look at your cash allocation, so 10 million inequities, 10 million to bonds, 10 million to something

else, you should be looking at the risk contribution that each asset says to your portfolio. Now, when you see that, you realize that by having a risk parity, so having each asset contribute the same amount of risk to your entire portfolio, you can achieve quite some interesting diversification. Now, that's cool. And now at some point people say, well, what if we apply some leverage on it? Because if we can do this,

it means that now we have a nice diversified portfolio with low volatility and we have allocated a bit of risk here, a bit of risk there. Let's apply some leverage so we can boost returns while keeping the diversification properties intact. Okay? This is in a gist what risk part is. And why am I mentioning this?

because when you have a risk off, when you have a bad event in the economy, a recession or something, you often have a situation when correlations move to one. So all these assets, which are supposed to behave differently in different environments, well, they start to behave very similarly because people become afraid.

They act with their guts, okay? And also they have to raise cash. So think of a family office or a business owner. He's invested his money and all of a sudden his business is suffering. So he needs to raise cash, guys. He's not going to wonder what am I saying? selling here. Am I selling gold? Am I selling treasuries? Am I selling equities? Am I selling Bitcoin? It doesn't care. It needs the cash to survive. So these are what I call de-leveraging

environments, environments in which investors won't care about everything. And the more leverage there is in the system, the more this de-leveraging events happen very, very viciously. And we have seen that as well in March 2020, if you remember. At some point, gold was down, Bitcoin was down. Treasury yields were up. So treasury bonds were down. What the hell, man? I mean, the was cutting interest rates and treasuries were selling off, it doesn't matter what the name of the asset is. In the deleveraging environment, people need to raise cash. They face margin calls.

They need to raise cash. And so I'm making all this story to say, Bitcoin has had a fantastic rally. In all cryptos, by the way, most crypto, have had a fantastic rally. This makes them a bit more prone to be a cash ATM machine for investors during these leaverging periods,

especially if they're seen as, a pro-risk asset, risk-on assets, as they unfortunately are seen much more in late stages. So you remember in October last year, we had Bitcoin going to 15,000, right? In October 2020 or 2023, I even forgot. But, okay, we went to 16K, okay? And if you think about it, again, this was the result of the leveraging. It wasn't anything that, from a fundamental standpoint, changed the property of why you should have crypto in your portfolio, but it was the leveraging.

And that's something that people should keep in mind if they own crypto as an asset class in their portfolio going into a potential recession. Okay. So we might, if we go into this recession, if what you're saying sort of comes true, then we might at first see this de-leveraging that goes on across all sorts of asset classes. And you expect, and I think I would expect crypto to be hit by that as those that were in the asset class because it was risk on sort of sell off. And, you know, like they go through this de-leveraging exercise. I do think that there could be a Phoenix rising from the ashes with another story here, which is kind of the money printing, monetary mechanics, debasement story. That is a huge tailwind for crypto on the other side of this, but there might be some pain in store first. I'm curious, through that pain, though, what is the portfolio to hold?

Let's ignore crypto. I would imagine risk-on equity assets also face this de-leveraging. What else? Like, what's good to be in? I mean, should you be in, like, bomb? stocks, short term, long term. How are you positioning for this? Look, if you get a recession, and as always,

it's always a probabilistic approach here, if somebody says, I'm investing for recession, that's not great because that's one potential scenario. What if it doesn't unfold? How does your portfolio look like? So you always have to have a balanced allocation and you can tilt it around a little bit, I guess, depending on your view.

But if you want to prepare your portfolio for recessions, historically, you go and look back at what happened in the past and you see quite some patterns, right? First of all, investors tend to underestimate how much the Federal Reserve is going to cut rates. So I made a bit of an exercise for my research subscribers. You go back to like 40 years ago, you check when the bond market was aggressively priced, like 100, 200 basis point of cuts like today, okay? And you buy bonds when it's already priced in, you would expect not to do great, right? and instead you make money because most times the Fed Reserve is forced to do more. So in 1990s, in 2008, the bond market was surprising a lot of cuts, but the Fed ended up delivering

a lot more. So that's the main message. In the recession, the Fed Reserve isn't going to be stopping at 3%. Guys, they're going to go all the way back to zero or 1% or whatever it's necessary to stabilize the economy. So again, Ryan, to make it simple, yes, bonds tend to make money. They have already been rallying a lot. And I think part of the most beautiful, easy part of the reliance,

is done, but yes, if you get the recession bonds, we'll keep making money. And then the other thing that is doing great, and I think it will continue to a certain extent is gold. So gold has the same problem of Bitcoin. It will be used as a cash ATM as well, but it is much more institutionalized. So you will have central banks around the world that will keep stockpiling gold because they've seen what has happened to Russia, right, with the sanctioned story. They see the US as acting more volatile from a foreign policy perspective, and therefore they slowly but surely try to accumulate more gold. So you have a structural buyer behind that.

