The Breakdown - Lyn Alden on Bitcoin, Inflation and the Potential Coming Energy Shock

Episode Date: June 23, 2021

Lyn Alden, investment researcher and strategist with a keen eye on both crypto and traditional markets, joins NLW on today’s “The Breakdown.” Listen for a conversation about the state of the market and projections for the future including: Inflation: base effects and transitory in nature or here to stay? Foreign debt markets tapering off The Lightning Network and predictions for the success of El Salvador Inflation at a high number, 5%, leaves investors and market observers jumpy. On top of that, many have a hard time believing the U.S. Federal Reserve’s narrative for inflation as outlined in the recent FOMC meeting. How is this inflation different from previous spikes? The foreign sector has historically been a large buyer of Treasurys in structural trade deficits. In 2013, China stepped away from this practice and started investing in its own infrastructure and in other regions across the world. Even if other countries continue to invest in U.S. assets, it is increasingly in hard assets like stocks or real estate. Will the dollar weaken as the Fed is forced to be the primary buyer of U.S. Treasurys? El Salvador’s commitment to bitcoin as legal tender is one thing, but what will the reality of this new currency look like? Bitcoin’s Lightning Network provides easy access and transaction speeds, so long as enough of the general population has access to smartphones. Lastly, with the public’s attention captured by the current inflationary moment, what market features are getting underreported? Tune in to hear Alden’s perspective on what will have an unexpected impact in the upcoming cycles, including the potential for a significant energy shock in the years to come.    -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Basically, with debt levels as high as they are and with Treasury issuance as high as it is, it's pretty challenging for the Fed to normalize industry rates without crashing the markets. And so they kind of find themselves where they can either let the interest rates stay low and let these spikes of inflation basically devalue cash and debt to a significant degree, or they can try to raise rates and taper to combat that, but then they risk pulling down asset valuations across the board. And because the market is so financialized, if asset prices have a significant fall and stay there that actually circles back and results in slower economic growth, like the tail wagging the

dog rather than the way around. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and circle and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, June 22nd, and today I am thrilled to a circle. We're welcome Lynn Alden back to the breakdown. At this point, Lynn needs no introduction. She is one of the most astute, thoughtful, and eloquent observers of markets, both crypto and traditional, and is just about the best guide out there to help understand what actually is going on. In this conversation,

we talk about inflation, the FOMC meeting's latest changes, dislocations in the repo markets, Bitcoin, Lightning, foreign debt holdings, and so much more. It's a great early summer check-in on the macro, so I hope you enjoy it. All right, Lynn, welcome back to the breakdowns. Great to have you back. Thanks for having me back. So we were just talking about this a little bit. What I really want to do on today's show is just check in with you on a number of

the different things going on right now. I think there's a kind of a broad sense of shifting between phases or cycles, certainly within the Bitcoin market, but also just, I think that there's maybe a larger shift going on as well in terms of how people are perceiving the macro landscape. And I think you're uniquely suited to help us sort through that. And so I guess as a way to start, let's talk about inflation. Obviously, this has jumped onto people's radars in a major way. And maybe just to start, you know, what's your read on how much what we're seeing right now is so-called base effects, how much is transitory versus something that should be, you know, people should be paying more.

attention to. Yeah, it's really good question. I think, you know, there are a few layers of inflation here, and some of those are more transitory where others are more sticky. And so the base effects are a pretty big figure. Like, for example, we saw roughly a 5% year-over-year CPI print this past month. And, you know, somewhere around 3% of that is, you know, basically if inflation did nothing abnormal over the past few months, and you just compared it to that May 2020 period, because that was a very low point for inflation, you'd have roughly a 3% year-of-year period, right? So maybe 3% of that is base effects, but that additional 2% was largely, you know, actual inflation.

So that's stimulus-driven things, that's supply chain-driven things, all sorts of problems like that. And so as we go into, you know, June still has pretty low base effects, but as you go into July and August, especially, those base effects get harder. And so the year-of-year numbers are likely to be lower than 5%. So 5% could be the peak for this particular moment in time, at least in a year-of-year terms. Now, if you look longer term, I mean, the Fed's long-term target is about 2% average inflation, the way they measure it, which is PCE. And right now we're above that.

And even if just say inflation indicators stop going up now and they just kind of go flat, we would still be elevated by the end of the year. And so by most metrics, we are running hot in many ways. But the rate of change is likely to cool off a little bit. Now, longer term, there are still multiple factors of play. They're probably resulting in a more pro-inflationary environment. But they depend on a couple decision points. So one big one, for example, is whether or not the U.S. continues to do more stimulus,

particularly in the form of infrastructure stimulus, right? So we're past the fast-acting kind of adrenaline stimulus. we just kind of give out checks and stuff. But a big question is whether or not we're going to have these kind of very large structural fiscal deficits or we're going to go back to kind of a more baseline, say, 5% of GDP deficit, which is still huge in kind of historical context, but it's different than more of a, you know, kind of a multi-trillion dollar infrastructure bill added on top of that. And so that's kind of a big political question to watch over the next year or so.

