TFTC: A Bitcoin Podcast - Ten31 Timestamp: The Die Is Cast

Starting point is 00:00:00 john here we are another monday morning another 10 31 time stamp recap every week another another time stamp another sunday night bitcoin dump to get the juices flowing hey liquidity alarm bells going off i just recorded with michael michael howard just talking about it it looks like liquidity is turning over we're we've peaked in the liquidity cycle going to a liquidity trough but we're not here to discuss that we're here to discuss the time stamp rain snow sleet we'll get get through it we just got 30 inches of snow here in the philadelphia area i've got kids home home from school crying downstairs i can hear them right now i apologize if you can hear them too but the show must go on um if you haven't subscribed to the 1031 timestamp or know what

Starting point is 00:00:43 we're doing here john writes a newsletter for 1031 every saturday it goes out you can sign up for that at 1031timestamp.com that's t-e-n-3-1-timestamp.com make sure you get on the list and this week we're talking about the reality distortion field a a concept that steve jobs popularized why did you decide to lead off with this this week john yeah it just it popped into my head this week after seeing a couple headlines uh you know i just i couldn't get it out of my mind this idea for those who haven't read the jobs bio or seen his various biopics of him over the last 20 years he's known for having a level of some would say charisma some would say brilliance some would say abusive personality whatever you know some combination of all of them as most

Starting point is 00:01:31 mercurial founders kind of often do you know but he had the ability through all those different things to warp reality to his liking right to get people to do things that anyone else would have dismissed as like structurally or like physically impossible these feats of engineering and product design that everyone else would have thought impossible and he just you know basically brute force it into into reality and it kind of occurred to me like as i was looking at headlines this week everyone kind of has their own reality distortion field but usually for most people it just kind of runs in the other direction like you take reality and then you mold it in your head and then you kind of like you know group think to with those around you to kind of massage it

Starting point is 00:02:07 into a narrative that is flattering to your preconceived notions about the way the world works how you want it to work and everybody is that way i'm that way marty's that way uh so no special kind of carve out for us here. You know, it's like the Garfield meme, you're not immune to propaganda. And that's true for everyone. But I feel like you really see it excessively in kind of late stage, sclerotic institutions like we kind of have right now. And there were just a couple examples of that this week that I feel like really are a good microcosm for the way that our institutions are trending in the way the world's trending, kind of the developed Western world. And so one of them is the Supreme Court ruling against Trump, President Trump, is tariff agenda originally authorized under IEPA, which is a 70s kind of emergency powers act.

Starting point is 00:02:53 And in a six to three decision that included some Republican appointees, Trump appointees kind of going against him, overturning that and saying that he can't use IEPA to justify those tariffs. And you saw quickly like this cascade of kind of celebratory headlines in certain mainstream media outlets saying, you know, this is a massive defeat for Trump, a massive blow to his agenda. And without having any opinion one way or the other on the quality of this idea, the quality of tariffs, the desirability of them, whatever, that's a whole different thing we can get into. But, you know, just to me just seemed like such a weird kind of victory dance that people were doing if you didn't like Trump, because as this chart from this convenient chart from Bloomberg shows and as Trump and Besson and Lutnick and the rest have been previewing for like a year, there are many other kind of ways to skin this cat from the executive branch. I think over the weekend already, maybe it was Section 301. The one in the middle was basically rolled out to justify a new set of blanket tariffs. But the point is, like, we are we've clearly entered a different stage of like global commerce. The global economic reordering is is preceding a pace. And, you know, Trump, the Trump administration and his officials are just not going to look at a Supreme Court decision and say, well, you know, rats, we we would do this, this this key bulwark of our economic and policy agenda, if not for that dastardly Supreme Court. And I guess I guess now we can't do it because, you know, checks and balances. You know, the reality is like because of the way that America has progressively installed more and more kind of unaccountable executive power in the executive branch, as illustrated by, you know, this this set of options that is still before Trump.

