The Breakdown - The End of the Super Bubble vs. WAGMI

Episode Date: November 7, 2021

This episode is sponsored by NYDIG. On this week’s ”Long Reads Sunday,” NLW looks at two very different takes on the economy in threads by Raoul Pal and Alex Good.  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. 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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: VectorInspiration/DigitalVision Vectors/Getty Images, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, November 7th, and that means it's time for Long Reads Sunday. Today we have a bit of a fun one. We are going to discuss dueling threads. And I think in many ways these threads represent poles of understanding and interpretation of what's going on in the world right now. They represent different takes on how the macro relates to what's going on inside crypto.

They address things that seem bubbly but might not be or they might be even more than we think they are. I think this conversation is fascinating and I think it's important. I also think, as you'll be able to tell from these reads, that there are really different ways. to look at it. So, without any further ado, let's read the first of these threads, which comes from none other than Raoul Paul, the founder and CEO of Real Vision. Rao writes, Not on holiday yet, so I'll allow myself one more thread. The markets are crazy. NFTs are just JPEGs. Dog coins, cat coins, Tesla, GameStop. Everyone is going to get burned. Don't they realize about discounted cash flows? These people are ruining everything.

Green energy? Crypto is a bubble. Tech is a bubble. VC is a bubble. Biotech is a bubble. Passive investing is a bubble. Web 3.0 is a bubble. Green energy is a bubble. The metaverse is insanity. Can't they see? They are all wrong. No, they are a new generation of investors. 86 million millennials got financialized in the U.S. last year. They hit their prime investing ages of their 30s. They have debts, no savings, no hope from the grind. They are poorer than any 30-year-old in the last 70 years. They were f***ed. Unlike their parents in their 30s, they didn't get gifted equities with a P.E. of 7. Bond yields at 13%, or real estate at the lows versus income. They got the opposite. Their opportunity set was an expected negative future returns.

They didn't want any part of our financial system. They had occupied Wall Street and no one gave a shit. Now they don't give a shit about how you or I think you should invest to run markets. We let them down. Why the fuck should they care? They were sacrificed to the altar of debts, leverage, and greed. Millennials and Zumers had nothing to lose. They had nothing. Then the pandemic hit and everything changed. We gave them free money and they collectively said, fuck it, let's take risk because their stake was free. If we were given a free stake at the casino, we would do the same. But they didn't buy our precious gold miners or our discounted value businesses.

Why? Because they don't care about 10% return. The only way to level the playing field was to take massive risk. Risk taking met Robin Hood options in 2020 and magic happened. These younger investors changed the entire fucking game. They arm themselves with the skills of Reddit, TikTok, and Instagram. Communities, virality, and memes, and stuff that they were told was stupid, like Hertz and GameStop and stuck up their middle finger to the rules and broke them. It was magnificent. If you can't win the game, change it. They took huge risks to to make big rewards. And contrary to us older cynics, they knew the risks, but they still wanted to take them. It was fun. Lost porn was celebrated and shared. Gone are the I never get it wrong

fin-twit people. Gone were the diversification for the long-run RIAs. These young people have been let down by us all. Why should they play by our rules when they could make their own? Screw active management, screw hedge funds, they wanted to stick money in the markets as they were told, hello passive, and punt the rest. Crypto resonated. Huge upside, downside of zero. It was a giant options market, limited losses, exponential upside. They are right. I can hear you all shaking your head saying, this time is not different. They will learn the hard way. Yes, they will. And that is good. And they want to learn, but they are also blessed with the exponential age where growth stocks keep going parabolic over time. And tradeoff metcalf's law, and thus don't give a shit about our old

boomer mean reverting valuation models. And they are right, very right. If they were 20 years younger, they'd be very rich from the same strategy. We mostly all missed it because we were too cynical and didn't understand that the VCs were right. I mean, they are insufferable, right? We thought they were mad bubble chasers, but we were wrong. They saw it, we didn't. I include myself here. They changed the rules to suit them, a set of rules where we can't compete. Not the hedge funds, not the regulators, not the wise and old hands. None of us. Politics will follow suit and change. All institutional infrastructure will follow. SEC laws too. Everything will change. Many will lose. lose lots, many will win huge, but the world has changed, but many elders won't accept it yet

because, air quotes, we know better. These new investors aren't interested in your love of oil or commodities or 1950s v8s or your contemporary art of the 1990s and 2000s. Your Jeff Coons is just a stupid balloon sculpture. It's not their cultural reference. JPEGs are and memes. This is all about culture. They value different things and there are more of them than you or I. It gets more extreme when you get to India or the Middle East, where everyone is under 30. Those societies are going to see seismic shifts. This is what the fourth turning looks like. I know many of you love that book, but are shocked at what is happening currently. You've lost your frame of reference. But this is the prophecy of the fourth turning. The politics and world of nostalgia of the 50s are gone. The world