Then gold does also well in recessions, generally speaking. And also about the dollar, right? Because everybody says the dollar should weaken when the Fed cuts interest rates to zero. Well, my question is the dollar weakens against what? Because the dollar itself is not tradable. You always trade the dollar versus something else. And now if it's against other fiat currencies, I can hardly see the dollar weakening against things like the euro or the,

the sterling or the Aussie dollar. Why? Because the central banks will probably be forced to cut even more. What I see the dollar weakening against instead is the Japanese yen, the Swiss franc. These are very defensive, safe haven currency. So when something so negative happens, people generally flock into Switzerland and Japan. They're seen as the safe havens, right? They're seen as the most stable currencies in the world during periods of stress. So when you think about the recession and how to make your portfolio proof, generally speaking for me,

This is something my mentor taught me. Instead of thinking about hedges and additions, just look at your portfolio and think about what you want to remove from your portfolio. Just think about what you want to cut from your portfolio that might suffer disproportionately from a recession. Because rule number one in investing is avoid large losses. Large losses are mathematically difficult to recover from. If you start at 100 and you lose 10%, you're at 90.

If you gain 10%, you're not at 100, you're at 99. So you see the problem. Drawdowns are mathematically difficult to recover from. So rather than looking at what hedge do I need to buy, the first question you should ask yourself is, am I too heavy on risk? Am I taking too much risk if I think I'm going to be going into a recession? And Alf, just to complete this section,

we'll get into debasement. So what's your probability of recession? You're talking about viewing the world probabilistically. And so this is not a certain outcome, but what probability do you assign to it? For the next 12 months, I would say we're 50-50. right here. So my models are pointing to, you know, an outcome that is close to a recession, not a bad one. And the reason why I say not a bad one is two folds. The first is fiscal deficits

and it's something you alluded to before. I mean, we have politicians nowadays that will not hesitate a second to throw in more money at the economy as soon as they see things weakening more substantially. And this is different from the past. In the past, like in 2008, it took like six to 12 months until we finally saw some sort of fiscal packages. This time is going to take way, way less. So this is going to act as a stabilizer, I think. So if we get the recession, I don't think we're going to get a very bad one. And the second is also because the private sector is less leveraged.

So we went in 2007 and, God, man, you had no income, no job loans. You had things that were all over the place, very little regulation. Right now, we are more regulated. We are less leveraged from a private sector perspective, which means, makes the magnitude of a recession worse. You still, I think, probably will get one. I'm on 50-50 odds. The market is around 35 to 40% odds right now.

But the pace and the magnitude of a recession might be a little bit less bad than it was in the past. Okay. Let's talk about something that will happen regardless, whether we go into a recession or whether we don't. And that is some level of debasement. And, of course, the central bankers, Powell and the government have all sorts of different fancy words for debasement, money printing.

I'm going to summarize it as kind of like monetary and fiscal stimulus. But maybe we'll start at the highest level at this meme. This is something you tweeted out recently that I enjoy. And I think is a way for everybody to understand what is actually going on with the monetary supply. It's a picture of somebody holding a gold bar. And it's saying 10 of these would buy you an average home in 1929. So 10 gold bars would buy you an average home in 1929. Wouldn't that be nice?

And then it's another panel that kind of mirrors it. And it also says 10 of these will buy you an average home in 2024. 10 gold bars, whether it's in 1929 or 2024, would buy you an average home in the United States of America. Man, that is not true if you held the equivalent in dollars, is it? I mean, we're talking about like maybe $10,000 in 1929 for an average home versus. I don't know, 450,000 now. I'm not sure what the median home is at this point in time.

Can you tell us why this effect is taking place? And what do we need to understand about our Fiat monetary system? Well, you can print dollars. You can't print gold. It's as simple as that, really. So look, after 1971, we changed our monetary policy from a gold standard to a non-gold standard, also known as Fiat system.

And what it does is it basically allows new dollars to be created without these dollars being pegged to a hard asset like gold. So just to make sure, in 1967, for example, you could create new dollars. We were creating new dollars. But the problem was that when you went to convert these dollars to gold, you had a fixed price for that conversion guaranteed by the government of the United States. So that basically limited the amount at which you could create new dollars. there was a natural cap to the to the elasticity of the system to the creation of debt in other world okay and now after 1971 that cap is completely gone so in principle you can create as many new dollars as you want of course there are limitations first and foremost inflation but you can in principle

create as many dollars as you want and here i want to make sure people understand something when i say create new dollars i am not talking about the federal reserve the federal The reserve creates bank reserves for banks. It's a different form of money. Still money, but it's different. What I'm talking about is the dollars at David, Ryan, Alf, and everyone listening here can spend. Okay, this is true dollars, like real economy dollars, as I call them.

