The Breakdown - The Best of the Breakdown July 2020

Episode Date: August 4, 2020

Today on the Brief: The TikTok-Microsoft Deal The Twitter hacker was 17 A changing of the guard for crypto hedge funds Our main discussion: recapping the best interviews of July 2020 Despite a huge variety of perspectives and experiences, one theme shown through in Breakdown conversations in July: the disparity between the stock market and the real economy and a growing unwillingness of people to accept their place in the order.  This show features clips from: George Gammon - @GeorgeGammon Daniel Lacalle - @dlacalle_IA George Goncalves - @bondstrategist Sahil Bloom - @SahilBloom Tyrone Ross - @TR401 Tony Greer - @TgMacro Jill Carlson - @jillruthcarlson Michael Krieger - @LibertyBlitz Sergey Nazarov - @SergeyNazarov

Around them, they just see that, my gosh, my standard of living is not improving. I turn on the TV and it's supposedly the greatest economy of all time in human history. It sure doesn't feel like the greatest economy of all time in human history. And then we're going through all these boom and bus cycles. I mean, I used to be relatively well off on paper. This is maybe a baby boomer. in my 401k and then that got crushed in the dot-com bust. And then I tried to go into real estate because that was the smart thing to do.

And then I got completely wiped out there. And so then I went back into the market. Fortunately, it's gone up. But now I'm 70 years old and I just can't afford for this market to go down again. 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 crypto.com, bitstamp, and nexo.io, and produced and distributed by

CoinDesk. What's going on, guys? It is Monday, August 3rd, and today we're doing one of my favorite episodes every month, the best of July guests. It should be a super fun time. And interestingly, there was a very strong throughline in the themes of that show. So I'm really looking forward to sharing some of the best highlight clips for our guests from July. First, however, let's do the brief. First up on the brief, we have to talk about the TikTok-Microsoft deal as all this happened after hours on Friday. Basically, President Trump has been loud about his desire to potentially ban TikTok. And there's been a lot of reasons why. Obviously, this is caught up in the U.S.-China trade war. There have been recriminations and accusations of TikTok moving data to China, et cetera, et cetera. And this was super accelerated on Friday when he said that this ban was actually happening.

and happening as soon as Saturday. Well, it turns out that Microsoft had been in talks for a while to actually buy the U.S. operations of TikTok. And what it looks like to me is that they had stalled at this impasse where ByteDance, the company who had owned TikTok or who does own TikTok currently, wanted some sort of minority stake to be retained. And that wasn't enough for the U.S.

So partial ownership, even majority ownership was not enough. It had to be total ownership. In that light, it looks like Trump's threat on Friday was actually kind of a negotiating technique. The flip side and the tricky thing is that banning TikTok might be an extremely unpopular move with its very large user base. And on the one hand, there's a lot of young folks there who tend to slant liberal. So maybe the Republican leadership doesn't matter. But I don't think that they're taking any chances in this year. So it seems to me like there was a goal, an imperative, to figure out a way to win this one,

which means getting TikTok out of the hands of China and not having to ban it. As details have emerged, and to be clear, there's no deal yet, it does seem like U.S. Republicans are pretty about the way that it's shaping out. So there are obviously a lot of reasons why this matters. On the one hand, it matters obviously to the millions of users who have a stake in this thing continuing. It also matters as a symbolic victory in the U.S.-China trade war. In China, this would be seen as some sort of a betrayal in some ways by the Bight-Dance

CEO, and indeed, TechCrunch had an article to the effect of that showing comments that were very frustrated with this possibility around the CEO himself. I also think there are implications for other apps, right? It's hard to see this as an isolated case of TikTok specifically, and what we could be seeing is the beginning of a template for how the U.S. wants to handle Chinese-owned internet companies more broadly. Next up on the brief, another follow-up this time around the Twitter hacker. Obviously, one of the big stories of just...