Starting point is 00:04:34 This is like happening one way or the other. And I think it's just it's interesting to watch the financial press act like there's any reality in which Trump just throws up his hands and says, oh, well, I guess I can't do it. And it just says a lot about the divided reality that kind of we still live in, where a certain contingency, a certain constituent constituency has a has a dominant narrative that they'll use to kind of mold what they see as reality. And then there's kind of reality itself, which seems to be maybe going progressively in the other direction. It is laughable. I mean, we're 11 years into the Trumpian politic, if you will, if you include his campaigning for the 2016 election in that timescale. and it's just will anybody ever learn he's going to get his way one way or another whether or not again to your point we agree with the way what she gets it doesn't really matter he's he's going to get his way and it was funny i think scott besant had a presser what was a friday afternoon

Starting point is 00:05:27 like within hours of the supreme court ruling well okay here we're pivoting to enact the tariffs in these ways through these means and in these avenues uh the show must go on and then trump quickly followed up with all right 10 tariffs across the board you know what wait actually 15 now and so we live in this very very weird reality yeah you know the the subtitle for this week was there's no fishing in the rubicon which is like an image i really like of you know caesar famously crossing the rubicon this this pivotal moment in kind of the the fall of the roman republic and you know saying perhaps apocryphally like the die is cast the die has been cast this is like going you know this image of kind of going across this line that you can't go

Starting point is 00:06:08 back from, you know, you don't go halfway across the line and then like sit there in the river and fish. Like if you go, you got to go. And I think over the last year, so much has been said by both Trump and people in his administration and industry leaders, right. Not, not even just Trump himself, but like companies kind of, even if they're just carrying political favor, like CEOs acknowledging the erosion of the industrial base in the U S and the position that puts us in from a defense perspective and national security perspective, you know, outsourcing everything to China to the point that we can't go to war without China's permission. Like that was always happening for decades but now like the band-aid has been ripped off and everyone knows that

Starting point is 00:06:41 everyone knows because of this past year because of what trump's done this past year and so once you once you start down that road you know you don't go back you don't get to say like well the supreme court said i can't use aipa for tariffs so i guess we're just gonna you know let's all bygones be bygones and act like that didn't happen like everyone knows that everyone knows and so you know there's no fishing in the rubicon like you gotta keep going for one for better or worse right that's probably gonna involve a lot of pain i'm not saying that's like a wonderful thing that i wish on the country or the world whatever but just like the reality is probably we're not turning back just because of you know a procedural dispute over how trump does it no there isn't a turning

Starting point is 00:07:15 back and they're getting more explicit with us too i mean it's not directly connected to the tariff rolling from the supreme court the pivot the quick pivot right after but i'm not sure if you saw i don't know if this was an old clip that resurfaced last week i'm pretty sure it was a new interview but marco rubio was on fox news talking about the fact that the the dollar reserve status is not ever going to be what it used to be like the the world is moving towards a multi-polar multi-currency sort of regime and the us has to be prepared for that and so that was and again i don't recall if it was a resurface clip i'm pretty sure it was a fresh clip from last week and i was like wow the fact that they're actually admitting this on on fox news is pretty

Starting point is 00:07:55 not startling but pretty crazy just to see yeah i i didn't see the clip and i don't know if it's new or not but i think it's it aligns with everything that they you know spent two weeks in Davos saying like last month, right? Telling the global elite how things were going to change. And I mean, everyone from Trump to Vance to the trade rep, Jameson Greer, you know, he gave a speech to that effect,

Starting point is 00:08:17 basically calling for like a new Hamiltonian system to people in Europe. And so, I mean, like there's been too much kind of publicly said about like all this. And yeah, you're not gonna be able to put that genie back in the bottle now. So yeah, I just think there's still a lot of heel dragging in kind of mainstream thinking.

