Bankless - Is This the Endgame? with Itay Vinik

Episode Date: December 7, 2022

Itay Vinik is the Co-Founder & Chief Investment Officer at Equi, an alternative investment platform that brings investment strategies to accredited investors. Is this the endgame? This is the central theme of today's episode. Further, we dive into Itay's outlook on 2023 and beyond. This episode is also very chart heavy. What are the charts telling us? ------ OPOLIS | Sign Up to Get 1000 $WORK and 1000 $BANK https://bankless.cc/Opolis  ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/?utm_source=banklessshowsyt  ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across  BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  NEXO | CRYPTO FINANCIAL HUB https://bankless.cc/Nexo  LEDGER | NANO HARDWARE WALLETS https://bankless.cc/Ledger  ️FUEL | THE MODULAR EXECUTION LAYER https://bankless.cc/Fuelpod  ----- Timestamps: 0:00 Intro 7:55 How Itay Got Here 8:50 Itay's Crypto Experience 10:20 Inputs on Terra/LUNA 12:42 Itay's Sentiment 14:00 History of the Macro Environment 17:42 Global Central Bank Policy Rate 22:30 U.S. Fed Balance Sheet 26:00 Everything That Broke 30:21 Nasdaq-100 Index & Fed Balance Sheet 33:00 Pandemic Support Programs 34:00 U.S. Personal Savings Rate 35:00 U.S. M2 36:40 Where Are We Now? 39:55 Inflation 42:25 Retail Sales & Non-Farm Payrolls 44:40 Housing 47:30 2023 54:37 The Last Dance? 1:04:00 Possible Outcomes 1:13:30 Demographics 1:18:00 Bull Market Mid-2023 1:19:00 The Dollar 1:22:40 Itay's Advice & Closing 1:25:40 Disclaimers ------ Resources: Itay Vinik https://www.linkedin.com/in/itayvinik/  Equi https://www.equi.com/  Devil Take the Hindmost: A History of Financial Speculation https://www.goodreads.com/en/book/show/91360.Devil_Take_the_Hindmost  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Hey, Banglis Nation, the title for today's episode, are we at the end game now? David and I are talking about macro. Got to pop our heads up from everything that's going on in SBF, FTX. And look at the wider world here, because I think there are some looming macro questions that face us as we are ending 2022 and going into 2020. We have the perfect guests to talk about them. But the big questions in my mind that I ask this macro analyst, is a guest I think has some fantastic perspectives on this. how did we get here? What's the history of how we got here?

Where are we now, pinpoint us on the map? When do we pivot? When is this Fed pivot going to happen? Was Powell's next move? And lastly, is this the end? I don't mean the end of all human civilization, David. I'm talking about like, the end of this credit debt cycle that we seem to be in.

Ray Dalio talks about this, right? You only get so many spins. at this wheel before everything falls apart. So who do we have on the episode? And why is this important? Yeah, we have a macro commentator, Itai, who has come in with a bunch of charts. So if you are listening to the podcast,

you might actually want to go over to the YouTube because this will be a very chart-heavy episode, which we don't get very often here on the show at Bankless. But when we do, everyone loves it, including myself. And so Itai has just a long history of charts, as in like it goes back, the first part of this show is going to go back many decades. But then as we progress throughout the show, we're going to get more and more up to modern times and be able to actually hopefully try to project what happens next.

And are we at the end of the road? And Ryan, this is the first week in a long time where we have zero SBF related content. And I am just absolutely here for it. I can't wait until we no longer have to say we don't have SBF content this week. I thought it'll be the next step of the phase. But yes, talking about macro today and it's refreshing to get back to some of these base essentials. David, you know what's also refreshing is talking about 2023 and where your health benefits are going to come from. Yeah.

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And for just under $21 a month, it probably pays for itself with just one air drop. So plug in your wallets at Earnify and see what you get. That's E-A-R-N-I.F-I. Meglas Nation, are we at the end game now? How did we get here? Where are we now? When do we pivot? What's going to happen with the Fed?

You have the perfect guest to talk about these subjects. Ita I Vinick is the co-founder and chief investment officer at Equi, which is an alternative investment platform. He knows a ton about the questions we are asking. In fact, we had a conversation probably, what, six weeks ago or so, Etai? Yeah, I was like, okay, I was like, you know this space very well.

You have the charts and data to kind of tell a story. Could you come help the crypto community and the bankless community make sense of what's happening, what got us here, and where we are now? So It's great to have you on bankless. And thanks in advance for your help in understanding these complicated subjects. Yeah, no problem. And especially because, you know, you do have to have a pretty good understanding of history and macro history in order to really understand how the current environment is being influenced by some of these events.

It even took place seven years ago. Can I ask you before we get into the questions of like, how did you? learn this stuff. Like, how do you get up to speed and get educated on understanding macro? It just seems like there are so many different topics. What's your story on how you got here? Yeah, it's a great, it's a great question. I mean, I started my career at UBS being an analyst and really passionate about financial markets, reading everything that I could and slowly putting the pieces together. After that, I started a hedge fund, a traded volatility. So it was pretty important to understand how some of these events can influence the volatility regimes in the market.

So really, it's 15 years of experience of just putting it together and it just, you know, it adds up and knowledge gets compounded. And, you know, when you understand these things and you connect the dots correctly, it could be very rewarding. So, Itai, I know you have kind of a foot in crypto, but also a foot out. Like, you're not 100% all in crypto. Like, you're also looking at other alternative investments and macro in general. What's your sense of crypto? What's kind of your experience in it? Give the bankless community some idea there.

Yeah, I mean, I've dabbled in crypto for a few years now. Really, for our firm, what we've done prior was crypto lending, but now I guess, yeah, it has a little bit of a bad rep plus defy and Delta neutral defy, really. So I figured that the arbitrage opportunities in crypto were quite a bit. for taking, you know, they were rewarding you enough to not take direct price risk. However, we exited crypto lending in May after Terraluna, even though we had no exposure to Terraluna, I was just worried about systemic risk generally. And I was thinking, what kind of firm has too much leverage that we don't know about? So even though we had exposure to BlockFi and Gemini,

we actually exited both in May. Wow. Wow. By the way, can you like DM me next time you get that Spidey Sense? That could be good to know. Yeah. Yeah, our exposure wasn't huge, but we We were using BlockFi as kind of a cash substitute, but then once Terraluna happened, you know, the, the, the, the, the, the, the, the, the, the, the, the FI type of risk was high, um, but also B5 risk was high with, as we've seen with Terraluna. And, you know, I was just worried that players in the space, even the bigger companies are just not managing risk correctly. And we exited crypto entirely in May as a result. Can you just maybe elaborate on what were the inputs to go into that decision? Was it like just your spidey senses? Was it just, yeah, experiencing contagion and other markets because I feel like, I mean, I don't have intrinsic details into like the whole state of the entire crypto industry and how we reacted to Tara Luna. But I think from my limited scope of what I can see, like most people were turning either willful blindness, but no one wanted to believe that there was so much contagion. So can you talk about like what your experiences were and

why you decided to make that move? And I think the thing too, David, I don't know if this resonates with you, but like is some people saw after Luna like that there would be fallout and contagion. But I feel like the FTX thing caught a lot of people by surprise. Like I thought all the damage had sort of started to work its way through the system. And then there was this other like secondary. It was like a one two combo punch and the second punch just hit us right in the gut. Yeah. So to me, first off, I would make it clear that even though we did crypto lending, we never did

algorithmic stable coins just because we were worried that they're not really backed by anything but the good faith of whatever VC is backing that particular project. And I was thinking at the time that there's a lot more centralized risk in the crypto space than what a lot of people believed. Because when you're looking at all these different projects that are supposedly decentralized, they're not really decentralized because there are backers across. And it's really fueled or was fueled by VC dollars. So as a result, when we saw what happened to Terral Luna, the decision was really, this is kind of a new space. There is no central bank, which is kind of the point, right, but there is no central bank. So we don't know who has too much leverage. We don't

know what kind of asset toxic ratios are out there into different firms. And if there's a true shock event and a real stress test, it's kind of impossible to know who's the good player and who's the bad player. So from an abundance of caution to our investors, we just decided to exit the space entirely, focus on some of the other assets that we trade and wait and see how it kind of plays out. Well, well played, sir. What are the other questions I have before we get into the charts? One of the charts that you have is about consumer sentiment, which is related to a number of things that we'll talk about. But as we go through this charts and as we kind of place ourselves in the macro context, Ite, what's your sentiment? Are you scared? Are you optimistic? Like overall, what's your vibe?

