Bankless - Stocks Up & Crypto Flat...Why? | Jim Bianco

Starting point is 00:00:00 If you look at Nvidia, the FOMO around NVIDIA is not necessarily the price breakout, but the narrative. I get it. It's going to be the biggest thing since the Internet, maybe bigger than the Internet. That's how you got to get people into the crypto space, not just talking about whether or not we're going to get to 100,000 and FOMO in everybody after that. But what does it do? What do we do with it other than custody it and wait for the price to go up? Welcome to bankless, where today we're exploring the reason why stocks are up and crypto is down or flat. This is not the bull market we were promised. This is Ryan Sean Adams. I've got a solo episode for you guys today.

Starting point is 00:00:46 David's out at ECC and he's climbing mountains. So I am here to help you become more bankless. That's the question for today. Why are stocks up but crypto isn't? We have macro investor Jim Bianco on the podcast today. And whenever I'm trying to make sense of something that doesn't make sense to me, in macro in the broader finance world. Jim is just the perfect guest to ask. So I brought them on. I had a handful of questions that were top of mind. We just dove right in. Number one, we talk about

Starting point is 00:01:13 tech stocks. Why are they at all-time highs? Is this a bubble or it's a breakout for tech stocks? Number two, is crypto going to have its moment? Are we going to enter the banana zone? Are we headed for disappointment? This is going to be a muted cycle for crypto. Say it ain't so. Number three, how's the U.S. economy really doing? It's really hard to find signal here. I'm getting so many mixed messages. Should we be worried about a recession? Number four, we talk about Powell and his quest to slay inflation. Did he do it? Is he going to lower rates on the back of this? And finally, we conclude by talking about the next potential events that could really move markets. Jim has some really interesting takes here, including takes

Starting point is 00:01:53 about the 2024 presidential elections. So all of the questions above and more were answered. In addition to all these, I even got Jim to talk about the recent crypto ETS. and he had a bit of a contrarian take on them. And maybe a quick spoiler alert. He's not altogether bullish on the crypto ETFs. So stay tuned for that. All right, let's get right to the conversations with Jim Bianco. But before we do, I want to thank the sponsors that made this episode possible,

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Starting point is 00:05:12 He's an investor. He's a macro research at Bianco Research. He's a friend of the bankless podcast. He's been a repeat guest a number of times because for David and myself, there's no better bridge between macro and Tradfi and Crypto than Mr. Jim Bianco. Jim, welcome back to bankless. Thanks for having me. Jim, you come to us at an important time, I think, because people are trying to figure out what the heck is going on. At least there's a number of questions in my mind about what's going on in macro,

Starting point is 00:05:37 what's going on in crypto. And so that's going to be the focus of the discussion. But this is really loosely organized by the most burning questions, at least in my mind. So we're going to probably hop around a little bit here if that sounds good. So the first burning question in my mind is this. and I think a lot of crypto investors and listeners are thinking about this. Why are stocks up, but crypto is not? All right. Now, this might be some recency bias. It's felt like this over the summertime doldrums in crypto.

Starting point is 00:06:08 So maybe you'll zoom out and tell us that, you know, it's about equal. But it feels like the NASDAQ, the QQ, the tech stocks in particular, are outperforming crypto. And we're doing that thing with, you know, the boyfriend and the meme kind of looking over his shoulder. and we're just like, hey, like, you know, the S&P looks pretty good right now, stocks look pretty good, what's happening to crypto? Do you have any explanation for this? Sure. First of all, let me say at the top, I actually think it's a good thing that crypto start becoming a little bit more independent from the Tradfai market. You know, you just don't want to basically hold out crypto is saying, hey, it's just, you know, a high beta or more leveraged play

Starting point is 00:06:49 on the Tradfai market because, you know, what are you? offering other than just more leverage, you can get that in Tradfai. So in some respects, it should march to its own drummer. Now that I've said that, what do I think's happening? TradFi's got a narrative. The narrative is AI. And the AI narrative is actually concentrated in the biggest companies, right, the magnificent seven companies. There's 62% of the QQQQ index, seven companies are, they're 33% of the S&P 500. Now, those concentration levels are some of the highest we've ever seen for a handful of stocks. I've got data back to the early 1960s, and I can't find another time where we've seen five stocks or seven stocks have this big awaiting.

Starting point is 00:07:35 Now, of course, what's happening is it's all around AI. And the center of the AI universe is NVIDIA. Invita makes the chips for AI. Here's something I think a lot of people don't realize. Where does AI get 50% percent, five zero percent of its revenue? Gets its revenue from five, companies. And who are those five companies? They're open AI, they're Microsoft, their meta, their Tesla. So it's like, it's all circular is what it is. Yeah. You know, Tesla has bought one billion dollars worth of Nvidia chips just this year. And so it's all because of their automatic pilot, their driving service, and they want to push AI down on that. And of course, with X2 and Gras. It's very expensive to do that. So it's got this narrative that AI is coming. It's going to be as big as the internet itself.

Starting point is 00:08:23 and everybody is piling into that. Now, the problem with that is it kind of sucks up all the oxygen in the room. Over here, you got the crypto guys going, a new financial system or a store of wealth, if you're talking about Bitcoin. Yeah, yeah, yeah, yeah, yeah. But I'm going for the new, you know, Internet 2.0 play, which is AI. And that's what's got everybody rushing into those stocks. So when you look at the S&P and you look at the QQQ,

Starting point is 00:08:49 understand that in the S&P, over half of the return has been seven stocks. Over two-thirds of the return in QQQQ has been seven stocks. And on top of that, a good third of the return in those has been NVIDIA alone. So that's the narrative that's been driving this. So if you're a Bitcoin Maxi, and you're saying, no, no, you want to buy Bitcoin. Make the case that it's better than NVIDIA, which is up 200% this year. And that's really what you're fighting with when it comes to narratives. If you're looking for people to move money into the crypto space, well, they recognize that the crypto space is a space of high volatility in wild returns. You've got to convince them to leave the AI space. The AI space has been making them a lot of money over the last two years, and they're very well

Starting point is 00:09:45 into it. So I think it really comes down to that narrative competition right now. You have to be better than AI, and it's been very difficult. Okay, so AI is just grabbing all the attention and therefore all the capital. I want to echo what you just said. I'm sharing a tweet here from Eric Baltunas, who points out that the top, just agreeing on your consolidation take here, Jim, the top 10 biggest stocks in the S&P 500 contributed to 77% of the index's total return in the first. And the first half of this year. And that is the second highest ever recorded of that number. The only time it's ever been higher. Can I make a quick comment about that? Yeah. Yeah, look at 2007, which was higher. Yes. But look at what the total return for the whole year was. It was three and a half percent.

Starting point is 00:10:32 You know, what's up with this? Yeah, so 77%. So the only time it was higher was, yeah, it's 2007. Right. But if it was only three and a half percent, what that means is that roughly speaking that the top 10 stocks returned you 2% in a 3.5% world. But look at 2024, look at 2023, which is an extension of 24, 24% and 15%. So those top 10% stocks are returning you a lot more than they did in 2007. So what does that tell you? So we've got the concentration of 2007, but we have better returns. Right. But you're just getting much bigger returns out of those top 10 stocks this year. Just absolute returns. You're getting much bigger returns. You're getting much bigger returns. than you did in 2007. In 2007, it was moment as a quirk that basically the stock market didn't even

Starting point is 00:11:20 outperform cash in 2007 because, you know, T bills were yielding 5% that year. And you could have made 5% in a T bill. You made 3.5% in the stock market. And you made 2% in the top 10 stocks. So a lot of people looked at that and kind of shrugged their shoulders. So what? It's not very exciting. But this year with these big returns and these big returns being concentrated with bigger returns, in the top 10 stocks, that's what's capturing everybody's attention. And that's what makes this year, and of course, last year's an extension of it, unique in anything that we've seen before. Okay. So in another year, I was just noticing as you were talking, that makes the top five is 1999. And I want to get your take for, like, just this chart here. What I'm showing on the screen is

Starting point is 00:12:03 kind of the NASDAQ from the 1980s. Of course, NASDAQ, we've used that interchangeably. If you don't speak TRADFI, QQQQ is a NASDAQ index. And we just see kind of like this chart. going absolutely, you know, we'd call this in crypto, maybe something close to parabolic. It's definitely up and to the right. And one year that I just referenced was 1999, and people look at this when it comes from a narrative perspective, said, hey, there's one big narrative that's just winning out, this concentration of stocks. It sort of reminds people of what was going on in 1999 with dot-coms. Even this element of, you know, Nvidia, where's it receiving its cash flow? Well, it's just a bunch of tech companies, right, like five of them, for instance, and you're pointing out that it's very