And then longer term, we're also seeing a risk for potentially energy-driven inflation. And so one of the areas that's still being sticky is higher energy prices. And if you look at kind of the, if you back up a little bit, you know, ever since 2008, we've basically been in a oil and gas bear market, and especially the past five or six years. And so we've been in this period of oversupplied oil. And that's because North American shale oil ramped up production faster than global demand kept going up. And so we entered this period of structural overreport. And that's because North American shale oil ramped up. supply. And, you know, basically oil drillers just kept drilling even if they weren't free cash flow positive. Just low industry rates and new technologies came together. And they just, you know, they didn't

ask if they should. They asked if they could and they could. And so they just kind of made a lot more oil. And but now, due to just, you know, 13 years of really bad returns for the oil sector, and then, you know, you had the oil price crash in 2015. Then we had the 2020 COVID. And then now you have ESG concerns, so some pools of capital are just not putting into oil stocks at all, now CAPEX is very, very low in the industry. And so you're not really kind of spending a lot of money to find new reserves or bring reserves up to supply. And so, you know, when you look at a few years, as global energy demand continues to grow and recover, especially from emerging markets, at this time where CAPEX is now very, very tight, we actually could see kind of energy

shortages in the years ahead, which would be the opposite type of regime that we've been in for the past decade. And so if that were to take place, that would give us another leg up in inflation. And so I think when you take into account wage growth, some degree of reshoring or kind of a flattening out of globalization and potentially slightly, you know, kind of a slight reversal of globalization. And then you include the possibility of energy shortages. I still think as we look out into the 2020s, we're going to see more of these kind of inflationary periods, most likely. Well, it sounds like, I mean, the, it sounds like your point of view on it is that a lot of that is sort of structural and based on decisions that were made a while ago, right? You know, we talk a lot about the inflation conversation as it relates to what the latest FOMC meeting said.

But I kind of think the point that you're making is that some of this is baked in and it's more just how it plays out. Yeah, I mean, basically, when it comes to overall policymaker decisions, you know, we made mistakes decades ago by by, by, encouraging debt to get as high as it has and doing some of the fiscal, some of the monetary policy we've done. And now the debt is this high, they find themselves with very little choice other than to essentially, you know, financial oppression. So maintain industry rates that are below the inflation rate. And that's obviously easier to do when you have an inflation rate that is above 2%. So they want to hold rates around zero. And they want to have inflation kind of run hot for a little period of time. And of course, they, you know, policymakers, they want things to be kind of smooth,

so they don't want 9% inflation, but they want positive inflation that is above the interest rates, if possible. And they don't really have much of a choice. And so my base case for a while is that we're going to, you know, the 2020s will be a period of, you know, certain inflationary spikes without corresponding increases in the industry to, you know, kind of keep up with that. And so, for example, we've seen if someone bought a five-year treasury, this type of last year, all of their interest payments for the past, for the next five years of that bond are already outpaced by inflation. So unless we encounter a period of outright deflation, you know, in the years ahead, that bond's already underwater. And, you know, so we're going to be at the case

soon where someone bought a 10-year treasury in 2020, especially the middle of 2020 when interest rates are like, you know, 0.6 percent, the entire 10 years worth of interest payments will be outpaced as soon as essentially the CPI is 6% higher than it was back then, which is not that far from now. It's only a couple quarters away. And so I think that's going to probably continue for a good chunk of the decade where cash and bonds are going to be yielding levels that are below the prevailing inflation rate. But that inflation rate will have periods of being elevated due to either shortages or fiscal stimulus. And then it had periods of kind of returning to normalcy until you have another capital. which could be infrastructure spending, could be energy shortages, things like that.

So you've identified kind of fiscal spending, infrastructure spending as a possible catalyst for more of this, which is sort of one side of the money equation. The other side is, of course, monetary policy. I'm interested in your take on how the Fed's discussion of inflation is starting to shift and change, especially as per last week's FOMC meeting. And two, just more broadly, how constrained you? feel like their policy options are at this stage? Yeah, so the Fed has been focusing on the idea of inflation being transitory for a while.

So they've had a couple goals. One is, you know, so they target 2% average PCE, which is their measure of inflation. And we can talk about all the different shortcomings of that, but that's what's what they're looking for. And over the past 10 years, nine years really, because they kind of formalized that target back in 2012. But so for the past nine years, they've on average undershot 2%. So the way they measure it is average more like 1.5% or so.

And it only touched 2% a couple times. Mostly it's been below that. And so they want to go back and say, okay, we want inflation to run hot the way we measure it for a period of time. We want to run at 2.5% or even 3% for a little while to kind of, you know, in hindsight, look back and see that we average 2% based on the way we want to do it. And so they're in that mode right now. But when they start seeing 5% prints, and that's not with PCE, but that's with CPI, PCE is also elevated, when they start seeing that kind of print and when you kind of see inflation kind of get into the popular narrative, you know, they get a little bit concerned on that. And so they were kind of playing down how big inflation would rise.

And they're also kind of emphasizing it to be transitory. But now they're admitting that it's probably a little stickier than they thought, right? So some of the Fed officials are admitting that it might be more, it might be less transient than they thought. And so we got a very, very slight hawkist shift in the previous FMC meeting. And so it's kind of funny how small it was. Basically, they tweak some of the near-term rates. They didn't actually raise interest rates, but they basically increased rates on repos and interest on excess reserves, which is basically a way to try to make sure that T-Bel rates don't go negative, right?

So that was one thing they did. That's really the only change they made. However, in their projections, so different FOMC members have different projections for what they think interrates are going to be in the next few years. And we saw that a couple of them, you know, started a price and hike, rate hikes, a year earlier than previously thought. So those are still a couple of years out, but they're a little bit, you know, pulled forward than the market was expecting and compared to what FOMC members were previously forecasting.