Yeah, I try not to, I try not to mix emotions with investing too much, generally speaking. So when I look at the environment as a whole, our goal is to protect capital during periods of volatility, which we've done fairly well. I think we've outperformed the S&P by 16 or so percent with maybe a fraction of the volatility. But really, it's what is the market going to do? Is the market going to move in one specific way? Is diversification going to work? Because what we've seen correlation is picked up with all asset classes, right? So, you know, bonds, crypto, gold, S&P have all been one trade.

So diversification does not work. So we add to hedging when that happens. So it's really not so much about sentiment, but more about understanding the moves and reacting to them in a way that our goal is to make money regardless, right? Well, I think without further ado, let's go ahead and get into some of the charts because we all love charts here on bankless. Itai, you want to guide us through some of the charts? What do you have up first? Yeah, so first off, I thought we would start with a little bit of a history, introduction to the general macro environment.

And the first question was, how did we get here? And I divided it into a few sections, really going back to World War II and ending in the current era. And it is all related. So, you know, the broader idea is that we had the Brentwood system that many of you probably know what it was. In 1944, the winners of World War II really got together and decided to create a new monetary system for the world in which the U.S. dollar was king, and it was the central currency. All the other currencies were pegged to the U.S. dollar, and then the U.S. dollar had the ability to convert into gold. However, in the 1960s and 70s, early 70s, the U.S. was abusing the system by running a large deficit for the Vietnam War and other social programs. And other nations started asking for their gold back.

And under those terms of that prior arrangement, the U.S. had to deliver the gold. They didn't want to do so because they were running out of it. So in 1971, Nixon just dropped us out of the gold standard and the modern era began. So the era we all know, the Fiat era, era of higher inflation, that really all starts at that time in 1971. The 1970s were a period of stackflation. So we've heard that term this year as well, and I think it's very relevant. Up until that point, it was pretty much the conventional wisdom that high inflation can exist at the same time of a recession, right? because a recession has declining consumer demand and things of that sort.

So it tempers inflation. But we've seen both inflation and a recession hitting us simultaneously in the 70s. And the main reason for that is most likely supply-side shocks in which even though demand is dropping, supplies contracting even further. And that's causing inflation at the same time. So 1970s had a lot of oil price shocks. And we've seen some similar things this last couple of years post-COVID. we've had a pretty big supply squeeze causing a lot of inflation.

So some people have brought back to stackflationary era. So once that was over, we really got the Volker era. Early 1980s, Paul Volker decided he's going to do whatever it takes to stop inflation. That was really the first time the Fed stepped in to really combat inflation in a very aggressive manner. He raised the federal fund rates to the double digits, which we can't even imagine. today what that would look like, right? So he really was able to crush inflation, but it did cost a pretty heavy recession in the early 1980s. Following that, we had a pretty good decade up until

1987. The famous Black Monday crash takes place, and Ellen Greenspan really introduces the idea of the Fed put. The Fed reduces rates for the first time in response to the stock market and not the real economy, which is really interesting. The real economy didn't even go through a recession in 1987, and we've had the biggest drop since 1929. So the Fed didn't even wait for the real economy to be hit. It reacted to the market. That was really the defining moment that started the modern era, in my opinion, for this type of Fed interventions. We can look at this chart, actually, as we continue to talk about the history, because what's interesting is that, every single time that the Fed reacts to one of these events,

the troth is lower and then the high is lower as well. And Etai, I wanna, could you describe what we're looking at from a chart perspective for those who don't see it on YouTube? So this is a global central bank policy rates. So that thing you were just talking about, that Volker raised and Greenspan kind of dropped with the Fed fund rates, which is basically the central bank policy rate, kind of the interest rate undergirding all other interest rates.

And I think what we see on the chart is from maybe 1970 all the way till now, the very central bank policy rates. They all kind of follow this blue line, which is the U.S. Everybody is following kind of the U.S. monetary policy. But then we also have the ECB. That's Europe. We have England, Bank of England. We have Canada, the Bank of Canada, Bank of Japan.

So we have all of the major Western, I guess, central bank policy rates here in the chart. Is there anything else you point out in this chart? No, that's a very good description. So what I would say is that the interesting part, since that period of the early 1980s, every time that the Fed reacts with lower interest rates, it's from a lower and lower place. So in the 90s, we're interesting because we add one more thing to this mix. 1997, a very famous hedge fund that was started by Nobel Prize winners, actually the ones that discovered the Black and Shoals options model blew up. It was called LTCM, long-term capital

management. And that was the first time when the Fed literally bailed out a company in order to save the market. Oh, really? So when was this? So this was earlier than 2008, where we saw a lot of that. This is 1997. Yeah. So what was the rationale then? Too big to fail still? Yeah, so they basically put bets that exceeded $1 trillion because there were 100 to 1 leverage. And they thought that they know how to hedge all the risk because they literally invented the options model. God, that sounds so familiar. We've seen some of that in crypto. So, you know, that has happened many times before, right?

It was called the Midas formula. Like we were able to cancel out risk. We can't lose. So that happened in 1996. the systemic risk was so great that they bailed them out in 1997. And there was a big criticism of that saying that, you know, it creates a lot of moral hazard. What prevents the bigger Wall Street banks from doing the same thing, knowing that the Fed had bailed out a much smaller hedge fund? And of course, we all know that 11 years later, that's exactly what happened.

So this is what we're seeing on the chart here is just kind of each cycle, I guess the highs of the interest rate are, are lower and the lows are also lower. And it kind of looks like it drops down to like this bottom line, which is, which is the floor at zero. And I don't even know, didn't some of these banks go into kind of the negative territory? I don't even know if we could see that on the graph. Yeah, the ECB in Japan did. You see it right there. You know, Japan still has somewhat of, you know, now maybe not, but they're still very close to zero.

So they're not at zero for some things and they also have other very extreme policies. We're in the basement here. Like the graph is kind of breaking. Yeah. The big takeaway here is that after the global financial crisis, we've hit the zero bound for the first time. And what do you do when you hit the zero bound and nothing works? You have to go to something very unorthodox,

which was QE quantitative using, which is a very fancy way of saying printing out a bunch of money. So not only we're at a zero bound, you start printing out a lot of money. Which printing out a lot of money, that's effectively going negative. right? Like if you can't go negative on the interest rates, you go negative by printing money. It's kind of how we did go below that floor, right?

In a way. Yeah, in a way. And that was a really interesting and also very controversial experiment. Ben Bernanke, I think in 2012, was saying that he believed it was justified in order to trigger the wealth effect. The idea that if people feel wealthier because the stock market is rising, then there's going to be more consumer spending. and then the real economy will go into a virtual cycle. Now, that's never been proven to actually work, by the way. That was the theory. Yeah, that seems kind of crazy. Just having you explain to me like, that was the theory?

That seems nuts. That was the theory. Yeah, show us some other charts here. So what's the effect of all of this? So this is really the Fed's balance sheet going back to 1995. You can see it was pretty not a big deal, just slowly grinding up, up until 2008. Then the biggest experiment starts.