Starting point is 00:12:46 self-referential. That was going on in 1999 as well. I remember a stock, my early investing day is, yeah, I was still a youngster at this stage, but I was looking at that dot-com stocks like Yahoo. And Yahoo's revenue at that time, the late 1990s was like off the charts. It was amazing, right? It was just like growing so fast. And yeah, revenue was a real metric, isn't it? This is cash. Turns out a lot of that revenue was advertising revenue from all of the other dot-com. tech companies, and it was self-referential yet again. So there is kind of this question, right? It's like AI is going to be transformational. It's an incredible narrative. I mean, all of us have used AI tools by now. ChatGPT really is amazing. I'm running it on my machine. It's like,

Starting point is 00:13:27 you know, like an AI agent that I use on a regular basis. So there really is this transformation happening. But there's this question of, are we in a bubble? Is that why stocks have become discorrelated from everything else, in particular, these large tech stocks and the NASDAQ, what do you think about that when you hear the word a bubble? Is this chart, does this remind you of a breakout or is it a bubble? You know, that's a good question. I think we're somewhere in between. Let me explain. If you look at that 2000 peak on the chart, it doesn't look very big because it's an arithmetic chart. It'd be a bunch different if we put it on a log scale. But that said, that was 5,000 on the NASDAQ. That's what the horizontal dotted line is. When was the time that it really

Starting point is 00:14:08 broke through 5,000 was 16 years later. So when you basically made that in 2000 peak, it held for 16 years before the stock market, or at least the NASDAQ, made a new high. Now, what happened in 98-99 was people got excited about the entire idea that the internet was going to be on everybody's desk and it was going to be this transformational tool, which it was. And we started to buy anything and everything associated with the internet. And by the way, one of the leading stocks back then was Cisco, which made routers, the hardware for the internet, and where Nvidia is making the chips, which is the hardware for AI. So there's definitely been a lot of people pointing out that parallel as well. And so what the stock market is doing is it's pulling

Starting point is 00:14:54 forward future gains, you know, with adoption of the internet. It pulled forward so many of those gains by the end of 99 into early 2000, that it took the internet adoption 16 years to catch up. And so really what you're talking about is all the AI hype that you have now, yes, every single inch of that AI hype is going to happen. But is it going to happen in the next 12 months or is it going to happen in the next 16 years? Because if it happens in the next 12 months, then these stocks will stay at these levels. If this AI hype is going to take 16 years to unfold, then we might see some kind of a replay of where we were in the late 90s. Now, I tend to think that this AI hype is getting to be a little bit over that, yes, we will eventually get there. Look, 25 years later,

Starting point is 00:15:50 whatever the wild-eyed estimates were for what the Internet meant in 99 has been fulfilled. It just took a lot longer than we thought it was going to take. And that's the risk that you face with AI. You'll get there. But where the prices are now, you have to get there next year. Otherwise, there's going to be a massive disappointment with a lot of these companies. I think I hear you saying that, Jim, it's getting more frothy. It's getting more foamy. It's getting more bubble territory right now. And so is your radar going off towards the B word? Yes, it is. But if I could mix my metaphors and throw in a baseball analogy, I know what people say, when you say bubble, they say, okay, ninth inning, two outs, two strikes. Well, no, it still might be the sixth or seventh

Starting point is 00:16:35 inning, but it is getting, or maybe it isn't the ninth inning. But, you know, it is bubblelicious, but that doesn't mean, you know, go ahead, get a cup of coffee and then sell every stock that you own right now because it's going to crash this afternoon. It could still last for several more months or a year or two more, or maybe it's really there right now. So I don't know that part, but yes, it is getting definitely towards that B word. I mean, we could be over here on the charts. We could be like 1997 or something here, which did look like a spike up, but there was still a lot more to go on this chart. Exactly. I'm curious what your take is on stocks overall. And I was looking at this tweet on the Buffett Indicator. The Buffett Indicator has officially crossed 195% for the first time in history. It's higher than the

Starting point is 00:17:21 dot com bubble than the global financial crisis in the 2022 COVID crash. I'd remind myself what the Buffett indicator is. It's actually the ratio of total stock market to GDP, right? So GDP is the total economic output of the U.S. and it's taking a ratio of the stock market, all of the market cap of all stocks to GDP. It says in Buffett's eyes, this is the best value indicator. And here's the chart right here. And we could see it's all-time highs as of right now. And so this would indicate that stocks are expensive. They're overpriced, at least according to the Buffett indicator. But also, when I look at this chart, Jim, and it was this way in the late 90s, 2000s, the Buffett Indicator was kind of like unprecedented at that time. Now it's above 2000s. I look at this chart and I'm like,

Starting point is 00:18:07 okay, I see some overvalue here potentially. But also, it looks like the metric is kind of broken because we've been overvalued for a very long time, at least since the start of quantitative of easing seem to start to pump all asset prices. So what does this mean to you? Like, is a metric like this even useful in trying to assess the relative value of stocks versus everything else? It is, but you has to put it in context. By the way, think plan B stock to flow. That's what this is. You know, it's basically, you know, the size of the stock market, GDP is flow, but it's stock to flow for the entire U.S. economy. And what it's basically telling you is the stock market is at overvalue.

Starting point is 00:18:49 range. Now, one thing you've always got to remember is valuation is never a timing tool in that, so you can be overvalued and you can be overvalued for a long time. So what good is a valuation tool. It tells you when the correction comes, it's going to be very painful. Because if you start a correction from a very overvalued place, it's going to go down a long way. If you start a correction from a not overvalued place, to use bad English, it's not going to correct this. much. So what this indicator's telling you is, yeah, everything's fine. You're making money. You're making money. And then be careful because if you're not paying attention, you might wind up losing two-thirds of your value because there could be a very stiff correction coming at some point in the future when the

Starting point is 00:19:36 stock market turns. And I'll end this idea with, by the way, who is a big proponent of the Buffett indicator? Is Warren Buffett himself? Warren Buffett currently is largely defensive. And I'll end this idea. He owns 3% of all treasury bills that the U.S. government is issued. Really? Yeah, I mean, he owns more than central banks do right now. He is positioned that he is so worried about the level of the stock market right now. He is hiding in – he's getting 5% a year in treasury bills, so it's not like he's getting nothing. Sure.

Starting point is 00:20:10 But he has definitely been very defensive and hiding, and he's really well away from the stock market. Basically, what Buffett is thinking, you got to remember the way Buffett is thinking, yeah, I like this company and I like that company. And I think I'm going to be able to buy it 40 or 50 percent cheaper in the future. So I'm going to hide away in cash. And then when they all crack up and fall in half, then I'm going to swoop in and buy them. Maybe it's a couple of years from now. Maybe it's later this year. But I'm 92 years old. And I learned how to be patient. That's kind of the way that Buffett thinks about things. So do you think he's right? I mean, to wait? He's Warren Buffett because that's the way he's operating for 60 years. Yes, I mean, I think he is right, but he is of a unique style that everybody wants to emulate, but very few can. Warren likes to say, you know, you should buy stocks or buy a stock index like SBY, and then don't even look at its price for five years. There's only one person who's ever existed that can do that, and that's Warren Buffett. The rest of us can't go five minutes without looking at it. So his style works, and his style works for him, and others have tried to emulate it as well. So I think, you know, for the long haul, I think he's probably right. But for the rest of us, do we really want to be that patient? Do we really want to take that kind of approach? We would like to.

Starting point is 00:21:29 You know, it's kind of like, you know, we'd all like to improve our diet and exercise more and lose a couple of pounds. But it's hard for us to do it, just like it's hard for us to emulate Buffett style. Well, something else I was mentioning. So we've had high rates, high-ish rates for a while now, which is, to Buffett apparently getting up to 3% of all treasuries, which is incredible to me. I was looking at money market funds. And this is a source where I keep some of my value. I'm excited about, honestly, treasuries these days at a 5% yield relative to other things. And this is a money market

Starting point is 00:21:59 fund assets reaching a new record. There's about $7 trillion in money market funds. And what's happening is, I think, like if you think about a small retail investor, they're looking at their Wells Fargo savings account. It's delivering like, you know, 0.25%, something just like, it's not even worth it. And some of that cash is bleeding out into money market funds, into treasuries. But the overarching tweet here is money market funds are at an all-time high. What do you think is going to happen if Powell starts increasing the rates again? Well, that capital will leak out of money market funds, leak out of treasuries, and back to risk on assets, back to stocks. And so we will get another pump into the stock market and risk