Starting point is 00:08:32 And, you know, that's just at odds with with reality um and the other the other kind of big headline that led me to think about like reality distortion field over the weekend was just the the fed minutes that that came out this past week which is basically had interestingly like had suggested you still got this divided fed we're still kind of like arguing over the path of rate cuts and how fast should they go how many should we have this year you've got some officials saying well maybe we should have two-sided language to suggest that there's still a possibility for rate hikes later in the year you know very much opposed to the direction that the administration wants to take things and, you know, potentially

Starting point is 00:09:09 opposed to what's even theoretically doable and feasible with the path of, you know, the budget and the administration's priorities this year and the next few years. And so that kind of whole narrative, this whole like hand-wringing about should we go 25 basis points now or should we wait three months, like whatever, I found to be very at odds with the latest treasury documents on the quarterly refunding announcement that they put out every quarter, just highlighting expected budget funding and deficits and a bunch of different dynamics that go into what they're going to need to go to market with. And so if you pull up that second chart, I think it really speaks nicely to exactly the divide at play here between kind of what the Fed thinks it can do and

Starting point is 00:09:49 what Treasury thinks it's going to do. It's a bit of a complicated chart, but basically the red bars on top of the blue bars are, if you can see down at the bottom, SOMA bill purchase effects. So this is the idea of what the Fed is going to absorb and it's on its balance sheet from treasury bill issuance. So like short dated bills and this maps roughly, you're just eyeballing it here, but maps roughly to about like $480 billion annually, which if you remember the pace of the RMP program, so reserve management purchases from December 25, it was like 40 million a month initially. And then suppose that was supposed to kind of come down and be you know kind of roll off to like 20 or less over time well 480 is 40 times 12. and so

Starting point is 00:10:30 i don't know that they're necessarily just kind of like flatlining that pace but either way like this speaks to an assumption that the the fed is going to be out there buying more bills consistently for the next like at least eight years um than on a much more consistent pace and at a much higher clip than powell was suggesting in december when they first rolled at the rmp concept and so i think this chart is basically telling you like net new information relative to at least like treasury's assumption about what's going to happen versus what the the fed was originally pitching where a couple months ago where the rmps were supposed to be you know front loaded at 40 and then slowly kind of roll off and not necessarily be necessary for all that

Starting point is 00:11:12 long this is looking at them this is looking at that kind of program as something that is going to be a structural a structural buyer that's in place for many years to come and so that's It's piece one of just like we've got the, you know, the hand wringing at the Fed dithering over like, you know, what we should do with like short end rates and maybe we should even raise rates. And meanwhile, Treasury is kind of doing doing the Leroy Jenkins thing and just saying, you know, no, we're going to be you can you can have whatever conversations you want on rates. But we're explicitly building funding plans and the budget with with your consistent participation at these levels. And that's that's number one on the chart. And correct me if I'm wrong, RMP was instituted to help smooth overnight repo spasms? Yeah. So the language around it was about ensuring adequate... I forget their exact

Starting point is 00:12:02 language. They've got three gradations of reserve levels in the banking system. There's ample and then something that means sub-ample. And I forget, but there are three of them. But we had moved allegedly into a regime of less than fully excessive and starting to get into like a somewhat less comfortable position in the banking system and so rmp was among other kind of factors intended to address the what was being seen as like an increasing move toward like a shortfall of or scarcity of reserves in the bank system um and also smooth and also smooths over your right the the repo dynamics that were acting up a lot more late last year and have smoothed out a little bit early this year so this like stop to your point i think like kind of stop

Starting point is 00:12:46 gap type funding that we can eventually roll off surprise surprise is assumed to actually become something kind of structural and consistent and long-term in asia yeah nothing is there's no such thing as a temporary government yeah government policy that is it's the the sort of conflict of what's actually happening behind the scenes and what they're saying during these meetings the fomc meetings can be more stark it's like well you're saying maybe we need to write a little hike rates there we go we may need to and then the back end you're injecting liquidity to make sure that everything's okay the overnight banking system yeah the other the other piece on this chart that people may notice is you know you got these blue dots and

