The Breakdown - Macro 101: Bonds, the Fed and Money Printing, Feat. Delphi Digital’s Kevin Kelly

Episode Date: March 6, 2021

What are Treasury bonds? Why does it matter how they’re doing? Does the Federal Reserve actually print money? What’s the difference between quantitative easing and yield curve control?  Bitcoin undeniably operates in a macro environment. In this 101-style episode, guest Kevin Kelly, cofounder of Delphi Digital, gives listeners a whistle-stop tour of a set of key concepts to understanding bitcoin macro, including bond markets, the Federal Reserve and money printing. -- 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

The internet economy is evolving into an investable market almost at the exact moment that we need it to. It's got much greater growth prospect. You're seeing everything that's happening in crypto with composability and all these different projects coming out. The amount of growth that can potentially be captured within this market is certainly attractive. We need an outlet for global savings, right? Because again, 1.5% on a treasury and potentially negative rates or yields in other parts of the world simply doesn't cut it anymore. 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 Casper and produced and distributed by CoinDesk. What's going on, guys? It is Friday, March 5th, and today I'm bringing you a show that has been extremely requested on Twitter and YouTube comments and in every other place that I talk to you guys. This is a macro 101 show. And my guest today is Kevin Kelly from Delphi. Kevin has been on the show before and does an extremely good job of breaking down complex macro topics in ways that people can understand. Obviously, I think Bitcoin is a macro phenomenon. And so I want to make sure my listeners who don't come from a macro background have the tools to engage with those concepts, even the ones that don't touch Bitcoin specifically, as cogently as they can speak and talk

about and discuss Bitcoin. So on today's shows, we're going to get into bond markets, the Fed, and all the different things we lump together as money printing, and Kevin's also going to give you his take on where we are in the macro cycle right now. I know you're going to like this show, and I'm looking forward to the questions that you have coming out of it. All right, Kevin, welcome back to the breakdown. Great to have you again. It's been like a year, I think, like a full actual year at this point.

I was going to say, it's been a minute. It's great to be back, man. Thanks for having me. Because I think when we were talking last, it was literally just as the market was finally starting to react. to COVID-19. I don't even think we were fully shut down yet. Yeah. No, I think it was right on the cusp of you started to see reactions in the bond market, not really a whole lot of reaction stocks. And then obviously Bitcoin was doing its own thing. So I think we were trying to just

kind of parse through, you know, what was going on. Perfect. Well, so that's a great setup. This show comes out of something that I get asked all the time on Twitter, which I think makes tons of sense, right? Like Bitcoin and crypto are often economic gateway. drugs for people, right, who want to understand more about the system that these assets are functioning in and more about the world in general. But a lot of times they feel like there are all of these macro concepts that they sort of like, you know, they haven't had a chance to dig into yet. And obviously, like in the course of a short show every day, I'm not going to do kind of like that full educational content. So I thought what would be fun is to like really go through some of the

big concepts at a high level from bond markets to the Fed to different things that we mean when we say money printing and so on and just kind of give people a little bit of that 101 framework. You are a really good explainer at this sort of thing. So I feel like we'll have a good time with it. Yeah, no, very much looking forward to it. When you reached out about this, I love the idea. And I think, you know, myself included, I've just tried to develop not only a framework, but also giving people an idea of, you know, why things could be happening, you know, the way in which they're happening, right? And oftentimes, I joke that, you know, you ask 10 different people what's happening in the market or the reason for why things are happening in the market.

And you get 10 different answers. And so this, you know, maybe isn't so much, you know, trying to pinpointing exactly why things are happening the way they are, but giving people that framework for trying to understand when things do happen, you know, what potentially could be the causes of the catalyst for it. Perfect setup. And with that, let's dive right in. And let's start with, I think maybe the thing that I've seen people feel like is the most opaque or unclear if you haven't spent time really digging into it, the bond markets. So I guess just to start us off, what are we talking about when we talk about bond markets? Yeah, so when you're talking about bond markets, you're really talking about just tradable debt instruments, right? Or debt securities, right?

And there's multiple different kinds of bonds. So when you think about, you know, you talked about the Fed earlier, a lot of that stems around kind of U.S. treasuries, right? So government bonds. At a federal level, the U.S. government issuing treasury bonds. But you also have things like municipal, which are at a state or a local level. You've got corporate bonds, right, which there you can kind of bifurcate between your high yield issuers that are a little bit riskier versus your what they call investment grades. You're kind of more tried and true corporate bonds. You've got mortgage bonds.

So when you're talking about the bond market, it's definitely a very kind of fragmented, but also diverse group of, you know, tradable debt instruments that investors are piling into. And let's talk about Treasury specifically because I think for the core, of this macro conversation and getting into the Fed and Money Printing next, they're the one that has kind of the most bearing on some of those high-level concepts. What are the different types of treasuries and how do they function differently for investors? Yeah, so the treasury market in of itself, you know, it's all backed by the U.S. government, right? Or it's issued by the U.S. government at a federal level. But to your point, there's several different kinds or flayers of

treasuries, right? And a lot of this stems from several different maturities. And what I mean by that is the U.S. government will come out and they'll issue bonds, but they'll issue them on maturity schedules that differs. So you have, you know, two-year bonds. You'll have 10-year treasury notes. You'll have, you know, potentially sometimes 30-year treasury notes. Those are kind of some of the more popular ones. But then on the short end, you've also got treasury bills that are usually renewable within, you know, a 12-month period. So the U.S. government will oftentimes try and use or try and plan which types of maturity debt that they issue based on what their goals are, right? So you're seeing a lot of T-bill issuance, for example, around coming out of the COVID-19 aftermath, I guess you could say,