Starting point is 00:22:42 on assets as the interest rates decrease because, you know, people will be in search of, I guess, yield in other locations. What do you make of what's going on with money markets, bonds, treasuries? And could this be a positive catalyst for some of the assets that we were talking about? Maybe, you know, pump the bubble to new highs. Yeah, it can be. But let's put this in the Tradfai perspective. You know, what do most Tradfai investors think that this stock market is going to do. Well, let's look at the book, Stocks for the Long Run, written by Dr. Jeremy Siegel. He put out a new edition of the book last year. And in it, he said, what is the long-term return potential for the stock market? That it's about 8% a year, right? It could be 16% one year,

Starting point is 00:23:28 or zero the next year. But usually you should get around an 8-ish percent return. Historically, that's been the case. And it makes sense why you should expect that in the future. Okay, so most trad-fi investors go into the stock market, go into structuring a portfolio, either by themselves or with a wealth manager, thinking I want to get 8% a year is what they think. I know that most Gen Z and younger millennials go into crypto thinking I want to get 8% a day, but you've got to keep in mind that that's their mentality is that they want to get about 8% a year. Okay, then they look over and they look at a money market fund. and they say, okay, that's yielding, the average money market fund in the United States right now is yielding 5.3%. They go, wait a minute, isn't that about two-thirds or 70% of that 8% number? And a money market fund has a net asset value, its price, is $1 every single day. It has no risk

Starting point is 00:24:24 because it just has the same price every day. And they go, okay, I'll take two-thirds or 70% of what I should get out of the stock market without any risk. And that's why you've seen this big rush in the money market funds. And you're right, it is not going to stop until interest rates are cut. And then you could scream that word that we used to use before the pandemic called Tina. There is no alternative. You've got to get your money back in the stocks. But it's going to take more than one cut to get that money out of money market funds. It's probably going to take three. It's probably going to take three or four. And we are now talking about potentially the first rate cut coming in the middle of September. The second rate cut, maybe, maybe towards the end of the year. And we can talk about

Starting point is 00:25:17 this later, but I'm a little bit more hawkish. I don't think the Fed's going to cut as much as everybody thinks. But when are we going to get those three or four rate cuts? It might not be for another year or so, unless the economy goes bad real fast. So, yeah, this can be a source of funds to push into riskier assets, but not for several months or maybe a year, assuming we get those rate cuts, as everybody points out. I might add, if I was here in January, we were talking about Fed's going to cut rates six times in 2024. Well, here we are now in the middle of July, and they still haven't pulled the trigger. So it's easy for us to say, yes, they're going to cut in September. and yes, they'll cut one more time in December.

Starting point is 00:26:04 But let's all remember that the people that are saying that have been wrong for eight months. And now eventually, if they just keep saying forever, the Fed's going to cut, at some point, they're going to look like Nostradamus because they will cut. But that's the issue that, you know, you have to face is that we're going to need lots of cuts before we could really start turning to those people and say, you don't want to get 4%. You want to get 8 in the stock market. So then you might start to see some movement. But right now, I don't think that money's going to move at all. If anything, I think as the line shows on that chart, it's going to keep going up over the near term, the near term being the next couple of months.

Starting point is 00:26:40 All right. And I said we were going to jump around a little bit. And I do want to get into inflation and Powell and what the broader context of all of this that's going on is. But before that, let's jump to crypto really quick. Because my starter question was, why are stocks outperforming crypto? And we talked about this story around stocks. And I think you gave a reasonable exploit. as to why stocks are outperforming so hard. But crypto, why has crypto been underperforming? At least in the last couple of months, it's been flattish underperforming. So let's talk about the crypto story. And I want to maybe ask in the broadest way, what your base case prediction for crypto this cycle is? I would say for most bankless listeners, let me describe the base cases. We're in another four-year cycle, right? We've had three of these before. This is the four. and so we're expecting something like the other three, right, where we get the seasons in crypto, we get winter, we get spring, we get summer, we get fall, and we get winter again, right?

Starting point is 00:27:42 It's, you know, four years, four seasons. And we are maybe somewhere between spring and summer. Maybe we're in summer, we're just in the summer doldrums, but we're still in a bull market and the best is yet to come. Our friend Raoul Paul calls this a banana zone where he thinks things are going to, you know, like shoot up as they have in other stuff. cycles. So that's probably the base case prediction that most crypto natives have been thinking about. This is another four-year cycle. And of course, these cycles don't play up only. It can get slow for times,

Starting point is 00:28:12 but we're still in the bull season. We're still in summer, entering summer, something like this, and the best is yet to come. What is your base case prediction for crypto, let's call it this cycle? So I tend to agree with that. You know, I think we're kind of, you know, late May and the weather's a little bit below average and it's raining out, but, you know, summer is still coming. And I am generally bullish on the space. And my maxi friends on crypto Twitter are still trying to rip my heart out because I've been saying some not-no-nice things about the ETF. Let me explain my position. Okay. I'm on the bankless podcast, which is the perfect place for me to explain this position. I look at crypto and I look at the entire space and I say, this is, this is the perfect place. I'm

Starting point is 00:28:58 the creation of a new financial system, a permissionless digital financial system, decentralized as well. As long as the space continues to move in that direction, I'm all in, and I still am all in, and I am bullish on the space. But when you start getting deviations from that, you know, and I'll piss off some other people here, one of those deviations might be Solana, because I'm not so sure how decentralized it is. Convinced me, guys, that it's decentralized, is what I want to say, because I'm skeptical of it. Another one is what's happening with the ETFs.

Starting point is 00:29:38 The ETFs, the 10-spot Bitcoin ETFs, have come out, and as a group, they have been the most successful launch of an ETF in terms of new money coming in in history. But what is that new money that's coming in? Now, a lot of the Bitcoin crowd has just decided that it's the Greenwich Country Club calling their wealth managers saying, put 5% of my net worth into the spot Bitcoin ETFs. And what we're learning is it's nothing like that at all. You know, it is all the institutions adopting it.

Starting point is 00:30:12 Yeah, there's a handful of exceptions, but it's nothing like that at all. It's coming from largely two spaces, the money that's going into the ETFs. It's coming from small retail momentum players. I used to call them DGens. I'm going to stop calling them DGens because I realize that that's a inflammatory word, and I don't want to get hung up on that. And most of it is coming from on-chain. Crypto-Quant J.P. Morgan have done some analysis that at its peak, $16 billion has gone into the ETFs.

Starting point is 00:30:43 Where has that money come from? Their estimating $13 billion of it was on-chain in a wallet, and they just moved it back to the regulated brokerage account, and they bought Larry Fink's magic ETF. If that's what we're doing with these ETFs is we're giving people an incentive to get off on chain. It's too hard to do your taxes. It's too tough.

Starting point is 00:31:04 I don't have to remember that. You know, Eric Balcunis tweeted out that no one's got time to remember a 12-word seed phrase. The ETF fixes that. Yeah, well, that's the end of the crypto space. If we're all going to just say, screw the L2s and screw all the dexes and screw all the electronic wallet,

Starting point is 00:31:22 And sorry, MetaMask and everybody else. We're going to just all go back into our Schwab account and we're going to buy Larry Fink's ETF. We're not going to get there. And that's what my concern has been is that we're going in the other direction. It should be a wake-up call that at devs. That is, you know, I've been in this space since 2017. And I would argue to you, it's 100x easier to traffic in the digital space now than it was

Starting point is 00:31:47 seven years ago. But for most normies, it's still impossible. even Coinbase is impossible for them. They're just comfortable in their current TradFi account, and they want to buy the facsimile of crypto, which is the spot ETF. But again, if you want to go the next step, you need to develop a whole ecosystem. And in order to develop an ecosystem, you need to get people on chain. And the ETFs are not the gateway, oh, yeah, we're going to take a bunch of normies and they're going to buy the Bitcoin ETF, and they're going to get comfortable, and then they're going to research it, and then they're going to open up an electronic wallet, and it's going to be the gateway

Starting point is 00:32:26 to get them in. It's the opposite. It's the gateway to get them back into TradFi. And if the argument is going to be that crypto is going to go to the moon, because we're going to allow Larry Fink to swallow it up and Gary Gensler to regulate the ownership of crypto through the ETFs, yes, the issuance of crypto through the decentralized blockchain may exist. But if you're going to, to allow them to regulate the ownership of it, they own you. They own you. They're going to make all the rules on you. And we're never going to get to that space. So I think really there's two problems here. Problem one is the net new money that's coming into this space, which is holding back the price,

Starting point is 00:33:07 isn't as great as we think it is, that the ETFs are just showing us that it's a giant swap, people out of their electronic wallets into their regulated brokerage exchanges. And two, if that's indeed the case, we're kind of going in the wrong direction here. We want to get more people comfortable with using these decentralized tools and using these on-chain tools and learning how to use that system. And so that's what I think is kind of holding it back. The biggest example might be, you know, the week we're recording, recording on July 12th, a billion dollars has come in, a one billion dollars would have been, has come into the spot ETFs this week. And the price hasn't done anything. Now, why isn't the price gone anywhere if a billion dollars has come into those ETFs?