And so the market is now kind of. pricing in, okay, when are they going to start tapering asset purchases and then start kind of gradually raising interest rates? And so I do think at some point they're going to cut down on mortgage-backed security purchases. That seems pretty unnecessary at this point. But it's going to be pretty tricky for the Fed to cut down on treasury purchases unless the treasury, you know, unless we don't get any more fiscal stimulus, if you don't do any sort of infrastructure stimulus, and we lower the amount of treasuries that are issued, right? Because right now we're still issuing a rather large amount for this year,

and it's very hard for the private sector to absorb that many treasuries. And so the Fed's been a core buyer. And so basically with debt levels as high as they are, and with treasury issuance as high as it is, it's pretty challenging for the Fed to normalize industries without crashing the markets. And so they kind of find themselves where they can either let the trade stay low and let these spikes of inflation, you know, basically devalue cash and debt to a significant degree, or they can try to, you know, raise rates and taper to combat that, but then they risk pulling down

asset valuations across the board. And because the market is so financialized, if asset prices is of a significant fall and stay there, that actually circles back and results in slower economic growth, like the tail wagging the dog rather than the way around. It's interesting. One of the things that you kind of brought up or alluded to was the fact that there's not the same sort of natural buyers for these treasuries that there used to be. I know this is something that you've been paying attention to for a long time, the sort of larger secular shifts in how much of the treasury market is being absorbed by, for example, foreign actors. I mean, what's the story there? And maybe we can talk a little bit more about just kind of some of the emerging market stuff in general as well. Yeah, so before 2008, I mean, you know, most of the treasuries were purchased by various private sector actors, right? So the Fed only bought a tiny amount for basically management purposes. They weren't really significant buyers of treasuries. And so you had a combination of U.S. households buying treasuries, different types of funds, pensions, of course.

And then the foreign sector was a very large buyer of treasuries. And the way that worked was because of the petrodollary system we've had in place since the 70s, The U.S. runs these structural trade deficits with the rest of the world. You know, those parties that get those dollars, those countries that get the dollars, they go ahead and reinvest those dollars back into U.S. treasuries. And so they build up their foreign exchange reserves. They hold a lot of treasuries. And so that's been the cycle that's been in place for decades.

But starting around 2013 or so, China said it was no longer in their interest to keep, you know, putting their surpluses back into treasuries. And they said, instead of we're going to go. go ahead with the Belt and Road initiative. So we're going to start, you know, buying infrastructure and commodities and financing the growth of infrastructure across Eurasia over into, you know, Latin America, even basically a bunch of places around the world. And so they started reinvesting those dollars into hard assets rather than buying treasuries. In addition, we've seen a general trend where even other countries, they've been happy to put money into U.S. assets, but instead of buying

treasuries, they're buying equities, like Apple stock, for example, or they're even buying single family homes and then renting those back to Americans. And so we've seen this kind of, you know, continued asset purchase of American assets, but not necessarily the treasury market because, you know, these countries want to manage their reserves. Some of them also have pension funds and things like that. Like Japan has been a buyer of treasuries. But, you know, they have to be careful about buying too many treasuries when the treasurer's yielding below the inflation rate. So they're basically parking money. assets that are no longer appreciating.

And so there's been less energy to do that. So basically, they find themselves now where the Fed has been, you know, forced to become the primary buyer of U.S. treasuries. And this is something that's happening worldwide. So, you know, in Japan, the Bank of Japan is the biggest buyer of JGBs in Europe. The European Central Bank is the biggest buyer of most types of European sovereign debt. And so you have weird things happening, like five-year Greece bonds. you know, having negative yields, even though, you know, they're, they're one of the higher default

risks out there. I mean, just a few, just several years ago, we had the European sovereign debt crisis. And, you know, basically that, that, those, that, that, that, that, that that hasn't really gone away, at least most of it. And so, you know, Greece still has an extremely high debt to GDP ratio, and they don't control their own money supply, really, right? Because they're, they're part of the European, you know, the currency. And so we're in the situation where all around the world, countries are doing this. And the only difference for the United States is that, you know, we used to be different. We used to be the ones where other countries bought our debt, and now we're looking more and more like those other currencies, where we're just kind of one

among many, rather than having that special status of other countries happily buying our debt. What are some of the implications of that if this continues? Basically, that it keeps the Fed as an active buyer of those treasuries. And over time, that could result in a weaker dollar, which ironically can in some ways benefit than at a stage, right, because a strong dollar has been part of why we've had to export a large chunk of our manufacturing base at a faster rate than Europe or Japan have, right? So it's not just a developed market to emerging market phenomenon. It's been specifically, you know, very much an American phenomenon as well, because we're running this policy of having a currency that is

kind of artificially propped up that makes our exports less competitive and our import power very strong. And so that transition could be painful, but ultimately is more balanced if our currency becomes one among many rather than this kind of central piece to the global financial system. So I think over time, we're probably looking towards a more diverse set of global reserves, right? So that's already happening since, you know, about 20, about the year 2000, where, you know, the dollar share reserves, even though we're still by far the biggest currency in those reserves, our percentage is going down over time. And so they're becoming a little bit more diversified. And I think that trend's probably going to continue for the next five, ten years. I want to come back to this

question. I think it's an interesting jumping off point for a discussion of CBDCs and just sort of that interesting battle. But one thing that I've had so many people ping me and ask me about, and I feel it's a perfect, perfect context to ask you is one more dislocation or kind of, you know, interesting thing around the Fed, which is what's going on in the repo markets. And so I know you spent a bunch of time over the last couple weeks kind of observing. And I think at one point, you actually said that it was sort of the opposite of the problem that was happening in September 2019. So first, I guess, just really brief, what are repo markets? What does their function? What do they tell us about the Fed kind of in general or markets in general? And then,

And what's going on right now with them that's starting to kind of crop back into headlines again? Yeah. So the Fed operates these facilities to basically allow the private sector to convert cash and treasuries back and forth. And those are either repos or reverse repos. And so if we look back in 2019, for example, when we had the repo spike, right? So basically there's an overnight lending rate between banks and institutions. And that spiked overnight.