And what was interesting is every time they stopped, the economy went into a crisis. The economy became addicted to liquidity. When QE1 was halted, we got the flash crash into 2010. QE2 was halted. We got the European debt crisis. And then, et cetera, et cetera, to the point that when COVID happened, they went just crazy. They were like, okay, we're just going to double the balance sheet in a year. And okay, so a couple of questions about this. So on the chart for those that can't see, we're starting around like 1995 and we're starting at what does this look like half a you know, 500 billion dollars or something like that? These are trillions actually. These are trillions. Okay. So is this one trillion at the beginning of 1999? Something like that? Even less that probably three, 400 billion. Okay. So and then now we are like, like,

like 2022, we are, I don't what, eight, eight trillion or so? Eighth a half, nine trillion, something of that sort. And you can see, this is ascending in a very kind of like policy driven way, where you get like these, a thing happens and then you get a spike up. And then another thing happens. It's not, it doesn't look very organic. Like the charts I see in kind of crypto, you know, trading charts are like up, down. This is like a thing happens and then boom, money spikes up.

But for people who are like confused about terms like balance sheet, right? This is effectively how much the central bank of the United States owes, I guess, right? This is their liabilities. And like when we say, oh, like, what does that mean? Who do they owe? Who does the U.S. central bank owe $8 trillion to? So it's actually not that they owe. It's actually kind of the other way around.

It's the U.S. Treasury that owes the Fed money. So what happens is the Fed creates money out of thin air. and then they use that to buy U.S. treasuries and literally giving money to the U.S. government. So those treasuries that the Fed holds on their balance sheet are assets. It's the U.S. Treasury that has that as a liability, but it was assets that were literally created out of thin air because they have the ability to press a bun, create money, use that money to just buy treasuries. So it was the treasury, it was the bond market, the price of bonds that were being propped up by all of this QE? That is correct.

The interest, it's actually works in two different ways. One way is the U.S. government gets a bunch more money that they can spend in all their social programs and Social Security and all the other things they have a deficit at because they obviously tax revenue is not enough to cover that. And then the second thing is while buying long term treasuries, they're able to suppress long term interest rates because bond interest rates and price are inversely correlated. Okay. So we got a massively expanding balance. sheet and this is all It's important to know at any time that I think the important point that we want to draw out of the

slides that Ithai brought up is that anytime that they don't do QE something in the world breaks and so the politicians, their hands just feel forced because no one wants to be in charge of things that break and so they try and not break it and so they do more QE okay Etai can you walk us through like I just really quickly like all the things that broke because you You talked about like the European markets broke.

So the parts of the economy that broke weren't, it wasn't even the United States economy. It was like parts, small pockets of the global economy that would throw a fit, right? Yes. And usually that happens because the dollar appreciates quite a bit when we go into one of these dollar drain periods. And the dollar index increasing also correlates with,

with problems around the world. But just generally speaking, yeah, we had the 2010 flash crash, the first hold of QE, We had the European debt crisis, 2011, the second time that happened. When QE3 was halted, that was in 2018, was a very volatile year. I know into December, I remember Mnuchin was calling the heads of all the banks, train what's going on.

And then the Fed resumed QE. It actually did some repo activity before COVID even happened to put liquidity back. And then when COVID started, they had the perfect excuse to flood a ton of liquidity again into the system. And this is exactly what makes 2022 so challenging is that now, for the first time since the 1980s, the Fed has to deal with actual inflation. So their hands are kind of tied. They don't have the ability to flood liquidity again the way they were able to do so since the global financial crisis. And that's really the core of the problem. You said that when's COVID hit, they had the perfect excuse to do more QE.

The way that you phrased it makes it seem like the Fed is like, dude, when can, how can we do more QE? Like, how can we get this done? Like, why did you say it like that? Because it's, it's, it's been the easy solution, right? Up until, up until 2020 and 2021, really, there was, I'll go back a little bit. In 2008, 2009, when this was first happening, crypto wasn't really a thing. And everybody was buying gold. And then gold had this huge bubble into 2011 and then kind of a crash.

And the reasoning behind that was. All this money printing is going to cause a ton of inflation. Now, guess what? It didn't happen. There was no inflation. A whole decade was done with QE continuously happening. Asset prices were booming. We're in this Goldilocks environment.

No inflation. Then we get COVID. Something changes and we get inflation. So the Fed didn't even realize that QE was a problem because there were no, you know, there were no real world impact to it, really. Inflation was just fine. Can we talk about that, though? no real world impact that they could measure in the dials that they were measuring.

I mean, if you could talk about some of the recipients of this, maybe I know you have a slide in here that talks about, they show stock market returns, right? And this is interesting because all of this money printing, all of this QE was good for a number of people. People in the U.S., people worldwide, particularly if you held assets, this could be stocks, those could be, you know, risk on assets. It could be property, it could be houses, and maybe it would get you to describe the chart here,

but you kind of said this word of like, it seemed to have no bad effects. I mean, it seemed to have some good effects, which is asset price increase and maybe talk about that. But like also, there were some bad effects, right? Is this a story about wealth inequality as well and some of the kind of societal fraying and rippling that happens when you're just like printing money? It definitely is. But however, there was no bad effect that the Fed could measure. So I will rephrase that as far as that goes.

As far as they were concerned, banks were getting recapitalized, asset prices were doing well, and there was no real CPI inflation. Having said that, I think that it's a sort of hidden tax because the QE period during the Goldilocks when CPI inflation was not high, really. benefited asset prices in a way that if you're a wage earner, you're not, your wage is not increasing nearly enough as the value of assets. And most wealthy own assets, which means that the wealthy just got wealthier and the wealth gap did increase during QE, just as you mentioned, Ryan. But having said that, we still didn't have real CPI inflation. It was asset price

inflation. And that's really what QE did initially. So what chart are we looking at here? I mean, this looks like an absolute run-up on this, on this blue line here. It goes all the way to 1995, all the way to kind of present times. And I think this is tracking like growth stocks. This would be the NASDAQ 100. And that's a blue line. And then there's a red line that kind of like, it looks like it's pretty correlated, tightly correlated with it.

Maybe you could describe the relationship. And that is the Fed balance sheet. What are we looking at here? Yeah. So that's back to that, you know, eight some trillion dollar number of U.S. Treasury. So it's really a measure of how much liquidity is getting pushed into the market in a way of money creation with quantitative easing. And what you can see, the response to COVID was so massive because the world was locked up and they thought that they needed to offset all that organic transactions that take place with just money printing. So the initial reaction to COVID was risk assets just went on a tear.

And you guys would know it too because crypto was one of the ones that was most impacted by 2020. printing. And then really you can see that periods where money printing is contracting doesn't really have great returns for stock price for asset prices like risk assets like the NASDAQ. And in 2022, even such a small decline in the balance sheets has created a lot of pain. So, you know, would I say that markets are somewhat addicted to this liquidity? I am definitely in the opinion that they are, because something very dramatic changed post the global financial crisis. When we got to that zero bound, markets became a lot more dependent on Fed liquidity and a lot less dependent on actual fundamentals.

All right. So the market is like... The words addicted and dependent. And I just got this visual of like the economy in some sort of hospital bed on some IV drip. And every time the IV drip gets yowing to the patient just dies. Yeah. Yeah.

I mean, unfortunately, when you get more and more debt in the system, that's kind of how it is. Because servicing that debt, at some, up until some point, debt is very positive, right? You want to start a business. You're going to borrow some money and then you're going to do some sales and then your business is going to grow because of the debt you took. But at some point, you get so much debt that it's becoming problematic. You have to, yeah, it starts buying you back. You need to, you know, it's really hurting your growth potential. So the economy, in my opinion, has passed that stage, which is creating a lot of drag on growth, right?