Starting point is 00:13:27 these these orange dots up on top and it's hard to read the legend but basically the blue dots are the cbo's estimates for for borrowing for deficits over this period this may just be gross borrowing not deficits but either way the cbo and even the omb like both significantly higher you'll notice than the total amount that treasury's forecasting and you know i think it's it's also like i i believe what this is telling you is treasury is taking a very optimistic view of the borrowing that will be necessary over this time period relative to what's already baked into say the cbo estimates which are famously themselves usually too conservative relative to what actually plays out if you look on like a you know five year forward kind of kind of basis so

Starting point is 00:14:12 i think this chart is also effectively assuming like that we because of gdp growth and because of having you know the the ai productivity boom and miracle that we're going to have that worse and invest and think we're going to have you know we can move into a period of much less borrowing and smaller deficits um thanks to that the massive growth in the real economy that we're we're going to have. And so as I look at this, I'm also like, even the gross amount is like pretty, pretty rosy of what you'd have to borrow. And if the idea is as, as the QRA documents we're talking about for, for this cycle, one of the big focus points is not how can you manage the degree to which a private balance sheets have to absorb incremental treasury issuance. And so if the idea

Starting point is 00:14:54 is that we want to hold that blue bar down to these levels, or at least keep the proportions the same, but the total amount has to actually be a lot higher than we're showing here. And it looks more like the blue dots or the orange dots than the bars that are shown on the page. Then you get to a position where it's like, well, the backfill is going to have to be that effectively the red bar has to get a lot higher, right? So not only are we assuming that something like RMP continues on a consistent basis for much longer, maybe even if there's a hitch in the AI story, if we don't get crazy GDP growth, if we have even modest recession, if AI takes even a small amount of white collar jobs and you need a lot more spending on the back end, or if we need

Starting point is 00:15:33 even more aggressive ramping and national defense spending, whatever, perhaps that red bar also has to even itself get a lot higher effectively. Right. So I think, again, just there's, there's this like this conflict between what we want to happen. Yeah. What we hope can happen and what our assumptions suggest can happen. And then kind of like what reality is, is throwing at us. And so again, some, some reality distortion kind of at play in our, our key institutions here. How do you think Bitcoin, I mean, obviously it's not going to play into these privately held net market borrowing markets, but it will be affected by the policy as it's instituted at the time it's instituted, as we know. Similarly with government policies, the projections are always way off base. So we can I think it's safe to assume that these bar charts will be much larger when as time passes and we actually get to the point where they have to make the decisions on the issuance of these treasuries and these these R&P facilities.

Starting point is 00:16:34 facilities where does bitcoin play i think bringing bitcoin in now particularly just talking about the the elephant in the room which is bitcoin's performance over the last six months the last four months really since it hit all-time high in late october early november we had another drop off last night we got on the one day chart we puked up we're recovering from them but obviously in the last month we had the in the fall from 90k to 62k taps 59k at one point hovering at 65 850 right now many people are are wondering what's going on with bitcoin it's supposed to be this this digital gold asset that's supposed to i mean we talked about a few weeks ago bitcoin is not a hedge but many people perceive it to be such and people are looking at bitcoin's

Starting point is 00:17:23 performance, particularly juxtaposed to gold, silver, and even the NASDAQ and looking at this massive disconnect. And I'm worried, is Bitcoin broken? Is it dead? What's going on here? Yeah, it's definitely a point of concern that we think about all the time as folks who are highly levered to Bitcoin's price action. I mean, there's the old saying that Bitcoin is dumpiest before pumpiest. And I think that's a very, very technically sophisticated way to look at it. But, you know, I think probably like it's maybe a little overdone at this point, depending on how on Bitcoin Twitter you are. But I do think there's a degree of accuracy in the idea that Bitcoin is this liquidity smoke alarm. And, you know, you referenced your talk with

Starting point is 00:18:03 Michael Howell earlier. I won't like spoil that for people and can't wait to listen to it. But, you know, it's pretty clear that we have not had in the last few months, if you've been following his work or anyone else who tracks similar metrics, a major liquidity tailwind. You've had, if you look at the Fed's balance sheet over a lengthy time period, you've had these major step-ups in the size of the balance sheet. And then we had a few years of QT runoff that was very aggressive, kind of backfilled by activist treasury issuance. You've talked about it a good deal on your show, treasury shifting much more to front-end issuance. And that was a pro-liquidity impulse for a while. But we may be running up on the limits of that, especially when we also now