because, you know, they're going to be expected to kind of roll over this debt, you know, in 12 months time. But, you know, I think that's a really important kind of differentiator is when you're talking about the treasury market, both at the, what we call the short end of the curve, which is kind of your two years and earlier versus you kind of longer end of the curve, which is your, you know, 10 years to, let's call it 30 years, those are important to differentiate between because there are different influences that can impact both short and long term interest rates and yields, which I'm more than happy to jump into. Yeah, I think it would be good to, so let's, if we view our kind of objective as someone being

able to turn on the horrible, stupid mainstream cable news, financial cable news, understand what people are talking about when they're talking about, you know, 10-year rates or 30-year rates, you know, let's dig in just a little bit deeper on some of the differences in how investors think about them, perhaps also in relationship to other parts of the market. Yeah, no, absolutely. So on the short end, as I mentioned, the short end of the curve, right? So your T-Bills, but also really kind of your two-year U.S. Treasury notes, those are oftentimes more influential. by a central bank policy, right? Specifically around where central banks are setting short-term interest rates, right? So you think about the Fed, Fed funds rate, those types of things are what really

are going to kind of impact the short end of the curve. On the longer end, and this is where you get into the differences between the two and also the kind of difference in yield between the two can tell you different things about what the market expects for the economy going forward. The long end of the curve, which is your 10 years and let's say 10 years and longer maturity is 10 years through 30s, that often is much more influenced by real kind of macroeconomic factors, right? Like the economic growth outlook, inflation expectations, which anyone who's been keeping up with the markets over the last, you know, a week or two weeks or so, has started to see that long end of the curve. Those 10-year yields start to peak higher. A lot of that has

been driven by increased inflation expectations. So a lot of that will influence more kind of the longer end of the curve. And the reason for that is because over that longer maturity, right, if you're holding a bond that's supposed to mature in 10 years from now versus one that's supposed to mature in 12 months from now, you're exposed to a lot more, you know, potentially inflationary risk, right, or interest rate risk on the long end, right? Because again, given where yields are today, you know, I think the tenure this morning was around 1.45%, right? Let's call it 1.5%. If you're going to hold the treasury bond for 10 years and expect to get a coupon of 1.5% over the next 10 years. That's a long time to, you know, potentially lock up that capital.

It's not to say that once you buy a treasury, you're locked into that. Obviously, these are tradable instruments, and that's where you see some of these price fluctuations come in. But the general idea is that the short end, much more kind of impacted by central bank policy, the long end has a greater influence from, you know, macroeconomic factors like growth outlooks and inflation. So let's actually talk about the inflation piece just in this context for a little bit, because I think that people often talk about kind of the nominal rate versus the real rate and as they're looking at expectations as it relates to treasuries. And so if we could get into just a little bit more, like if I'm holding this 10-year note that has kind of a, you know, a 1.5% coupon, but I'm expecting inflation higher than that, we get into territory where you're actually potentially expecting to lose money, right? Yeah. And I think that that's a really important differentiating factor between nominal rates and real rate. as you mentioned, real rates essentially being what that nominal yield is, right, that 1.5% less,

whatever you think inflation expectations are going to be, right? And so for the most part, for most of history, you've seen, as you would expect, kind of a positive real rate, right? Which means, let's say, you know, back 25 years ago, if you had a 10-year treasury at, let's call it 7 or 8%, and inflation expectations were, you know, maybe 3%, then you would have a real rate around 5%, right, that 8 minus the 3. Today, what you've gotten into and what we're seeing, not only in the U.S., but almost across the board, is negative real rates, meaning today you've got that 1.5% on a 10-year treasury that you expect, but inflation expectations are closer to 2.3, even potentially moving as high as 2.5 that some strategies are calling for here in the next 12 months,

which basically means that if you're holding that 10-year treasury bond, right, and, you're you held that out to maturity, you would be expected to. The market expects you to lose purchasing power, right? You basically would not be getting enough income from that treasury bond to keep up with the expected rate of inflation going forward. So how does this impact how investors think about buying and holding these assets or not? And maybe as an additional dimension to that question, a lot of, again, that conversation in mainstream financial media is about reading the tea leaves of how rates going up or down, what that means for for treasuries. So maybe we can get into a little bit about what types of what types of signals those different moves might represent.

Yeah, no, absolutely. So I think to get to your first question or the first part of your question around what is that kind of relationship with treasuries and how people think about it in the context of a, let's call a multi-asset portfolio, right? Very quickly, and this all, I'll tie this back can this will make sense. When you think of things like stocks, right, like the equity market, investors often use, or this historically has been used, various methods for kind of valuing stocks, right? So one of the most popular that I'm sure people are familiar with being this idea of a discounted cash flow model, right? And essentially what you're doing there is you're taking whatever you think expected future cash flows are for a specific stock. And you're discounting that

back to the present value. And in order to discount that back, you use what's called a discount rate, right? And oftentimes that's plugged in as the risk-free rate or what you would expect to get on a U.S. Treasury, for example, or a U.S. Treasury bond. And so the way in which you can kind of think about discount rates in U.S. treasuries and how that kind of fits into a broader investing framework is it's almost a measure of opportunity costs in a way, right? So if we go back to that example 25 years ago, if you're getting 7 or 8 percent, they're expected to get 7.8 percent annually on a U.S. Treasury bond, well, that's a pretty high hurdle