And really the moment was the global financial crisis. So let's just finish out this. How did we get here story? And let's zip through the next three charts and let that kind of sum it up. So the next one is this is the COVID stimulus programs. And so this is basically just showing the massive fiscal stimulus. that was injected into the economy. Anything you want to say on this?

That was, yeah. So, you know, people ask, so how come in COVID we got real inflation? Why did that happen? We've been doing money printing since 0809. It's true. The difference is that 2020 was really the first global experiment,

in my opinion, with helicopter money. Call it as you want, but people just had money dropped into them on them, whether it was through stimulus checks, whether it was through unemployment benefits. And the economy was close, so they didn't have the ability to really spend it.

And that was different because we had money printing and we have fiscal stimulus at the same time. Monetary and fiscal combined. And that created real world inflation for the first time. Got it. And then this other piece, the personal savings, right? You see kind of the same effect of, I guess, stimulus and the post-stimulus. And this looks like, you know. You can literally see it.

Yeah. So what is this? This is the first stimulus check. This is the second. And then in red, you can see the credit card debt. standing for the average consumer in the United States. So what we see now is that the savings rate is already lower than what it was pre-COVID and credit card debt is in a new all-time high. So if we do fall into a recession, the consumer is not in good shape right now. You can make the

argument that they're actually worse off now than they were prior to getting all that stimulus. Do you think that the creation of the stimulus and the creation of the money created that outcome? I think it's a mix of that plus some COVID closures and other. things like that where the economy was closed up. But you can make the argument that all this was short of for nothing because now the consumer is in a worse off place. And we are dealing with a big inflationary problem. And we're also dealing with a huge debt problem. Okay. All right. So how did we get here? We saw how we got here, right? A whole bunch of money printing. You kind of guided us. It's really kind of that simple. Like we printed a whole lot of money for a whole lot of reasons.

This is M2 supply that we're looking at. Is there anything you want to say? about this. And by the way, what is M2? That is a measure of money. Is that savings accounts as well as base money? Yeah, it's a broader, it's a broader definition of money supply. M1 is just the, just the actual fiat money in circulation. This is a broader definition including accounts. And it's just staggering, right? There was a 40% increase in 2020 and 2021 in just money in circulation. The total supply of money. It'd be like, I mean, for people in crypto, right? It's like, Let's say Bitcoin next year. You remember that 21 million hard cap thing?

Well, for one year, we're just going to increase the total supply of Bitcoin by, say, another 8 million. You know, how will we round it up? 30 million Bitcoin. We're just doing one time, 40% increase one year. What does that do? So like the Bitcoin, like, well, probably it's a lot more drastic because it's a much more honest market than kind of this market is because people would just get out of Bitcoin. prices would drop, like all sorts of chaos would ensue. But that's effectively what we did here is just a token issuance of USD coin by 40%.

Boom, hit you with that. And now we're seeing all of the after effects of this. And so what are the after effects of how do we get here? It feels like, you know, where is here is kind of the next question. But what we have is we have is inflation, both CPI inflation, asset price inflation, rampant wealth inequality. that spilled over into our politics, and it's starting to fray the structure of society. And I think the big question now from a macro perspective is, all right, where are we now on this map, right? So take us there. Yeah, give us the punchline of like December 2020, going into

2023. So the punchline is this, in my opinion. The Fed has realized that they've made a giant mistake. They've realized that probably late 2021, and they are trying to reverse that mistake. So they are doing a few things to do so. They're doing the most aggressive interest rate increases since the 1980s, right? We've raised interest rate 75 basis points now. I don't know how many meetings in a row. We're approaching very restrictive monetary policy. Financial conditions have deteriorated. But more so, one of the things that Sless talked about, they're doing money printing in reverse. So they are destroying, actively destroying around $100 billion of USD every single month in order to literally reduce the amount of USDA circulation. So they're doing the

exact opposite. For crypto people, they're burning. This is a burn mechanism like EIP 1559 for the Fed though. Where are they getting that money? So what they're doing is as they've printed the money if they purchased treasuries, now they're doing the opposite. As these treasuries mature, the U.S. Treasury sending them back their principal and the interest. And then they just click the delete button and they just take that money out of circulation. Token burn, maybe. Okay. So who wait?

So who the government has less money now? Who has less money? It's total supply, right? Yeah, it's just the total supply. So the total supply of USD is dropping. Okay. All right. Okay.

And what do you said, they're trying to undo their mistake. You mean like sort of the mistaken Powell's regime, right? You're not talking about like all the way back to, kind of Nixon era, like that mistake that happened in the 1970s and going on Fiat in the first place. That's like, that ship is already sailed. I don't think anybody in the Fed is of that opinion. Okay. You know, I do, I do think that they are worried. So, you know, it's a very difficult place to be. They're really between a rock and a hard place because we're sitting on a huge debt burden.

I think it's around 130% debt to GDP. And that's only with, you know, without counting for other types of liabilities, or to total of that. This is just government debt. And the problem is, is that you cannot have this massive increase in interest rates while you have this much debt, because you could hypothetically crush growth. And we're already seeing real GDP estimates slowing down quite a bit into next year. So that basically says that next year is going to be very challenging. And the biggest mystery is, so I'm going to skip this, is how, how, how in inflation is going to end up. Because inflation right now is just tying the Fed's hands in a way that they can't respond to the events the way they did before. They can't just go in and turn money printer again. They just can't do it because inflation's too high. So what happens with inflation is really what's going to determine how 2023 is going to look like. Isn't inflation taming now? That's kind of like what we're seeing. Well, tell us. What do you think? Yeah. So next week we're going to get another CPI print. November's print. was a little bit lower than estimate, but it was still in the sevens, right?

That, you know, one print doesn't mean that inflation is tamed. And yeah, the market is highly driven by this. The S&P 500. When we say it's in the sevens, that's if you take like the last 12 months, right? But if you take the current month and then you like project it forward and you annualize it forward, it's actually at a much lower rate. Aren't we talking like, you know, 2 to 4% range, something like this? But that has a very high base effect to it because you're taking the current level of inflation, which still really hinders consumer spending, especially if we go into a recession, we get some layoffs and things like that.

To me, it's not it's not about the headline number that's as important. It's about the general interest rate environment that is still here because inflation is relatively elevated. And there's two main reasons for this, right? first services are relatively sticky. So energy has come down, right? Other commodities are coming down, even shelters coming down a little bit. But services is much more difficult for it to come down, especially quickly. So if you think about it, when wages go up or when the price of certain services go up,

how often have you seen those prices come back down once they're adjusted upward? Yeah. I feel like that's probably something important to hang on. on. We're not going to go back to the era of like a $3 Starbucks. I don't know how much a Starbucks is. I make my copy of home. I'm sorry of like $5 or $6. But we're not going backwards to $3. So the point that you're making is like whatever the prices of our service industry products are or probably going to stay the same. Is that right? With one exception, right? The one thing that could change is if we get mass layoffs. If we start

getting mass layoffs, that's going to change the inflationary picture because that's, going to be, then inflation is probably really going to start going down. Okay. Yeah, but that's bad because then we're in a recession. That's what we don't want. Yeah, but it's, yeah, yeah, but we were most likely going to get it. The question is how severe it's going to be. That's really the, the base case is we're going to get some sort of recession,

whether or not it's going to be shallow or is going to be deep. Is really the question. Can I rephrase that and see if you like how I rephrase it? So we're definitely on the path towards recession. We're definitely having slower economic growth. I think a bigger question, a big question is like, does that slower economic growth self refer to itself and become worse as a result? As in like, do we have slower growth because we have slower growth because we have

slower growth? As in like, do we lay people off because they, other people got laid off and does this recession start to feed on itself? Yeah. Uh-huh. Like, is that a fair question to ask? That's a very fair question to ask. And, you know, we're talking about this.