Starting point is 00:33:53 Because obviously, somewhere, somebody out sold a billion dollars. And that's why we've kind of gone somewhere. And maybe some of those people that sold that billion dollars, maybe that is that they're moving, you know, from on-chain back into the regulated account. That is the issue that we have to deal with, is that it isn't the great, you know, adoption tool that everybody was hoping, that the boomers are coming. You know, I've heard Dylan McClare and a lot of people say, the boomers are coming, the boomers are coming. No, they're not. They're playing golf in the Greenwich Country Club and they're yelling at their wealth managers that they don't own enough in V-Vidia.

Starting point is 00:34:27 In Bitcoin, yeah, yeah, just get me in Nvidia. That's really the conversation they're having with their wealth managers. They're not really having a Bitcoin conversation with them right now. And so that's really where the problem faces is that it's stuck behind that AI narrative. and most of the money that you're seeing that you think is coming in is really on-chain money moving back to regulated accounts. That's a really good take. I definitely share many of your concerns that you stated here, Jim, particularly around kind of like the centralization vector that this could be. I do think that the Bitcoin ETF in particular could struggle for this more than possibly the Ethereum ETF, just because there's less to do on Bitcoin, right? It's a more custodyed asset. But this is also a trap for Ethereum as well.

Starting point is 00:35:11 And to your point, from 2017 until now, it has gotten easier to use crypto. I would 100% agree with you. It's gotten 10 to 100x easier. And yet, it is still not ready for my parents, let's say. It's still not ready for our grandmothers. Like, it's still very difficult. We haven't solved some of the key UX issues. And we're just now unlocking transactions that don't cost, you know, hundreds of dollars

Starting point is 00:35:36 or tens of dollars, right? We're just unlocking that. We still haven't fixed wallet user experience. like there's so much more to fix here. So while the ETF stuff is cool in a way, I guess your message is be cautious, this is not going to be the thing that takes crypto to the moon. I want to ask you about other TradFi involvement and whether you think this kind of carries through. I guess, you know, one thing that Tradfai is doing as well is getting on the tokenization bandwagon, right? And, you know, one thing that has been tokenized from 2017 up to now, and it is growing that I think you've been

Starting point is 00:36:09 bullish on in the past, is stable. coins. And I remember you coming on bankless and being worried, maybe this was in 2022. You were a little bit worried about crypto and D5 because you saw the supply of stable coins just kind of like halting and like starting to go down. And so some of your warning levels were flashing because, you know, you saw at the time stable coins being sort of a source of liquidity for DFI. Stable coins are now back to all time high. This is a chart from Visa. So we're back to all time high. As of today, there's about, let's see, $150 billion worth of staple coins on chain. Not all-time high by much, but it has grown since the previous bare markets.

Starting point is 00:36:50 What's your take on stable coins? You know, tokenized treasuries are now at $1.3 billion, and, you know, the Biddle Fund from Black Rock has a push. You can hear all of these, like, Tradfai institutions talking about, you know, tokenization like Larry Think, et cetera. Do you think that is bullish for the space, or do you have the same critique? that you just gave about the ETF? No, I think that that's really bullish for the space,

Starting point is 00:37:14 because that's what you want. You want adoption. You want on-chain adoption. And you want people to, when they get on-chain, as opposed to what Bitcoin is, you know, I'm done. I'm just going to custody this and wait for a number to go up. That there's things you can do. You can lend it.

Starting point is 00:37:27 You can borrow it. You can stake it. You can transact in it. And so as these stable coins start to appreciate in value, I think, you know, you're going to start to see more defy. You know, you're going to see more TVL in defy. and you're going to start to see the space offer alternatives for people to start looking at either adopting it as a merchant, maybe I'll accept payment in a stable coin, or as a user that I can use these

Starting point is 00:37:54 stable coins and the defy space to do more things. I think one of the biggest issues that we struggled with, you know, in 22 and in 23 was, you know, one of the biggest stable coins out there was UST. that blew up. And then we had USDC, you know, USC had presented itself as the safe, mature version of a stable

Starting point is 00:38:21 coin, and then it got swallowed up in the Silicon Valley Bank issue where it had a bunch of its assets with Silicon Valley Bank and it briefly broke the buck down the 88 cents. Now, it recovered because Silicon Valley Bank never held back their money, but it scared the hell out of a lot of people.

Starting point is 00:38:37 It was very damaging for their reputation. is what it was. Along those same lines, if you remember during the winter of 22 and 23, if you talk to any trad-fi person, they all had the one trad-fi trade of all trad-fi trades, was, I'm going to short tether. And it was like every coin fell 90%. I've forgotten about that. Yeah. Every coin, like every coin fell 90% except tether. So they found the one coin that short that didn't go down during that period. Well, you know, and it was Chinese, you know, you're going back to asset flashback to bad memories, right? Remember, it was the Chinese commercial paper that they wouldn't tell us all about and everything.

Starting point is 00:39:17 They've kind of worked that issues out now. And they're kind of leading the charge in terms of stable coins coming back. So Tether has got that big first mover advantage. It was the first stable coin. It seems to be back ongoing. So if stable coins continue to go, think of them, you know, it's the dollar. It's a dollar in the crypto space. It opens it up for a lot more tokenization, transactions, lending staking, trading, everything else because you've got this $1 stable token that you can use. And I think that could really lead to a lot of more adoption in the space. So I'm very high on that idea that finally that stable coins are starting to come back and they're starting to come back in the right way. and that hopefully we're going to see that long-haul adoption and then all of the ecosystem around

Starting point is 00:40:10 them continue to grow. Yeah, I agree. So this is still a metric that you pay attention to then. It would be great to see this at rather than $150 billion, you know, $500 billion and closer to a trillion and tokenized treasury is taking a similar trajectory. Coming back to the ETF story, one of the interesting things, I got to say the Ethereum ETF sort of caught us by surprise over the last couple of months. I don't know if you were anticipating that. I thought there was a chance, but it was more like a Hail Mary pass. And then suddenly, on one particular day of the week, we got this note from the SEC, I think it was a Thursday, that the Ethereum ETF was approved, right? And so that's interesting. You've given your comments about kind of like the ETF itself.

Starting point is 00:40:51 But what it also, you know, portended was a political shift that I think has been happening in the U.S. And, you know, of course, in the U.S. we've had a lot of regulatory hostility towards crypto. We've had, you know, the banks being choked off in crypto. We've had aggressive regulators, the Gary Gensler's of the world coming out against this industry, trying to, like, choke it off in various ways. And then there was this, I guess, you know, light shining through the clouds of an Ethereum ETF out of left field being approved. Now we're at a place where crypto, it seems, has become a 2022 political issue. We've got Donald Trump now speaking at a crypto conference. We've got increased pressure on Democrats as well on like being less crypto hostile. I saw this from Hayden Adams,

Starting point is 00:41:39 a Democratic representative Ro Khanna organized and moderated a roundtable around Defi with Hayden Adams and Uniswap and Mark Cuban was there. So they're starting to be receptive. The Republicans have come out with the GOP platform policy. This is like their policy paper. They had a section under innovation, championing innovation. There's a paragraph on crypto that reads pretty well, actually, Jim. So it says Republicans will end Democrats unlawful and un-American crypto crackdown, oppose the creation of a central bank digital currency, will defend the right to mine, Bitcoin. This is my favorite part. And ensure every American has a right to self-custody of their digital assets, the right to go bankless as part of their platform,

Starting point is 00:42:22 and transact free from government surveillance and control. Now, of course, politicians say things, and there's political platforms. The difference between that is also a follow-through and how much can you really, you know, I don't have to inject cynicism, political cynicism, into our audience. I think they already have that. But we have seen some political wins change, and that has been part of the Ethereum ETF story. Do you think that is a bullish catalyst for crypto?

Starting point is 00:42:48 And how do you take all of this news? Well, when it was approved, I did. I tweeted out that I thought it was extraordinarily bullish. Remember, the price of, I think, ETH was up like 20% that day, you know, the day that it was approved. And it was more about not that the EETF is coming, that that was going to be transformational, but that this whole argument about whether or not proof of stake is a security is blown up if the SEC approves, you know, an ETH ETF. Because you can't tell me that ETH is an unregistered security because it's, you know, proof of stake. And oh, by the way, you could then approve an ETF that trades on it.