rate for investing in some type of equity or stock, right? It has to kind of, the expected return has to kind of be above that or else you might as well just go into U.S. Treasuries because that is, quote, unquote, you know, more of a kind of a risk-free play. What you tend to see, though, is, you know, when rates rise, so too does this, this discount rate that you use to kind of discount back and evaluate the equity market. And so the higher the discount rate, all else all equal, usually the lower the present value of expected future cash flows. Now, why this is important and where this kind of ties into what you're seeing in a broader kind of macro standpoint today is when you have yields that are as low as they are today and even as we just talked about negative real rates,

this idea of kind of the time value of money, right, almost kind of goes out the window, right? So people or investors are much more willing to pay for these high flying kind of tech and growth stocks that maybe aren't even profitable today, right, or operating with major losses. And you're seeing this with the different companies that are coming to market, whether it's in the IPOs or direct listings. Investors, long and short, are willing to pay or hold on to these stocks that maybe don't even have any real trajectory for profitability in the short term because so much of the valuation is now way, way out into the future and is based on what these companies can do way, way out in the future, because there isn't really this massive opportunity cost of

holding something like a treasury bond. And so where it gets important, and we can get into this in a little bit after we've developed some of these kind of foundational principles is, I think this is having really, re perverse impacts on not only just asset prices, but the way in which investors are thinking about markets, the way in which they're starting to use markets as savings vehicles and things of that nature, right? So that's kind of the first part, how the Treasury rates or where yields are today can actually impact investing from a multi-asset portfolio perspective. But to your second point around, what does it mean when you're seeing these? fluctuations, there's a lot of different drivers, right, for Treasury rates and Treasury yields.

And so, like all other assets, you know, a lot of the bond prices are impacted by things like changes in supply and demand, right? So you think about on the supply side, we talked about, you know, treasuries being a U.S. government instrument, right? U.S. government issues that debt. Well, if the supply of the amount of government debt is expected to increase an increase significantly, as we've seen kind of, again, in this post-COVID era, so to speak, then, you know, potentially you could see pressure on bond prices because that supply is going to outstrip that demand. On the demand side, you've got a lot of different types of buyers for treasuries. You've got the Fed, obviously, which has had a huge impact and become much more of kind

of active market participant these days. You've also got foreign central banks that hold these, and it's one of the reasons why, you know, treasuries and the dollar continue to be the world's go-to reserve currency. the world's go-to reserve asset. You've got private and forward investors. And so long and short, the kind of supply demand dynamics can have pretty large impacts around, you know, what the prices are for U.S. Treasury bonds on different parts of the curve. So let's maybe take one specific example, just because I know we're not going to get as, be able to go as kind of deep as I would love to in this. But last week, we saw a spike up in

treasury prices where on one day they went from like one point this is the 10 year they went up from like 1.38 percent all the way up to 1.6 what did you see the mark what did you see as the popular kind of narrative or interpretation of that? I know it's hard to definitively say it was caused by X, Y or Z, but how were people interpreting that move? Yeah, very much so, at least from my understanding and what I was able to garner very much so around inflation expectations, right? And if you turn on any, And this goes not only to traditional financial media, but every now and then I'll toss on CNN just to see kind of what, let's call it the average American potentially could be listening to or watching, right? And what information is being conveyed to them. They're talking about, you know, the potential for runaway inflation on, you know, major networks like CNN, right? So I think a lot of the kind of price action last week was at least in part or stemmed from the idea that we are going to see higher inflation going forward. And interestingly, when you talk about inflation, one of the actual best predictors of future inflation is the expectations for future inflation today. And so I know it's a bit counterintuitive, but basically it says if people expect higher inflation today, then they're going to, if you're a business potentially raise prices, right?

If you're a consumer, maybe you're going to potentially go out and spend more today because you expect prices to rise. However, that impacts you from a behavior standpoint can actually end up creating or causing inflation to move higher if expectations. today for future inflation are moving higher in and of itself. Super interesting. Yeah, I think I have to kind of cut myself off from going deeper on this because otherwise it'll take all of our time. I know people will have follow-ups. We'll do another one at some point.

Maybe we'll do a whole show just on the bond markets at some point. But let's talk about the Fed and the Federal Reserve, because obviously, especially in the Bitcoin context, something that comes up a lot. So I guess let's start at the highest level. what are the Fed's actual mandates? And then perhaps we can segue from there into what are the Fed's main tools. Yeah, no, absolutely. So the Fed's mandates, typically people refer to the Fed's mandate as a dual mandate, maximum employment, price stability. And this third one, which is kind of moderate long-term interest rates, which really that and price stability go hand in hand. So if you think about

it, dual mandate, maximum employment and price stability. And price stability really refers to, as we're talking about here, right, the level of inflation, right? And having that be not only moderate but predictable over the long term. And so the Fed really is balancing between strong employment, but having strong enough employment where you're not seeing inflation really start to creep up. So that's kind of the dance or the balance that the Fed often has to walk. And so when it comes to, as you mentioned, you know, what are the Fed's tools? There have a number of things that they can do to kind of play with these different gauges, right, to try and again achieve that balance between maximum employment and price stability. And so one of them, as we've already talked about,

is this discount rate, right? So essentially setting the Fed funds rate, which is used for short-term bank lending, but basically setting short-term interest rates because those become the benchmark for kind of general interest rates, right? So times in which you see, and we'll use, you know, right after 2008, but as we also just saw, you know, post the initial kind of COVID outbreak, Fed dropping rates to interest rates to zero essentially is trying to stimulate the economy in a number different ways, one of which just encouraging lending, encouraging people to spend more. It disencourages or disincentivized people to save because you're not earning very much on savings accounts or savings vehicles. So the discount rate is one way in which or one tool the Fed has in its arsenal.