Yeah. retail sales are still above trend from last year, but they're slowing down as well and many other factors. Non-farm payroll to that point, the jobs number is still holding up. And that's really the key driver of this economy, in my opinion, because what you've seen right now is we've gone into a good news, bad news cycle. So on Friday, when we got a positive non-farm payroll hit, markets sold off on it. Why? Because they're worried that, If the economy stays strong, the Fed is not going to slow down. It's interest rate increases.

So it's become a backwards world where every time we get any type of good economic news, the market sells off immediately. Yeah, that's insane. I remember growing up, I was definitely far much more left than I am today growing up. And I was always just pissed off that there's this disconnect between the economy and the stock market. Like the Starbucks, the economy is not the stock market, stock market, stock markets on the economy. These things are supposed to reflect each other. Now it's actually the opposite, as in these things are going against each other.

How insane is this? It's absolutely insane. But you understand the psychology is everybody is, it's Boblovian, right? It's the bell and the salivation and the dog. We're addicted to liquidity. Right. Okay. For 12 years plus, I mean, every time there was a dip, you buy it, you make money.

And it's very hard to change that behavior in a short period of time. the one other graph i'm wondering if you'll pull up for us on the where are we now kind of piece is a housing um yeah i think that's interesting that that affects a lot of people and what i am stuck kind of i'm scratching my head about is like how are people millennial generation gen z even how are they going to afford a home like how does this even happen because we saw the last 10 years of asset price inflation. We saw the charts. It's like number go up on the house price. And that was at least compensated because you could get like a pretty low mortgage. Yeah, at least you could afford your your mortgage payment. But now we have like rapidly increasing

fixed price mortgages and asset prices for the houses really haven't gone that down down very much. Tell us what are we looking at here. Yeah. So on the right you can see the the mortgage rate. which to your point, mortgage rates are now at about 7%, which is just very high, right? We haven't seen that since before the global financial crisis. But at the same time, housing prices have gone up a lot or have gone up a lot in the free money era. And they haven't really come down that much.

And buyers can't afford. They basically stepped out of the market. And you can see that here. There's no sales. Sales are virtually at zero. I've heard buyers can't sell because of, or buyers can't buy because of, of obvious reasons.

Prices are still too high and mortgage rates are too high. Sellers also can't sell because they're locked into their super low. Low rates. Yeah. Right. So they're fixed. So the housing market is just frozen. It's a stalemate.

It's a stalemate. That's exactly right. So, you know, why would I trade my 3% mortgage house to go in for almost the same price, 7%. Right. I'm just not going to do it. Right. Yeah.

And I think the stalemate is going to continue until, we start getting the unemployment numbers pick up. So it all depends on the jobs market. If the jobs market starts deteriorating, right now the only sellers that you have is just organic. Let's say there's a divorce or there's a death or something like that, then you get people selling. But if you want to really see prices falling on mass, you need the labor market to deteriorate. If and when that happens, people won't be able to pay their mortgages and then prices will start plunging. So I feel like we're in this in-between phase of things, right? And maybe you could kind of sum up the section of like,

like where are we now? It feels like we're not quite in recession, but we're headed towards there. We've got some more work to do on inflation. That's an untold story. We have all of the last like, it's, you know,

10 to 15 years, asset price inflation and, you know, money printing to deal with as well. What's kind of like the what's kind of the outlook going into 2023? And I know a lot depends on kind of the next section we're going to get to, which is what's Powell going to do, the Fed pivot.

But like, as we're looking down the barrel of 2023, is like recession completely imminent? Like, what do you think is going to happen? What trajectory are we on right now? I actually think so. And I will tell you one of the main reasons is that monetary policy acts with a lag. People tend to not get that as much. You know, we are having all these interest rate increases and are like, okay, we continue with our lives and it's all normal.

But one of the things for you to consider, for example, is just like we have our housing situation and people don't want to switch into a higher mortgage, higher rate mortgage, we have a lot of corporations that borrowed a ton of money during the easy money era at very low rates as well. So S&P 500 companies is an example or just publicly traded companies to the tune of about $6.5 trillion. which is a massive number that's coming due next year and we'll need to get refinanced into the higher rates. So they don't have the option of just not selling because they don't have a fixed 30-year mortgage during the bond market. When those bonds mature at the low coupon, they have to recycle it to a higher coupon. And I think that's going to be one of the most difficult things. And that's when I think the jobs are going to start getting lost because the increase in debt services for all these corporations will force them to lay off some people. And that's why I think monetary policy works in the lag.

And that's why it takes time until you really see all the effects of these things. Okay. So you think a recession, right, is going to happen next year. I'm curious how deep you think this will go. And I'm also curious because, as David were saying, economy stock market, different. What do asset prices do during this time? So how deep is this recession? How bad is it going to be?

Yeah. And then what do asset prices do? So first off, the Fed pivot again. The market doesn't believe we're going to get that much help from the Fed right now, even though markets have rallied over the last month or two in hopes of this markets, meaning stock market. What you're seeing here is the dot plot. Each dot represents what a member of the FMC thinks interest rates are going to be

in different time intervals, and then the white is what the market thinks. So the market is looking for 4% rates to last at least until 2020. which is pretty restrictive. So the market does not believe at this time that the Fed can go back to easy monetary policy, and I think that's going to definitely impact what kind of recession we're going to get. The market does believe right now that we're going to get a pivot around June. So either a slowdown or starting to cut rates, this is what called the Fed Fund's futures. Market is expecting some sort of a pivot around the middle of next year.

And then to your point, what will markets do? And what is the answer to that question? So here you can actually see the two different scenarios. There's been a few cases, 1995, 98, and 2019, when the Fed cut rates, and it actually saved the economy from going into a recession. It was actually able to stop the recession. Markets were very positive a year later. in the 1989, 2001, 2007, the rate cuts did not stop the recession. It was too late.

And a year later, markets were substantially lower. So the answer is, is the Fed pivot going to help? Well, it depends. 50, it looks like. We got three instances were yes and three no. We got three instances that the rate cuts saved this from a recession and three instances that they didn't. Wow. Well, flip a corner.

I guess. Then you have to look, then you have to look and make the assumption, well, are we going to get a recession or not? And that's going to answer kind of your question. It's the end game and the scenarios that we have. Before we get there, we die, we got a break. We're going to talk to our sponsors. But we are queuing up the last part of this, which is I think the big question in my mind, which is, are you sure we get another round of this? Like at some point the merry go round has to stop. And there's the question of like, is this the last loop around?

Is this the end game scenario? We're going to ask you after the break. Before we do, we want to thank the sponsors that made this episode possible. In all of my years in crypto, I've never been hacked, scammed, or lost money to a thief. And a lot of that credit goes to my ledger hardware wallet. The Ledger NanoX and the Ledger NanoS Plus hardware wallets allow users like you and me to secure and manage all of our crypto assets and our NFTs. all with the security of storing users' private keys offline and out of rage from hackers. The Ledger NanoX is the perfect hardware wallet for managing your crypto and NFTs on the go

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And Eti, I want to ask you this next, because we're going to go into the last part of your slides, of your charts here. So this question has come up to me in a number of macro podcasts about similar subject matters. Like, oh, the feds, you know, we're at the end of the line. We're at the end of the sidewalk. The game's up. But then some people always propose, like, well, maybe the game's not up. Like, maybe we get to go and do this one more time. And to me, like, I'm relatively young in the markets world.

This is all still, like, relatively new to me on the grand scheme of things. But for me to say, like, learn about, like, okay, the entire thing hangs on the Fed's policies. like the entire stock market, the S&P is just tracking the balance sheet. If everyone knows that, can we really get one more go out of it? Because then we're all just playing the same game. Like, oh, we're all just going to make money and lose money together, but we're all playing the same trade. That seems insane.