And who creates these dollars are two entities, the government of the United States and banks. So now let me walk you through this. So let's talk about the government first. because for housing is going to be more about the banks, but let's talk about the government for a second. The government creates new spendable dollars. And how do they do this?

By your deficits. It's pretty intuitive. So the government says, I want David to be able to spend more money next year. I want him to, you know, be wealthier. Me, me too. Nice. Nice, right?

So let's take 2020 as an example. I want to send $10,000 to David as a check in his mailbox, basically, okay? And I don't want him to pay anything for it. He just needs to get this money, okay? So I'm the government of the United States and I print dollars. I am the owner and the printer of dollars.

I enforce the legal tender. Okay, so I am the United States government and I will blow a hole in my balance sheet. I will say I will do deficits. And deficits means I will spend more money than I have pretty much. Okay, that's what it means. So it's hard to walk people through the accounting on a podcast, but what it means is it's pretty complicated.

it, but I have done it on substack, for example, on Twitter plenty of times. So please go there and have a look at the actual T accounts because you can't go wrong that way. What it means is that the government lowers their equity position. They blow a hole in their balance sheet. They are the government. They can do it. They do this.

And at the same time, they inject money to David's bank account. They say, David, here is the check, go cash it in, spend it in whatever you want. Now, debit can be very inflationary there. He can go and he can buy a bunch of stuff and true stuff, stuff that goes into the inflation basket, right? And so the government has the power of creating new dollars, new spendable dollars. What's the limit there? Well, it's inflation. If the government creates too many dollars at the same time, well, like they did in 2021, for example, then, ta-da, surprise. In 2022, there are too many dollars going on in the system, and we cannot create enough services and goods too fast, to absorb

these dollars. It's impossible in such a fast-based environment. There are also supply constraints in 2022. And guess what? The release valve is prices. So too many dollars chasing a limited amount of goods and services and you get inflation. Okay. So the government of the United States has been making deficits for, I don't know, on a back-to-back basis on average for the last 25, 30 years, pretty much. So we are creating new dollars through government deficits every year. Year in. Are we, are we like a trillion dollars deficit this year? Something about. About. And if you look at the CBO, the Congressional Budget Office for. Don't worry, Ryan.

It's going to be a trillion plus every year for the next decade. So just relax. What's just a trillion dollars in deficit? You know, like we can make that back, right, guys? But the fun part is not about making it back. It's about the government willing to inject continuously money into the economy, regardless of the state of the economy. They don't care whether it's weakening, it's accelerating.

It's a trillion dollars a year to you guys, okay? And you know, by the way, this is the base case, and this is going to happen no matter what. I don't know if you got an opportunity to watch the presidential debate, but something that was interesting that a number of people pointed out is there was no discussion of the deficit. There was no discussion of the government debt at all. Neither candidate could tell the other that they had a plan for this. It wasn't even on the menu, elf. So that just tells us where we're going with this, which is no matter who gets elected, we're going the direction. of more deficits.

So guys, I mean, this is very positive in general for crypto, for any asset class that is denominated in that denominator. The denominator is the dollar and you will blow up a trillion dollars per year more into the economy of that denominator. So guess what? You're diluting the denominator. Any asset that is denominated in dollars, the more dollars you throw in the economy, the better it is for the asset, stocks, crypto, anything, you name it.

Okay? So that's good. House prices, by the way, which is also something you were referring to before, Ryan, and that's why we're talking about this. You are creating new dollars every year on a continuous basis that has to increase asset prices and housing prices too. But the most important thing for house prices is the other lever through which we create new dollars, spendable real economy dollars, it's credit, lending, basically injecting new debt and credit

into the system. And banks are, well, the main engine by which we do that, right? I mean, we get loans from banks, basically mortgages and loans, right? And so if you think about it, so what the bank does is it looks at your potential to generate cash flows over the next 30 years. Like, do you have a job? Do you have a company? Let's look at your ability to generate cash flows over the next 30 years.