Starting point is 00:43:25 Exactly. It's almost like an admission that you're giving up on whether or not it is an unregulated security. And so that's really the approval of that ETF was really that a lot of the regulatory uncertainty was, you know, resolved all in that one spot. And I think it's definitely moving in that direction. You know, you're right. Trump is speaking, I think, next month or Bitcoin Miami is when he's going to speak. And the Democrat Party trying to appeal to younger voters is all of a sudden gotten a lot more, you know, open to the idea of crypto. But I hate to put the cynicism in. If Liz Warren gets reelected, and if the Democrat Party, maybe it's Biden or whoever, gets reelected and Liz Warren's there, I wonder what their position on crypto will be

Starting point is 00:44:16 in 2025. I feel fairly confident that the current position, of the Republican Party on crypto, win or lose, will be the same position that they will have in 2025, or roughly the same position that they will have in 2025. But nevertheless, definitely the move towards allowing this asset is underway. And what's also helping is things like these ETFs and tokenization, that these big companies are not just sitting around going, it's a bunch of tulip bulbs and no one should touch it and stuff. They're getting involved. And if they're going to get involved, they're not going to want the SEC and the Treasury and the Federal Reserve to basically shut down this new business venture for them. So I definitely see us

Starting point is 00:45:03 moving in that direction. You're right. We've got to get the UIUX better. We're getting some more clarity on the regulatory front in this country. So that's why I said I'm very bullish on the long term that we're moving in the right direction. The current Trad system, which I've been in for 30 years, more, actually closer to 40, is ripe for disruption. It needs to be disrupted. And I think the crypto space is how it's eventually going to get disrupted. And hopefully it will. And I think a lot of the players in that space are no longer trying to fight that disruption,

Starting point is 00:45:42 but they're trying to say, look, let's play along with the disruption. You know, they watch the newspapers, try and tell everybody, don't go get your news from the internet. You want to continue to pay us a dollar a day to buy your local newspaper and we'll tell you what you need to know. And that didn't work out very well for them. So they're not going to try and do that with the current trad-fi system. They're going to try and move along with it. So we are going there in fits and starts. And I'm very bullish on this space long term.

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Starting point is 00:48:06 easily onboard to the extension using the Uniswap mobile wallet to begin managing your assets across platforms and take advantage of smooth, seamless synergies with the Uniswap web app. So go and sign up for the Waitlist today and download the Uniswop app and claim your free username to get added to the extension waitlist. The Uniswap extension is available later this month to everyone. Just another way Uniswap is helping you swap smarter. Okay, so let me inject some cold water into our bullishness just to make sure we're steel-manning the alternative case. So you think it's something like maybe it's May, for example, in the crypto cycle, where at the beginning of entering summertime in another four-year cycle. So new all-time highs, like Bitcoin going up.

Starting point is 00:48:46 I don't know if you have price predictions on this. Maybe we can get to that at the end of the episode. But significantly, ether going up significantly, long tail of crypto assets going up significantly. But what if that doesn't happen? And let me give you some takes on why it might not happen. So the negative signals in crypto, retail really hasn't come yet. this cycle. Very much seems this way. If you look at kind of like coinbase traffic, other indicators, retail is not fully here. I mean, it fits and starts, you see them and like doing things in

Starting point is 00:49:16 meme coins, but mostly that's like PVP, like crypto. It's just the crypto natives being bored and just doing meme coin shenanigans. We also don't really have a killer breakout app this cycle. You know, previous cycles were discovering defy for the very first time. We're discovering NFTs. and what's the equivalent for this cycle? We haven't yet seen it. And I think there is this underlying almost like nihilism, cynicism that pervades the space, even among the multi-cycle crypto-natives, you know, like somewhat, but also just like in general, if the outside looking in, but crypto's just not going to live up to the hype. It's not like AI. It's not going to be transformational. It's just a giant casino. You know, Bitcoin's 15 years old,

Starting point is 00:49:59 Ethereum is nine years old. You'd think they would have figured it out by now. You'd think the cases would have emerged faster and they're just not. So maybe this is kind of a casino and a small niche, not what all the crypto bulls thought it would be. Obviously, this is not my perspective. This is not the bankless canon perspective. But let's steal man this argument here a little bit. Like, do you think there's any merit to this? There's a lot of merit to all of those arguments. And that's why I think that this has been taking such a long period of time to unfold. The biggest merit in that argument is that crypto tends to want to focus on the casino aspects of it. You know, everybody wants to talk about price predictions

Starting point is 00:50:37 number go up as opposed to, you know, take the AI thing. When you talk to people about AI, they are going to tell you what AI is going to do to revolutionize the world. And when it does that, don't worry about Nvidia. Its price will make you wealthy. So we're not talking about NVIDIA number go up. We're talking about what AI is going to do for the world. It's what crypto's got to do. what's crypto going to do for the world, as opposed to talking about when are we going to have the next wedge breakout to, you know, some kind of projection in the price. Now, I actually think that what might help that is some of the tradfai firms coming in. Because if they're going to bring a mentality to this space, the mentality of this space is not going to be that we need to get Bitcoin above a hundred and then we're going to fomo everybody for the next hundred. No, their argument is, How are we going to get everybody to start using this as an alternative to the U.S. dollar in the current trad-Fi system, either as a store of value or a medium exchange and or is at some transaction level? That's where they're going to start to push real hard. And I think that once they start doing that, I think that you could definitely see the price go.

Starting point is 00:51:52 And you're absolutely right that every big major pump in crypto comes from new innovation. in 2020 summer, Defy Summer, 2025s, 2024, I think the killer app for 2024 was supposed to be the ETF, but it really hasn't played, it's not a negative, the ETF, other than maybe it's dragging money

Starting point is 00:52:15 from on-chain back into the Tradfai world, but at a minimum, it's just not living up to the hype because every killer app, whether it is Defi or an NFT, drags more people in to the, on-chain world. The ETF is not doing that. And that was supposed to be the killer app at the beginning of the year. So now we're waiting for something else to come along that might be the killer app. We're talking more about tokenization. I think tokenization of treasuries might be a very interesting one.

Starting point is 00:52:45 You know, the treasuries got a lot of debt. They got an issue. And if they could find other ways to get other people involved in it like tokenizing treasuries on chain, that could be very interesting as well. I know a lot of people are pushing real hard to get into this space. in a tokenized way. So maybe that will be it. But I agree with you that part of the mentality of the space has got to be we need to get everybody to use this alternative financial system. Part of the problem with Bitcoin is they think we're done. We've created the perfect instrument. Now we're just going to wait for everybody to figure it out and arrive. They're working there too with L2s and NFTs in that space and they need to continue to develop that out as well.

Starting point is 00:53:27 and that has some very big promise. But along the way, we all then get trapped into, you're right, we get bored, we play with meme coins, or we talk about breakouts and technical analysis and all of that other stuff. And we talk about FOMO. FOMO is not going to get anybody really in. Really, if you look at NVIDIA, the FOMO around NVIDIA is not necessarily the price breakout, but the narrative. I get it. It's going to be the biggest thing since the internet. bigger than the internet. And I saw what the internet did to transformize the U.S. economy and what it did in the early stages for all those internet stocks. I'm in. Whether or not it's breaking out or whatever, I'm in. That's how you got to get people into the crypto space. Not just talking about whether or not

Starting point is 00:54:14 we're going to get to 100,000 and FOMO in everybody after that in Bitcoin. But what does it do? What do we do with it other than custody it and wait for the price to go up? And that is, is where I think the space is going to have to keep going. It's very close. It is very close to being there. As we mentioned before, right, the UIUX is 100x better than it was seven years ago. It has to get better for, like you said, my mother, your mother to, you know, want to give up their Schwab account and move into this space. But it can. It can get there. You know, it's getting there, but it's got to continue to work towards that. It feels very much like we are six to 12 months away from that, but also that, like, it could take a long time. Like, we could be perpetually six to

Starting point is 00:55:01 12 months away from that, like, in a way, if that makes sense. Because, like, there are, I mean, layer twos are fantastic. We've got this path to on chain now that we didn't have last cycle, which is kind of the coin base and the ego directly to the base chain and the wallet experience is just, like, fantastic and your apps are there. We just haven't really connected that with retail yet. And I do wonder if, like, just flushing up the steel man on the bare side a little bit, coming back to this NASDAQ chart, and we were talking about the internet being, you know, that 1999, 2000, the bubble, all of the wireless streams of the internet eventually came true, but there was this dark period of building, at least from an asset price appreciation.