July 2020 was the Twitter hacks that ended up having people from Bill Gates to Kanye West to Kim Kardashian to Elon Musk all shilling Bitcoin effectively, or rather shilling a scam by which they wanted to get Bitcoin. When this went down, a lot of folks basically had their first reaction that this was so unlikely to produce a significant amount of Bitcoin in terms of the actual value of the scam and was such a high-profile attack that it seemed like it might be maybe a state-level actor trying to show what they could do. Well, there were arrests made last week, and it was not that. In fact, it was a 17-year-old, a 19-year-old, and a 22-year-old. And here's the funny part. The 17-year-old was the mastermind. So this was not a sophisticated state-level attack.

This was a group of teenagers who were kind of trying to prove that they could and also make some scratch along the way. Now, the 17-year-old has been in trouble before. He has apparently 3.4 million in Bitcoin, and last year, authorities confiscated 400 of his Bitcoin and then returned 300. So the story is still emerging. It's not exactly clear what's going on, but this 17-year-old has been busy. I think for me, this is a good reminder that as big and crazy as things can seem, sometimes the simplest explanation, in other words, that 17-year-olds might like to mess with the system and get $100,000 for their trouble are the right explanations. Last up on the brief today, a hedge fund changing of the guard in crypto. So if you've been paying attention for the last few months,

a ton of 2017 vintage crypto hedge funds have been folding. The latest is neural capital, which had only raised about 13 million and had lost something like half of it in the market subsequently. Other hedge funds that have closed included adaptive capital, prime factor, and tetras. Meanwhile, there is a new set of funds springing up. Just today, the Huobi group announced the Hwobi Defi Labs, which is capitalized with a ton of their own money. And really, the reason that I wanted to point this out is that I think that it's potentially a new time, which means new strategies and new capital. You should expect to see some of this shifting. 2017 and early 2018 saw an absolute explosion of crypto hedge fund, something like 200 plus

were registered. It's inevitable that a big portion of them, perhaps, in fact, the majority of them are eventually going to go under. And I think that what we're seeing right now is, is probably a number of them who went out and tried to raise based on potentially changed or new theses who weren't able to, and because of that, decided to fold it in. But it does also likely mean that new actors will enter the space and try to capture some of that capital that might come about as prices continue or start to go up in a big way. Defi has certainly been leading the movement, but now that Bitcoin is having its own little surge as well, you can expect more capital to start to get interested.

This is something we'll continue to watch because obviously the way that capital is structured has a major impact on the way that capital is spent. But with that, let's shift to our main conversation, The Best of July. Every month on the breakdown, we have an awesome array of really interesting guests with really different types of backgrounds, and it was fascinating then that this month there was such a clear throughline in what the conversations were about. And if I had to sum it up, it was the disparity between inflated asset prices and a surging stock market on the one hand and real economic pain being experienced on the other.

And frankly, it could be that that's just the story of 2020 when all is said and done. However, it was fascinating to see how clearly that played throughout, again, this very different set of folks. George Gammon, host of the Rebel Capitalist podcast in the George Gammon YouTube channel, kicked us off and called out the lie in the idea that this has somehow been the greatest economy of all time. Around them, they just see that, my gosh, my standard of living is not improving. I turn on the TV and it's supposedly the greatest economy of all time in human history. It sure doesn't feel like the greatest economy of all time in human history.

And then we're going through all these boom and bus cycles. I mean, I used to be relatively well off on paper. This is maybe a baby boomer in my 401K, and then that got crushed in the dot-com bust. And then I tried to go into real estate because that was the smart thing to do. And then I got completely wiped out there. And so then I went back into the market. Fortunately, it's gone up. But now I'm 70 years old and I just can't afford for this market to go down again.

