BTC Sessions - Understanding And FIXING Legacy Finance With BITCOIN - Guest GREG FOSS ep 129

Episode Date: December 22, 2020

Greg Foss has had a 30 year career trading the credit markets, and discovered very early on just how fragile the current system is. This journey eventually led him to Bitcoin as a solution. In this conversation we discuss how much of the current financial markets are structured, the massive amounts of risk, erroneous ratings agencies, major banks on the brink of insolvency, and how Bitcoin fixes this. Follow Greg Foss on Twitter: https://twitter.com/FossGregfoss SUPPORT THE SHOW: LEDN Bitcoin backed loans –  get $25 free https://bit.ly/397rlLN Get Wasabi wallet for Bitcoin privacy https://wasabiwallet.io/ Cobo Vault: secure your Bitcoin! https://bit.ly/2GgMFlH BillFodl: get your wallet backups in solid steel. https://privacypros.io/ Bitrefill: use Bitcoin to purchase gift cards https://www.bitrefill.com/buy/?code=O04UMic9 LIGHTNING tips: https://tippin.me/@BTCsessions Telegram channel: https://t.me/btc_sessions

Wasabi wallet and fairly private. Greg Foss has had a 30-year career trading credit markets. He dove into Bitcoin just around five years ago and has been integral in bringing Canada's first Bitcoin fund on the Toronto Stock Exchange to market. We had a really great conversation here regarding legacy financial markets, bond markets, some of the risk underpinning a lot of those markets and how Bitcoin can potentially act as an opt-out of the deficiencies in our current system. I really hope you enjoy this talk.

I know I did. I learned a bunch. And without further ado, I'm Ben with the BTC sessions. And this is your daily session. Before we dive in, big shout out to sponsors of the show, ledden.io. This is where you can use your Bitcoin for a variety of data. different services. Of course, they have their Bitcoin back loans. These have saved my butt on a few different occasions. This is where you can use your Bitcoin as collateral to get a Canadian or US dollar

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Up next we have Kobo Vault. This is one of my regularly used hardware wallets. I love it because it is 100% air-gapped. That means you never plug it into anything internet connected. It's all done via QR code. keeps the keys to your money safe and offline. It has a secure element. It is open source firmware. By the way, I recommend switching to the Bitcoin only for increased security and less attack vectors. And of course, it works with all of my favorite Bitcoin wallets.

Bitcoin Core, Electrum, Wasabi on desktop, blue wallet on mobile, plus a ton of great multi-sig solutions. So be sure to check out the Kobo Vault. There's a link down below. And just for reference, I am using the Kobo Vault Pro, which has the finger. fingerprint scanner and rechargeable battery. Now, I am all in with Bitcoin. I live on Bitcoin. That's the majority of my income. But of course, I have expenses. I got to eat. I got to drive. I got to get groceries. I got to do all of those things. And one place that I can do that is at bit refill.com.

You can get basically gift cards for anything that you need. It's available in a ton of different countries. So check it out. See what they have in your area. And the bonus here, is that as I shop, I actually earn Bitcoin back for those purchases. So if you want to pick something up, maybe even just the prices up and you want to treat yourself, well, you can earn some Bitcoin back while you do that. Head over to bitrefill.com. There's a link down below and pick yourself something nice. And finally, of course, we have the guys at Privacyprose.io and the bill funnel.

When you're backing up any wallet, maybe like the Kobo, you have to write down. a seed phrase, 12 to 24 words, and typically people write this on a piece of paper and keep it somewhere safe. Thing is with paper, it can be prone to issues. There's the threat of fire or flood and water damage or just accidentally throwing it out because it's a piece of paper. Well, with the bell-fottle, it is a solid plate of steel and you can slide in the steel tiles to store your seed much more securely. It is fireproof, it is waterproof, and you-proof because you're much of steel. less likely to throw out a solid piece of steel, as I said. So head over to privacypros.com. They've got a ton of other great swag there too. And with that, let's dive into the interview.

Okay, we are recording. Greg, welcome to the show. How are you? Things are really good. Ben, thank you very much. So we've been chatting for quite some time. I'll let you give yourself a little bit of an intro and then we'll kind of dive into why I wanted to talk to you. But Greg, can you let everybody know, I guess, who you are and where you fit into the realm of Bitcoin? Well, I am a 30-year veteran of trading in financial markets. I've traded, my primary focus has always been on credit. So I've been a high-yield bond trader. But within that, I've traded credit default swaps. I've traded bank loans.

I've actually traded equities both long and short against positions in the in bonds to hedge or in some cases do a flip where you're short bonds and long the stock. It's called capital structure arbitrage. So I've worked on both sides of the street. Both sides being the sell site. So you can work at dealers. I've worked at TD Securities, for example,

had a really, really fun career there. Lots of smart people at TD Securities. And then I worked on the buy side. I worked for a couple of hedge funds, both in Canada, but most of our trading took place on Wall Street because most of credit in the world is traded out of New York and London, but high-eield bonds in particular out of New York. So based in Toronto, but traded global credit.

most of my counterparties in New York. Awesome. And you are, and we'll get more into this momentarily, but you have done some work and alongside Fred Pye at 3 IQ, I believe. So, yeah. So full disclosure, I'm on my way out of 3 IQ. But I only as a shareholder and only as a shareholder in the management company. Fred approached me about four years ago.

We're both Montrealers. And while we never met each other personally in Montreal while I lived there, he reached out to me through mutual friends. And I thank Fred for introducing me to Bitcoin. It's a 30-year journey or at the time is a 25-year journey to find a replacement to Fiat. And I'd like to talk to you about a little story, not right now. But yeah, so Fred said, I have this idea. of all, I'm going to, do you know much about Bitcoin? And honestly, at the time, it was

2000, 2016. And I, you know, I knew enough about it, but it certainly was not immersed in it in any way. And he showed me one screen that for, I will never forget. And that's on tradeblock.com. And I'm not sure if you know that, that, but honestly, when I'm an engineer in training in undergrad and when I saw the functionality of money trading or Bitcoin trading around the world, it's true. And then the blocks and everything, it blew me away. And I said, okay, I love it. I'm going to do more work on it.