It went up to like 7%. It was a complete, you know, basically a micro-discarstastic. happening. It's one of those things where the average person in the street wouldn't know about it, but anybody working in financial markets, it was like watching the Titanic at the iceberg. You're like, what the heck was that? And so, you know, that's where, you know, for, you know, about over a year before then, the Fed was reducing their balance sheet. They were doing quantitative tightening. But then starting with that repo spike, the Fed had to come in and start supplying repos. And so basically these institutions with T-bills could give them to the Fed and basically, you know,

use those as collaterals for liquidity. And so then there are a bunch of analysts like myself saying, okay, this is due to, you know, basically an oversupply of T bills compared to the amount of bank reserves in the system. And so basically we ran out of buyers for those T bills. And so the Fed is going to have to create new bank reserves to buy more T bills. Essentially, they're going to have to start deficit monetization, even though that was late 2019. That was before the pandemic. That was before our recession. That was, you know, the economic growth rate was slowing. But we were still in an expansionary economy. And so it's kind of awkward for the Fed to have to come in and essentially do quantitative easing, you know, when we were not in a recession. And so that was kind of a

challenging narrative battle for them. They called it not QE and say, we're only buying T bills. And, you know, so it depends how you kind of want to, it's semantics. But basically, we had a problem was too many T bills and not enough reserves. Now, what we're seeing in 2021 is the opposite problems where they've done so much quantitative easing that banks are so stuffed with the reserves and the Fed has bought so many of the T-bills that there's actually too many reserves relative to how many T-bills there are. And T-bills are an important part of the system. They use those as collateral. In many ways, they're more valuable than cash for the financial system. And so basically, they've had to do reverse repos where these institutions can put cash

with that institution and they get T-bills out of it. And so it's kind of the exact opposite problem of 2019, we'd have too many reserves relative to T-bills. And the last time we saw this happen was towards the end of quantitative easing three, the third QE program back in 2014. And that started to signal eventually that the Fed would begin tapering and winding down that QE program because they were already kind of effectively at the maximum amount of liquidity. Right. So there's so much liquidity in the system that some of that liquidity is actually being forced back into the Fed because there's nowhere else to put it. And so basically any more liquidity. equity at that point doesn't really kind of doesn't really liquefy things anymore. It's kind of like

once you, if you're already soaked, you're standing out in the rain, you've been out there for an hour, you can't get more wet than you already are. And so the system's kind of like that now where there's so much liquidity, it just can't hold any more liquidity anymore, it just flows back into the Fed. And so probably what we're going to see, eventually is reduction of mortgage-back security purchases, and then we'll see what happens with their treasury purchases. That'll largely depend on how much treasuries, you know, the Treasury Department issues in the, you know, the years ahead. And part of why this has been happening in the past quarter in particular, you know, in addition to just, you know, just the amount of QA that's happened over the past year, but it's also because this past quarter,

the Treasury drew down their Treasury general account. And so for people that aren't familiar with that, the Treasury issues bonds and they bring in cash, and they hold that cash at the Fed. And then as they spend over time, they draw down that cash reserves. And so if they issue more bonds than they spend, that TGA goes up. And if they spend more than they issue bonds for, that goes down. And so normally that's a few hundred billion dollars. But in 2020, they brought that up to $1.8 trillion. And so it came time to normalize that, which means that they basically would have a period

where they're not issuing as many treasuries, but they're still spending aggressively on all these fiscal programs, and so that helped draw down the TGA. But basically, what that happening means you're not issuing a ton of T bills, and you're putting all those, that TGA account is essentially going back into bank reserves, right? So it was kind of held in this void on behalf of the Treasury, but now it's actually going back into the, in the commercial banking system reserves. And so that's kind of, you know, putting excess liquidity into the market. And so basically, as that process went underway, some of that spilled over into things like reverse repos. Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need.

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With Circle Yield built entirely on USDC, your funds are fully secured with Bitcoin collateral, giving you added protection and peace of mind as your interest grows. Visit circle.com slash yield to learn more. That's Circle.com. slash yield. One of the things I've been thinking about a lot and observing is the extent to which the market seems not to be buying the narrative that the Fed is selling. And I wonder to what extent that is just my perception, because I'm paying much more attention to it than I have in the past because I have a daily podcast now versus there is actually sort of a narrative loss, a loss of control around the

narrative. And I, you know, I started to especially notice this a couple of months ago when it felt like every time Powell said anything about, you know, not even thinking about raising rates, the market was just basically not buying it and convinced that he was going to have to. And now we sort of have had this moment of them acknowledging that some aspects of inflation may be not as transitory as they hoped, which is effectively acknowledging the narrative loss because of inflation, sort of self-fulfilling prophecy impact. So I'm interested in your take as someone who's watched this for, you know, a longer period of time on whether this is sort of just part and parcel of the sort of normal ongoing Fed battles or whether it does feel like there's a loss of control of the PR tools that

they have to keep the markets in line with what they want them to be. So overall, I think they've actually been moderately effective at getting their message across. And the inherent problem is how challenging their message is. Because their message is that we want bond yields below the inflation rate for quite a while of time, and we don't necessarily want you to sell your bonds, right? So that's a hard message to get across. And basically, you know, from, say, Wall Street perspective, you know, we're trained so that if industry rates go up, we expect interest rates to go up. That's how it's worked for decades, where the Fed, you know, if inflation goes above a certain threshold, they raise rates to help contain that inflation.