Another is looking at bank reserve requirements, right? So, So in theory, banks have to hold a certain amount of reserves with the Fed, and they also have to hold a certain amount of reserves on their balance sheet compared to how much they're lending or how much they're loaning out. And so when the Fed comes in and says, okay, we're going to lower the bank reserve requirements, essentially what that means is there's more capital that should be available for banks to be able to lend out, right? And the theory is, more money to lend out, encourages them to lend it out, they'll lend it out

to consumers and businesses, and that will start to hopefully jumpstart the economy, jumpstart economic growth, because now you're putting more hypothetically, you're trying to put more money into the system, right? And the third one that's big is open market operations, right? And this is really where we get into things like quantity of easing and big asset purchase programs. And this is the buying and selling of treasuries and now, you know, other potential securities. And the impact of these policy tools is really to not only impact financial markets in a direct way, right, whether it's changing interest rates or actually buying and selling treasury bonds, but also it can certainly have an impact on the confidence of

investors. And it really depends on how much the market can trust the Fed's forward guidance, right? So what I mean by that is if you expect the Fed to come to the rescue every time, let's say the S&P 500 goes through a volatile period, or you see market sell off, or you see an elevated period of market volatility, well, then you as an investor, your behavior, your confidence around, you know, the Fed's ability to come and save you may cause you to go further and further out the risk curve, right? So there's a handful of policy tools that they have, but they can impact markets and impact investor behavior in a number of different unique ways, if that makes sense. Yeah, absolutely. And I, I want to, I guess, maybe get into the sort of the set of

things that we colloquially lump together as money printing, you know, these sort of open market operations in just a minute. But first, again, just for the sake of really one-oning this thing, can you talk just briefly about the difference between monetary and fiscal policy? Absolutely. So monetary policy you can think of is really everything has to do when we talk about central banks and the Fed. And that revolves around interest rates, as I mentioned, and really controlling the money supply, right? So anything it changes interest rates or changes the potential money supply that or I should say the trajectory of what the money supply looks like, that's going to stem or center around monetary policy, right?

Fiscal policy, on the other hand, is anything that has to do with government spending, taxation. And so oftentimes, I'm really glad to brought this up because it's a very important kind differentiator. Oftentimes, what you'll see is monetary and fiscal policy are independent of one another, right? because you have, for example, in the U.S., you have Congress and lawmakers on one hand that are impacting fiscal policy. And then you've got your central bankers like Jay Powell and Co on the monetary side for central banks impacting interest rates or determining what, you know, they want the

money supply to look like. And so it's interesting today and why I think this is actually more important to differentiate today, you know, more so than ever, is because the line between monetary and fiscal policy, especially here in the U.S., has gotten extremely blurred. And one of the reasons for that for that is because the two are almost working together at this point. Right. So you've got on the fiscal front, if we were on the, we were on the clock really quickly, right after we saw the, you know, the outbreak of COVID and we saw, you know, government lockdowns and we had this whole period of, you know, aggregate demand really kind of falling off a cliff. You had fiscal policymakers come in and pass that $2.2 trillion, you know, CARES Act stimulus package

relatively quickly, right? And what that basically means is they're going to a big part of was trying to put money into the pockets of the average American, right, actually give money to the people to be able to help them sustain or get through this, this difficult time. In order for the government to be able to do that, they have to finance that in some way, right? And so oftentimes this comes in the form of increasing treasury issuance. So they basically sell, you know, treasury bonds to finance government spending to be able to kind of fill this huge hole in demand that people were going through. Now, if that taken by itself, you know, potentially, as I just mentioned, in terms of the kind of supply dynamics for the treasury market, if you're increasing supply without an increase in demand, all else held equal, that potentially could cause serious problems for treasury prices. You could see yields are really starting to spike up. And so what monetary policy and the Fed on the other hand are now doing is basically monetizing that debt. And what that means is fiscal policy comes out finances, government spending by issuing

Treasury bonds, monetary policy steps in and says, okay, we are going to be one of the backstops who is buying up or soaking up that excess treasury issuance so that we don't see some type of bond market freak out, for lack of a better word, right? You're not going to see people kind of running away from treasuries because they think there's all the supply that's going to come to market and there's not going to be enough demand that's going to be able to backstop it. And so, again, I think it is just an important point to highlight because the two oftentimes don't necessarily work in tandem, right?

And there are actually two different levers that you can pull depending on what the longer term kind of economic goals are and what the current economic landscape looks like. But given how severe, you know, the most recent recession has been and the longstanding impacts that it potentially has, monetary and fiscal policy are very much, you know, two sides of the same coin right now. Yeah. And a lot of what we saw last year was the Fed really being the buyer for all these treasuries that were issued. It wasn't going to foreign governments and other types of investors, right? Yeah. And that's a really important long-term trend as well because when you think about, you know, oftentimes people will say, well, how do we get out of this, right? How does the Fed kind of remove itself from the equation?