And yes, I think I want to be involved in funding your company. So myself and a fellow Cornellian who currently lives down in in Boca Raton, Florida, both invested with Fred four years ago with the idea of bringing a Bitcoin. Bitcoin fund to be listed on the Toronto Stock Exchange. And they have accomplished that. And I'm extremely proud to have been part of that. Yeah, it was really cool to see happen. And so it's very interesting, somebody that spent so long in traditional markets being

attracted to Bitcoin and kind of getting their feet wet there and then kind of diving in head first. And we see more and more of that today. Now, we've been kind of talking behind the scenes and figuring out a time to get together and chat for a while now. And to be honest, the reason it kind of got delayed on my end, it's 100% my fault because I felt that I was not informed enough when it comes to traditional markets and bonds in particular to even start the conversation. So I've been working on that a little bit myself to at least have some questions to, to start that conversation. And, you know, I'm coming from a place where now I'm starting to understand the implications

of what we see happening in traditional markets and in credit and in bonds. And there's going to be a number of people watching this show. There's kind of a mixed bag, but a lot of newcomers that see Bitcoin, understand the promise of it and understand that something's wrong with the traditional system, but may not really get everything that's happening. And so there's a couple basic questions that I want to kind of get out of the way first so that we can kind of set a baseline and then we can just run with it. So I've got a first question, just the very, very basics. What is a bond? Who can issue them and what are they for? Wow, that's okay. Great way to start. So a bond or a loan,

both the same thing is a contractual obligation to repay a set amount of principle and interest over a period of time. So a bond has a maturity, a loan has a maturity. Typically, loans are shorter maturity than bonds. Bonds can have maturity as long as 100 years, okay? Typically, though, the U.S. Treasury and governments that issue debt, the longest debt they issue on the run is 30 year. Okay, so you'll hear people talking about the long bond. Now, the long bond is 30 years, or typically 30 years. But interestingly enough, I can't remember how many years ago it was, but JCPenney issued a 100-year bond. Isn't that amazing? Okay, so who would buy a 100-year bond? Well, typically it's a life insurance company that needs to match its liabilities and its assets.

and as you know how, that's how life insurance companies make, make their money. So, you know, bonds can't extend past 30 years. A hundred years, it happens. It's not a, it's, I threw it as an example. Typically, corporations issue debt for anywhere between five and 10 years. That's a pretty standard term. And then if you're a high quality bond issuer like Microsoft or Apple, high credit rating, you can go out to the 30-year term as well.

So what you need to understand is the bond is a contractual obligation to pay a series of interest coupons over that period. And usually they're semi-annual. And the coupon on the bond defines it's typically its yield to maturity. So let's say a bond is issued at 4%. The coupon will be a 4% coupon on a $100 principal maturity due. at the term. So does that sort of define or?

Yeah, yeah, absolutely. And so corporations and governments can, can issue bonds as well. So any government, you know, so I say, yeah, federal governments, state governments, municipalities in the U.S., corporations, then you have neat things. Well, sometimes they're neat. Sometimes they cause a credit calamity like structured product, which, you know, is a combination of securitized debt of various.

counter parties, you have mortgage-backed security. So beautiful fluid markets, and I need people to understand that the bond markets are far larger than the equity markets, okay? Cumulatively, the bond markets are far larger, much more capital. The size of trades are monumental compared to equity trades. It's just part of the capital structure. And the most important thing to remember is in a corporation, the bond ranks senior to the equity. So unless the bond is worth 100 cents on the dollar, the equity is worth zero in a priority of claims basis. Or if the company goes into default, the claim is the equity ranks before the preferred shares, before the common shares, et cetera.

So essentially, yeah, if somebody, if a company goes into default, they are obligated to pay back the bond holders first before. The obligation is sort of a tough word. They have exhausted their obligation. Then they've decided to say, okay, we'll let the courts decide. And we'll go into CCAA or debtor in possession financing. And the whole capital structure gets re-scrambled. So that kind of ranking of, I guess, debt, that is why people refer to bonds as

safer than equities, correct? Excellent point. Like within a single corporation, absolutely. So the equity of Microsoft is more risky than the bonds of Microsoft. But then I'll throw out a question for you. Are the bonds of Delta Airlines, which is a junk high-yield issuer because of the volatility of its business, are the bonds of Delta Airlines more risky than the equity of Microsoft? You know?

So this is a neat question. Are is the debt of Brazil more risky than the bonds of Microsoft? Well, you can look bond to bond and you can see that the relative credit spreads that things trade. And you can say, well, the market tells me, you know, yes or not. The market spread over a benchmark will indicate the relative riskiness of those bonds. But then you flip and say, okay, well, what about the equity versus a bond? What about the preft shares versus a bond? And that's where it's really interesting.

And the U.S. guys are so good at this is capital structure arbitrage and whatnot. Okay. So with that knowledge, let's talk a little bit. And again, I'm going to do this in the context of ideally how things should work in a kind of free and open market. Often you'll hear that you'll have allocations split between equities and bonds. that differ from bull markets to bear markets. Can you talk a little bit about how a lot of traditional investors or what you hear from a lot of guidance from some individuals

regarding those allocations from bull markets to bear markets? How do people often approach that? Sure. I'll take, I will say, I'm not certain that allocations, typically the allocations themselves change. What happens is weightings can change in bull markets or bear markets. A typical allocation and a, you know, back of the envelope, they always talk about the 60-40 allocation, which is, you know, has been a pretty standard starting point, 60% equities, 40% bonds. And the reason that that was good is because

typically when equity sold off, the markets would run to the safety. of bonds, which means the price of the bonds go up and the corresponding interest rate goes down. That worked really, really well over the last 40 years because interest rates 40 years ago, believe it or not, we're close to 20%. Okay. Now they're close to zero. So you have all these huge funds that are, let's say, Ray Dalio's fund. It's called a risk parity fund.