Let's take that. And now let's credit your bank account with a bunch of money that you don't have. So that's your mortgage, right? You get basically credited the amount to go and buy an asset, which is a house, without having the money in the first place. And so what the bank is doing there is they're creating new money. They're giving you all this purchasing power, all in one go, and then you can go and buy the house,

and the seller of the house finds himself with a bunch of money on his bank account. That's fantastic, right? And now, if you continue doing this process, and also the trick is you do this at lower and lower interest rates. So you get a loan, and it's a mortgage, and it's $300,000, and you buy the house at 8% mortgage rates. the next guy after you can get a mortgage at 7%. The next guy after can get it at 6.

The next guy after at 5. What happens is that all of a sudden, even if salaries aren't going up, as soon as interest rates are lowering, basically, you get more mortgage capability, right? Because your salary is 4K. If you get a mortgage of half a million, but you get it at interest rates that are 3%,

while you can afford much more than an interest rate of 8. So lowering interest rates and continuous creation of credit by banks has made it so that you can afford, buy, afford, between brackets, buying houses that are more and more and more expensive. So basically we are creating this wealth effect, right, where people feel wealthier because interest rates have moved down and therefore they can afford more leverage

and they're chasing houses, they're buying houses with this additional leverage. So we are creating new dollars, we're lowering interest rates. Well, guess what? House prices are going up and they are not going to stop, If we continue with this model, we're feeding inequality. We're basically making sure that assets that are denominated in dollars keep going up in price because we're injecting new dollars into the economy by a deficit and by a credit creation. So mortgagees and loans year after year after year.

So when you measure your house price in dollars, you see the price going up. Now try to measure it in a denominator that cannot be printed, gold. And then your house price hasn't gone anywhere, nowhere, because the appreciation is all the result of the Fiat system and how it is built and credit rather than anything else. And so how is pricing gold? Same as 1929. Nothing has changed.

It's all about the denominator, isn't it? And so when people, I think in the months and years to come, hear all of these terms from government officials and central bankers like quantitative easing or fiscal deficits or the bank term funding program, might remember that from, you know, I guess a year and a half ago, the BTFP or TGA drains and refills and that sort of thing. These are all terms for either money creation or money destruction. Most of the time, it's going in the direction of money creation. What is kind of your base case?

Because, by the way, I will include a link in the show notes for bankless listeners. MacroAlpha has put together this fantastic chart on all of these terms. And they're just different ways to print money and kind of the money flows in different areas, whether it's on the bank reserves or if it impacts the real economy, if it might impact, you know, risk assets and risk appetite, or if it's potentially inflationary, he kind of maps these in a fantastic chart that will include in the show notes as a resource here. What's kind of your base case? Do you think that we get continued fiscal spending and fiscal deficits and also a monetary expansion on the Fed balance sheet and just like money printing in general over the next like one to four

years. Physical deficits as we discuss is more like a feature used to be a bug, you know, used to be a thing that politicians went through when the economy was weakening. And now it's like, yeah, it's one trillion a year anyway. We don't care. Who's the new president? What is the economic cycle? So for people looking at that table, anything that says fiscal, I would look into it because

I'm opted out for what does it mean for liquidity? So bank reserves, what does it mean for inflation? What does it mean for economic growth? What does it mean for markets? What does it mean for stocks and crypto, et cetera? So there is a different mapping that is being down there. I would say fiscal is my strongest conviction call here because, look, you hear them talking or actually not talking about it

as if doing a trillion dollar per year is nothing, which really makes you think about how the tide has changed there completely. And it's something investors should realize because it's a very strong force of creation, of new dollars supporting the economy, but also risking inflation volatility and also supporting assets that are denominated in dollars. And what should investors look for there? Just big government programs, you know, stimulus packages in the hundreds of billions

of dollars and then the underlying, you know, I guess deficits, budget deficits on a year-to-year basis. That will show you all of the data you need to kind of project this. I mean, the good thing is that these are very, very public data. So deficits are published. even on a monthly basis, actually, in the US. So you can check how much the government is spending. When it comes to where the money goes, that's also important because deficits are not necessarily

bad per se. They inject money in the real economy. But the question is, how productive are these? I mean, what are we doing with this money? Where are they directed and what are we doing with it? And so there is something that I think people should realize by 2008, the next elections, the majority of voters in the United States won't be boomers anymore, or Gen X, for example. it will be actually millennial San Gen Z.

They will represent the majority. There will be the majority of voters. And so you are now widening this wealth gap massively, you know, by applying this field system and stretching it to the max. There was a chart released yesterday, very, very interesting that shows that the percentage of 30-year-olds in the U.S., that they're living with their partner and they have a family and they're owning a house is dropping further and further and further. So you're basically widening this wealth gap.