And as much as I hate to be the kind of doomsday guy, it's very, very difficult for the Fed to kind of remove themselves from the equation at this point. because again, if the expectation is for fiscal, for all this treasury issuance to come to market, and now you've got a U.S. national debt that depending on how you want to gauge it, right, whether it's what they consider kind of marketable securities or ones that are still, you know, held quote unquote kind of off balance sheet, you've got, you know, 110, 115% of GDP that's represented by our national debt today, right? And that's probably expected to continue to increase, you know, at least here in the, for the foreseeable future.

And so why that's important is because once you hit these types of levels, historically what you tend to see is this, this is kind of the, I guess, writing on the wall for the demise of that country's currency, right? Because eventually people just kind of, you know,

look at that, they'll look at treasury bonds and say, okay, there is no real practical way for the U.S. to be able to pay this money back aside from either, you know, defaulting, raising taxes, austerity,

which we can get into in a second, or, and this is kind of the base case, I think, for a lot of people now, you basically just try and inflate that debt away, right? You inflate away the real value of that. Why that's important is because it can really dictate or influence, you know, investor confidence in the U.S. Treasury market. And from there, once you lose, you know, a lot of investing is very much a confidence game, right? And the U.S. Treasury market is a perfect example of that. Once investors, especially foreign investors, lose confidence in, let's say, U.S. treasuries, and they start to shy away from that and in substitute for kind of other alternatives or other places to put their money,

well, then it becomes a really kind of potentially vicious circle, right? Because then the Fed essentially is on the hook or puts more pressure on them to be the kind of buyer of last resort or soak up, you know, a rising amount of kind of excess issuance from the, from the Treasury. And you can get into this really, really, you know, difficult death spiral, I guess you could say, for lack of a better word. And so it is an important to understand kind of who the end buyers are of this treasury debt and how those dynamics are changing and potentially forecast a change going forward just given the level of debt we have today here in the U.S. Looking for the best way to unlock your crypto's liquidity?

nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12% and swap between more than 75 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Until now, blockchain technology has been a series of compromises. No layer one protocol exists in the market that supports everything enterprises,

developers, and consumers need from decentralized applications. Meet Casper. Casper provides the blockchain ecosystem with a solution that makes no compromises. around decentralization, security, or performance. Learn more at casper.network. I'm looking at this list of concepts that we had, and I'm thinking to myself, there's no way we're going to get through all of these today. And so what I think we should do is actually maybe segue from here into maybe trying to tease out and break apart, like all of these things that we call money printing, which you've already kind of alluded to, but like give each their own little space. And then from there, maybe wrap up with

just kind of your summary of maybe kind of like the high level picture of where we are now and what you're watching. And then we can come back to maybe these other things. If people like this episode, we can do a 102 and come at some of these other concepts, inflation, deflation, debt, reserve currency, shadow bank, all this sort of stuff too. But for now, maybe let's move into just kind of like trying to kind of tease out everything that we mean when we say money printing. Right. So we use this kind of interchangeably to talk about quantitative easing, asset purchase programs. I mean, other things that aren't exactly in the money printing bucket, but they still get lumped together as we talk about liquidity moving into the market. We talk about

zero interest rate policies or negative interest rate policies, yield curve control. All these concepts are sort of in the same vein, but they're worth kind of separating out, I guess, yeah. No, absolutely. And I think, you know, at a very high level, I think one of the almost common misconception to this point is, and don't get me wrong, I very much subscribe to the money printer go Burr memes and I'm by no means trying to disprove that. But I do think there is a misconception around how money actually gets quote unquote printed, right, and how money supply actually increases. And it's not as simple as the Fed essentially printing money and that increasing money supply and, you know, the buck kind of stops there. It does require a large,

kind of buy-in from the banking sector. That's how our system is set up at this point, where the Fed can come out, and this is really where quantitative easing comes in, the Fed can come out and buy up treasury debt, right, as we talked about. But they're not necessarily buying up treasury debt and giving it to your average Joe, right? What they're doing is they're buying it from, essentially taking it from the banking sector, right? They're buying it off the banking balance sheets in exchange for bank reserves. And if banks, all, you know, all else illegal, if those banks are encouraged and they have the right conditions to go out and lend those increased reserves, that's where you start to get money supply increases, right?

Because you're increasing the amount of credit that's in the system. You're actually increasing the money supply. But simply, the Fed just buying treasuries does not equate to money printing, quote unquote, if you don't also have the buy-in from the banking sector. And I'm happy to go into that, but I want to pause there and take it in the direction that you want to because I know that is a very important kind of topic. Yeah, let's stick into that a little bit more before we talk about the other pieces, because I think it's really important, too. And it gets at, you know, there's another dimension of this, which is maybe a spridge off, but people always ask, why isn't this producing inflation? And there's this dimension of it, but there's also the dimension of the velocity of money,

which maybe worth just touching on briefly, too. Yeah. So if we rewind and we go quantity of easing, you know, the Fed coming in buying treasuries, buying it from, let's call it the banking sector or the banking system, and increasing the amount of reserves, right, the kind of swap for treasuries for reserves. If you have the market conditions that are conducive for banks to lend, right, where you know, you've got rates that are relatively low, but on the high end, it's still profitable for banks to lend. And you have some type of backstop that the Fed puts in that encourages them to lend, then you can start to see money supply really increase because that bank lending to consumers, to businesses, whether that's big or small, that money gets into