You know, they were mathematically really, really strong. it's saying, okay, how many bond, how much bond exposure corresponds to an equity exposure, and the two would nicely offset. The problem with that is once interest rates reach close to zero, there really is not much to play for in the bond market. You know, you can say, well, interest rates can go below zero, which, you know, I find quite astounding that they do. But my argument for that is that's like picking up nickels in front of a steamroller,

okay if you're giving money to the government to hold your money the only way you're going to make money on that is if someone else comes along and pays the government more to uh hold their money and the corresponding interest rate actually goes more below zero i don't want to get in too much to that because it's only it's almost a mathematical complexity that you know bonds which are an obligation go from being an asset in someone's uh in someone's book because they're earning a coupon to a liability because you actually are losing money by holding that bond at a at a negative yield losing money if you hold it to maturity but again they'll say well i'm going to hold it until somebody else comes along and buys it from me at a higher price well if you've ever

heard of a dumber story let me know because you know that's only math if you held it to maturity you would lose money on a negative yielding bond so so here i guess to answer your question too ben and i'm sorry So what happens, though, is the 60-40 model. It was really good when interest rates went from 20% down to zero. The pension funds out there haven't really changed their assumed rates of return, though. And I mentioned this briefly with you guys last Friday. A prescribed rate on a pension fund, let's say being 8%, that's pretty neat to have an 8% return when bonds are paying 8% and equities can, you know, they'll, some years earn double digits and then some years they'll have down.

But over time, it worked. Right now, though, if you still have that 8% return, the one year, sorry, excuse me, the 10-year U.S. Treasury rate right now is 1%. Mathematically, the return on the U.S. Treasury over the next 10 years is going to be 1%. Okay? It's very simple, 1% per year. Barring a default, and I say chuckle, chuckle, because that's becoming a bit of a larger risk, But barring a default, that 1% return on bonds means you need to really knock the ball out of the park on equities and your 60% waiting on equities to reach your hurdle rate overall of 8%.

And I mentioned to you, it means that with a 10-year bond at 1% and high-yield bonds that yield right now about 4.5% you need to get about a 15% return on your 60% weighting in equities just to get your 8% percent. blended return in your fund. And that's what's called an unfunded liability because if they change that prescribed rate on that on that pension plan, your unfunded liabilities change very meaningfully. Okay. And that's a huge problem. So I have a question regarding why are people buying these bonds in the first place if the return, especially like on a 10 year bond, is so, poor, like you're not outpacing inflation with something like that. What is driving people to even bother purchasing these things? And is there a situation where they just get left holding a bag? So, um, so two good questions. Um, there's a status quo bias a little bit where, well, I've always

owned bonds. So I better continue to always own bonds. Is that part of a diversified portfolio? I'm not going to argue with that as long as you understand what the returns are going to be. When you start with a 20% yield and barring any default, imagine how attractive that was 40 years ago lending the governments of Canada and the United States money in return for a contractual obligation of 15% or higher per year. man oh man like there were guys in bond markets that were just like they were coining it right it was just a really big number now it's 1% over a 10 year period um so you who who lends at 1% the people that say i can't put 100% of my money in equities that would be real irresponsible where are the returns going to come from though i just laid it out equities you know equity

guys are pretty, here's a neat, not statistic, but I always used to say, look, I'm a bond trader. I always ask how much can I lose? Okay, that's my first question. How much can I lose? Equity guys, I love them because they don't ask how much can I lose. They're always like, how much can I make? Okay. The problem is they don't always make what they think they're going to make. There's no contractual return on an equity. There's a dividend. It's non-contractual, and it doesn't guarantee a repayment of principle. You need people in the equity market to realize the shares that you bought on the cheap side or you have the foresight to buy them.

They get pushed up by the market valuation. So, Ben, I think it's as simple as this. They're people that own bonds because they've owned bonds for their whole lives. And there's bond managers out there that don't want to give it up. I mean, you know, a lot of bond managers managing a lot of money that just, there's governments that need to fund themselves, bond managers that need to invest money. So, you know, it will always exist. It's just, again, not as attractive rates of return as it was many years ago.

Does it still make sense with negative interest rates? That's what I really can't parse is, you know, you say, yeah, the rate of return is not as attractive and I can't put all my money into equities. But once it goes negative interest rates, is it not better? to just hold the cash instead of having bonds? Okay, so you're very logical. And sometimes markets aren't logical, right? Sometimes there's a huge buyer in the market.

It's making rates go where they are. Who could those, think, think, think. Who could those buyers be? Oh, yes. Okay, so the central banks of the world. Those are administered rates or manipulated rates, if it's longer than the short term. They are huge.

Those are meaningful, meaningful, huge players in the market, and there's nobody bigger, especially when they can print money. So it makes no mathematical sense to me, Ben, you know, and especially if you're holding cash, as Michael Saylor said, and I think he's so eloquent, you know, CPI or the measured rate of inflation on a basket of, is benchmark for 2% per year. The real inflation, though, that you need to worry about is the 15% inflation and the debasing of your Fiat currency by the printing of money. You hold cash. Well, we all know there's an implicit tax in inflation or the debasing of your currency, your purchasing power.

Hell, excuse my language, but like, I don't know. I for one own zero bonds. Okay, as a high yield bond trader my whole life, I now own zero bonds. High yield is paying the lowest yield it's ever paid in its history. Okay, that's not high yield. Four and a half percent before defaults, that's not high yield. You pay a bond manager 75 basis points to manage that. So you go from four and a half percent down to 375 after fees.

and then you subtract out defaults. And in bad years, defaults, you know, are substantially higher net cost to you than three and a half percent or three and three quarter percent. Doesn't make sense to me. That being said, do I have all my money in equity? No, no. And thank goodness I found Bitcoin. 100%.

So what you're saying and alluding to especially with Bitcoin, it seems to be. a lot of people are recognizing this because they may not have the greatest faith in the equity market at the current time, but they're also looking at, obviously, bonds where you're going to get a, you know, next to nothing for return or negative when you factor in everything. I wanted to touch on something quickly before we kind of dive in that direction is risk when it comes to bonds. In particular, let's talk a little bit about, I suppose, government debt and the obligations that they have with these bonds and other liabilities that they may have. And do they have the cash flow necessary to meet some of these liabilities, including

bonds? And if not, how do they go, do they default or do they default? Or do they, they use other approaches? What are you seeing here? What are your insights into this realm? While you're knocking things off one by one, you know, so in a bond, there's, there's two principal types of risk. There is interest rate risk and there's credit risk, okay? For the longest time, and even now, by and large, federal governments are not viewed as huge credit risks. especially G7 and down to G20 nations, quite honestly. But the history of countries defaulting is quite long. And I wanted to mention this at the outset.