Starting point is 00:55:38 A lot of building got done, but the assets didn't reach highs again for 16 years. I'm not saying we're going to be 16 years in kind of the dark ages with respect to crypto, but it could take a little bit longer than last cycles. It is a take here. I'm still a believer in the base case four-year cycle. You know, just like wait for it. It's going to happen just as it always has. But there's a part of me that wonders if it's going to take a bit more time because we have

Starting point is 00:56:05 some building to do first before we reach kind of all-time highs and it go back to the moon. What's your take on this? Yeah, I would agree with that. And I would also say, too, that as far as some of the building goes, I think that there needs to be a bit of a different mentality about the building. A lot of people in the space kind of, for lack of a better word, take a gaming mentality, right? Let's just get 1.0, 1.0 out there. It's a little bit buggy. It doesn't work right. And we'll kind of fix it with 2-0 and 3-0 and 4-0, and eventually we'll get it right. All right. If I'm playing World of Warcraft, then I get the blue screen of death. There's no big deal.

Starting point is 00:56:39 But there's two industries you absolutely cannot do that with, and that is money in health care. You cannot put out a buggy 1.0 decks or buggy 1.0 bridge or a buggy 1.0 wallet. We saw that in 22 and 23 with all of the hacks and the money lost. And not understanding, maybe the space didn't understand from the Tradfai space, the tremendous reputational damage that that did. In that even if, like the Salana going down a few months ago, I went down for a couple of hours and totally just kind of joked about it online on X. Understand that people that are looking at Solana and thinking about Salana and hear that and see him, it is tremendously damaging to the reputation of it. You cannot go down ever one time ever. And if you do everybody, Associated Wants should be fired and they should bring in new people and tell them you can never, ever go down.

Starting point is 00:57:39 It's just like with health care, you know, and Theranos, you know, you can't just throw this out there and it doesn't work, people die if you do that. You could do it in the gaming industry. You can do it if you're trying to put up a blog. You can do it in some of those other, because no one dies and no one loses all their money if you screw it up. And so hopefully when the building comes, and we've gone, you correct me here, but we've gone through a pretty long period here now without any major hack problems or any reputational damage in the crypto space recently. We got to keep this up. And, you know, my fear is, is that we get into another mania building phase and then everything

Starting point is 00:58:18 kind of goes sideways again. And it just, you know, scares the hell out of people that they don't want to put their money in that space. So this is part of the, understand the space that you're in. You know, if you're going to build in this space, you're asking people to put their money in this space. It can never go down. It can never get hacked. Ever, not once, ever. And it can never cause a problem for anybody. That's the one thing the Tradfai space does for you, is that it promises you it will never go down. It will always be there. And if it does go down through an act of God, they'll make you whole, even though they don't have to. And so that's really where the space has got to really start to think about things. I think that's a great take,

Starting point is 00:59:05 Jim. One example I saw earlier this week is this company called exponential, which is kind of cool, but they basically are exposing different defy yield type opportunities, but they're doing it in kind of a unique way, which is like they're actually showing you the risk-adjusted rate of return. So they're doing risk profiles. You know, you can get defy yield in all these various places, compound, Aave. But, you know, in 2022, people were getting this in Taraluna. And it promised, you know, 18 to 22 percent yield. returns and what terrible user experience when you expect to get 20% yield on a stable coin that shouldn't go down, you find out not only did you not get those returns, but all the wealth that you put into this thing dropped to zero. There's an element of this gym where I think we have

Starting point is 00:59:52 to get better around education, showing investors risk versus reward, and funneling them into the right place. Like we need some safety rails around this, the type of safety rails that TradFi has. And that's just going to take some building, honestly. It's going to take market demand, and it's going to take some building. But I think you're right, the approach to the space has to be different because crypto builders tend to play pretty fast and loose and fairly short-termist. So this might take some time to play out. Jim, I want to get back to inflation as a topic. So there was this good news on inflation this week. At least I think it was good news. So has inflation cooled? What was the news, by the way? It was inflation.

Starting point is 01:00:34 Was that, what, like a low for the month, like lower than analysts expected it? Yeah, so the June consumer price index was reported on January 11th. And it came in as a decline of one-tenth of one percent, its first time at four years, that the number is actually declined. So what that measure is telling you is that prices from May to June in the entire U.S. economy fell slightly. Or if you want to, you know, round it. There was basically no price rise.

Starting point is 01:01:04 And May was also zero-two. So you had two months in a row of zero and negative a tenth. And that has brought the overall level of CPI measured inflation down to 2.97, round to 3%, which is the lowest it's been this cycle. Now, a year ago, June of 23, it was at 3.05, and now it's at 2.97. So inflation seems to be moderating in that low 3% range. This has got people thinking, that we're finally on that path to that Fed target, the Fed targets inflation at 2%, that we're going to finally get inflation to go down to 2%, and that's going to allow interest rates to be cut several times. So that's really what happened in the inflation numbers, and that we're hoping that this big rise in prices that we've seen is finally starting to moderate. Now, quick word about that. Since 2020, and I'm using the end. of the recession, not necessarily the election. The end of the recession was April. The average price of something in the U.S. economy is 25% higher. So whatever cost you $100 to buy four years ago, cost you

Starting point is 01:02:16 $125 today. Now, the average paycheck in the U.S. economy is up about 18 to 20% over that same period. So if you're an average paycheck, you have to shell out more money today to get the same things you could have gotten four years ago. This is why when you look at presidential approval ratings in polls, they say, what is the number one issue in the economy? Inflation. And they're very mad at the president because they think that inflation is very high. And Axios had a great graphic, and they showed the year-over-year inflation chart where one up to 9 percent. it's back down to three. And they said, this is the way economists look at inflation. It was high and it's coming down. And then they showed the cumulative rise of inflation going like this. And they said,

Starting point is 01:03:06 this is how Normies look at inflation, is that the prices went up a lot and they never really came down again and that they're still paying higher prices. So that's the rub there. Now, where do I fall down at it? Warning, I have an unconventional view. I don't think that the inflation rate at 3% is going to go much lower from here. I think that it's going to sort of bottom out, and I've been arguing for years now, it's going to stay in the 3 to 4 percent range. It's at 3 percent now, 297. It's at 3 percent now the lower end of that range. And I don't think it's going to go much lower than that. That means that all those price gains that we've seen over the last couple of years are going to stick around. That means that the Fed, while we're talking about a September rate cut, is going to find it very difficult to actually get that

Starting point is 01:03:53 rate cut done, and once they get that rate cut done, if they do it, to do multiple ones after that. Why do I think that the inflation rate is going to stay sticky? It's supply and demand. There's a giant demand for things in the economy, services, goods, and everything else, buying them up, keeping the prices elevated. Where is that demand coming from? Two sources. The first, the biggest source is the U.S. government itself. The U.S. economy is 30, trillion dollars. That's how much there is in turnover in the economy. You know, us buying stuff and getting paychecks and everything else. Add it all up, it's a 30 trillion dollar economy. Who is one-fifth of that number, 22%, to be exact, the federal government, they are six trillion

Starting point is 01:04:42 of the 30 trillion dollars in the U.S. economy. And that 22% is one of the highest numbers we have ever seen in American history. The only other times it's been higher was the COVID response when we shut down the economy four years ago in World War II. Typically what the government does is when we go into recession, the COVID response, they spend a lot of money to stimulate the economy to get it out of recession. Okay, we did that. Then when we recover, they're supposed to stop spending money because the economy can kind of continue on its own. They haven't done that. And that's why we've got these giant budget deficits, and we've got all this government spending, and that is going to keep prices higher. The second thing is more psychological or ephemeral, and it's the mentality of the

Starting point is 01:05:30 American consumer. The American consumer is spending more money now. They spend money now. I've heard it being described as PTSD from the shutdowns. It was like a near-death experience. The economy is going to collapse. My job is going to go away. Well, damn it, I'm just to take whatever I got left and I'm going to go to Italy and I'm going to enjoy myself and I'm going to buy some stuff and I'm going to live my life and I'm not going to adhere to those pre-COVID rules that I have to take a certain percent of my paycheck and I got to save it and I got to do some other things. I'm going to enjoy myself. And part of that might also be all the risk taking that you see in financial markets.

Starting point is 01:06:06 Well, I ain't going to worry about buying bonds or put my money in a 5% money market fund. I'm going to jump all the way to meme coins is what I'm going to do and hope that I could strike it rich in a meme coin. Well, part of that spending is also keeping prices up as well. So I think that those prices are going to stay higher and the economy is going to stay stronger. Government is spending too much money. And our mentality is definitely of a spending mode. And that is a post-crisis thing.

Starting point is 01:06:33 And when I say spending mode, I'm talking about like the number of units of things we buy because people always say to me, yeah, we're spending more because prices are higher. Yeah, that's true. But we're buying more units of things because we want more things. You know, as an example, if you look at the TSA, the Transportation Security Administration, gives you a number on the number of people going through the airports in the United States every day. It is booming to new all-time highs of $3.1 million a day going through the airports this week. So, you know, and I reason that I bring that up when it comes to spending.