the system that winds up becoming, you know, deposits into another bank, which with our fractional reserve banking system basically allows the creation of credit, right? And that's really where you see a large, you know, majority of what we consider to be money supply increases actually stem from. The problem is how do central banks, it's almost like central banks can lead a horse, the horse being banks to water, but can't make them drink, right? You can lead or give banks the proper conditions that you would think are conducive for them to lend, but you can't necessarily force them to lend. And where you saw this really kind of come in was post-2008, to your point, you had a ton of quote-unquote money printing, right? You had a ton of kind of treasury bond purchases from the Fed,

putting another balance sheet, swapping it for reserves. But you didn't see a whole lot of inflation really, really kind of percolators or stem up. And one of the reasons for that is because a lot of this money ended up actually just getting trapped within the financial sector, Right. And so you saw, I'm sure you didn't see inflation in consumer prices, but you saw a lot of inflation when it comes to asset prices, you know, stock market, things of that nature. And so what's important and you kind of dovetail this with the velocity of money concept, you know, the idea that if you have this money actually getting into the hands of consumers, then and businesses, right, the real economy, that is where you start to see inflationary pressures start to creep up. And one of the reasons bringing it back to what we were just talking about with last week and inflation expectations around. you're seeing that show up in the treasury market, a treasury bond market. One of the reasons why this time is, quote, unquote, potentially different is because now you have that fiscal aspect, right? You have the actual direct payments from fiscal stimulus that are going into the real economy that the Fed is monetizing, but that money is actually getting in the hands of consumers, right?

You're actually giving people a direct injection of cash, whereas the flip side, where it's really kind of your post-2008 period, that money was brought into the financial sector, but it wasn't necessarily lent out, right? It took a long time for banks to come around to lending this out to consumers, lending out to businesses because there were still a lot of scar tissue from what had happened in 2008, right? And so you had, you know, some of these banks were a bit more conservative or simply just did not want to lend to, you know, your average Joe. And so I think that's a really important differentiator between, you talk about money printing, how it actually gets into the market.

I certainly think that, again, at a certain point, the Fed and fiscal, the monetary and fiscal policy almost have to work together at this point because you can't go through another post-2008 period where you basically just have the Fed buy up a bunch of treasury debt. Yes, that can have longer-term impacts on, again, investor behavior and confidence in markets, but it's not actually getting hands in the people who need it most. And that's where you start to see inflation pressures really start to potentially perk up is when you can get money into the hands of the people who need it, whether that's through direct payments or whether that's through, you know, the creation of credit via, you know, the traditional

banking sector, if that makes sense. Yeah, no, absolutely. And again, I think this is something that we could go a lot deeper in, but I did want to give folks that at least that kind of like, you know, high level overview of the mechanism by which this actually flows into the system or doesn't. Because if only to be able to fight the regular FinTwit battles where people are like, well, this doesn't actually increase the money supply. So hopefully people feel a little bit more armed to have that conversation.

I guess let's talk about some of the other parts of this money printing equation or other things that people talk about as they've kind of almost all of these things fall under the category of policies that people find extraordinary vis-a-vis the Fed. So I'm not sure maybe we can just kind of you can pick and choose what we should focus on, be it yield curve control or any of these other ideas. Yeah, I think yield curve control is actually a very relevant one to dig into because, you know, essentially what that means is as we talked about, you've got central banks that will come in and I'll continue to use the Fed as just kind of our basic example. They'll come in and they'll buy treasury debt, right? And they'll buy different maturities of treasury debt, right? So as we talked about in the very beginning, you have, you know, two year yields or excuse me, two year notes, you've got 10 year notes, you've got 30 year bonds. The Fed will essentially come in and buy different parts of quote unquote the treasles. So what yield curve control really does is central banks essentially kind of anchor longer term interest rates, right? And a prime example of this is Japan. Japan implemented this back in late 2016 and basically said we are going to anchor, you know, long term. And by long term, this was 10 year yields. We're going to anchor 10 year yields close to basically 0%, right?

And this is the Japan example. We're to anchor yields close to 10 year yields close to 10% or 0%. And so it was really interesting. thing. Part of this is to say, okay, we're going to have a very kind of transparent predictable policy. And the big difference between this versus just traditional quantitative easing is today's quantitative easing for the Fed looks like we're going to buy X amount of treasury bonds every single month, right? Whether it's $80 billion, whether it's $120 billion, that number can change, but that's really where they're being predictable. Yield curve

control kind of flips it on its head and goes, we are going to anchor longer term rates, or longer term yields at a certain percentage at a certain point. And the amount that we're going to purchase for 10-year yields, the amount that we're going to purchase in 10-year bonds is up in the air, right? We're going to basically use as much or as little as we need to to keep yields anchored to what our target is. What was really interesting about the way in which Japan implemented this, and I'll take this in a pre versus post-COVID world because post-COVID,

everybody had to come out and start to monetize more of their debt, right? The Bank of Japan included. But actually leading up to kind of the pre-COVID period was really interesting is that as soon as the BOJ came out and said that they were going to do this and do, quote, unquote, whatever it takes essentially to anchor 10-year yields at 0%. It actually caused investors to basically assume this would happen, right? It would cause investors to assume that any really significant deviation from this, if, let's say, 10-year yields move closer to 1%, they assume the BOJ would come right.