Starting point is 00:18:45 are looking to spend much more into the real economy and potentially out of financial assets. We're giving a bid to manufacturing. We're giving a bid to data center construction. We're giving a bid to industrials and defense. And increasingly, there's less potentially capital out there in a non-Fed supportive world to flow into classic financial assets. And so I think if you, to me, the story of the Fed's balance sheet really tells the tale. We're kind of flatlined now at this, we basically came back down like right to where where that level went to during kind of spring 2020 so we've worked off everything post call it like may june 2020 which frankly it's pretty incredible that bitcoin did what it did against that kind of like monetary based headwind and

Starting point is 00:19:29 now we're just kind of hanging out right and i think it's going to be i think the market is digesting a lot of is digesting that digesting the ai story and how that's going to affect a lot of different asset classes which we could maybe get into and then i think digesting also like, what is the stance of this incoming Fed? You know, if Warsh gets confirmed, which is not a given, is he going to be, you know, fully subordinate to the Treasuries or let's say in partnership with, you know, what Treasury wants to do and what Besant wants to do? And what will that actually mean in terms of like liquidity, broad liquidity support and the direction of the Fed balance sheet? I have, you know, as we just discussed, I have my suspicions

Starting point is 00:20:07 about where that ultimately ends up. But historically, you also have needed like some kind of crisis panic moment for policymakers especially monetary policymakers to really kind of recognize to get out of their reality distortion field recognize the situation that they're in and you know step on the gas to do the only thing that they really can do right so i think we're in kind of a holding uh holding pattern of processing a lot of different crosswinds and yeah it's tough to say what the next three to six months are going to look like not just for bitcoin but yeah you for everything yeah and it will be interesting if some sort of liquidity crisis emerges between now and warsh's nomination process because what do you think jerome powell would do in the interim

Starting point is 00:20:51 sort of a lame duck fed chair a fed chairman right now and like you could see the the politics around that if there's liquidity crisis that emerges between now and warsh's likely nomination and jerome powell's tasked with fixing a problem that arises i can see him putting his hands up saying hey i'm about to leave i don't want to i don't want to make any decisions that the new fed chairman will not like and i don't know i'm just thinking on the go here but that could be an interesting situation yeah i think ultimately every fed chair does the same thing like when when push comes to shove so i don't know like how how strong his stomach would be to just kind of let you know to lose the long end or to let equity indices fall like 30% just to basically give Trump the

Starting point is 00:21:34 middle finger, especially because that paints, that allows Trump to paint like a wonderful narrative that this idiot Powell kept rates too high. And then when, you know, the moment of truth, when he could have saved the economy, he, he, he stepped back and, you know, there's a reason for the DOJ to, you know, put Powell in jail for life. Right. So I, if I'm, if I'm him, I like, I probably, you know, I don't know if I want to try to be a hero on that basis. Um, but so yeah, I don't really think that he would throw his hands up and just kind of like do nothing. I think the pressure is going to be too great from a variety of fronts, but also Powell doesn't necessarily have, you know, I can't remember the exact mechanics by which like

Starting point is 00:22:06 the decisions get made by the FOMC, but you know, it, it isn't ultimately Powell's final decision. And so if you want to vote on a board of 12, yeah, right. So if, if there are a bunch of governors who are yet to say like, yeah, you may be gone in three months, but I'm here for the next like 10 years or whatever. And also I need, I'm trying to retire on a reasonable timeframe as well. and my bags need to be sufficiently pumped, I don't necessarily think

Starting point is 00:22:26 that there's going to be a ton of appetite for just outright 08 type collapse. Yeah. Over 26 minutes, we're trying to keep this at 30 minutes. I know you said there's some stuff in the real world economy we could expand on, but let's push that to next week