So there's credit risk and there's interest rate risk. Right now the interest rate risk in U.S. treasuries is that the Fed stops intervening and lets markets just go where they would. And what that would imply is rates would most likely rise. And when debt rolls over, the coupon that they pay on a 10-year goes from a 1%, which it is now, to over time it'll go higher if the Fed wasn't there. The Fed currently, the U.S. Fed, has a credit default swap rate of around 14 basis points in the five-year term. It means that people are paying money to protect against the default on the U.S. Treasury.

They're paying 14 basis points. It's a very small sum, but on, you know, it adds up if you're insuring 10 million bonds, it's $14,000 a year that you pay to insure $10 million of bonds against default. It's not zero, which means there is a risk. Always we heard before, U.S. Treasury debt, the risk-free return. No, it's not risk-free anymore, and I'm going to compare that to Canada. Canada actually has a higher credit rating than the United States. Canada is still AAA, and the U.S. is double A plus, according to S&P.

But the five-year CBS rate on Canada is actually 36 basis points. Wider means more risky. Well, who's right, the market or the rating agencies? And I will never tell you that a rating agency. agency knows risk better than a market. So the market's right. The interesting thing, though, is Canada, at a 36 basis point five-year CDS rate trades closer to a single A credit than a triple A credit rating goes triple A, double A, single A, triple B, and then high yield double B, single B, triple C, okay? And you can get that gradient of risk by the

rating agencies, which is a subjective opinion, or the market, which is a real, hey, this is where it is, okay? Canada pays 36. I'm going to throw out Italy. It trades at about 110. Pretty neat, you know? Turkey, well, it's at about 350, 350 basis points a year. That's a government. They can print money as well, but guess what? Soon the markets are saying, I don't care if you can print money. I'm just seeing money in Venezuela on the corner. The garbage. The garbage is there.

It's money as garbage, right? So it comes back full circle to my first experience. And this is important. And I don't want to get hate mail, okay? But I tell the truth. So I think I mentioned I was an engineer and undergrad. And I went down and I got an MBA in the U.S. And then I came back to Canada.

And my first job was working for the head office of Royal Bank of Canada. And it was pretty neat job because one of my first projects was evaluating our Latin American debt portfolio, which was largely a basket of loans to, sorry, I said Latin American. They called it LDC, lesser developed country debt. Most of the countries where the big borrowers were in Latin America, Brazil, Mexico, Argentina, but it included other countries like Philippines and Vietnam all over the world. and every single bank, money center bank in the U.S. had the same problem. They had taken petrol dollars and loaned money to countries around the world. And many of these countries borrowed in U.S. dollars, but their currencies depreciated against the U.S. dollars. So they had to default.

And a lot of these countries, the debt went from trading close to 100 cents on the dollar, indicating, you know, they thought that debt was money good, to trading at 25 cents on the dollar. And Treasury Secretary Nicholas Brady came in and said, we got to clean this up. You know, these 25 cents on the dollar loans to Brazil and Mexico, we got to make them whole over time. And there's going to be a plan called the Brady plan. So that was my project. This was 1988. I was just out of school. I'm like, geez, you know, this is pretty exciting stuff. we have billions of dollars of this. But I looked and I said, well, this is interesting.

We have billions of dollars. I wonder how much we need to write off as the Royal Bank of Canada. And to make the math easy, well, I won't even go through the math. Suffice to say that the total exposure of our LDC book, if we marked it to market at the largest bank in Canada, Canada's Royal Bank of Canada, if we marked it to market, we would have used up all our book value of equity. we would have had a negative book value of equity. The Royal Bank of Canada was insolvent

when I started working there in 1988. All right? I'm not sure how many people understand the significance of that, but it's an ugly situation. Banks only have about 4% of capital against their loans, which is to say that if a loan loses more than 4% or $0.4 on $100, the banks don't have more cash.

capital for that loan. Now you paint it across a portfolio and hopefully not all your loans are defaulting at the same time. But that's an extremely levered that you're basically 25 times levered as a bank. No one thinks of a bank as being risky. My God, they are actually the most risky corporations out there. They have 25 times the amount of risk versus the capital that they hold against that risk. why then do they maintain high grade credit ratings? They have an implied backstop by federal governments. How does the federal government pay for those implied backstops? They print money.

For 30 years, I've been looking for the solution to my 1988 experience that Canada's largest financial institution was insolvent. And it wasn't just Royal Bank. It was all the money center banks in the U.S. as well, as well as most of the other large Canadian banks. They all had the same problem. And Treasury Secretary Nicholas Brady solved that over time

by changing a five-year loan into a 25-year obligation backed by U.S. Treasury zero coupon bonds. Very, very smart solution, but seriously scary that our system is that fragile. And it maintains that same level of fragility. In 2008, I'm 100% certain the financial institutions and the financial system was insolvent again. And I'll go out on a limb and say in 2020,

we're not as in good shape as those people think we are who are saying, well, bank stocks look cheap because they pay this level of dividends and their loan provisions may not come in where they are, I trust, trust me as being a trader for 25 years. If you mark your book to market, which I did every single night, 4% equity cushions, the equity cushion of a bank gets vaporized really, really quickly.

Okay. You don't think those loans in Calgary to those oil companies and all that real estate and Calgary might have lost maybe a little more than 4% of its value? I think so. So what, what, like, is this, kind of bad debt. Like the the amount of debt in the world is is has gone up exponentially over right over the past. Well, I mean, even since 2008, it's it's we're more levered than we used to be. Correct. Oh yeah. Not it does not even the you you mentioned cash flows. Well,

look, when a government runs there's there's a deficit which is your annual how much you miss your annual, uh, spending targets. And then there's accumulated. debt, which just deficits seem like, oh, they're not that bad. And then you go to a deficit and you just say, oh, my Lord, it's not possible we'll ever pay that back. And that's what happens in a debt spiral. You're the accumulated debt and the coupon on that debt is actually growing faster than the ability of the economy to grow and the ability of the attack space of the economy to catch up. So you have your total debt and you have your economy down here. But this thing's growing this fast and this thing's growing this fast and ultimately it becomes a spiral. And the

solution to that mathematically is a D-based fiat currency. That's the error term in math. That solves the equation and completes the loop that we can continue this little bit of a, you know, smoke and mirrors and, you know, moving things around. It's dangerous, Ben. It's really dangerous and that's why I'm a bit coiner. So, so what's the, like, let's say in a world where Bitcoin did not exist, what's the end game here? Like you just said, Fiat currency debasement, but what does, what does that look like when there's no, there's, there's no release valve?

So, wow. You know, again, please no hate mail. Like, this is, this is important. I'm telling you, and I read this. on Bitcoin Twitter and the truth is like Bitcoin is hope. It is actually hope. It is the solution in my opinion. It is the, I'm not going to go.

You know, it is a solution to fiat currencies which always fail, right? Fiat currencies are guaranteed to fail over time. Historically, that's been the case. And I think we're living it right now. There will be hundreds of currencies or fiat currencies that fail before either Canada or the U.S. fail, but it'll be a bit like a domino effect. And then people will be like, oh, gee, I better get some insurance on Canada. Why?

Well, because, you know, interest rates are 1%, and someone's paying a 36 basis point of that 1% as credit insurance or, you know, this is scary numbers, man. This is, you know, and people don't get it. They really don't because firstly, they don't get math. Secondly, they sure don't get bonds. And thirdly, they tend to believe stuff like, oh, Stephanie Kelton says it's okay to continue printing money. So I'm going to go with that. I'm going to go with this modern monetary theory, whatever.

Mathematically, it doesn't work. So if there wasn't Bitcoin, I would be a bit of a gold bug. I have been in the past. I like the arguments. But when it comes right down to it, the two aren't comparable, in my opinion, in terms of it's, yeah, we don't have to get into that. that all our guys know the difference between gold and Bitcoin and the attractiveness. But yeah, I would have been a gold bug, but sort of concerned about, geez, you know, what do I do with these physical bars of gold and the like?

I don't want it to happen. That's the thing. I don't want this inevitability to happen. I have a price target on Bitcoin that could be so huge. And if it doesn't get there, I win as well because it means the world has figured it out. Problem is I don't see the other, I don't see the ability of the world to figure it out. Mathematically, it's just, it's not possible to figure it out now. It's done.

We've kicked the can too far. There was a time when you could have done it. Now mathematically, it is impossible to escape this debt spiral. So now in light of the craziness that is happening with, with excessive levels of debt, fiat currency is being debased. faster in some countries than others, but gradually over time, you know, those dominoes are slowly falling. We do have Bitcoin. We have an asset that cannot be debased, that has a fixed issuance. We know every aspect about it. You can understand and look at the source code at any time

and get any metric you need. It is perfectly predictable in terms of how it functions. and from that you can get basic economic measurements that are actually consistent. What does the shift of people recognizing that look like? And I think you know that we've already started to see it, but maybe I'll let you speak to that. What do you see this shift is looking like? Great question. So I think there's a number of steps.

But I will go, I will say first of all, there's people that understand the fee at risk. and they don't want to say anything. They may be a bond manager and they're managing billions of dollars of bonds. And they're making a nice little living on managing that. They don't want to go out and, you know, start ambulance chasing and saying, oh, my God, like these bonds that I own, who in the world would own these things? It's like, you know, there's a word for it, you know, something where you eat.

You don't where you eat. So at the end, you don't say that. So I think, though, that there will be two levels. There'll be the guys that they understand it. The mass mutual, that was a huge announcement, a state-old community, a insurance company buying Bitcoin as a store of value, a hedge perhaps to their bond portfolio. Sure, sure, sure. And then there's going to be the practical side where I think energy is going to start becoming

priced in Bitcoin. So as Michael Saylor says, and I believe it, and I'm never going to take credit for anything he says, but I was always thought as an engineer, I said, look, this is digital energy. This is what I love about Bitcoin. It's actually digital energy. So it's not a stretch for me to imagine that there will be a time when electricity, natural gas, and oil is priced in Bitcoin. And it's not crazy to think, you know, Saudi Arabia. in Russia sure don't want to be sitting on U.S. Treasury assets and U.S. Treasury is the world reserve currency. Excuse me, U.S. dollar is the world reserve currency. But they have to, because oil's priced in U.S. dollars, you know, it's the largest economy in the world. But imagine if

Bitcoin, if oil starts trading in Bitcoin, if electricity starts trading in Bitcoin, then gradually, it's not the investment community that's putting Bitcoin at the forefront. It's actually coming up as the energy industry. And we all know how important the energy industry is in the world. In fact, I would argue that if we didn't have energy, you know, there would be a whole lot of things we don't have. So Bitcoin is that transfer mechanism between the value, the unit value of energy and money.

And Sailor has a lot of really great quotes, the purest form of monetary energy, thermodynamics, this, and hey, I'm not going to argue. It makes sense. And yes, I believe the order of progression will be a little bit of the investment community grasping it. But then, like in Canada,

I'm so pumped for Canadian stranded gas and the like and projects that are going to bring some of these very, I'm going to say risky or projects in Western Canada, I mean, we could change their whole economic outlook if they started embracing Bitcoin on the mining side. You know, selling power back to the grid, you mine when it's a profitable to mine, and then you take your turbines and you actually sell power back to the grid as a peaker. and you're balancing, you're balancing energy and Bitcoin mining and actually stabilizing the grid. This is what, this is even more exciting. You're stabilizing the electricity grid by mining Bitcoin. So, so many different moving parts in this, in this. And again, well, how old is Bitcoin? Like I know it's somewhere, I guess it's around 12 years old now. And look at what it's done in 12 years.

I just, I wish I could see out 20 years, but I have a really good confidence that Bitcoin will be a very, very substantial part of finance as well as electricity markets. Now, you touched on Michael Saylor briefly. Anybody that, I mean, I imagine a lot of people listening or watching will be familiar with him. He's CEO of Micro Strategy, and they famously dumped the majority of their cash reserves into Bitcoin to effectively store their wealth because they, I think he coined the term. They're sitting on a melting ice cube with that much cash. And more recently, we actually saw him raise money to purchase more Bitcoin. And one of the things that I found interesting was the, and maybe you can help me. understand a little bit here how he went about that. But the interest rate that he offered on on on the the the the raise was something like 0.75 percent, which I believe is just above the interest

rate that the Fed has said. Is that correct? So yeah, we have to be careful. And so I'm going to, I'm going to, I'm going to, I'm going to mention the second part first, which is he actually issued a convertible bond, though, okay? A convertible bond is a hybrid instrument between straight debt and an option to switch your debt into equity if the price of the equity appreciates and the bond becomes de facto an equity instrument. or it's a hybrid instrument that incorporates equity volatility and a coupon on the debt. But you've got to be really careful. You cannot just compare the 75 basis point coupon on straight debt because within that coupon is an implied convertible option premium that the convertible ARB funds will massage

so that they are collecting the volatility within the equity. It's a pretty complex relationship, but again, it incorporates equity ball and interest rate or credit risk on the micro strategy. If micro strategy were to issue purely a straight five-year instrument, I'm guessing here, but I would estimate they'd have to pay about at least 250 basis points more than five-year U.S. West treasuries, okay? That's just a straight debt instrument. It would rank senior in the capital structure to the convert, but the convert as the upside, straight bonds, they never go back and say, oh, you know, my company's doing so well, I'm going to increase the coupon on the bond.