in, purchase up a bunch of 10-year notes, and drive the yields back down to 0%. Because investors thought this, it actually turned out that the BOJ could actually slow its rate of asset purchases because there was the investor assumption that they would come in and be the backstop if things got out of hand, right, or deviated far from what their target was. So why this is relevant now is because there's a lot of talk around, especially with now 10-year treasury yields rising. what is the Fed going? What is the next kind of evolution of Fed policy or what can the Fed do in addition to what it's already doing? And how can it send this signal to the market that this accommodated monetary policy is going to be here for the foreseeable future, right? If the Fed comes out and implements something like yield curve control and does something similar to what Japan does, the hope for them would probably be that they come out, they say they're going to do this. Let's say they anchor, you know, 10 year yields at one and a half percent, right, close to where they are today. The idea being, Hopefully, maybe they could even slow their asset purchases because everyone just assumes that that backstop is going to be there, right? The Fed backstop is going to be there.

Where this gets a little bit dicey is a lot of this is very, very heavily dependent on the market expectations or the market's trust in what the Fed is saying, right? And with their forward guidance. If the market doesn't trust the Fed's going to be there as this backstop, then as we just talked about your kind of demand side for treasuries, right? You're not so much the Fed, but your foreign investors, you know, even potentially foreign central. banks, private sector investors, if everyone, you know, doesn't have the confidence and thinks that they're going to let yields continue to run, then maybe they'll shy away or they sell out of their treasury debt, which puts more pressure on the Fed to buy more of that treasury debt to keep, you know, yields anchored to what their target rates are. And so why it's really important is because I think, you know,

personally, if you see the Fed come out and start to talk about and they've addressed it, but they haven't officially come out and said this, if you see the Fed come out and say, we are going to implement some type of yield curve control, I think, to be honest with you, things like Bitcoin, but even precious metals like gold, silver. I think honestly it's off to the races for them because that is almost one of the best case scenarios, right? Not from an economic standpoint, but from a pure investor standpoint, because what that'll end up doing is you'll have nominal yields that are anchored.

We talked about a difference between nominal and real yields. Nominal yields will be anchored. Inflation expectations are likely to, you know, continue to run higher if you get some type of yield curve control rhetoric from the Fed. And what they'll probably do is drive, you know, real rates back into deeper negative territory, which is kind of a perfect storm for, you know, Bitcoin, gold, silver. And then obviously, you know, some of these these higher kind of tech slash growth type names as well. So it's very important, you know, to watch for, I guess, going forward.

And that's why a lot of people really dig through the Fed commentary and, you know, people are constantly watching, you know, J Powell and everything that he says. And sometimes, you know, people can think that that's a little. bit excessive, but the moment the market interprets whatever he is saying or whatever, you know, a policymaker is saying as something that gets close to something like yield curve control, that's when you put on a lot of positions and that's where things can get, you know, potentially pretty crazy. So this is actually a perfect segue because I've had you now kind of explaining concepts, providing frameworks for about 40 minutes. Let's just use by way of kind of

wrapping up the last few minutes to get your take on where things are. You know, we're a year out, It's the beautiful one-year anniversary of our two-week lockdown. And, you know, we've got a new administration that has come to power. What are you seeing kind of from this macro-fed perspective? What are you watching? What seems important? What are the things that we, you know, aren't sure of yet, but could be big kind of inflection points? I mean, give us your subjective take now on where things are from kind of a macro perspective.

Yeah, I think, you know, we talked about, coming into, you know, we'll say before this, this most recent administration change, you know, how much, whoever won the U.S. presidency really mattered. And to be honest, yes, there were a lot of things, you know, not only from just a social standpoint, but from an economic standpoint that matter and the differences between what a, you know, Republican administration versus Democratic administration would look like. But to be honest with you, I almost think the genies out of the, out of the bottle when it comes to this monetary and fiscal kind of intertwined interconnected world that we now find ourselves in. And what I mean by that is the markets in the economy are much more interconnected now than they were before. And part of

the reason for that is almost, you know, this hole that we've dug ourselves that isn't necessarily the fault of one person, but more so, you know, decades and decades and decades of what was considered kind of conventional, you know, monetary policy that's now gotten us to this point. So what I mean by that is, Over the last several decades, you've seen interest rates trend lower. You've seen central banks really slashing rates, especially in the wake of financial crises. And what that's essentially done is it's forced investors further and further out the risk curve, right? And what I mean by that is if you're a pension fund, for example, right, and you have these long duration liabilities and you need to or your target rate of return every year somewhere around, let's call it seven and a half, maybe eight percent a year, right? back 25, 30 years ago, you could have actually achieved that in a nominal basis.