And so that's how it's been working for decades. And you have to go all the way back to like the, you know, the 1940s and 50s to find a period where inflation ran very, very hot, and the Fed said, nope, we're going to hold rates near zero anyway. And so, but that was, you know, that was the last time, for example, that we had debt as a percentage of GDP as high as we have now, and the last time we ran deficits as a percentage of GDP as high as we are now. And, of course, that was related to World War II. And, but, you know, what people don't really, like basically the World War II spending, you know, large part of that ended up being stimulus, essentially. You basically stimulated the local, you know, the domestic economy to build all this stuff. And then after

the war, you transitioned it towards, you know, refactoring towards domestic stuff, right? So instead of, you know, you made a ton of cars. And he said, okay, now we're going to make a ton of tanks and planes. Now we're going to go back to making cars again. But now your, your industrial base is two and a half times bigger than it was. And so that was essentially kind of almost like an MMT program. Then, of course, you had the GI Bill. You got millions of people trained and educated and given sort of mortgage assistance, all sorts of stuff like that. So it's a very large domestic space. program in the grand scheme of things. And so back then, they had very, very high federal debt to GP, and they basically just had this decade where you'd get these big spikes in inflation, and the Fed would say,

oh, well, we're going to hold intrates to zero, because this is not kind of bank loan-driven inflation. We're not trying to curtail bank lending. It's just that all the inflation's coming from the fiscal spending. And so rather than the Fed fight that, they're just kind of let that run hot. And so we're in this period now where, you know, the types of inflation that we're experiencing in the 2020s looks a lot more like that in 1940-style inflation rather than the 70s inflation. So 70s inflation was driven primarily by increased bank lending on top of some fiscal deficit spending. But it's really that combination. It was in large part it was bank lending driven. And so the Fed would try to raise rates to curtail the growth of the money supply.

Whereas now, because it's very fiscal driven, the Fed can't really push back. on that. It doesn't really have a good incentive to. And so their messaging is inflation is going to run hot. We're still going to hold rates at zero and you're going to have negative real rates and you have to just deal with that. And so they have to kind of spin that message to say, oh, it's inflationary. We're going to let things run a little bit hot for a period of time. But we also, you know, in their FMC meeting minutes, you know, when they're talking about why they're purchasing bonds, they explicitly say they want to keep yields low, including on the long end of the curve if possible. And so we've had periods of time where, you know, certain months where the Fed is really buying more treasuries

than are being issued on net from the Treasury. And so they're basically soaking up that excess treasuries. So they're basically holding short rates at zero and then they're buying, they're by far the biggest buyer of treasuries. And that helps keep industry rates relatively low. And so that's a very kind of challenging messaging environment for the Fed. They kind of ran into that same sort of messaging environment in late 2019 where, you know, they couldn't say there's just too many T-bills. So we have to buy. some of them. Instead, they had to say, oh, there's like plumbing issues. There's, there's, you know, there's these technical matters that are happening. You had to kind of, you know, put it in language where you don't just say we're doing deficit monetization. You just have

to kind of, you know, kind of soften that blow a little bit. So that's kind of what the Fed's been doing. And it is a really tough thing for them to be in, right? So I think a lot of the mistakes were laid decades ago. And for example, I wouldn't envy being in Jerome Powell's position right now. It's super interesting point. I wonder to what extent you're going to see then some of the narrative battles shift to other parts of the political sphere where it's sort of like the Stephanie Kelton's of the world who are creating the narrative fodder. Because in some ways it feels like you've got the you've got two camps broadly speaking. The bad shit crazy, you know, to use the phrase that Paul Tudor Jones used on on CNBC a couple weeks ago looking at markets, you know, where he said that he's just waiting to see what they do next because that's going to shape everything versus sort of the, you know, a newer school of thinking that says this new normal isn't something to be concerned about. You know, is that, is that how you're seeing it play out? Or is, are people still in more traditional

camps than that? Yeah, I do think that inflation is becoming a political tool that the different sides will use. And it makes, you know, if you're looking at purely a kind of an effectiveness tool, it makes sense for them to use it, right? Because you use whatever tools you have to try to win over the other other side. And so, you know, for example, whenever you have a period of inflation is going to be winners and losers. So for people that are receiving a lot of the aid that is, that is helping to contribute to inflation, they generally benefit from that. Whereas if you're a person or an institution you're structurally overweight bonds or cash, you're the one essentially paying for it. You're essentially being the one taxed for that, right? Because you're being diluted. It's like, you know,

if a company issues equity to fund something and you're a shareholder, but say the thing, the things that they're funding are not necessarily things that are going to benefit the earnings of the company, well, you're just getting the dilution without the earnings. Where it is if you're another party, if you're an employee, maybe you're benefiting from it. And so it kind of varies based on where you are in that ownership structure. And so we're seeing now that, you know, if for parties that are in favor of another round of stimulus, they naturally want to play down inflation. They want to say it's transitory. There's, you know, supply issues that are temporary. It's not due to the increase in the money supply, and so there's no problem with doing another round. On the other hand,

if you were a party that wants to, you know, kind of push back on that, right? Say, for example, you know, the right now Democrats have us, you know, they control the House, presidency. They have a very, very tight Senate control that they're worried about losing in, in 2022. Another hand, Republicans are the out of favor party, the, you know, the ones that are kind of, you know, wanting to get back in control. And so there's a natural thing where they want to say, no, no, this is inflationary. We need to stop the spending. And then they can hope, you know, from their perspective, they can, they can hopefully get back in 2022 and start that cycle anew. And so it's naturally going to be the different part is using this, this, you know, how the public

perceives inflation as part of either justifying certain programs or to push back on certain programs. Yeah, it's interesting too. One of the things that I'm just kind of watching, I don't necessarily have strong feelings yet about how it plays out. But the number of, I feel like there's a corresponding growth in the people who pay attention to these types of issues as political issues that coincides with the number of people who are trading based on memes like MoneyPrint or Go Burr, right? I mean, it sounds sort of silly, but like when you have, I don't know, a 10% increase in the number of people who consider themselves investors or who actually are allocated in

equities markets and things like that. you probably have a corresponding increase in people who pay attention to these arguments, which makes it more politically salient rather than sort of just some abstract Washington, D.C., you know, infighting, right? Yeah, I mean, I've been describing it that we're in a macro-heavy decade. And last decade was a macro-heavy decade, and this decade's another macro-heavy decade. And what that means essentially is that, you know, the government's in a position of choosing winners and losers.