You're making the rich richer. And well, guess what? The new electorate is not part of the rich cohort. They're part of the struggling cohort. And so I think they will demand different policies and redistribution policies, which I think are quite interesting. And I hope that happens, frankly, because I don't think this system is very sustainable. The way we've built it, we're probably stretching it very thin.

So what are your favorite debasement assets then? If that's kind of the, you know, like money printing moving forward, is it? is it gold continues to be? And then what else? If we're going to keep doing deficits and you think like a long-term macro investor, you want to have all possible assets denominated in dollars, and then you want to have attackers and defenders in your portfolio. So there is one asset that is denominated in dollars. So it benefits from this dollar dilution,

but it also generates cash flows. That's amazing. And that's stock markets. Companies generate revenues. I mean, guys, the world grows over time. so companies go up and they're also denominated in dollars and they have earnings. That's fantastic. The problem there is buying at the right valuations because if you buy something and you pay 40 times earnings for it, I can assure that it doesn't matter they make earnings.

You pay too much for them. So stocks, I think, and put them in a responsible way in your portfolio. Buy good companies and buy them at good valuations. I think you're going to be fine over the next 10 to 20 years. Then in your attackers, you also want to have some allocation to, to other stuff that is pro-risk, but it has other features as well, or thermal features like crypto or gold, for example.

Gold and crypto don't have cash flows. They don't. They don't produce cash flows directly, but they have different monetary features that you want to have as well for diversification in your portfolio. Then you want to have defenders. So the defenders are two folds, I think.

One is bonds, which in a recession or disinflation, they always work to protect your portfolio, but sometimes they don't, like in 2022. So what else do you want? Commodities, for example, They're also denominated in dollar, and if there is inflation, they will protect your portfolio. And then finally, speaking a bit that my home book, I'm launching my macro fund, my macro hedge fund. So I decided to do this strategy right now and go back into managing money because the

opportunities when it comes to macro will be enormous. And this macro volatility can be harvested with certain strategies that try to take advantage of all these shifts that are happening. And they also provide diversification to someone's portfolio because they don't depend on a specific economic outcome to make money, they actually exploit macroeconomic volatility. So I think that also can be in the mix of investors. Yeah, it's an exciting time, I think, to be in macro when regime changes are happening. And by the way, for bankless listeners, that might be interested in that. I don't know if you're sharing any details here, Elf, but where can they find out more information

about your macro fund? Well, I mean, the easiest thing if somebody wants to have a chat about it is just to send me a message. I'm reachable and approachable everywhere. Can I have a chat about it, Twitter messages, LinkedIn messages. I'm amenable to having a chat. Why not? Cool. We'll include some links for all of those things in the show notes. Alf, this has been great. Thank you so much for guiding us on this potential outcome for macro markets. And of course, I think we'll get this episode out on September 18th, which will be very big day. That is the day that Powell will tell us whether he does 25 bibs or 50 bips or maybe 75 bips, which would be absolutely crazy.

But who knows? But bankless listener, you will be informed about that and what comes next as a result of this episode. I guess, Elf, any thoughts to leave folks with? How would you summarize all of this and, you know, leave us with some words here? I would say the Fed is late. The Fed is chasing. The Fed will do 50 basis point. Hold me accountable. We're recording one day before. Just joking. I mean, I'm right about 53% of the times. Might as well be wrong. But I think they will do 50. They have to do 50 to catch up. Not all fat cuts are good for risk assets. You need the economy to stabilize for fat cuts to be good. So always bear in mind which regime are win. Is bad news good news?

Or is bad news, bad news? And I think it's bad news, bad news again. So always have your portfolios prepared for different outcomes. Be nimble. Don't be stubborn with your opinions. Markets are unforgiving for people that have a long, big ego. As my mentor once told me, the best macro trade you can always put up, always, every day of your trading is short your ego. Sure your ego.

Alf, I remember when we brought you on a little over two years ago, I just came out much more knowledgeable. And I think that was the reception from a lot of bankless listeners as well. You have your own educational platform, your macro educational platform, the macro compass. There's actually a Google sheet, a Google form in the show notes of this. podcast. So if listeners are interested in macro elf's content, his analysis, his understandings of the macro world, he wants to know a little bit about you, what you're interested in, and so he can refine his research. So if you intend on becoming a macro alpha content consumer to explore the macro world more consistently, A, you can get his stuff

at the macro compass.org and B, fill out that form that we have linked so he can know a little bit more about you. Macro Alf, thank you so much for coming back on the show. Thanks, guys, and keep doing the good work you're doing. with this of course none of this has been financial advice we cannot predict the future we are not Jerome Powell but crypto is risky you know this you could lose what you put in we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot