TFTC: A Bitcoin Podcast - #140: Kyle Bass & Parker Lewis

Episode Date: March 12, 2020

Join Marty as he hops on a call with Kyle Bass and Parker Lewis to discuss: - Recent market chaos - The Fed's response up to this point and what they may do moving forward - The need for a strong fiscal response in conjunction with Fed policy - The dangers of centralizing our supply chain in China - Russia's move in oil markets over the weekend - much more Follow Kyle on Twitter Follow Parker on Twitter Shoutout to this week's sponsors. Cash App. Start #stackingsats today. Use the promo code: "stackingsats" to receive $10 and contribute $10 to OWLS Lacrosse you download the app. Unchained Capital. Head over to www.unchained-capital.com/vaults and check out their 2-of-3 multisig vaults.

What's up, freaks? It's your boy Marty here to introduce the second episode today, dropping two episodes today, because I think this episode particularly is very timely and important to get out to you freaks as quickly as possible. I had the immense pleasure of sitting down with our good friend Parker Lewis from Unchained Capital, and he was so kind to invite his friend Kyle Bass, Chief Investment Officer of Hayman Capital, and Kyle was so kind to oblige to come on my lowly podcast. We talked about everything that's going on in the markets right now, the Fed's reaction up to this point, what they may do moving forward, the need for a strong fiscal response in conjunction with what the Fed is doing, the dangers of centralizing our

supply chain in China, the move that Russia made over the weekend in the oil markets, and a bunch more. It's a very dense 45 minutes. I'm very excited for you guys to jump into this one. This episode of Tales from the Crypt is brought to you by our good friends at Unchained Capital. they're doing incredible work to bring solid financial services to bitcoiners they started out with their loan program where you can use bitcoin as collateral excuse me to get liquidity if you need it if you don't want to sell your bitcoin and if you need some cash you can put your bitcoin up as collateral and unchained will give you us dollar loan in the same day okay and on top of that they have their vault program they're very security focused security

first is their mindset the vault program is a two or three multi-sig quorum where you hold two keys either treasure or ledger can be used to set up these keys soon to be a cult card and unchained holds another and you can move your your bitcoin out of the vault whenever you want by yourself with your two keys but if you're ever in a pinch and you need unchained to help you move that they will be there with their key to help you move it off exchange on top of this excuse me not off exchange out of their vault uh on top of this they're doing incredible work in the open source space uh they've open sourced their multi-sig quorum with caravan you can download that and create multi-sig quorums by yourself without unchained being involved they're working on slip

39 hermit and then they've got an incredible blog series as well uh multiple incredible blog series excuse me parker's got gradually then suddenly druve is doing great things on huddle waves and bitcoin in space will call will cole's coming on talking about the product side phil geiger's got some great blogs on there as well go to www.unchained-capital.com www.unchained-capital.com check out everything they've got going on incredible team doing incredible work this episode's also brought to you by our good friends at the cash app you guys already know all about them they're helping you do many things they're helping you stack sats they're helping you send sats they're helping you receive sats or helping you sell sats if you want to sell sats also helping you

sell songs sell stonks sell stonks they've got cash app investing where you can buy slivers of stonks now all right if your favorite stock is just a little too expensive which may be hard to believe after today you can buy as little as one dollar of that stonk okay and then on top of that uh they've got their boost program you get a personalized debit card except then anywhere visas accepted you put your nice little signature on that and then they have partner merchants and then when you go shop at those merchants you put on the boost you save a little bit money okay go download the cash app today use the code stacking sats that's one word stacking sats you're going to get ten dollars and then ten dollars going to go to our good friends at

Owls Lacrosse. Also, don't forget Cash App Investing is a subsidiary of Square and member SIPC. Go to your local app store and download it today and enjoy this episode. You've had a dynamic where money's become freer than free. If you talk about a Fed just gone nuts, all the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin.

If you're not paying attention, you probably should be. You probably should be. What's up, freaks? It's your boy Marty Bent here. For a very special episode, another flash episode this week, we've got two very special guests, one that you've met before. We've got Parker Lewis from Unchained Capital on the horn, and he's joined by Kyle Bass, the CIO of Hayman Capital.

Parker and Kyle, welcome to the podcast. Glad to be here. Yeah, same here. Very happy to have you guys on the horn today, particularly a tumultuous day in the markets. S&P is down 9.5%. The Fed came out. and announced that they're going to do $1.5 trillion in repo operations over the next few days. So I guess we could just jump in. It seems that the markets have been hit with a couple

black swans in the last few weeks with the coronavirus and the oil wars over the weekend throwing more fuel on the fire. So Parker, last we met, we talked about the repo operations after the spasm in mid-September? What has happened since we last talked in your mind? Yeah, so I think that that is one thing that obviously when we see a sea of red out there day after day after day, and we see what's going on with the coronavirus and the all-out oil war, I do think that it's important to kind of frame that with the backdrop that the repo market essentially broke down in September before all of this happened and that it's really the culmination of a setup where there was already some I wouldn't

say necessarily systemic but there was some underlying market structure issue that the Fed was already dealing with and then that then accelerates when there are two kind of two events that the market really had no way of forecasting. And so, you know, as of two weeks ago, you know, obviously the oil imbalance likely existed before, you know, the all-out war. But in terms of the market's pricing for that, it didn't. And then again, two, three weeks ago, people understood that coronavirus was out there, but the real public perception around it had not yet accelerated. So I do think that we should talk about kind of the current market moves and what it means and what the Fed's likely to do

next. We saw what obviously the Fed did today with three different $500 billion repo facilities, two three months and one one month. But that sometimes in the volatile markets, we can forget that the issues already existed and this was the accelerant rather than necessarily the underlying issue. Curious to get Kyle's thoughts. Yeah. I mean, it seems to me like the various parts of washington started to actually wake up today and that you know we are down in the dow we're down 25 year to date and the s p uh we're down 23 year to date and of course much more from the highs because we had a we had a pretty big january uh with capital flows coming into equities on the retail side but it's important to note that even basic funding markets actually seized up

late last week and early this week, i.e. we had a building that we had invested in and it was a new build out in North Dallas and it was being, it is a brand new class A building, built, leased, sold to an institutional buyer. They funded the earnest money and we're going to do a CMBS funding for the closing. It was supposed to fund last Friday and close this Monday and the transaction failed and they asked for a three-week extension because the CMBS markets weren't funding and so when you think about Class A real estate fully leased credit tenants this is easy funding and the easy funding stops so when I think about the repo operations today the Fed woke up they

did five hundred billion in three months today they're going to do five hundred billion in three months tomorrow and five hundred billion in one month tomorrow. So you have $1.5 trillion in, call it, basic funding markets. I think you have to separate that from high yield, even corporate credit and equities. That doesn't do anything for the stock market or the bond market. It does a lot for basic funding markets in the banking sector. And then the little tweak that I'm not sure people noticed yet, the $60 billion tweak is they said they're going to spread across maturities. So now that's full QE, right? That's not short-term funding that they can just turn off. That's spreading, they're QEing $60 billion

a month from now on, meaning they could expand the balance sheet a trillion in a year's time. Yeah. And that's the question that I've had is they've been signaling these short-term facilities and at what point do they just recognize, or they may already recognize that, but something's preventing them from just going full QE and terming it out? Well, I think that the Congress doesn't want Fed balance sheet expansion again. The Republicans don't really want it. However, our country is facing a crisis, a crisis of not only funding but of corporate credit, because no one anticipated revenues dropping 70%, 80%, or in some cases, maybe

even 100% for a couple of months. And so I think no one thought about consolidated debt to EBITDA covenants with EBITDA collapsing. And so I think it's important to note that monetary responses here have to be coupled with fiscal response. It just has to. I know you and I, Parker, have talked a lot about, you know, let's just say the school of balanced budgets. And, you know, we're both disciples of Hayek, I think. But it's important to note that if you and I were running the Treasury, I could convince you today that we need a massive fiscal response immediately and not infrastructure spending 18 months out. We need payroll tax cuts now so that that money gets into the U.S. economy, coupled with a fiscal response.

So the Fed is going to meet next Wednesday. I don't think they can wait till Wednesday anymore. And they're going to cut 100. they're going to announce maybe even a little more QE, but I think it needs to be side by side concurrently with a fiscal response. So that's a long way of saying that I feel like maybe the Fed's there, but I'm not sure President Trump's there. He seems to be taking a laissez-faire attitude, which I think is flipping his chances of election, truthfully. So two weeks ago, I'd say it was 60-40 Trump-Biden. And now I will say it's 60-40 Biden-Trump, because Trump has

absolutely blown the handling of this virus. Yeah, that's becoming more and more evident by the day. He was comparing it to the flu only a week ago, last night during his speech. He seemed like he was putting concerted effort to be more resolute and more presidential about this disease but he did come out and sort of hint at the payroll tax cuts that need to earn the speech and it seems that yeah it's yeah it's it's important that you know what trump proposed is exactly what our country needs but he seemed to after the market closed yesterday and like i know that i know your podcast that you want to make it more uh uh let's just say timeless but this is so timely given when we're talking um he he made this proposal that was eliminating both

the employee side and the employer side in elimination of even Social Security tax throughout the end of the year, that's $800 billion of stimulus. That's 5% of GDP. That is massive. And if you look back to Obama's 2011 payroll tax cut, the polling back then was the people receiving the payroll tax cut would spend 15% of whatever they're getting in addition in their paycheck, they would spend it immediately in the economy. And if you look back at it, they spent about 36%. So if you take 36% of $800 billion and we get the full payroll tax holiday

throughout the end of the year, that's a 2% of GDP fiscal injection immediately, which is exactly what we need. But let me see if you agree with this. The Treasury can only do that if the Fed's financing it because that's going to blow out the federal deficit oh yeah no doubt about it but that will be easy yeah you could hit the easy button on that the treasury or the federal government congress announces that in conjunction as the fed is announcing the four trillion dollar qe program well i don't know about the four trillion but i you know look if the fed were to be really bold here and push Congress, the Fed could announce that they're going to allocate $500 billion to coronavirus spending, and they're going to expand their balance sheet by $500

billion as Congress deems fit. And that would put the pressure on Congress to come up with a plan for coronavirus spending up to $500 billion. But the Fed has really stayed in its lane, and Jay Powell is a stay-in-your-lane guy. So I think you're going to need the executive branch and congress to come to some conclusion now rubio has said 300 billion pelosi said 400 billion trump's at 800 so if you if we think bid offers 400 800 then trump should just get with pelosi and make something happen we're at that moment where we got to in the eurozone in 2011 where we needed draghi to come out and say i found a magical trillion dollars at the imf and we're We're going to do whatever it takes at the ECB to solve these problems with our sovereigns.

And that press conference marked the turn of both equity and sovereign debt markets in 2011. We need a similar press conference. We need Trump to stand next to Pelosi as painful as that's going to be for both of them. And we need a few other senators and congresspeople. We need Mnuchin. And we need Powell. And we need them to stand behind a microphone and say, we're going to do whatever it takes to counteract the negative implications on our health care system and our population from a health perspective of the virus. And we're going to counter cyclically spend from an economic perspective.

And we're going to do whatever it takes. That's all they have to say. And I think the markets relax. You would think that. Yeah, go ahead, Marty. I was just going to say that whatever it takes line is coming back. We must go to whatever it takes. And that in itself, it'll change the perceptions of the participants. And right now, after a drop like this, we have wiped out such an enormous amount of equity in global markets that at some point in time, somewhere around now, you're at full panic mode. The S&P futures today traded $195 billion in notional value, and the spiders traded another $100 billion.

We traded $300 billion in indexes alone today. And just to put that into perspective on the futures side, that was almost 20x average daily volume. Oh, my gosh. And we closed on the lows. and so if anything this this this crisis that we we find ourselves in is really laying bare the vulnerable situation that our economy's gotten in over the course of the last few decades right a virus can come out of nowhere and sort of grind everything to a halt and we sort of in my view are being caught with our pants down and it seems that

other countries, Russia, maybe China in particular, sort of smelling the blood in the water, tasting the blood in the water, and acting. Do you think that move by Russia over the weekend to not cut production was them striking while the iron was hot, while they saw us in a vulnerable state? 100%. They play it off as a dispute between OPEC and Russia, really between MBS and Saudi and Russia. And what it really is, is the MBS Putin two-step. They smell blood in the water. It's a giant demand-driven collapse. And at that exact moment, they move to crush U.S. energy independence by coming after our shale business. And what a lot of people didn't didn't really make a lot, really, it didn't get reported yesterday. President Trump had a call

with MBS yesterday morning. Just after his call ended, MBS announced the hiring of many super tankers to take oil out of Saudi strategic reserve and flood the market in the United States. It was a big middle finger to the Trump phone call, because as we all know, anything below roughly 40 equals bad for the United States, i.e. rigs get laid down, people get laid off immediately. We have massive job losses. And also, it increases our dependence on foreign oil, because above 40, we are now a net exporter if you include NGL. So that was a pure economic attack on us. And then just today, the Chinese foreign minister came out and said that they believe that the coronavirus was brought to China by the U.S. military. One day, Wall Street's going to

understand China is our mortal enemy. So far, our executive branch, our intelligence service, and our military knows China's the largest existential threat to the United States over the next 25 years, and yet Wall Street can't wait to invest another shekel into China in hopes of chasing the 1.4 billion person uh pot of gold at the end of the rainbow yeah i was actually just reading um the department of justice release late january of the harvard university professor and two chinese nationals who were charged in three separate china related cases where they think that maybe the harvard professor was sending information back to the chinese government so it seems that they're trying to infiltrate us uh and then attack from the inside

and then attack from the outside. And that's what really perplexed me this whole time. Since the news of the virus has started to spread in mid-January and then picking up through February, it was extremely confusing to try to grasp what's going on because it seemed like China wasn't being forthright with the information. And that's sort of the relationship we're in. We give, give, give to them.

And they're holding their cards as close to the chest as possible and not being open about what's going on? Well, it's important to note that the Harvard professor that was indicted by the DOJ along with his Chinese national postdoc students was the director of Harvard's chemistry program, biochemistry program. He was on the payroll of the Chinese government. He was part of their Thousand Talents program. They recruited a U.S. national into their spy network,

and they arrested him and a handful of others and if you look I don't know if you've ever looked at his home page or the page of the Harvard biochemistry department but it looks like he looks like he's standing at the University of Beijing and he's actually in he's in Boston and Cambridge and it's important to note how deeply they've infiltrated our educational institutions and our companies in the United States and our national labs for that matter and so We, as a government, need to engage in a whole-of-government rethinking of any labs that are funded by DOD or NIH and whether or not we allow even naturalized U.S. citizens from foreign countries to participate in those labs

because right now we don't have any way to protect that intellectual property. No, we don't. Again, switching back to the supply chain problem, it seems, again, we're being caught with our pants down where China's producing a lot of the medicine that's coming to this country. And again, right before we hopped on air, I saw a tweet that they're threatening not to send medicine over if we don't sort of comply with what they're asking for. Yeah, I mean, Rosemary Gibson is the world's authority on this.

I suggest you see if you could get her to come on. She's probably very busy at the moment. But I had dinner with Rosemary about two months ago, And she gave me this entire dossier on how 90% of the active pharmaceutical ingredients that go into U.S. antibiotics, 90% of antibiotics, the APIs are manufactured in China. Now, from a national security perspective, that just can't be. And we've let it happen. So, again, whole-of-government approach. We must have many, many, many, many, many months, if not years, of the ability to manufacture APIs for antibiotics. 100% of people that take blood pressure medicine and kidney dialysis medicine comes from China, 100%.

So what Rosemary says is, if China cuts us off, our military hospitals will run out of antibiotics within three weeks. Just think about how bad that can be for us. It's insane that we let this happen. Like, we're after cheap T-shirts and cheap tennis shoes, and here we end up offshoring all of our API production to China, who uses substandard reagents and who has sent toxic chemicals over here and drugs like Zantac. As you probably remember, it had to be pulled from the shelves because the quality of the reagents they were using to create Zantac created a toxicity that actually was killing people. And it doesn't even get into the fentanyl either. Yeah. Yeah, I mean, fentanyl is a reverse opium war.

They're running it against us and killing us by the tens of thousands. So how do we reverse this? If we need a fiscal response to this, what does that look like? Do we start funding factories here that solely produce these goods? Is that the way out? Like last time I checked, our drug companies do pretty well. I don't think this requires government spending. I think it requires a government mandate that says of the drugs that they produce, of the antibiotics they produce, pick a number.

50% to 70% must be produced within the continental United States. It's a U.S. law. It seems pretty simple, simple enough, and it seems logical, too. It's so simple. Their margins are so big. This offshoring of drugs while they raise drug prices only increases pharma margins. So this is a greed problem. Interesting.

And then I noticed with the oil, too, you were suggesting to impose a $10 per barrel tariff on imported crude oil. Is that a good step forward as well? If you're going to have Putin and MBS ganging up on us at a point in time in which our energy national security is just as important to us as our pharmaceutical national security, I think that, look, my own view is the reason we were in the Gulf War and going into Iraq, I think it had everything to do with U.S. energy security. And in fact, I've spoken with President Bush about this several times.

So I know that 9-11 was a big deal, and I know that we had 3,000-plus Americans die in the most horrific terrorist event in the history of our country. But I also think that our presence in Iraq and Afghanistan was twofold. It was to, you know, fight al Qaeda and the terrorist networks that are trying to disrupt, you know, the U.S. way of life over here in our country. And also to protect U.S. energy security, as if you remember back then, we really hadn't discovered fracking yet. We were having real problems getting hydrocarbons out of the ground. It is crazy that we could be energy independent and something like this is prohibiting, may prohibit that if we do not. I mean, we we we got we went from five and a half million barrels a day of production to 11 and net of NGOs.

We are technically a net exporter today. Now, if they kill our shale business, you know, that roughly six million barrels a day all came from nonconventional sources or unconventional. And those decline curves of shale wells are, you know, 75, 80% in the first year. So that hamster wheel moves pretty quickly. And if you bankrupt the shale business in the U.S., we'll all of a sudden, in the next 18 months, we'll have to rely on the Middle East again for 2 or 3 million barrels a day, which will, again, change this geopolitics. How do you think this is different than 2014? Now, obviously, Russia's involved, but similarly, oil went from 100 to 30. West Texas, the oil field restructures and becomes more efficient. We move on, and now this.

So back in 2014, it was a technological innovation. We got to a point where we were fracking gas, then we figured out how to frack oil, and And then we started really moving the needle on our production. And we started extrapolating, well, if we keep adding a million barrels a year to production by fracking the Permian, that we're all of a sudden going to have more than enough oil than we know what to do with WTI, so we're going to have to actually start exporting. And so when the oil market figured that out, we were trading at 100, 105, we went to 30 because of the oversupply.

is this is an outright sovereign attack on our business here this is this is analogous to China what China did to our pharmaceuticals business it's what they did to our aluminum business they what they do is they give their aluminum producers free electricity and free land well electricity is the largest input to aluminum smelting so they could come in and under sell us for at price for aluminum and our capacity utilization of our aluminum plants went from 85 to 40 in a year and in 40 you're out of business so that's why we implemented those you remember wilbur ross's first tariffs were on steel and aluminum because the chinese were giving their

producers free electricity and free um land and they live intentionally wanted to put those businesses out of business so we would rely on china for our strategic aluminum steel and metals which clearly we couldn't do but they got us on pharma we didn't see it they didn't get us on aluminum and steel and i don't want i don't want saudi and uh and russia to be able to get us on oil so we should i think we should consider putting a an import tariff on on import on foreign oil now that will suck for some refiners that only use foreign heavy oil right uh but uh you know if you're going to implement radical plans they're always going to be winners and losers and you just have to deal with it and so when you when you when you think about so

we're talking about massive geopolitical issues with china russia saudi arabia all of those not only are geopolitical issues they're also structural right if we think about what's happened today and in thinking about markets today and what the fed does or what the markets do to correct like in my view you know especially when we look at high yield because a lot of the energy bonds that are in you know in the high yield index of many of them are trading at 20 cents 30 cents 10 cents on the dollar it's very difficult to put that back in you know back in the bag um and that you know now that the market is so aware of this imbalance like that that debt needs to be restructured and you know just looking at the high yield market as a whole it's like

those funding issues kind of in the overnight markets you know are one kind of aspect of it but then corporate credit and you know how how you know once that dam breaks it's very difficult to turn it on a dime oh yeah right so i'm not suggesting we're going to turn it on a dime that this f5 tornado is ripping through here and there will be casualties right the last thing you wanted to do is just keep ripping through here though right so what I'm suggesting is we don't want our entire shale business to go bankrupt the weaker players will certainly go bankrupt the over levered players in the corporate side will certainly go bankrupt you know look the

our administration is going to have to decide whether we're willing to bail out the airlines, the cruise lines, and the theme parks. We're just going to have to make that decision. And that's going to be a tough one. You remember 9-11, when you have high fixed cost structures, when you have an airline, you have pilots, flight attendants, gate workers, gates, your cost structure is still 100%. You can't lay those people off. They're all unionized. So if your revenue goes to zero for three weeks, you can go from healthy to out of business. You just think about how crazy that is. An airline can be out of business in three weeks with zero revenue, with flights grounded.

And so I think that we'll have a period of time, whether it be six or eight weeks, where people won't fly. And whenever infection rates start headed down and people start coming back out, they'll fly some more. Cruise lines, I'm not so sure. I'm not so sure people are going to go get floating petri dishes and hope they can dock somewhere again. I'm sure. I don't care how cheap. I'm sure some of middle America will, but I bet they have a permanent loss of, of, uh, customers at a certain, to a certain extent for, for, for more extended period.

So it's going to be really hard for the government to quote bail them out unless they're senior secured in front of the banks in front of the equity. And, and then you're going to have to start imposing. I think you're going to have to impose, uh, uh, curbs on executive pay until they've paid the government back. So that's the only way I would do it. Yeah, it seems like, again, we're in a very precarious situation. Drastic times call for drastic measures.

And yeah, Parker, like you said, with the shale business particularly, like a lot of that debt is triple B rated or junk, straight up junk. And the restructuring of that corporate debt sector particularly is frightening when you just think about the numbers. There's hundreds of billions of dollars worth of these corporate bonds. Yeah, and so I believe the high-yield credit markets, don't quote me, but it's either $1.6 trillion or $1.9 trillion. It's somewhere in that order of magnitude. And if you just look at HYG, which is the high-yield ETF, the high-yield ETF has dropped $10.

dollars and if you again it's more than 10 bond points in the last you know two weeks um you know it's dropped from 87 to 77 and when you think about the you know the average maturity that's in that index is is about it's just under five years and you know not doing complex bond math but just you know kind of averaging it out that's effectively you know an interest rate increase for you know that entire universe of corporates and obviously not distributed evenly and energy's gotten hit more, that the cost of interest to refinance debt in that space has gone up by 2% in a matter of 10 days. And if you were thinking about the Fed slowly increasing interest rates by 25 basis points over the course of 18 months or two years, that's like these companies getting

eight interest rate increases in two weeks. And we know that the Fed looks at risk premiums. And so what we're essentially seeing now with Treasury's, you know, one Treasury volatility is a problem in itself. But generally, over the last two weeks, Treasury yields collapsing and at the same time, risk premium widening. And so I think that that's a real problem. And just looking at, you know, sometimes we get lost looking at the aggregates. But if you look at the actual components of the of the HYG, the high yield index, or at least the high yield ETF, there's a thousand bonds in there. When I looked at, you know, when I was looking at this 18 months ago or two years ago, virtually every single of the 1,000 bonds that were in that index were trading at or above par. And the entire index was trading at, say, 105, 106 relative to par. You know, two days ago, 650 of those bonds were trading above par.

Yesterday, it was 530. Today, it's 430. So, you know, Kyle and I have both traded in the high yield market. And when liquidity leaves that market, if we think that there's a liquidity issue in the equity markets or in the repo markets, when liquidity leaves the corporate bond market and the high-yield space, I mean, it leaves. And every trade, even a very small percentage of the float, moves bonds 5, 10 points in a trade. So something that happened an hour before the market closed today, I have friends that manage huge high-yield portfolios, and they deal with capital flows from investors daily. and a bond that traced at a last traced and traded today at 82 they needed to sell you know 10 million of that bond before the close and the only bid they

could get was 74 and they hit it and so you know you when you look at what NAV is today that's not definitely not a liquidation in a B that's a maybe last traded 1 million bond nav that's uh if you really need to move some things the numbers are much worse yes and i that gets into the next question like the the last crisis really proved in 2008 how over levered the system is like is it any any worse this time around like how over levered is the system right now you know it from a corporate bond perspective uh it is it's the most levered it's been and that's that's largely because we we were at the lowest rates again and we've let we've levered up that the good news about the system is

our banking system fully recapped after the financial crisis and this is you want to compare us to Europe to Asia we we had about a trillion of equity going into the crisis and we had about 1.7 times GDP in total banking assets if you include the non-banks like fannie and freddie and the and the non-bank financial institutions so uh we really had call it on balance sheet about 100 of gdp and off about 75 including fannie and freddie so uh we lost about 800 billion dollars in the financial crisis and we replaced that through common and preferred uh equity raises for tier one capital europe doesn't have a central taxing authority and never recapped its banks. And so that's why, like when you had Raoul on and he

keeps talking about Europe's banks, Europe's banks have no capital. In fact, they have more non-performing loans than any banks in the world, except for maybe China and Hong Kong. And so Europe's in real trouble. Italy is the old man of Europe and Italy's banks are the worst capitalizer of them all, along with Greece. And now, you know, tourism's off and Italy relies almost solely on you know manufacturing and tourism for its gdp greece relies almost solely on tourism it's off their banks have huge non-performing loans uh europe's going to have another existential crisis the u.s is actually okay now our gdp could drop with the world gdp going down but we're not going to have an 08 with our banks it's just the problem with the reason

that we spoke about earlier with Wells Fargo and JP Morgan and the rest of the big G-CIFI banks, if the Fed cuts 100 and we're back at zero, net interest margins collapse again. And then we've got zombie banks like Japan and Europe. So, you know, I'm not so sure buying the banks is a great idea, even though they've dropped 50%. They may bounce, but I wouldn't think they're great long investments from here yeah that is a question that I've had and I think you may have answered part of it there is that thinking about 2008 as subprime that bled into the banking system and then so it's subprime being the match and that then when when the counterparties that were failing were

actually banks that's when everything really accelerated and one of the questions that I have and I've thought some about but I don't yet have answers for is to today what we're seeing is volatility around the edges the banks counterparties not the banks themselves and it sounds like you have the view that because we recap the banks that the banks won't be the same issue they were then but yeah if this goes on for a month two months three months how much can the banking system withstand where the weakest of the lot falls and yeah be consistent i'm just saying the system as a whole again there'll be casualties of people

that were offsides that were lending too much energy let's say right the the big energy companies are going to draw their revolvers and then they're going to file and the the ones that are in trouble uh and then the bank's going to have to go through bankruptcy processes right the ones that were their uh lines of credit or their their abl line so i i think i think you're going to have casualties But as a whole, 2008, our entire banking system was insolvent. Everybody. And we had to buy enough time to have the earnings to earn back into equity and extend maturity as much as we can. And Bernanke, you know, Paulson Bernanke did a great job of doing that.

I'm saying you're not going to have to worry about your bank being solvent if you have a money center bank as your custodian. That's what I'm saying. It's just different. yeah there'll be some again there'll be casualties but they'll be on the in the banking sector i think they'll be in the fringes there won't be a there won't even be a a mid-sized regional that goes down yeah no that's sort of what people are surmising was the the uh the impetus for the spasm and repo

in mid-september right it was a restructuring of jp morgan's balance sheet particularly rotating out of um treasuries and into cash or excuse me out of cash and into treasuries yeah yeah and you know again what's interesting is that the move today when you think about stocks and bonds um bond yields you know collapsed this morning and then finished the 10-year i think finished the day higher in yield so if you remember 98 they were the the long-term long-term capital crisis you had a you had a firm that was hyper levered to risk parity and relative value trades. And when historical correlations break, like today, think about this, right? You had equities down 10%. You have

Bitcoin down roughly, I don't know, 10, 12%, whatever. 25. Whatever. All right. It was down a lot. Gold was down. So you have stocks, Bitcoin and gold down. And you would imagine if I gave you that if i told if someone asked me stocks down 10 bitcoin down 25 gold down whatever it was down today and you said kyle what would you do with bonds i'd say i'd have my entire account in bonds and and i'd have lost money and so the historical correlation between stocks and bonds broke in the last couple of days and what that tells me is uh some of these risk parity funds are blowing up because they run a lot of leverage. Again, correlations break.

These highly leveraged structures get in trouble really quickly. Yeah, everything becomes correlated to the dollar. Everything. So moving forward, I mean, I think we would agree that the Fed's policy over the last 12 years or 11 years has really suppressed volatility. And it seems like they're running out of ammo, like we've discussed, and we're going to need some help from the fiscal side. So how long do you see the Fed's policies having any efficacy moving forward? I mean, I find it hard to believe that people don't lose confidence in their ability to actually manage this stuff.