We're all playing the liquidity trade. And even more so, you know, when asset prices rise, you see a decorrelation, right? then it appears that everything is doing its own thing. However, when risk acid fall, correlations tend to pick up to one. I would tell you, you can plot a chart of Bitcoin, U.S. treasuries, gold, Euro-USD, right? SMP 500, Germany's Dax, Japanese Niki for 2022. You can add multiple moral asset classes to this chart, to this list.

they're all going to be doing exactly the same thing with different varying degrees of volatility based on what asset price it is, what asset class it is. Everything has been one trade. Okay. So what you're saying is that doesn't matter what you put as the numerator, Bitcoin, pick your asset, housing, like whatever. It's the denominator that matters. And everyone is like, oh, I'm so bullish on my particular numerator of choice.

But like the real trade is like, no, you trade the denominator. You trade the value of the U.S. dollar. That's right. You trade liquidity. And you can see that the best performing asset in the world this year was actually U.S. dollars. So when I was getting into investing, when was this, 2016, 2017, like put my, you know, $5,000 in Robin Hood. I was, like, learning about, like, the markets. Like, oh, like, I'm going to be bullish on this company because of, like, it's got this arbitrage opportunity.

Like, these fundamentals are better. Like, you're telling me, like, everyone who's playing. that game of like picking stocks or like, you know, managing their portfolio, or I feel like we're all just a bunch of chumps. And this is like, well, picking stocks could could work, right? And actually it works a lot better in a period like this. Because right now, fundamentals of individual companies matter a whole lot more than during a period where the Fed is just lifting the index. I would even argue you can look at passive versus active investing and you would see that active investing that has been getting a lot of, you know, bad rep recently because, oh,

indexing beats everything and whatever. Indexing beats everything when the Fed prints money, right? It's obvious. It just floats all boats. Prior to the GFC, active investing and even hedge fund performance was better than the indexing. And then this year as well, you're seeing hedge funds for the first time in a while really beating the market as well. Prior to the GFC, great financial collapse. Great financial. Crisis, yeah. Crisis. Okay, cool, cool.

Okay, so just to reiterate that, you're saying when it's easy money times, low interest rates, QE, you're saying that, like, indexing doesn't really matter. But then when we flip that around and we make hard money, more restrictive policy, higher interest rates, that's when being a fundamentals-driven investor, who's savvy, who's actually playing markets the way that I was told that markets are supposed to be played, that's when that actually matters. and which actually kind of makes sense because like interest rates like what's that line like when the tide goes out we'll see who's not wearing any swim trunks and so like what is the Fed when when there's zero percent interest rates they're just pushing water up the beach but now but until no it doesn't really matter what fundamentals are but now now the water's actually coming out so now it actually really does matter what fundamentals are it matters it matters how you control your leverage right because everybody underwrote this one

percent interest rate type of type of assumption and now it's five six seven right they have a much bigger debt load to pay whether it's in real estate whether it's in corporate financing so if you are if you were prudent if you didn't over lever yourself if you knew how to manage risk you know this is a great opportunity for these companies because all their competitors that don't know how to do that are just going to class getting wrecked and that's what we're seeing in crypto and what's interesting is the root of all of this when when the fed started to change policy well, that's when we saw Terra Luna collapse. And that's where we saw the contagion of like in crypto.

Guess who's falling? It's all of the risk seekers who were celebrated. I mean, Etai, these people were treated like gods. Gods. Could not fail. Could not fail gods for the last two years. And it's been so infuriating for people who have focused on fundamentals. My co-host being one of them, all right?

He was doing the right thing. and risk seeking was all the rate. And now these groups are being completely wiped out of this market. They're being completely wrecked right now. And the people who did have good risk processes and take in place, it did not go margin long on crypto, did not go down kind of the stream of all of these assets that don't have any fundamentals,

didn't go into NFT crazy JPEG world all in, and buy the board ape at the top, these people are doing well and everybody else is kind of getting wrecked. And this is all the same trade. It's all one trade. It's all Jerome Powell at the end of the day. What he decides to do with the money printer, yes? Yeah. I mean, you know, it even goes much further back. I wrote my thesis long ago about financial bubbles and the behavior, human behavior is always the same. You know, and you probably heard of Isaac Newton, right? What people don't know about Isaac Newton is that during his time, there was a very famous bubble that was called the South Sea bubble, where this company was claiming to bring the wealth

of the American continent back to England, and everybody was going crazy because the new world was the thing. Everybody knew that there's all these riches in the new world, and it's going to be worth all this money. So he bought into the South Sea company stock, saw the price just explode, and it kept going up and up and up and he was like, well, I'm just going to take my profits and get out, which he did. And then it kept going up. And he saw all his friends getting richer. And he couldn't deal with the FOMO. And he bought again at the top just to see the whole thing collapse and lose literally 90% of its value. And later he says, you know, I can understand the works of heavenly bodies, but I don't understand the action of men.

Look at this. I want to emphasize this. Probably top five. In top 10 list anyone would make of the smartest human beings ever. Isaac Newton is on that list. Smartest human being ever, and he gets messed up by these types of emotional roller coaster markets. He loses. If the smartest human being in history

gets wrecked by these markets, who are you? Why are you trading against the Fed? Etai, have you read the book Devil Take the Hindmost? Yes. Great book. That part was a chapter in this book. and what the devil take the hindmost book is,

it's just like a history of financial bubbles. And like if you just, if you're not going to read that, highly recommend that book, by the way, to all bankless listeners. There's not very many books that I recommend, but there's like a list of 10 of them in the bankless Discord for,

it was a question that somebody in the discord asked, what are your books? That book is in my top 10 books. And the thing that I learned in this history of financial bubbles, which goes back hundreds of years, hundreds of years, is that humans make financial bubbles.

It's not some like thing that we discovered. We didn't discover this shiny rock in the ground and create a financial bubble around it. We didn't do this financial engineering. It's human phomo that always triggers these financial bubbles. And the best thing about that book is that like, it's this crazy cast of characters of people you already know throughout history. Like smart people like Isaac Newton and other like very famous people that you totally know who all get caught up in financial bubbles. No matter who they are or what their background was or how smart they are, they all get caught up in financial bubbles. No people can't help it.

So if you feel bad about your mistakes, this cycle, go read that book. Yeah, exactly. Yeah. Fear and greed never change, right? Maybe human beings are the true denominator. The layer zero. That's the denominator. The layer zero.

We all want to get rich by doing the minimal amount of work possible, right? So, so, Etai, can you help us answer this question as we kind of like summarize this and I'll conclude of, is this the end game? It's the big question, right? Because there's this macro story about how many shots do we get at this. And you presented that interest rate slide at the very beginning.

We're floating at the bottom. We're at 0%. Can we go any lower? Talk about, oh, I love that, by the way, talk about these possible outcomes that we could see. And then let us know, do we have another ride around the merry-go-round or just the sidewalk end here, is able to saying, and can we anticipate something even worse?

happening that is like much more severe than kind of a you know sort of the typical standard recession that people are saying might happen yeah so let's cover this um with a little bit of probability chart to it so yeah we've gone to the zero bound however the good news is we've just shot up way back above the zero line we're actually at the highest interest rate environment since back into 2000s and we're probably going to top out around 5%. That actually gives the Fed firepower to cut back down if rates go lower. But this is really the old debate between Keynesian School of Thought and this Austrian School of Thought, which is more on the restrictive side. The Austrian says, well, this is how the money

printing game comes to an end. We hit this inflationary period and we have to restructure debt. So what is really the endgame? Is the end game going to be some kind of debt forgiveness, restructuring of the US dollar restructuring of, you know, another Brent Woods in which we create a commodities back for and see. There's a lot of different possibilities, but I don't think we're there quite yet. The good news is that the banking system is a lot healthier than it was in 2008, 2009 because all these years of QE really recapitalized a lot of the banks. And we don't really have these wild lending practices in especially housing and things that are really high-ticket. that could crash the economy. Another good thing is that home equity is high. So most people's

debt to equity ratio in homes that could really collapse the economy is healthy. So those are all the good, the good factors. Now, we know the bad factors. We discussed them quite a bit. So that's why there's these three type of scenarios. Scenario number one is it's really a softish landing. We don't really have a real recession. It's more like slow economic growth. The jobs market doesn't really fall apart. Companies are able to hold on. We go through a period of flattish growth. Inflation calms down. Fed is able to cut rates back to 2, 3%, not really zero.