He also called attention to the Fed's role in creating wealth and equality. This has been an ongoing theme itself due to the Fed's recent and repeated denials of any responsibility in this area. I mean, you can go to the Bank of England's website and the report they came out with when they did a couple of videos on it as well in 2014 that explains quantitative easing. and they say it explicitly that the goal of quantitative easing is to increase risk assets or increase the price of risk assets. They just say it right there. They've got a YouTube video on it. So for Jerome Powell to come out and saying that it doesn't create wealth inequality is

utter nonsense. But you've got to go back to understanding that whether it's Powell or a politician, they're just going to tell you what they think you need to hear. If you're taking power, anyone, for that matter, in the political sphere, if you're taking what they say at face value, you're going to be making a lot of mistakes. Economist Daniel Lacalm makes a similar point, here describing that money creation is never neutral. In other words, that the cost always gets passed on to someone. If we look at capitalism and if we look, for example, at the middle class, which is in itself a creation of capitalism, there wasn't, any middle class before capitalism. We must remember that the history of humanity is that in which

the vast majority, 90% of the population, were not poor, but extremely poor. And there were very, very few close to the government and the church maybe that actually held some privileges. With capitalism, we created what is called the middle class. But the middle class, but the middle class is being depleted out of its incentives and its opportunities to improve in a society in which the economy grows by a constant decision from policymakers to increase inflation and to incentivize the wrong side of the economy with monetary policy. It's almost funny that you hear the president or the governor of a central bank talk. about how concerned they are about the rise in inequality when they pump money massively into the

economy and that benefits those that are able to either hold stocks or that have access to debt. Because money creation is never neutral. The interventionists, the MMT, modern monetary theory defenders, etc., try to tell us that there is a way of making money creation neutral. But it is not neutral. It is always going to massively benefit the first recipients of money, which are always government and the sectors close to government, and it's going to disproportionately negatively impact those are the last recipients of that money, that is, real wages and the savings of the middle class. One of the key elements to recover equality of opportunity is to return to sound money policies.

He goes further and explains why this money creation has created inflation, just not in the places where we expected to look. The United States is in a unique position to export inflation out to the rest of the world, which is what it does through quantitative easing. What it does, basically, is that the demand for dollars is global, And therefore, when you increase the money supply, the Federal Reserve actually takes into account the global demand for U.S. dollars because it's the world reserve currency. It's used all over the world in commodities, et cetera, et cetera. However, that doesn't happen with any other currency. That doesn't happen with any other currency. So you cannot do the same. And there was a big mistake. And in my first book, Life in the Financial Markets, I actually talked about this. is that Austrian economists, traditional Austrian economists said immediately when quantitative easing was launched that it was going to be hugely inflationary.

And that in itself created this concept that you just mentioned, this counter argument. It was a mistake. And I'll tell you why. And actually, there are a lot of economists, Austrian economists as well, that actually said, No, it's not going to be inflationary. If anything, it might actually be price disinflationary. Why? Because it will perpetuate overcapacity.

It incentivizes debt. By incentivizing debt, what it does is that the level of productivity of the economy comes down. Sectors that actually were close to obsolescence or obsolete would remain sombified. and therefore prices don't go up. You see what I mean? And obviously, where do you generate massive inflation and financial assets? Look at the multiples of private equity,

look where bond yields are, look where the stocks are. That's where massive inflation is being created. Therefore, the mistake was to believe that massive money creation was going to generate inflation without understanding where the new money was going to go. Still, when it comes to the Fed right now, bond strategist George Gammon argues that the bond market is suggesting that the Fed may actually be running out of ammo. Why are bonds telling us a

different story than equities? There's this view that, you know, what else can the Fed do if we do see a bankruptcy wave, if insolvencies were to pick up again? If we actually see a natural side of a recession, the acute lockdown, shutdown, impact, and creating like a very short- short-lived kind of depression, it's easy to dismiss that and say, oh, look, that was just because of the pandemic. It's going to all come back. It's going to be fine. It ignores the reality that, you know, we were already fragile heading into this environment and that credit markets and the ability to service debt, you know, were pretty stretched. And so I feel like the core bond markets, which is the government markets and the tips market, they're looking at all this information.

And they're saying that, you know, look, the Fed and the U.S. government, obviously valiant efforts. They did a massive campaign in March and April to try to stop the bleeding in the economy. But they perhaps maybe shot a lot of their ammo too quick. And now they've really limited the ability to actually arrest any sort of second wave, both in COVID, but also a second wave in the economy slowing down in a more proper recession. And I think that is lost upon most equity folks. Speaking of new economic challenges, the rise of remote work might create significantly more competition for today's American white-collar workers than has been there in the past. Investor and storyteller Sahil Bloom explains.