No, no, that doesn't happen. All of that accrues to the equity guys. Okay, so that's the one thing. So let's look at what Saylor did, first of all, and everyone says this was irresponsible. It wasn't irresponsible. It was actually brilliant. First thing he did is he was sitting on $500 million of cash. And he said, okay, we're going to go out and buy, and I may have the numbers a little bit wrong, but essentially we're going to buy at least $250 million of Bitcoin. We're going to announce it to the world. And any shareholders that don't like this new strategy, I'm going to have the other $250 million worth of cash there

to be able to buy my shares in the open market. Fair? That's what he did. The number of people that actually sold into the tender offer was very small. Wow. It means they have confidence in the vision of the CEO. This was a pretty ballsy move. There's going to be people that disagree with NNA. Sailor and his board were very smart and said, for those shareholders, because it's our fiduciary responsibility to manage the company for the shareholders, they want out. Here's our bid. We have $250 million worth of buying power. How much did they buy? I don't remember what it was, but I guess we could do the math because they ended up investing a total of $425 million. So let's do the math and figure they probably bought $75 million worth of equity plus or minus at the tender. Then they took the balance and they bought more Bitcoin, which is beautiful. And they ended up buying $425 million worth of Bitcoin. The neat thing though there, Ben, is the cash.

was already on their balance sheet, the market wasn't giving them any value for the cash. They certainly weren't subtracting value, but the whole market cap of micro strategy at the time was something like a billion and a half dollars. The enterprise value, they had no debt or a very small amount of debt, they were giving that cash value $1 per dollar. And then the rest of the company, the other billion dollars of market cap was because of their future cash flows, et cetera, maybe because they thought. the CEO was a genius, which I actually do as well.

So it had a billion and a half enterprise value. And as soon as they bought Bitcoin, that enterprise value went up to, oh, you know, there was a huge premium, which was a very smart move. So the second thing they did is they bought with cash flow, they bought another $50 million, right? So they bought another $50 million just because they had cash coming into the company. And no one said anything. But then he did something even more brilliant. He issued debt at manipulated rates and interest rates and manipulated volatility, manipulated both by the Fed, and issued at terms that were just crazy attractive,

and took that money and bought more Bitcoin. And I term it capital creation using Fiat destruction. okay every single CFO in the world should look at that trade and understand how brilliant it is now I mean sailor doesn't do things in halves in quarters the guy goes like full speed right so like it's just amazing so there's lots of companies that wouldn't be sitting on 500 million dollars of debt excuse me 500 million dollars of cash reserves um but if they have an ability to borrow a capacity to borrow on a term of five years, every CFO has to look at that and say, wow, I can issue a crazy low interest rates, crazy because, you know, the Fed's in there making them low.

And I can turn that into a reserve currency potentially that in five years, if everything goes according to plan, my Fiat will be debased, my Bitcoin will be higher, and I only have to pay it back in Fiat. Like, it's just a beautiful thing. And Sailor nailed it. And as a rocket scientist and a guy who used to walk around with. these guys that are walking mainframe computers, Sailor gets it,

but then he can actually explain it as well, which is a beautiful thing, whereas most of these rocket scientists guys are, you know, they start shaking and you know that they're, they know something, but they can't exactly explain what they're trying to say. Sailor gets it,

he explains it, and he arbitrages it. And he did a beautiful thing. It's so interesting because it's, this is all of the Fed's own making. It was almost an inevitable inevitability because the the I guess

the tendencies of people to the actions of people are driven by the environment that they're in and so as our fiat currency is gradually debased to drive certain tendencies and certain behaviors and people are much more likely to saddle themselves with debt But people that understand that the value of their cash is going down, they're going to want to park that in assets that can go up. And so we see asset bubbles and things like equity markets when banks get bailed out.

What do they do? They buy back their shares and they buy more equities and they buy other things where they can hold their wealth because they know there's more dollars sloshing around. But obviously, like the end game would be that the most scarce asset is where the money flows. And in a way, the Fed has kind of backed them and central banks everywhere have backed themselves into a corner where there's there's so much debt and there's so much bad debt out there, including their own, that the option is let massive defaults happen everywhere, which nobody wants to do or devalue the currency to pay off those obligations. And if they're going to go that route, then people are going to flock to other assets. And you're seeing, and I think Pierre Richard coined this phrase, but it's a speculative attack on the dollar. And I think we're just starting to see it.

Okay. You know, Pierre Rochard, really, really smart guy. Robert Breedlove, like these guys are just, you know, and they get it. We know they get it. What I think people miss is this. There's no disrespect to them. It's just they haven't spent a whole lot of as much of their time in credit markets. And what happens in credit markets is it's a crisis of confidence that happens really quickly.

You know, we can say, well, we'll keep printing money. And, yeah, you know, it works until it doesn't. And, you know, it doesn't work anymore in Venezuela. And are we a Venezuela? No, we're not. But we're actually employing the same tactics that got Venezuela in trouble. All the other governments are employing the same tactics, which is the assumption that the credit or the lender will always be there.