We go back to Goldilocks. We go back to a healthy period. Fed doesn't come back to money printing. And things will kind of heal out organically because things will grow. That's sort of the optimistic scenario. This is the scenario in which the Fed wins. That's a scenario which the Fed wins. That's the scenario that a lot of people in the market believe.

And every time that we hear talks about a Fed pivot or things like that, the stock market celebrates that because people want to believe in that. They tend to be naturally optimistic. The softest landing is the hopium take. Yeah. Yeah. So then there is the hard landing, which is a tough recession, but not necessarily a catastrophic one. We think that's the base case, primarily because we don't know how much leverage is really out there in shadow lending. We have an idea. We know that monetary policy works in the lag, and we do believe that job losses are going to come, and they're very likely to come because corporations, once the wave of refinancing happens, they will lay off people in order to offset the decrease in their earnings. Once that

happens, it will probably cause lower housing prices. Housing is a very strong fundamental factor in the economy, less purchasing of furniture and all this kind of stuff. Similarly, consumer spending 70% of the U.S. economy. Once people lose jobs, they can't spend as much, that creates actually a down cycle. So there's a lot of negative feedback loops that can trigger in this scenario, which is why we call it the most likely scenario. Now, why is it not a catastrophic scenario? It's really the banking system and systemic risk. If systemic risk doesn't trigger, and we don't get Lehman, and we don't get things of that nature, because banks are supposedly healthier. We don't know what we don't know, right? But if there is no debt crisis, it's

eventually probably going to work itself out. And after a period of recession, inflation will come down and we'll start growing again potentially from a better place. That's if there's no systemic risk, if there's no like FTCS hanging out there. That's right. But if there is an FDX hanging out there, then we veered more towards catastrophic. Yes. So the catastrophic landing is potentially the end game that will require real restructuring of things. And this scenario, imagine a Bank of America. I'm just giving an example. Obviously, I'm not saying Bank of America is going to go down under,

but like a Wells Fargo, Bank of America, J.P. Morgan Chase. It's probably Wells Fargo, right, David? We like to pick on a Deutsche Bank. A Deutsche Bank, a numera. Like, it could very well start internationally. Actually, more likely it's going to start internationally if it does, particularly Deutsche Bank Credit, Swiss, all that kind of stuff. Systemic risk, bank runs.

you know, no money in the ATM, like bail-ins, this kind of stuff. If that spreads across the West and at the same time, inflation stays elevated, maybe because of supply-side shocks. So imagine, you know, commodity prices, the war in Ukraine expands, like, different things that can cause supply-side shock. Tie-to-fed hands from being able to ease too much into this type of condition, that is the catastrophic scenario, but we assign a lower probability to that. Have people in their lifetime living, like right now in general, have we experienced anything

that you would label us catastrophic? Was 2008 catastrophic? Or do we have to go all the way back to like the 1920s, late 1920s and early 30s to label something catastrophic? What's the difference between hard landing and catastrophic if you could bring us back to kind of life experience? I think 2008 was hard landing because at the end of the day, the catastrophic was avoided. Lehman did collapse, but inflation was not a problem. The Fed was able to be. bail out the banks prevent the systemic risk. There was systemic risk. It did have the potential of deteriorating to the point of catastrophic, but it did not.

I think you have to go back to, I mean, we do have it in other countries. We can see Greece in 2010 or other places, you know, in more modern history. But I think for the West, you really have to go back to 1929 in order to envision what catastrophic means. A 25% chance of something worse than 08. not liking those odds. Maybe this is hopium, copium, but we were talking earlier about how the economy and the stock market is inversed. And so is it hopium to think that like if we get something catastrophic like an OA moment,

we'll just turn on the money printer and be good again? Yeah, in a way, that's one of the arguments that says that if we do get that, it will end up being bullish net net, because regardless of the inflationary environment, the Fed will have no choice but to step in. This is so dumb. What is this world? Bullish for asset prices, though, right? Not necessarily, like, because, like, how much more?

Yeah, do we just get even more wealth inequality? And that's a question I have, like, that's the thing that the Fed's not measuring, right? But we see it. We see the ripples in our society and the fraying of our politics. And, like, how much more wealth inequality can a society really sustain before it breaks and starts to act populist leaders that, you know, turn, Weimer Republic into the, into kind of the next thing after it. That's the risk, yeah.

That's definitely a political risk. I know Ray Dalio touches a lot on this as well in the New World Order. This is definitely, this is definitely reminiscent of some of those, some of those periods, kind of late empire type of debates, but I don't disagree, but it's beyond my ability to predict the future political and your politics implications for this. Okay. I was just going to say 75% probability that we get another round at this. I think so.

With a 50% probability of a hard landing that's not catastrophic, how, and you said like, okay, it'll just play itself out over time. We'll have a recessionary period. We'll just deal with it. It'll be hard. We'll have to cut down our spending, but fine. How long? Like one, two, five years?

What's in a recessionary period? like it's typically shorter i mean honestly it's less than 18 months but the implication of it is is you know that's the trough but then the recovery it depends what kind of recovery you get right that's going to be hard to predict recovery could be b-shape it could be slow um and obviously there's the scenario no one wants to talk about which is japan which is just anemic growth for decades following a top. I think a lot of it has to do with demographics as well. So one of the reasons that I don't subscribe into permanently high inflation is because I just don't think we have the population to support it. It's not the 60s and 70s. We don't have an insane amount of boomers coming out and

starting to buy houses and all that. We skip this slide. We can talk about the yield curve if we have time at the end because that's a very good tool to predict future recession, which is very much inverted, which is implying we're going to get a recession very soon. But if we go into this chart, what you can see here is the age wave. And age wave is the percentage of the labor force ages 16 to 34. It's a very good predictor of inflation because that's the age in which you're getting your first real job with a real paycheck. You're getting married. You may have the first kid or so, and you may buy your first home. All the things I just described are massively inflationary. right when they happen on mass kids are inflationary kids are inflationary buying homes yeah imagine imagine

what goes into starting a family right buying a car and buying a home like i don't think i've ever seen a chart like this so this red line is the age wave you're saying and we sort of it definitely peaked in the kind of the the 70s the late 70s i guess early 80s when u.s inflation peaked. So we've seen a very tight correlation between the percentage of population in that age group and the inflationary trend. And as you well know, the US birth rate is around 1.8, which is below replacement at 2.1. Even with immigration, it's barely at 2.1. What we're looking at is the baby boomers, basically, coming of age, becoming 16 to 34 in the early 80s. And then it falls off from there all the way to kind of like almost like lows. And you can see that also with the age wave and the 10 year, 10 year yield. So this is why I believe this inflation is really just a monetary phenomenon. It's not an organic phenomenon.

If it was the 80s and 70s, it wasn't really because of printing. It was an organic phenomenon of a lot of people coming to age at the same time and all grasping for resources at the exact same time, which causes organic inflation. We don't have that now. We have monetary inflation. Well, what about the meme of the COVID baby? My sister had a COVID baby. I've seen a bunch of COVID babies in my life. A lot of people had COVID babies.