I think we are increasingly going to be moving towards global competition for high paying and for highly technical jobs. I think that technology has been driving that change for a number of years, and it's just much more visible now because of all of these accelerating movements. I mean, over the last 10 years, if you had a friend that started a new startup and was trying to bootstrap it, where was he getting the technical and back end work done? It was Ukraine, it was Bangladesh, it was India. And those developer jobs have been international and that competition existed internationally in the freelance market. It's just that now the freelance market is going to be the mainstream market in a lot of ways as we go forward. So yes, I do think

you're going to see an increasingly globalized world as it relates to that kind of talent as more and more of these jobs go digital and go into the digital ecosystem. Is it a good thing or not is a much more tricky question for me? I very much believe in the American dream. My family came here to pursue that and I very much believe in it and I believe we live in the best country in the world. That being said, I'm also a big believer that historically and throughout history, talent is evenly distributed but opportunity is not. And that is something that really has troubled me throughout my life and something that I'm determined to, even in the tiniest way, help fix throughout the course of my life. And this is an event that

begins to see opportunity distributed more evenly. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more, with crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September.

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that crypto wasn't doing more to help solve the real. economic pain people have been experiencing? One, we have to start taking the information to the people now, immediately. Secondly, we have to meet people where they are. Do you live in the poorest congressional district in the South Bronx where half of the people are unbanked? If that is the case, I do not care what ether is. I do not care what an ETH is.

I do not care what a Roth RIA is. What I do care about is that I have to operate outside of a financial system that was not tailored to me. So I use payday loans. I use check cash in places. I do use cash every day of my life and mostly transact with cash. What does it mean for me to actually operate in a system that was not set up for me? And oh, by the way, when you meet these people where they are and you look them in the eye and you try and help them get a bank account, they look at you and say, well, what's a maiden name? Morning Navigator author Tony Greer, meanwhile, pointed to a different place that the frustration of regular people with regard to the markets is showing up.

The surge of day traders bent on bending the markets to their will. You expressed the frustration that's clearly coming out from a younger generation and needs to be heard is that they're feeling as Americans feeling totally disenfranchised. You know, they see the stock market like this disco ball that's just running away from them and it's like, wow, you know, how do you latch on to this? And that's why the attitude has manifested itself through barstool presidente of all places saying, I'll show you how you fucking latch on it is. You get in there and you buy stocks. They go up every day. Right. And like as that sounds to somebody that's been in the markets for 30 years,

that sounds completely nihilistic. Like, what are you doing? You know, that's not how you do it. Right. Like the way we've done it is, you know, you pick the companies that you like and you have reasons for liking them and you stay patient and you wait for an opportunity till they dip, certainly, to buy them because markets go up and down and why just chase a market to the moon. You ask a day trader that today, the higher the price, the better, right? They want things that are exploding, right? You can't talk to them about something that's sitting still, you know? And so that, that to me is translating, you know, it's that sort of disenfranchisement translating into the nihilistic attitude, set of emotions that I feel like I read from that generation. And I totally,

I'm in touch with them. I'm not telling them that they're wrong. I'm saying that there's definitely something that needs to be addressed here. Slow Ventures Jill Carlson also pointed out that this set was skeptical of the professional moneyed class. Hey, hedge fund manager, if you're so good, why is it you that has a yacht and not your LPs, not your investors? Where are all the LPs yachts? Indeed, if you're so good, why aren't you just? investing your own money and then living off the fat of land of that. And I think that, again, this has been something that everyone kind of knows, but like the system works so well for those who are in a position of power and position to profit off of it and position to just be the incumbents

to it that no one before has been incentivized to actually change it. And that I think is what is so heartening about seeing new entrance and even retail itself come in and kind of kick some sand up. She went further, making the point that this new activity might be an actually optimistic sign. There is something really powerful in people waking up for the first time and kind of asking these questions. Like, well, wait, how is the stock market still going up? Like, everyone I know, you know, has been laid off or furloughed.

why is the stock market still up year to date, depending on what index you look at? And I think just even the asking of that question is such a powerful thing that is going to be a driver, not only of different financial decisions for a lot of people, but also, you know, different politics potentially. And I think that we are just at the beginning of a cycle of something that could look very different. And I say that very optimistic. I think that it's easy for me to get misinterpreted as sort of like, oh, this is, you know, this is all doom and gloom that's very scary. I actually think that that's a very powerful thing to have people asking these questions and that potentially wind up leading to change. And that's something that I'm actually quite optimistic about.