You could have achieved that by holding a portfolio that was essentially consistent of entirely U.S. Treasury debt, right, especially on the long end. You were getting 7, 8, you know, potentially even 10 percent yields on treasury debt. Now, you know, given, you know, where yields are today, we talked about 1.5 on the 10-year treasury. Now, in order to achieve that same type of required return, you have to go further and further out the risk curve to get that, right? So now a majority of your portfolios in things like equities, right, the stock market. It's in a liquid investment life, potentially private equity or venture

capital. It's in some of these alternatives, which can be fantastic diversifiers. But when you start to get people using, and I think Corey Hofstein from Newfound Research does a really good job of explaining this kind of concept around central banks, essentially with rates falling, forcing people to use markets as a savings vehicle, right, which I think is a really important differentiator. Now, if people are using the market as more of a savings vehicle to achieve these, you know, what were considered average returns, you know, historically, if you have to take more and more risk to achieve that return, well, then the markets in the actual real economy become much more interconnected because if you see the S&P 500, for example, you know, drop by 10, 15,

maybe 20%, well, all of a sudden, that's going to start, that's going to start feeding into consumption pattern that's going to start feeding into investor confidence, which feeds into consumer confidence because the market's in the economy is much more interconnected now. And so what I think is difficult is, you know, what is the path forward from here? And I just don't see how debt monetization really, I think it's here to stay for the foreseeable future because trying to remove the Fed and other central banks from the equation at this point, it's almost like we've gone too far, right? And developed markets are propped up by, you know, debt fueled growth. So you don't have this organic growth that can really come through and kind of pull us out of

these large debt burdens that we're facing. And so one, I think U.S. Treasury is carry more risk than a lot of people anticipate or expect. I mean, we put out a note, I think it was about six or eight weeks ago now talking about this because, again, if you just think about growth and inflation expectations, if those rise, if you saw any type of, you know, optimism around the vaccine, you're going to see expectations for growth and inflation rise, which really is going to put pressure on U.S. treasury yields and as a corollary treasury prices, you've got structural forces that are set up for a weaker U.S. dollar over the long term. And so that's kind of the pessimistic side of things where

I think this actually ties into our world of macro, but also crypto and Bitcoin and this whole kind of emerging internet economy is I think you're going to see a lot of increased capital flow from conventional assets to the internet economy because if you think about it in a weird way, The internet economy is evolving into an investable market almost at the exact moment that we need it to, right? It's got much greater growth prospect. You're seeing everything that's happening in crypto with composability and all these different projects coming out. The amount of growth that can potentially be captured within this market is certainly attractive. It's not burden with the high type of debt levels that we typically see in the conventional assets or conventional markets.

We need an outlet for global savings, right? because, again, you know, 1.5% on a treasury and potentially negative rates or yields in other parts in other parts of the world simply doesn't cut it anymore. So you need these higher yields on savings vehicles. And this concept around, you know, the internet economy almost needing a universal asset on which to kind of build this, this better, more equitable financial system. Again, you know, Bitcoin, while it is extremely volatile, I should say, you know, its volatility profiles above average in the short term, long term, if it gets to be, you know, as large as we all think it really can be. Honestly, it might become a little bit less sexy. The volatility,

certainly we expect to be suppressed. And it almost becomes, you know, the greatest form of collateral that we've ever seen, right, because the internet economy, it's going to need a collateral asset that's permissionless, that's secure, that has a predictable supply, right? All these types of things. And then top on top of that, the accessibility of crypto assets and the crypto market in and of itself, I just think a lot of this increased capital flow is going to try and move to the internet economy in the short, term chasing some of these returns, chasing some of this yield, chasing some of this growth. But to be honest with you, you know, over the long term, I certainly think that it could actually

be a gateway or a way to help alleviate some of these really big, you know, systemic issues that we're facing today, especially when you talk about things like widening wealth and equality and now the accessibility for people to actually come in and, you know, build a nest egg for themselves by, you know, getting involved in the digital asset market is one of those things where, you know, I feel like oftentimes, you know, being a macro strategist, a lot of what you read is very kind of doomsday, right? It's a lot of, you know, this is what's wrong and there's really no way to fix it. And so I've been trying to focus a lot more time, you know, especially as of recent, trying

to take the flip side of that and say, okay, how do we actually rebuild, you know, the financial future that we want, but how do we also use the tools and the different protocols and products that are being built today to actually improve and potentially, you know, help dig our way out of this whole that, you know, again, is very, very, you know, potentially systemic in nature. So long-term, increased capital flow to that internet economy, certainly helps Bitcoin, helps crypto assets. But, you know, in the short term, it's not to say that the show can't go on because, again, you know, the Fed and this relationship between monetary and physical policy, I think, is going to be here for very much so for the foreseeable future.

That is an awesome spot to pause. Particularly that note. of the idea that rejecting and trying to rebuild a system that isn't working is, despite the protestations of many who don't get it yet or kind of aren't with it yet, not a cynical position. It's an optimistic position. It's a bet on human ingenuity and the capacity to change. So, Kevin, awesome to have you on the show. I want everyone who's been listening and has additional questions to go back.

and listen again, write down your specific questions, you know, tag us on Twitter with them, and we'll use that as the basis for more conversations somewhere, whether here or on Clubhouse or wherever. But thank you so much, man, for taking the time today. I know people are going to really like the show. And I know it'll be the start rather than just the answer for a lot of great conversations. Yeah, I know. Thank you, man. Really appreciate you. Give me the platform to kind of riff on some of these thoughts and obviously a huge fan of what you're doing, not only for the space, but really kind of, again, you know, elevating the conversation. I think I've been a huge follow of years for a long time and really looking forward to the next time we can sit down and do this.

Yeah, cheers. Hoo, that was dense. So listen, guys, rather than a big wrap up for me, I just want to say this. I'm really interested in what questions you still have, what other topics you want to explore if this 101 style format was useful to you, because if it is, I'm really excited to do more of this. Let me know on Twitter, in the YouTube comments, wherever you want to hit me up, what questions you have and what type of topics you want to dig into further, and I will try my best to make it happen. For now, I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.