What about that? It's not, if you look at it statistically, the birth rate is still low. It's not, it's not that massive. I mean, on a relative basis, though, the U.S. is substantially better than the EU and Japan. The EU birth rate is really low. But don't remember exactly that I think it's around 1.4, maybe 1.5. So it's far below replacement rate. In Japan, it's far below replacement rate.

And net net, I think long term, you need people in order to drive inflation. Because if you literally have less people than replacement rate over time, you're going to have less demand for the same housing inventory and cars and all those things. I've always wanted to do an entire episode, David, on demographics, actually, because China is actually in a worst place in the U.S. too, which is there's some countervilling points there if their demographics are kind of weak. Anyway, it's very interesting. Ita, you touch on this, but since somebody in the YouTube chat asked the question, I'd like to you to go back to a question from Dan, fun fact, I do actually watch the chat.

Can immigration compensate the lack of boomers? I mean, it can to a point, but immigration also has slowed down and it's also a political issue, right? So if you look at the EU, for example, that's exactly what they try to do. They try to open their borders to a lot of immigration because of their population decline. And it caused a lot of social rift within their societies. And it caused, for example, in Italy, we just had populist right yet voted in Sweden. We had the same thing. So even though it can in theory, it's very different than can, will the society actually accept it?

Particularly when times are tough and everyone is like talking about ways to split the pie. Right. So this sounds like good news. Yeah. Yeah. Yeah. Yeah. So net net, this is why I believe that inflation will eventually subside if the Fed really stops all the money intervention word right now that they are.

So that's why I believe this is one of the reasons I don't think we're going to reach the end game just yet because this really helps. We're going around again? Yeah. Bull market around two? I'm thinking like 2024, 2025 is when I'm planning my bull market. I don't know. Oh, yeah. I think it's going to be sooner than that because the second the market sniffs it out, the market usually prices these things out six to 12 months before the reality actually even happens.

So what are you doing? How are you thinking about this? So market continues to go down for a while but then starts to turn in 2023? I think the turn happens in 23. Yeah, if you ask me, I think around mid-23, potentially is when things happen. We've been in a bear market now since for a year. Usually bear markets don't last more than 18 months. It all kind of lines up.

But it really depends how severe things get. The base case is they don't get that severe. Even in a tough recessionary environment, I mean, you know, stocks could go 20% lower from here. But nonetheless, you know, that will put it in within an average, you know, 40% decline type is not crazy for a recessionary bear market. Mid-20203. And David, if crypto is front-run that by six months, then we already bottomed. I just want to say, Ryan, you're running out of time to get your three-digit ether, brother. It may happen.

I'll give my 30% no, 25% probability. The number is going down. Well, okay. One last question for you, It had to kind of, because you brought up Ray Dalio and you got some charts on here about

the dollar, which is always like when we talk about, is at the end, do we get one last cycle, one last shot at this or no. Dalia talks about when empire kind of fall, the last thing.

they sort of lose is reserve currency status. And how is a dollar looking from a reserve currency status perspective right now? Is it weaker? Is it stronger? And like, how do you forecast that moving into, you know, the next couple of years or like, you know, 10 years? We can probably spend two hours talking just about this. I'll try to make it brief. You know, dollar is still strong as far as global reserve currency because a lot of the lending that takes place is in U.S. dollars and it's a self-fulfilling kind of loop. So imagine even a company drilling off the coast of Norway potentially doing business with the UK is going to do it

in dollars and borrow money in dollars. So it's a self-fulfilling loop. 60% of foreign exchange reserves are still U.S. dollars, but those numbers have declined slowly over time. And I think one of the risks to the dollar is a reserve currency is literally what we're seeing right now with Russia and Ukraine. it's an example, right? Russia doesn't like it at all. China doesn't like it. The more sanctions the West puts on countries like this, the more incentivized they are to find workarounds around the US dollars, a global reserve currency. And typically when these reserve currency status is lost, it's very rare. It's like, you know, it's Monday, the dollar is the reserve currency, Tuesday, okay, it's not. It's a very gradual process that might take decades. So you won't

even realize that it's happening while it's happening. That's, the most likely outcome. There will be more and more use of other things over time until at some point the dollar is always going to be important, but is it going to be the only currency we're transacting with probably not. All I'm hearing, maybe I want to be hearing this, is that we have enough runway to do this all one more time. Why do you only want one more, David? What happens after that one? At least we'll, so I can sell the top next time. It's, and the U.S. is in a relatively very good place, relatively to the rest of the world. You know, we're talking about all these potential negative implications, but the rest of the world is much worse, right?

China is worse. Japan is worse. The EU is worse. So it's kind of the cleanest dirty shirt syndrome. Where do you go? And it's still, the U.S. is still the most stable. The political system is still considered very stable. property rights very well respected the probability of bail-ins is virtually very you know with the exception of I don't know if you know about the 1933 order to take all the gold away oh we've heard about that one we talked about that a few times so with the exception of that which I think would probably not happen again there's not going to be a 2023 take your take your crypto order yeah I mean there is there's precedent for that right but it's um

it's unlikely and that you know if that happens then the u.s government risks its status as the safe haven where when things get tough money from the rest of the world literally flows to the u.s typically because because we got good property rights yeah yeah very this has been great i mean i feel like you just did a bang-up job answering these four questions how did we get here where we now when do we pivot and is this the end um thank you for this and um you know Is there anything you sort of leave folks with? Like, should we, yeah, what's your kind of advice? How would you summarize this if somebody's like, okay, I,

what should I do as a result of all of this? How can they prepare? Yeah, it's a, it's a great question. I would say that the go-to advice is always increase your productivity. Make sure that, especially during your recession, you save more, you invest more so you have the dry power in order to do it when things really go on sale. You don't over leverage yourself. You don't go into debts that you can't afford. And during a period of high interest rates, you don't want to be exposed to these type of

debts that you have to pay massive amounts for. So first take control of your impersonal finances, especially during these periods, that you see them as an opportunity rather than a challenge. increasing your productivity sure sounds a lot like building to me. That's what I hear, Ryan. This is time to put heads down building, heads down building. You know, a lot of times recessions are a good time to go back to school and things like that. If it's more difficult to find a job, make yourself more competitive, makes yourself more appealing. When coming out of it, there's going to be a lot of opportunities.

Typically out of, you know, the recovery out of recessions is usually one of the best periods to take advantage of opportunities. Ita, this has been absolutely fantastic. You're a wealth of information, my friend. It's so glad we had you on this episode. I guess last question for you before I thank you. But are these slides publicly available anywhere? Is there a link that we can include in the show notes? They're actually our internal company slides.

Okay. So it's our asset management team slides. We typically don't share it. It's just for our internal research. Okay. Thank you so much for putting them together. Yeah, we appreciate it. Where can folks find out more about you and about what you're doing at Equi?

Yeah, equi.com is a good place to start. We do have a pretty substantial wait list right now. I think it's over 2,000 people trying to get access to the platform. However, we are going to have it reduce the minimum and open it to a much wider amount of people in 2023. And the whole idea is how are we able to invest in a way that's not correlated to all this craziness? And how can we maintain the value of our money? And we've been able to do just that this year despite all the all the volatility. Well, that sounds real nice right about now.

So thank you for sharing that. We'll include a link in the show notes where you can sign up the wait list and find out more about that. Yitai, thank you so much for joining us. We appreciate you. No problem. It was my pleasure. Bankless Nation, as always, got to let you know at the end of the show, none of this was financial advice.

We really don't know exactly what's going to happen next year or in the future. And of course, got to remind you that crypto is risky, eth is risky, Bitcoin is, so are the macro markets. You could definitely lose what you put in, but 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.