Yeah, well, yesterday was a big, it was an epic blunder on Trump's part. Two days ago, he said he was going to hold a press conference at 5.30 to discuss both fiscal and regulatory, fiscal and monetary actions from the federal government, and Trump didn't even show up at the podium. He sent Pence. Immediately, the market dropped 80 S&P points, and we have today. And today was just an epic failure of just a tiny tweak on the regular funding markets, but no help for asset markets anywhere and no whole of government approach. Again, think about how they orchestrated the bottom in 2008, and they just seemed to be asleep. Now, again, some people in D.C. woke up today. Maybe 6% yesterday and 10% today wake some people up.

now 16% in two days is an absolute abject disaster what do you think makes them actually term you know at least on the Fed side because I think Trump Trump's speech last night being a nightmare but then pal today 1.5 trillion of repo market rallies 6% and then rolls over and finished the day right so yeah what We need a fiscal response. You think that it's... Yeah, absolutely. We need a fiscal response.

I mean, I know we're optimistic about them coming together, or we may seem a little bit optimistic, but considering the history of Trump's first term, it seems hard to believe that they're going to come together, especially during an election year. Yeah, it seems like a very, very precarious situation. Holy shit. Yeah.

Yeah, I think that they'll likely be forced to do it, but I also believe that in order for Congress to pull that off and to blow out the federal deficit, it's going to have to be timed in concert with a formal QE program. And whether it is or isn't, that whatever the Fed has bought or accumulated to this point in time will have to be termed out. Otherwise, the bank's ability to satisfy that excess supply of treasuries without causing rates to rise would be practically impossible. That just seems like the inevitable end game.

Now there's a question as to even the efficacy of QE, but if you beat a dead horse long enough, maybe it'll get a little bit more dead and the markets will calm down. But that's really where ... I'm probably less informed on the fiscal side, but That is, in terms of the monetary side, QE and a longer duration QE and likely something bigger than QE3, in my view, comes. I agree, but your question is when? And look, the Fed already did an intermeeting cut, right? If they have to come in and intermeeting cut again before Wednesday, right, that's not good. But if they do nothing going into tomorrow and the weekend, I mean, God help the asset prices.

Well, it's sort of a rock and a hard place, right? I think their first 50-bip cut did absolutely nothing. And if they have to do it again before the meeting... Well, again, I can promise you the next cut won't be 50 or 75. They will go a full 100, and they will tell you they're going to expand their balance sheet. Yeah, I was looking to this point. They have, or at least as of yesterday,

before the repo program that they were announcing today, they had increased the balance sheet by, I believe, 500 billion. net, from October of 17 through September of 19, they had effectively only reduced $700 billion. And then in six months, it's basically that whole practically two-year runoff, gone, and put back in the system. I think that what that shows us was they never could take that liquidity out of the system. Well, look, if you look at the way Basel III works, there wasn't enough collateral

in the system for the system to operate. You have to have, if you're gonna run fiscal deficits, you have to expand your balance sheet. You have to have the bonds to run them. And so your banking system needs those bonds to repo as collateral to increase the money supply. And so my view is you could never get it below three and a half trillion,

just given the requirements that Basel III institutes on banks. And so your point is well taken. And unfortunately, we're headed down this road never we're never going back yeah we are never going back how close is nerp what was that how close is nerp i oh i i think that's uh today you know i know enough fed governors uh that uh i think it is literally an impossibility today given our current fed staff and understanding of of nerp i just think we'll we'll just keep

expanding on the fiscal side you know that doesn't mean that you know we can't expand on the fiscal side enough to where we have a where we cap maybe the 10-year and and try to develop some steepness in the curve the steepness in the curve is positive for our system and so we can't have a flat curve and I think I think we'll go for that all right we're about 45 minutes in I'm scared shitless I want to thank you gentlemen for taking some time to sit down and talk with this freak if you guys have any parting notes in the last 45 seconds words of wisdom you want to give to the listeners now that's it we

appreciate it and you know God God help the United States here in the next few weeks and God help the Bitcoiners there are no circuit breakers be careful find safety and sets thank you guys really appreciate it all right see you marty see you