And so, you know, basically, you know, when you're looking at central bank activities or sort of stimulus Congress is passing, you know, basically what investments you make will large part depend on what you think Congress is going to do, right? So if you didn't have multiple trillion dollars of stimulus, then the correct investments last year would be very, very different than the ones that ended up being the best investments, right? So maybe instead of being in some of those more inflationary assets, you would have stuck to more deflationary assets. But then the trap there is that, you know, a lot of people are coming in, but it is inherently a very challenging space. And it's something that is, particularly it's very sensitive to rate of change. And so, for example, right when

the inflation course reaches its peak, right? So right when we're getting these 5% inflation prints is right also when we're kind of at peak base effects and we're kind of starting to roll over a little bit, that's when I think, you know, a lot of people that are kind of new to the space are then at that point really off sides because they're, they're in like the hyperinflation camp, right? And that's just, that's not happening this year. And so then they're like, well, what do you mean doge coins going down? Right. So that's where you get to these traps, right, where people kind pile in for the wrong reasons and the wrong asset at the wrong time and the wrong everything. And then they get punished for that. And so it is really, really challenging environment where I think

it's important for people to be aware of macro factors, but also, you know, make sure they really understand them before using them to justify investments that might not otherwise make sense. Yeah, I think that's a super salient point. And maybe a good shift over into Bitcoin and crypto markets. I guess I love your take on, you know, how you see where Bitcoin is right now from more of a kind of an asset trading perspective, as well as, I mean, a subset of that question, but to what extent, you know, Bitcoin or crypto markets in general are subject to the same forces impacting equities and everything else right now? Yeah. So basically, Bitcoin, for the most part in its history has behaved like a risk on asset. And so when there's liquidity in the system,

when stocks are doing well. Generally, Bitcoin is doing even better. Now, because it's a smaller asset and because it's only a 12-year-old asset, it's been heavily correlated to its own adoption cycle. So kind of like how, you know, say, in its early days, Google could be immune to the economic cycle because no matter what the economy was doing,

Google was growing its market share and still is in large part. And so Bitcoin's been like that for a while where, you know, Bitcoin's growing, but the price can obviously fluctuate substantially based on if there's a liquidity event, right? So if the dollar spikes, if liquidity gets tight, Bitcoin is likely to sell off. On the other hand, if liquidity is very abundant, then Bitcoin can do very well. And of course, when Bitcoin is doing well, people want to go out into the risk curve and buy, like, you know, silly coins. And those kind of, you know, temporarily outperform Bitcoin.

But then when the, you know, kind of when the music stops and there's less liquidity and everything kind of corrects, those things go down a lot more and tend not to hold their value for multiple cycles. And so basically, Bitcoin's benefiting from the long-term adoption cycle while still being generally a risk on liquidity-driven asset that is prone to sell-offs when it's not going in this direction. You know, another thing that I think is really kind of understated over the past few months is how important grayscale has been for, for Bitcoin's price action in the tactical sense. And so, for example, you know, the second half of last year, gray scale,

was by far the biggest buyer of Bitcoin. And so some of that was natural demand. But another part of it was that arbitrage trade. So Grayscale had a premium over NAV, and investors could, you know, they could buy that. They could buy in at NAV so they could create new units of it and they could short Bitcoin elsewhere. And so basically that served as this program that kind of kept converting liquid Bitcoin into illiquid Bitcoins. And so even when that trade ended every six months, those Bitcoin would stay in there.

and just be permanently a liquid now, and then traders could go and do it again and put another batch of Bitcoin in there. But because we've had a rise in competition, right? So we have a Canadian Bitcoin ETF. We have other ways to access Bitcoin. Exchanges have gotten more and more usable. We have all sorts of ways to access Bitcoin now for institutions and individuals. So that gray scale Bitcoin trust went to having a discount to NAV. And so that kind of closed that, that, you know, very aggressive, kind of neutral risk-free arbitrage trade. And so gray skills no longer been a buyer of Bitcoin like they were. And so essentially the biggest buyer went away. As we started to see Bitcoin consolidating and kind of, you know, not really making like,

you know, higher highs. And then when you get the Elon fud, when you get all the other fud, and now we have kind of China hash rate moving around. And so, you know, we're seeing kind of a period of Bitcoin weakness. And I think in some ways this was due, and how much euphoria there was in things like Dogecoin, you know, things like Ethereum Classic, where things like come rock, like basically every, every token under the sun was, was having these crazy vertical price action in 2021. And so now reality is kind of setting in. Some of these tokens are crashing. Bitcoin that actually has the fundamentals is correcting, but it's holding up better than those meme tokens and things like that. And so overall, I don't have a firm, say,

three to six month outlook. I'm kind of watching certain risk levels, right? So I was kind of watching to see if it breaks, you know, we started to have some rising action in recent, you know, weeks. So I was trying to see if it would break over, say, 41, $42,000. So far, it's, it's kind of gone the other direction, kind of settled in the lower 30s for now. And so I don't have kind of a near-term price action, but overall what I'm doing is kind of watching the fundamentals of the space. So watching development continue to happen on the lighting network, watching what's happening with, you know, say, El Salvador, watching what's happening. happening with some of the layer three now stuff that's out, watching what's happening with this,

with this Bitcoin mining migration that's, you know, potentially underway here. And so I think it's kind of a time to focus on the fundamentals and make sure they remain favorable. Whereas the price action, I think, has, you know, it definitely has to start, you know, it has to start proving itself to the upside in order to kind of regain that momentum. Right now, it's kind of in that big and solitory phase. I think one of the really interesting points that you, your gray scale point kind of reifies is how much we're being, we're either learning or being reminded, depending on who you are, that things that we attribute largely to narrative are actually more about market structure on both the way up and the way down. You know, where big runups come