And in a debt spiral or when you're increasing your debt balance continuously, debt never really matures. It just rolls over. And so you take your one-year obligation comes down to, you know, it finally matures. But it's not like you're paying it off with cash flow that you've collected. The bubble is getting bigger. So at new debt, it's just funded with,

or that maturing debt is just funded with new debt. it's just funded with new debt. The big risk is when it doesn't roll over. It's the margin. It's when an auction fails. It's when a big buyer who's always there doesn't show up to roll the debt. They want their money back and no one else is big enough to take their place and it doesn't role. And in Canada, we had a huge example of that in 2009 with the asset back commercial paper crisis. It was one of actually the most exciting trades of my career. I was at a hedge fund with Mike Weckerly. Not sure if you guys know who he is, but an unbelievable Bay Street equity trader from Griffiths McBurney. He actually was on the TV show Dragon's Den for Canada if you

saw whack. Anyway, great guy. Um, you know, asset back commercial paper went from trading at close to 100 cents on the dollar to literally 50 cents and then 20 cents on the dollar in short order because the biggest buyer in the market, which was Quebec's provincial pension fund, case de de de poe, blasments, Quebec, stopped rolling their debt. And as soon as they stopped, there wasn't enough money to fill in the gap and it crashed. And it actually crashed before all these other things in the world were crashing. So it actually was a precursor to the credit crisis globally. Started in Canada.

And since Canada is not that important, no one really, really identified it. But it was a $32 billion market in Canada at the time. These are not small numbers, $32 billion. The case owned $16 billion of it, Ben, $16 billion. It was 10% of their assets. And it went from 100 cents on the dollar down to 20 cents on the dollar. And as a Quebecer with parents who at the time, you know, relied on the case for their assumed pension benefits, you don't want to lose 10% of your assets overnight. I mean, that's not a good trade.

Is there a lot of this kind of stuff still sloshing around out there? Structured product is nothing but alchemy by financial engineers who are really, really smart at ripping other people's faces off. Wow. So again, so we're sitting at a place where we know that, I mean, effectively everything's kind of broken. we see some people recognizing value in, you know, a truly scarce asset. How do governments deal with this eventuality?

What happens? Great question. I don't actually know. And especially when terms generally are between four and eight years for certain in the U.S. We don't have a cap in Canada, if I'm not mistaken. We didn't used to. Maybe we should, right? But anyway, the point is government terms are four-year terms generally.

And these are 40 and 60 and 100-year solutions. It's very hard to square that circle that you're going to be the guy that goes out and says, that's it, austerity this, and taxes go here. Even if we could solve it, which we can't, again, it's impossible to solve. But even if we could, who's going to be the guy that does that? And what are his likely chances of reelection in four years? Like, come on. So that's a very dangerous thing.

You know, like again, there are very few solutions. There truly are. And nobody wants to fess up. There's people that understand the math, but they're not telling everybody. They can't. It's, you know, a guy like Pierre Pahlmev in the House of Commons. Like, he's bang, bang, bang in Canada's House of Commons. The guy is pretty cool.

But even he doesn't show. Friedland doesn't know the answers. He isn't even sure the questions he's asking sometimes, but man, oh man, it's sort of comical to see these guys that have no idea how debt markets function running around and trying to put, oh, well, yeah, so we're talking about a billion here and a billion there. Those are such rounding small, such insignificant amounts. Guys, we're talking trillions, trillions of dollars that we need to, you know, restructure. The answer that you want to hear, not that you want to hear, the answer that I know, only the answer that I know, only the answer that I know. know is hard assets. So I believe in hard assets. And of all the hard assets, I believe are the cheapest. There's no question in my mind that Bitcoin is the cheapest hard asset that will

protect against this. Doesn't mean that you don't own other hard assets and I don't need to list them. But I'll just tell you, then in a world where other hard assets trade for multiple, multiple trillions of dollars, Bitcoin trading at $560 billion. It's wrong. There's a discontinuity there. So what kind of a, in an instance where people start moving their assets and they start to recognize this as I think we're starting to see, what kind of a bite out of the market does Bitcoin take?

And what does that do to Bitcoin's market cap? I love it, man. I love it. So I'm a probabilities guy, right? And so I need, I try and say, and I'm not really good on Twitter. I've just sort of found this thing. What a beautiful resource to begin with, right? I used to rely on Bloomberg machines and all these captive ecosystems. Twitter is such a beautiful thing because it's, you know, anyone can say whatever they want. And I guess you get censored. But if you say stuff that's halfway intelligent, you know, usually you'll get an audience. You know, you can say halfway stupid stuff and you'll get a bigger audience sometimes. But coming back full circle, you know, it, okay, probabilities. Again, don't overthink this. Bitcoin is either worth more than $250,000 a coin easily, or it's worth under $10,000 a coin. But you're not supposed to care whether it's trading at 20 or 18 or 17. Those are all rounding. errors compared to 250. So I'm going to tell you how I get to my price target. I play probabilities. And I'll say very simply, I think Bitcoin goes to over a million dollars of Bitcoin. And I can tell

you how I get there, but let's just assume that's not an irrational expectation. People start laughing. Oh, you're such a moron. And I go, okay, well, how about this? We'll play a little probability game. How about you give me a 5% chance Bitcoin goes to a million dollars and I'll give you a 95% chance it goes to zero. Is that fair? And most people say, yeah, that's really fair. And I'll say, well, right there on that binary distribution, meaning there's only two outcomes, 95 times zero is zero and 5% times a million is 50,000. You add those two together. You get what's called a probability or an expected value and it's 50,000 of Bitcoin.

On that pure binary outcome, you're supposed to buy Bitcoin with your eyes closed when it's trading at 20,000. Okay? I actually think it goes higher than a million bucks, not with 100% certainty, but with greater than 0% chance. All right. One of my favorite calculations is this, really simply. Breedlove incidentally doesn't quite agree with this calculation. And he's an accountant, and I love, offline I talk with Breedlove a bit. So I believe there's $900 trillion of financial assets, including real estate in the world.

There might be a little bit of double counting on the debt side, and that's where Robert takes his issue. But let's just assume my $900 trillion is not crazy. Okay. So real estate, bonds, equities, gold, so commodities. Of that $900 trillion, we know that gold is only about $10 trillion. either side of 10 trillion. But 900 trillion, let's say Bitcoin someday gets to be 5% of that entire value. Not a crazy assumption, especially if it ever becomes the World Reserve currency.