Starting point is 00:22:39 because we do need to pat ourselves on the back. I mean, we warned everybody who was listening, I think a few weeks ago now at this point, that there were many people out there saying that the precipitous fall in Bitcoin's network hash rate a few weeks ago. And the large downward difficulty adjustment of 11.7% was a signal that miners are leaving the Bitcoin network because of quantum fears and a transition to HPC compute to service the expanding AI economy. Well, time has passed and

Starting point is 00:23:15 we've had yet another difficulty adjustment. And it was a rather large upwards difficulty adjustment of 14.6% towards the end of last week. And that was because hash rate stormed back on the network, pun intended. And I think it's become clear in retrospect that the fall in hash rate that we witnessed a few weeks ago was due to the large winter storm that blew through the country, which necessitated that miners that are participating in demand response programs turned down to make sure there was enough electricity supply on the grids when the temperature dropped and people turn on their heating systems. And on top of that, I think there was also a number of mining facilities that were literally shut down because of inches of ice

Starting point is 00:23:58 that, that overtook their, their operations. But time passed, the sun came out, the temperature rose, things thawed out, demand for electricity on the grid fell and miners were able to turn back on. Yeah. Yeah. I think we were making that exact case a couple of weeks ago. So not super surprising that it played out. The cynic in me looks at this and says, well, this is just a dead cat, dead cat bounce. But I, I, the optimist, uh, which, which wins out says that it's just all part of the long-term trend of, of hash rate pumping forever. Um, but yeah, the one thing I'll say here is like, there were a lot of like tourism posts over the last couple of weeks pointing out this chart and saying, well, obviously, you know, it's a combination of

Starting point is 00:24:35 a hash price is so low and a lot of miners are capitulating and they're going to be net sellers forever. And also like, they're just pivoting into AI and then HPC capacity. And here, that's the reason for all this and i would just say like look boys like the last like two years has been like the hpc story didn't start like last week right like this entire chart that you're seeing here like hpc has been alive and well as like a you know a mining diversifier story for like multiple years across this entire chart and yet hash rate continued to pump right like hash price was has been in a narrow band you know not a very impressive band but a narrow band of like 30 to 50 bucks a peta hash for basically this entire time you're seeing on this chart and hash rate continued

Starting point is 00:25:11 to pump right so we can get into like maybe on another episode what that means and who might be driving that but you know to look at like a two-week chart here and say well it must be because hpc or must be because hash price and minor death spiral whatever like you know you're identifying forces that have been at play for years at this point and despite all that like hash rate was up into the right like the entire time basically so you know maybe maybe as always zoom out a little bit don't make any reads based on a two-week chart and you know think through how some of the trends play have been affecting it for for longer than that and check the weather check the one check the weather yeah yeah just last thing there tie it up i mean one like there was quantum people

Starting point is 00:25:48 out there saying i mean that's the least valid of any of the the arguments is put out there ai hbc compute we know there's publicly listed bitcoiners that are openly and aggressively transitioning to ai data centers and that's okay but like to think that that transition would result in just just like a precipitous fall in hash rate is idiotic. These are businesses that are run well. I mean, if they're going to diversify out of Bitcoin into AI, HPC, compute, they're going to sell their machines. And who are they going to sell them to?

Starting point is 00:26:17 They're going to sell them to people that want to plug them in. So yes, individual mining operations may be pivoting to AI compute, but they're going to sell the rigs. They're not just going to unplug them and sit on them. That would be a waste of capital, shareholder value, if you will. And then the other thing that I wanted to mention here, is quickly escaping me but in that same vein i think oh and we could talk about this another time the big beautiful bill i think bring cash price into perspective it is relatively low not

Starting point is 00:26:48 impressive but i think there are countervailing forces particularly via tax policy that are making people sort of you know price agnostic in terms of hash price because of the sort of depreciation write-offs they can get by buying mining equipment and plugging it in so yeah that's the timestamp recap a little over 30 minutes john thank you for writing thank you for joining me i'm very much enjoying the show i hope you are too same here look forward to every week all right see you guys next week.

TFTC: A Bitcoin Podcast - Ten31 Timestamp: The Die Is Cast

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