from in our brains is, well, it's institutions buying, you know, spot, but that's not actually it. You know, it's these specific trades like you mentioned. Same way on the way down when something, you know, when I think the second round of the 18 China Fugs that we've had this year or whatever happened. And we dropped from like 41 to 32, you know, to listen to people who are at trading desks and on exchanges and things like that. Talk about it. No one actually wanted to sell much below 39 or 40. It's just they were liquidated, right? And so this move that was meaningful, but not devastating, became a, you know, a 30% move instead of a, you know, a 7% move. And I think it's a, It's an important reminder, I think, to not get too euphoric on the way up or too depressed on the

way down. Speaking of the sort of El Salvador and Lightning Network, I know this is something you've been paying attention to. One, I love your kind of impressions about El Salvador and, you know, what that might mean for Bitcoin. But then, two, you know, I'd love to get your take on how it could be or whether it will be a force for really putting some momentum and excitement. back in kind of lightning network development, which is something that's been comparatively quiet

to some other parts or aspects of the industry over the last year. Yeah, I think overall it's good news, right? So, you know, basically, you know, we've had the whole story of expensive remittances to El Salvador, a country that's very reliant on remittances. And so anything that can lower that cost is helpful and anything that can give people, you know, banking when they don't have banking. And so there's still challenges there to get more people's smartphones, for example, because, you know, the population is underbanked, but also under penetrated in terms of smartphones.

But, you know, potentially smartphones are a quicker thing to fix than banking issues, right? So if you get more people smart phoned up, they can access things like, you know, a lightning wallet. They can now have kind of, you know, basic banking services. And so overall, I think that's a good thing. And by making it legal tender, it increases the, it decreases the friction for things that they can do, you know, when they get the Bitcoin. and they don't have to rely on stable coins as much. If they can interface the banking system with that in a better way, that can be a smoother process for them.

And so it kind of enables that technology. I also think that the potential for El Salvador looking into Bitcoin mining as a revenue source is interesting. So that's part of the diversifies hash rate. If they can make it work financially, then that's good for them. I think at the same time, Bitcoiners should be careful about hero worship and always kind of wanting the next narrative, right? So I think they learned that lesson with Elon Musk, where they were super happy when Elon, you know, finally bought into Bitcoin. But then it turned out his narrative is kind of all over the place.

He might have been pressured by, you know, outside entities or his board or whatever the case may be about, say, some of the ESG narratives around it. And so, you know, he kind of backpedaled on, you know, Tesla's support for Bitcoin. He's also, he was out there pumping Dogecoin and other kind of meme coins. And so they kind of, I think, regretted some of the status they gave him in the space. And so I think people have to, you know, think the same way than when they're giving, you know, the president of El Salvador or that kind of same treatment where, you know, you have to realize El Salvador is still a very troubled country. You know, there's questions about the way that they run the government, you know, to put it lately. And so I think people have to be careful about, say, you can recognize a good thing, but you don't want to get into the next trap of always kind of, you know, feeling you're relying on one point. person to kind of drive the Bitcoin narrative. I do think overall, I think one of the stories of the

Bitcoin conference followed up by this El Salvador news is that Lightning is starting to reach critical mass. And so, you know, if you kind of look back in history there, I mean, it was it started, you know, it hasn't exploded the same way that, say, DFI has on Ethereum, right, because it's inherently different purpose. Lighting doesn't have that inbuilt incentive for using it as like a gamified token, you know, casino, right? So it's basically this slow. more structural buildout. And so it started as a white paper in 2015. Then they had to do some standards, right? So the different companies could start kind of implementing lightning that were interoperable. And then with the Segwit update, they could start actually building lightning on top

of Bitcoin. But there, you know, the limitation of lightning is that there's, it's all reliant on liquidity. And so if there's only a handful of nodes, it's not a broadcast network. It's like a channel network. And so that took a long time to build out, both the tools to a allow that to be easier and for just more people to use it, more and more kind of channels and nodes on the network. And so we've really kind of reached critical mass starting late 2020, where it's a pretty usable network for small transactions, and it's kind of sufficiently liquid now. And so we're starting to see kind of the killer apps come that are actually kind of putting that network to use and starting to use that technology. And so it's one of those things where, you know,

it can happen slowly and then all at once, where you had a couple of years of really building it out, ever since it's been possible. But I think, you know, now I think we're in a more exponential growth phase, most likely, where the apps and the users are really starting to onboard on that. So exchange is starting to use lightning because it's cheaper. And we're also seeing that, you know, it can be used for places like El Salvador and remittances. It can be used in, for example, games that are streaming lightning, you know, streaming stats, you know, based on rewards in the game.

I think that's kind of one of the takeaways of that conference overall is that lightning is now, pretty well developed. There's still a lot to go, but it has come pretty far, and it's really a usable network now. Slight detour, but I want to make sure to get your take on it before we wrap. I'm interested in your take on what's different this time with China's sort of anti-B Bitcoin, anti-Crypto actions, how much you think it has to do with their CBDC, and just in general, how much you're watching what's going on with, you know, China, CBDC, digital dollar, and that sort of emerging topic of conversation. Yeah, so there are certainly people more than me, better than me, that can, that follow

Chinese law closer than I do and kind of understand the nuances more than I do. My interpretation from people that are more knowledgeable to me in the space is that this one came from, you know, the premiere, it came from a higher source. And so this one has so far held more weight than previous, you know, quote unquote China bans for mining. And so this one, as far as I can tell, seems to be actually resulting in hash rate shifting, which I think is in the long run's good. It's probably not ideal to have, you know, estimates of over 50% of a hash rate in any one country, right? You want it to be as decentralized as possible. At the very least, it takes away one of the narratives that bears would have for the network, that China somehow controls it.