Starting point is 01:07:08 The ultimate discretionary item, discretionary meaning you don't have to do it, is to travel. You don't have to do it, but everybody wants to do it. Yet, we all talk about the consumer slowing down. We might be going to recession. If you've been to the airport, the airport has never been more crowded. And most of those people at the airport are doing personal travel. And no one has to do personal travel. But we all want to do personal travel.

Starting point is 01:07:36 And whether or not the economy is slowing or whatever, you know, how much excess COVID savings we have, we are traveling. because it's a different mentality that we have about our spending, and that keeps prices and inflation up as well, too. So prices and inflation will be up. But this is another question I had for you that I can't get my head wrapped around. It's just really hard to understand how the U.S. economy is really doing. I think part of this is election year type stuff, right? So there's all of these messages you can't trust traditional media. So, you know, like there's a certain cohort of the population. It's really awesome. It's never been better. It's been a great four years. And there's another portion that that you can't trust. the population. This is a Biden-led depression that we're in. And so, like, finding some truth in the

Starting point is 01:08:18 middle is really difficult. And so there's also, like, there's a question of, where are we now? How is the U.S. economy really doing? You mentioned a lot of confidence in consumer spending, people traveling. You also have high prices. You have U.S. housing is incredibly unaffordable at this point in time. This is one of the most unaffordable housing markets in U.S. history. Levels below 100 have only been seen two times in 2006 and then in 1990. So we've got incredibly unaffordable housing, you know, and then we have other things like weird unemployment numbers as well, you know, coming out. Here's a tweet. The three-month unemployment rate average has risen to 4%. That's 50 bibs above its 12-month low of 3.5% triggering something called Sam-Rul, I believe.

Starting point is 01:09:03 Sam-Rul. Okay. Sam-Rul. And according to this, I don't know what Sam-Rul is. Maybe you could explain it to us, but this is accurately marked the start of every recession since 1950 with only one false positive. So there's a question of where are we in the U.S. economy? Is it doing well? Is it not doing well? And are we getting ready to teeter into recession? Do you have any answers for us? Yeah, I'll give you an answer. I'll give you a thought or a take on it. We call it the K-shaped economy. You know, it's the letter K. Part of it's going up and part of it's going down. How do we know which part's going up and which part's going down? The unfortunate reality is it's based on income.

Starting point is 01:09:39 So let me give you a disturbing statistic. Bankrate.com, which is a website that monitors banks and helps people with their banking, does a survey every year. And they ask people, if in an emergency could you come up with $1,000 right away? And two-thirds of the American public's answer is no. They cannot come up with $1,000 in an immediate emergency. right away. They'd have to borrow it from a friend or a family member or they'd have to max out their credit card or something, but they just can't go to the ATM and withdraw $1,000 and say,

Starting point is 01:10:15 okay, I need $1,000 because there's X emergency, whether it's a health emergency or your air conditioner breaks here, here's $1,000 and let's go fix it. Two-thirds of the country can't do that. And that's very disturbing in that respect. So when you look at the economy with inflation going up and wages not keeping pace, those two-thirds of people are really put behind the eight ball. And it really, they have to struggle. You know, as I like to say, they shop at Dollar General or Dollar Tree or they shop at Walmart. And they sit there and they go, well, if I want to buy this because the price has gone up, then I can't buy something else. And they have to make those kind of decisions.

Starting point is 01:10:56 The other third of the country is locked up at the airport going to Italy, is buying home. is enjoying themselves, is revenge spending. And so that's what you're starting to see in this economy. Now, you could argue, hasn't that always been the case? Yes, but the difference is inflation. Inflation really, really hurts the bottom half of the country. And it doesn't hurt the top half of the country as much because what doesn't the bottom half of the country also have? They don't have assets. They don't have a portfolio. They don't own crypto. They don't even own a home. They probably rent. the top half of the country probably has S&P 500 index funds. And they probably have a retirement account. And they probably own their own home. And they see the S&P's up 18%. And they see while housing is

Starting point is 01:11:47 unaffordable, part of the reason that housing is unaffordable is that the prices are continuing to go up. Well, if you're a homeowner, you're not complaining about prices going up. If you're a home buyer, you're definitely complaining about prices going up. So they're in an okay position. So it's this imposition of inflation. This is why the president's approval rating is so bad, because Jeff Bezos gets one vote and somebody on public assistance gets one vote. And if two-thirds of the public can't come up with $1,000 in an emergency, you bet they're going to be very angry about the economy. And the upper one-third might look around and go, looks okay to me, because it is okay for you. But it isn't okay for them until we get the inflation rate down and a lot more. And as I mentioned before,

Starting point is 01:12:33 unfortunately, I'm not so sure that we are going to get the inflation rate down. So that's a great take, by the way, Jim. And it's important to get out of whatever bubble that we find ourselves in and realize that there can be multiple worlds playing out at once. And so how does this end up? Does the U.S. economy pivot towards recession, do you think? Or is there a recession already in progress for kind of the low part of the K and like it's good times ahead for the upper part of the K. And then how does this all resolve? Because we can't be K-shaped forever, can we? No, we can't be K-shaped forever.

Starting point is 01:13:07 I would say there's two ways you could pivot this. We could either see, maybe I'm wrong, and the inflation rate is returning back under 2%, and wages will continue to grow faster than the inflation rate. That's what happened from 2010 to 2020. So you could argue back then from 2010 to 2020. Wasn't it sort of case shaped? Yes. But the difference was those on the bottom end every year they got a raise.

Starting point is 01:13:35 That raise at least met inflation. So to use a tennis metaphor, they could hold serve every year. That when they went to Dollar Tree or Walmart, they bought exactly the same amount of stuff as they bought a year or earlier. And the amount that they had to spend to do it, relatively speaking, after their wage, increase was the same. They didn't get worse. They just kind of held serve and then if you get a raise and improve your life, you can move out of that category. Now they're not. What will get them back into that position is to get the inflation rate down. Now, maybe I'm wrong, and we do have the inflation

Starting point is 01:14:11 rate go down quite a bit, and that will go a great way towards resolving that problem as well. Otherwise, I think that this problem will continue to fester for a long time. make a quick word about recession. There was an economist in MIT in the 1970s called Rudy Dornbush, and he's very influential in Federal Reserve circles. And he had a very famous line that he said that economic expansions do not die of old age, that they're murdered. And what he means by that is if you look at every recession in the last 50 or 60 years, usually the recession comes about because something like COVID or the housing crash or a war in the Middle East that you know, 1990, that causes the price of oil to go up 400% in a week, which is what it did in August

Starting point is 01:14:59 to 1990, went from $10 to $40. And those type of things murder the U.S. economy. So are we going to go into recession? My answer is no. We're not going to go into recession unless you tell me that something is going to happen and murder it. Middle East is going to spike the price of oil, a geopolitical crisis, you know, some kind of a crack up in the financial markets or something, or another pandemic that just shuts down the global economy, or something that we haven't foreseen that comes along, as I like to say, you know, I'm looking at my Bloomberg for my quotes and they have these big red headlines,

Starting point is 01:15:34 and this big red headline comes across the screen, and I go, oh shit, that just changed everything. You know, that's what causes a recession, is that headline. Now, to be fair, I thought that was about 15 months ago, Silicon Valley Bank fails. I thought, man, that might be it. And it turned out that it wasn't. It wasn't it.

Starting point is 01:15:53 So that's what causes a recession. Otherwise, what's going to happen is we're going to muddle along. We'll have some slower growth. We'll have some faster growth. But if the inflation rate stays high, then I think what you're going to continue to see, and this might be the murder weapon, is more social unrest. If you really want to see, you know, the difference in the K-shaped economy where it's really big is in Europe. And what do we all see all way too often in Europe? is demonstrations and tear gas and police and riot years trying to calm the masses. Look, France just had an election over the weekend, and the left won, the left won, and they still burned down Paris, you know, because they're so unhappy about what's going on in the country right now. So if we don't get that recession or we don't get that 2%, then I just think the social divide is just going to continue to grow. Maybe that grows to the point that that is the murder weapon that causes a recession. But short of that, I don't think that the economy's going to roll over and it's just going to die. You know, economic expansions don't die of old age. They're

Starting point is 01:17:03 murdered. Something has to break it is what it has to be. So as we draw to a close, Jim, one of the questions I was going to ask you is like, what are the upcoming things that could potentially move the markets? And it seems like part of your answer might be like we don't know. I mean, we'll know it when we see it. But it'll come out of the blue. It'll be one of those flashing headline types of events. I mean, what do you think about the 2024 election? Could that have the ability to move markets? Do you think any Fed rate cuts might move markets? Like, what sort of catalysts? Are you just keeping an eye on in the background to make a change with your investing strategy in portfolio? Yeah, absolutely. Those can. So as far as the 2024 election, I will say this,