5% of 900 trillion is 45 trillion. 45 trillion divide by 21 million. Do your calculation. Wow. You know, that's $2.5 million of Bitcoin. And I think it's bigger than 5% of $1,000. 900 trillion, okay? Point is we're talking with numbers that are so large that you're not supposed to trade

this stuff because, oh yeah, I bought it at 16 and I'm selling it at 20 because, you know, I'm so smart by a half. There's an expression in bond trading. Do not be too smart by a half, meaning you don't, you know something's worth 85 cents on the dollar and it's trading at 40. The market's 40 bid, 40 and a half offered, meaning you can buy bonds at 40 and a half. you say, you know what, I really want to buy them at 40 and a quarter. So you go 40 and a quarter bid and all of a sudden that half offering disappears and you're like, God damn it. I wanted it

at a half. Why didn't I pay that price? Even though you know it's worth at least 100% higher. Don't be too smart by a half of you guys. Don't buy Bitcoin at 20,000 and sell it at 25,000. Okay. That is not why you're in this trade. 100%. I think that's, and you see that mentality popping up. up on, you know, because making money's fun, Ben, making money's fun. Let's not forget what capitalism is all about. But for a total valuation of $560 billion US dollars compared to where it could go to, I don't know, maybe it's not $45 trillion, but maybe it's, you know, the market cap of gold, 10 trillion. Well, even at that price, that's, you know, close to $500,000 of Bitcoin, US.

don't mess around with this. You put it, you keep it there. And when you really wake up the next morning and Bitcoin is still around, you're like, wow, my risk actually went down. Bitcoin's still alive. And I love that guy. Did Bitcoin die today? I don't know if you, but, you know, that's his handle. Did Bitcoin die today?

Well, no. So implicitly, you're supposed to realize that your risk actually went down. And that means your anticipated expected return actually went up. These are really exciting times. People don't understand the magnitude of these potential returns. It is the best asymmetric return trade I've ever seen in 30 years of trading. Can't guarantee it. There's very few things I can guarantee.

But I will give you some very good odds that you're buying it extremely, extremely cheap right now. 100% certain? No. The only person out there that's 100% certain is Peter Schiff. Okay. How's that working out so far? I think that is a perfect note to wrap on because I think we've covered an excellent amount and given some people in some really great insight into the bond market and again, kind of the failings of our current infrastructure.

But I'll pass to you if you have one. One last thing, okay, and I've been trying to get this in. So I'm Canadian, you're Canadian. I think the Canadian communities really coming together. I went to a really fun meetup in London, Ontario with Ali from the Real Tahani's Schwimmer restaurant, you know, and there were a couple of Bitcoin guys there. I wanted to mention Jesse Berger, who I first saw speak on your show. I'm starting to read his book.

So he's a Canadian. Wow. Like, you know, Breedlove can write and, you know, Real Vijay can, they can write. these guys are frigging good writers. Jesse Berger is crushing it in this book that I'm reading so far. Okay. So as a Canadian, please do this for your kids. Don't do it for yourself.

Okay. This isn't about buying something and selling it because you made a 25% return or whatever. This is because you're trying to ensure or protect the future generations of Canadians. This is way bigger than making money trading. This is about an asset that could honestly, I believe, change the way the world functions. And I'll borrow things from Marty Bent. And it happens to be the first line in Jesse Berger's book, Fix the Money, Fixed the World. Okay.

That's what Jesse started his book with. And God love you, kid. I mean, that's the truth. It's that big. This is way bigger than bonds. and politicians and, you know, this is about the future. So please do it. If you have any questions, anyone listening to this, I know I ramble on a lot,

but I've seen a lot of neat things in my career. And I continually learn from the young kids that are coming up through the system. You can't, I don't know what a note is. I don't run one. I have people that run them. I love the people that are running them. I'm getting involved in the electricity business. right now. I think we're going to have some really big announcements for Canada in the next

little while. And it's important. It all is part of this movement to replacing melting feats and the unsustainability of just printing money because you can. That runs out. Look at Venezuela. I love it. Greg, I've got to say, first of all, a vote for Jesse Berger. Everybody, be sure to check back. I have a full interview with him and his book is fantastic. And I'll link to that down below so people can find it. But yeah, Greg, this is a great conversation. I had a lot of fun.

I learned a whole bunch. And I'm sure everybody else watching and listening has as well. Really quick, where can people find you out there on the interwebs or anything else you want to mention? So my Twitter handle, which is getting, I didn't name it, Twitter picked it for me, but Foss, Greg Foss. So my last name Foss, Foss, and then my first name, G-R-E-G, and then my last name again. You know, I'm old, my best conversations are held with people that are afraid to ask questions in, in public. And I don't be afraid. bonds it's not about bonds it's about risk okay bonds are just a form of risk uh it's about risk and probability and i'm always happy to apply on that uh you got to play probabilities it's like sitting down at the you know at the card table you you there's times when you go all in there's

times when you walk away there's times when you you know there's the biggest challenges i have lately is not actually looking at the price of Bitcoin for over 24 hours. And it's sort of a challenge because I'm dying to look at it. And darn it if CNBC doesn't put it on their tickers sometimes, and I don't know yet dogs, I didn't want to know what it was, you know? Because it's not about these prices at these low dollar values relative to where I think it could go.

So you can reach out to me. Thank you for inviting me. I swear I'm open for any future conversations with anybody. I believe in this. I'm almost 60 years old. So I graduated university my first time around without ever having used a personal computer because they didn't exist. Can you imagine? And then the power of the iPhone, which I have now, I don't have it in my hand, is more powerful than putting two men on the moon when I was like, I guess that happened in.

I might have been six years old, something like that. Guys, you have no idea how much the world has changed and how exciting. is. And where kids grow up right now, they're just used to this. It wasn't always like that. It wasn't always like that. So be excited. Be a risk manager. And let's ride this wave together because it's important for the future of our country and the future of all risk managers. Awesome. Greg, thank you so much for being on. I had a blast. Hey, I'm Ben. You guys have a great show. And I look forward to to talking again, I guess, this Friday, right?

Yeah, absolutely. All right, brother. Thank you guys so much for watching and or listening. If you are on YouTube, please do hit like, subscribe, and share. All of those things help so much. I can't stress it enough. The more you do those things, the more content like this gets bumped in front of more eyeballs.

So thank you for those of you that have been doing that a lot lately. If you want to help out the show in another way, you can hit up the sponsors I mentioned previously down below. That was Ledden, Kobe. Bill Foddle, Privacypros.io, and the guys at BitRefill. And finally, if you really liked what you saw or heard, you can head over to my tippin.me page and leave me a Bitcoin Lightning Network tip. That is t-I-p-p-in.me slash at BTC Sessions.

With that, I am out. Have yourselves a wonderful day, a wonderful evening, wherever you may be, and I will see you next time for your daily session. Oh, yeah.