One of the most cogent and clear-eyed commentators of the last decade when it comes to the rot in our financial system has been Michael Krieger. In this clip, he discusses the end of outrage and why he decided to end the Liberty Blitzkrieg blog. But in a lot of ways, yeah, I was pushing outrage, right? I felt that outrage, even though it was genuine and I think it was thoughtful outrage, it was outrage, nonetheless. And I was trying to actually get people outraged because I figured if people got outraged, but for the right reasons, we could kind of change things. It doesn't work that way or it did not work that way.

And that approach I sort of ditched a while ago. But now, yeah, as you say, the problem that we have, I think, is we're not setting, if we're not setting the agenda of what we're talking about, then we've lost. And so by engaging on the controversy of the day, right, whether it's statues, you know, white supremacy, whatever is being promoted by the media or certain people and that everyone seems to need to talk about at this exact moment for some weird reason. By putting myself in that debate that I didn't bring up to begin with, I'm being played to some degree.

My energy is being redirected. It's being pushed in a manner that I don't necessarily want to be going in. but I felt obligated to some degree, because as you say, my hat's been in the ring for so many years, you know, and I do have stuff to say on all this stuff, you know. I feel obligated to say something. Now, on our last clip of the month, let's turn our attention to future possibilities. I had a discussion with Chainlink co-founder Sergey Nazaroff, where we talked about what it would take for DeFi Decentralized Finance to actually start to replace traditional finance.

In scenarios where either middlemen are overly inefficient and or when brand-based contracts suddenly start failing left and right, I think that math-based contracts are going to become very, very attractive because they're going to be the manner in which you have an actual guarantee of ownership. You have an actual guarantee of a financial product paying you out its interest. You have an actual guarantee of a contractual obligation with account. party being followed through on, not because you trust the counterparty, but because math and physics will enforce the contract according to the way that it was written. The reality is if you

actually look at the contracts you have, they are based on a game theoretic assumption about the good behavior or the solvency or the proper behavior of this brand. And that might be an okay assumption when things are going very well and the brands need to fight for market share and they're willing to make 50 promises and things like that. Math-based contracts, on the other hand, are not based on a promise for somebody. They're based on mathematical facts that guarantee you certain outcomes. So this is why the tagline of, for many Bitcoin people is veris and numerous, trust in mathematics or trust in numbers. As you can see, a huge number of the same. As you can see, a huge number of the same themes, and all of it boils down to this idea of people being frustrated at the disparity between

what they've been told and what they experience on a day-to-day basis. I think we're at the beginning of a generation saying no and standing up and being incredibly unwilling to play the game as it's been played before. Now, how all that energy gets channeled is the central question perhaps of our time. Will it be to just political unrest that has nothing to do with these economic issues, will it be to some version of MMT? Will people flock to Bitcoin? Will it be some weird combination of all of them? Inevitably, it's that last answer. But I think that for anyone who wants to have a stake in the future, trying to orient this frustration and anger and discontent and potentially agency, a new agency blooming to something that is more positive, more productive,

and more along the lines of what you would like to see becomes a really important objective. Anyways, guys, that is it for the best of July on the breakdown. I appreciate you listening and I appreciate you sharing. Your reviews and ratings this month have made a huge difference in growing the podcast and helping new people discover it. So please, please, if you haven't had a chance yet, go over to Apple or wherever you listen and rate and review this thing. It makes a big difference and I appreciate every single one of you.

Anyways, that's it for today. So until tomorrow, be safe and take care of each other. Peace. Thank you.