Starting point is 01:17:42 that up until now, you know, and it's been historic because as recording, we're not even sure who the Democrat is going to be on the ballot. Who's going to be running? Yeah, we don't even know what the name of that Democrat is going to be. But yet, if you were to just look at a chart of crypto or the S&P 500 or interest rates and said, so where in this chart do we see when the Democrat is falling off and they're going to have to have complete upheaval at their convention to figure out who it's going to be? The answer is you don't see it in those charts. In the end, so it hasn't been impacting the financial markets to date. I don't think it will until after the election, but there's definitely a lot of issues that are coming that it can impact the economy. One big issue, you know, you asked me about

Starting point is 01:18:31 the SOM rule, about rising unemployment. There's a counter narrative to that. And the counter narrative is the reason that the unemployment rate is rising is not because the number of jobs is lacking. It's the number of migrants that is coming into the country. Millions of people are coming into the country, literally walking over the Southwest's border every day. When they step one foot in this country, what are they? They're unemployed. They don't have a job. Do we have 10 million jobs for largely unskilled unemployed workers just waiting to be filled? No, we don't. So what we're doing is we're bringing in more and more unemployed people. And when they do the survey of the unemployment rate, they survey households. And they ask, you know, how many people are in the house? How many people

Starting point is 01:19:13 are looking for jobs? Well, we're creating more households with unemployed people. because they're migrant workers, and that's what's raising the unemployment rate. If that continues, that can be a problem for the economy, that the unemployment rate is going up not because the number of jobs is disappearing, it's the number of people looking for jobs in this country is swelling because of the mass migration that we've seen. That could be a breaking point. The other one that you mentioned, too, is when Rudy Dornbush said that the economy is murdered, one of the big murder weapons, I should have mentioned it earlier, is interest rates. that the Federal Reserve raises rates too high and they break something.

Starting point is 01:19:53 Now, that's always a concern. And people have been screaming that the current level is already too high. And it could be breaking something already has broken something. I don't think it has, but maybe it has. But, you know, so watching interest rates could be another one as well. But other than that, it's kind of be kind of like COVID. You know, it kind of comes out of the blue and breaks the economy. Or before that, the financial crisis.

Starting point is 01:20:16 It's going to be something like housing prices because I was around in 08. And what we were all saying in 08 was the one thing we can be sure of is home prices never go down because they never ever have gone down. And so therefore, if you see that they're starting to roll over and go down, don't worry about it, they'll go back up. And then they kind of never did go back up. And it did break the economy into a bad recession. So something like that will happen. But yeah, there's a catalyst that could be coming out of the election. There's two wars in the world.

Starting point is 01:20:45 There's one in the Middle East and there's one with Israel and Gaza. Those could manifest itself into something that could wind up, you know, hurting the global economy. So there's lots of things that can happen along the way that we don't anticipate. But if that doesn't happen, the economy will continue to grow and then it'll grow a little bit slower and it'll grow a little bit faster. And then that K-shaped will just continue to widen and widen and widen until we get to something where we try to bring everything back into balance. And a recession is kind of a cleansing event. It helps to rebalance the system. And so that K will just continue to go out of shape. I hate to say it, but a recession is painful, but it also is cleansing and rebalancing and brings everything back in the focus again. Okay. So then with all of this backdrop, Jim, how should the savvy investor, you know, play this, right? We have some potential catalyst that could just kind of come out of the blue. How are you playing this from like what you're allocated in? What does your portfolio? look like when it comes to different asset categories that you hold? So cheap commercial, I do run an ETF and that ETF is a long only fixed income ETF. So it's a fairly generic kind of

Starting point is 01:21:56 ETF. I'm not trying to downgrade my own product. I'm just trying to explain what it is. Why do I run that kind of ETF is because that's where I've been in the space for 35 years and I'm most comfortable with it. Its symbol is WTBN. It's Wisdom Tree, WT, WT, it's a wisdom tree ETF, Bianco, Nancy, WTBN. In its space, it's been having a very good year so far. I didn't know you were doing that, Jim. So you launched your own ETO. That's really, really cool. Yeah, it started in December. It started in December. So, you know, it's seven or eight months old right now. Biancoadvisors.com is the website for my ETF. You could read all about it or just ask me any questions about it as well. And WTBN is the symbol. I am currently positioned longer term over the next several years thinking that we are going to be in a

Starting point is 01:22:41 period of stable to higher interest rates. And that in that period of stable to higher interest rates, there's a lot of opportunity in the bond market, even though prices will be going down, there's big coupons in the bond market to get a five-ish percent return on a coupon level and try and hold on to that by not losing on prices. So I think that the first thing I would say to people at this stage of the game is your expectations for what should. should happen in the future, should be dialed back quite a bit. Because there's two opportunities that you have in the market. You have the traditional market, let's call that the S&P 493, which is not the magnificent seven AI stocks, and the bond market. I think that in a blended period,

Starting point is 01:23:31 you should be looking at about six or seven percent a year out of that, a little bit less in the bond market with more stability, a little bit more at equities, with a little bit more volatility. After that, there's another group. There's the seven AI stocks. There's other things like crypto. You can make orders of magnitude in those markets, you know, double, triple, quadruple your money, but you can also wind up seeing 70 or 80 percent of it being drawn down. You've been in crypto space a long time. I've been in crypto space a long time. How many times have we seen 70 or 80 percent drawdowns in this market? Count on it. It's going to happen. Yeah. So you don't want to have your lifestyle dependent on not having a 70% drawdown in crypto. You know, if you're so

Starting point is 01:24:14 into crypto that if the prices fell 70%, you've got to sell your house or you've got to change your lifestyle, you don't want to be there. You just don't want to be there right now. So, yeah, you want to have some portion to that, especially if you're younger. The last thing I'll give you is an idea is I always talk about bear markets as being about time, not about price. So let's say the stock market peaks and it has a bear market. All right, it will be a number of years before the stock market makes a new high. If you're 65 years old, your life expectancy is 20 more years to 85, let's say. That's the life expectancy.

Starting point is 01:24:54 You don't have 10 years. You don't want to wait 10 years for the stock market to get back to its old highs. That's half your life expectancy. If you're 35 and there's a bare market in stocks, keep waving. in all the way on down. Because if it takes 10 years for that bear market to run its course and you're 45, you've got another 40 years and another couple more cycles that the stock market keep going up. So a lot of it is dependent about where you are in that age bracket. My fund is probably more structured towards older people that are looking for higher, you know, more safety kind of

Starting point is 01:25:30 income ideas. But that's where all the money is, too. That's why I decided to do that kind of fund because the boomers still own a majority, a boomers anybody over the age of 60 at this point, and they still own a majority of the- And they need something like this basically. Yes, exactly, exactly. I'll get it. If you're Gen Z or a younger millennial, you can look at my fund and go, why would you want to own something like that? Well, it might make sense in a smaller proportion for you. Sure. But you might want to take more risk because you've got decades of investing left, whereas boomers have a decade or two of investing. left in the marketplace. What about you personally, Jim? What do you do on the kind of like, you know,

Starting point is 01:26:09 are you doing anything in crypto? Do you hold any crypto assets? What's that portfolio look like? I've held crypto assets for several years. I continue to hold crypto assets for several years. I will always hold them as well. I first got into Bitcoin in 2017. I got into Ethereum in 2018. And then I got into Defi. Most of my Ethereum based assets are either in Avevaltz or they're in Uniswap pools, you know, they're locked away and, you know, I'm going to do the Warren Buffett thing. I'm going to check them again in five years and see where they're going to go. I am in the stock market. I own real estate. You know, I'm in my own fund. So I'm in a lot of different places along the way. That's a great place to be.

Starting point is 01:26:51 Jim, thank you so much. You know, conversations with you always just help me make sense of what's going on in macro. And I think you answered a lot of questions that were top of mind for me today. So we definitely appreciate you. And you are going to be, so David's not on this podcast because he's away at ECC and you like couldn't make it. The next time I think I will probably see David and yourself will be at the permissionless conference.

Starting point is 01:27:14 That's coming in October. and you're speaking there, correct? That is correct. I think I'm going to be on a panel as it stands right now with Balcunas and James Seifert talking about the ETF. Oh, are you going to be arguing about ETFs or what's that? I think I'm going to be the antagonist on that panel. And I look forward to it. I know both those guys are very good guys and it should be an interesting conversation. I can't wait to see you there, Jim. We'll talk in person for sure. So we will end it there. Bankless Nation. Thank you so much. As you know, none of this has been financial advice. You know that crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. Not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - Stocks Up & Crypto Flat...Why? | Jim Bianco

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