it's much harder to make that argument if they have 40% or less of the hash rate there, right? Or even, you know, if it goes down much lower than that, it's even better. And so there's that kind of characteristic. Now, China, you know, there's a couple factors of play. One is, you know, they, you know, I think they are somewhat concerned about, say, commodity inflation and some of the issues there, right? So, but I think that's the smaller factor. I think the bigger factor is that they are pretty far along here on their central bank digital currency. and they don't really want to have competitors to that,

and they don't, you know, they want to have that kind of be as much used as possible in the years ahead. And so they'd rather have that surveillance token, that programmable token, rather than a decentralized token. And, you know, in some ways it makes sense. So, for example, China wants to go around the dollar-based system. They want to be able to buy commodities without having to rely on dollars. And so we've been in this kind of weird situation for a while where, you know, structurally for decades, the dollar has been the only currency worldwide that you can buy oil in.

And to a lesser extent, it's mostly the only commodity, I mean, only currency you can use to buy commodities in general. And for a while, that sort of made sense. I mean, the United States was the biggest commodity importer. But once China surpassed the United States and became the biggest commodity importer, it's awkward that they're using this other currency to buy their own commodities. When in many ways, in many times, they were the biggest customer of whatever entity they were doing business with. And so they have a pretty strong incentive to want to be able to have a currency that is more efficient and can, you know, form their own roots rather than be relying on another country that could sanction them.

They could cut off their circulation to access those payment channels. And so that part makes sense. The part, of course, that people that value freedom are, I think, rightly concerned about is all the other attributes that that comes with that currency, right? So the ability to surveil it, the ability to shut off someone's access to it, if for whatever reason, they're not on the right side of the government. The ability to automatically deduct money from it, for example, like automatic taxation or automatic fines or things like that. And so, yeah, I do think that's a pretty big factor. And I think sometimes it's hard to read exactly what Chinese officials are thinking. And so, again, I'm not the most optimal person to kind of give insights onto what China is thinking in any one time.

There are people much closer to source where that devote more of their time to following that market than I do. No, for sure. I think it's just, it's kind of one of these things where even if you're not, it is forced itself to be in the list of things that we all have to pay attention to at least a little bit, you know, because it's sort of just becoming a bigger factor. Lid, it's always awesome talking to you. I guess I just have kind of one more broad question as we wrap up. You know, is there anything that you're watching that you think people? are under indexing for not really paying enough attention to, you know, housing prices, you know, I mean, it seems like everyone's paying attention to that, you know, that we've had

so many conversations this year about commodity prices, lumber supply, things like that. Is there anything that people are sort of paying too much attention to or not enough attention to that you think are interesting right now? I think on one hand, people are starting to pay a little bit too much attention to this current inflationary moment, right, the current few months. It is kind of a notable moment because, for example, core inflation is the highest it's been since 1992. So it's certainly worth a lot of headlines. I just think people have to be aware of the base effects and kind of following that rate of change terms a little bit.

So I think it's a little bit overplayed, even though it is a really real phenomenon. I think then ironically what a lot of markets are underplaying is the potential for energy shortages in the years ahead. And, you know, this whole kind of period of ever since 2008 has mostly been an environment of oil oversupply and then especially the past five, six years. And so that's a pretty disinflationary force. Because if you look at commodity markets, you know, oil is by far the most critical commodity for the world in terms of how much money goes into oil, how much that to use compared to to, you know, comparatively more niche things like even though lumber and copper are big and then you get

down to others. But oil is really kind of the big one, especially because oil is used for getting those other commodities out of the ground as well. And so when oil goes up, it impacts other commodities. And so because you've been, you know, even in this past period, oil has gone up in the past year. But, you know, compared to some of these other commodities that hit all-time highs or tested previous highs, oil still is nowhere near its highs. And that's because it has more structural oversupply than some of these others, like say lumber and copper and things like that. And so, you know, in the years ahead, because we have low-cap-ex, because we have ESG mandates and things like that, I do think we're likely setting ourselves up for, you know, some degree of oil and gas shortage

when we look out a couple years. You know, we could get taste of that, you know, later into the summer, I think. But then whether or not that materializes, you know, because that a partial depend on lockdown decisions and variants of the virus and all sorts, you know, basically what, how much demand comes from emerging markets. But as we look out two, three, four years, I think that that becomes an increasingly probable period where we're going to get another inflation spike from oil. And that can be a lot rougher because it's such a larger market than these other commodities. Super interesting. Something to watch for sure. Lynn, like I said, always great to have you here. Can't wait till the next time. And really looking forward to seeing how these things all play out.

Yep, thanks for having me. And it's, you know, it's always a challenging market, but we do our best to interpret what's happening. This is why we have a daily podcast. There is so much interesting in that conversation, but I think the thing that strikes me most is the need to expand our horizons when we talk about things like inflation and market cycles. Part of the reason that I think Lynn is so even keeled, even in the gladatorial ring that is Twitter, is that when she's looking at these phenomena, she's not thinking about just the latest headline. She's thinking with decades and even a century or more of historical context. She can situate what's happening now in much bigger and broader patterns, and I think that's incredibly valuable. We heard about that today in the context of inflation and whether we should be really talking

about these 5% numbers from just recently, or whether we should be looking at phenomenon that are more likely to be problematic in the future, such as what seems to be the potential for a coming energy shortage. I think especially in a world where we live headline-to-headline, to tweet. That sort of analysis is absolutely invaluable. So I hope you enjoyed this show. I hope you enjoyed hearing from Lynn. She's always a great guest. Until tomorrow, guys, be safe and take care of each other. Peace.