of white picket fencing, muscle cars, factory workers, suits, TV, radio, all of it is in the dustbin of the past, irrelevant to the harsh realities of being young in the 2020s. The next 10 years are going to have the fastest great technology change in all human history, the exponential age. We will all feel left behind, but we have to trust in this younger generation of people under 40 to lead the way and show us new ways. We need to be led. You may hate it, fight it, complain about it, make chippy comments about it, but it won't make a single piece of difference. Change is upon us. Embrace change. Don't fight it. And change lies all our future. Nidig sponsors this podcast and they're integrating Bitcoin into everyday life, not only for Wall Street,

but also from Main Street, because NIDIG is built for Bitcoin and Bitcoin is built for everyone. Learn more at Nidig.com slash NLW. That's N-Y-D-I-G.com forward slash NLW. The next one comes from Alex Good, who lists himself as an options in crypto trader. He writes, I just read an interesting thread by Rao Paul talking about techno-utopianism and how we are all going to make it. We are in what I believe is the final stage of the Superbubble. The Superbubble is the misconception that bailout capitalism is actually a free market.

The belief that markets are a machine is a beautiful lie, peddled very profitably by Ray Dalio. Funds invest hundreds of billions of dollars in his underperforming funds because it is so enticing to think of a system running on levers. Capitalism, the vast Randian railroad. Dallio and others advised central bankers in 2008 that bailing out the financial system and later going big or using bazookas or doing whatever it takes is a far better alternative to the austerity which caused the Great Depression and subsequently led to World War 2. It is difficult to say if this is true or not. What is less difficult to say is that we are now

witnessing moral hazard at full force in financial markets. Lunatics are fully in charge of the asylum and exorbitant excess is visible in nearly every asset class. Consider crypto. Bitcoin, which started as a rejection of bailout capitalism, has become part of it. Gensler referred to Satoshi affectionately as Satotian. Bitcoin was randomly whitelisted in an infrastructure bill. Larry Fink loves the environment, but also for some reason is fine with crypto. Tether is running a $70 billion offshore bank, which is a huge player in the global commercial paper market, with a white paper that warns that a risk as they may abscond with the funds. Regulators are slow, give me a fucking break. That was sane in 2018. Not anymore. Bitcoin and Crypto more broadly is an

officially sanctioned way for the ruling class to get their money out of the system, before a barrage of financial repression comes into effect via CBDCs. The money has to flow out before 2025, when all transactions are tracked and fully taxed. To understand the inevitability of tax, consider the premise underlying the last 12 years of bailout capitalism. The three deflationary drivers, cheap commodities, cheap Chinese labor, and structural technology deflation. I believe these drivers were transitory. Why? First, commodities. Low rates caused an overinvestment cycle in fracking that subsequently crashed and had its legs kicked out during COVID. The energy industry has heavy supply discipline now. Climate change is further accelerating food scarcity and pushing electric

grids. Second, Chinese labor. Louis Vuitton bags are comping at 39% versus 2019 in China. Apple is selling 89% more iPhones this year than last year in China. China was poor in 2009, now China is rich. This is outright inflationary and doubly so when you factor in geopolitical tension. Third, technology. Companies like Uber and WeWork are great examples of venture-backed largesse that never really made money and still don't. They lowered the price of office space and taxis. But now they need to hike prices to make money. Same story with cloud compute. Put another way, low rates forced institutions up the equity risk curve into venture and private equity. VCs funded money-losing companies, lowering prices, and PE firms like our Fed Chair's old employer,

fired people and outsourced jobs to China lowering employment and inflation. In other words, the deflation which enabled vast monetary easing was funded by the gutting of the middle class at the benefit of the ruling elite. But now that China isn't cheap, and tech is largely IPOed, this deflation is reversing, compounded by the commodity complex. So when we say millennials were f***ed, that is true. But crypto isn't the solution or some utopian dream. Crypto is the off-ramp for people who did the f***ing before policymakers have to raise taxes aggressively to fund giant fiscal programs. The reason why markets are allowed to be a casino is the same reason why gladiators were encouraged in ancient Rome. The goal isn't to protect investors. The goal is to protect elites

by keeping people distracted. As once inflation kicks in, there will be social unrest. The Metaverse in the growing surveillance state will be further tools to quell social unrest and monitor citizens. We can debate whether China was capitalist or communist, but it is undisputable that it is a police state and that it has succeeded in a way the USSR never did. It is likely the United States and other democracies will weaponize crises to justify further surveillance a la China, quell dissent, as well as cynically limiting immigration via tools like arbitrarily complex vaccine passports. China, Europe, and the U.S. have no real incentive to allow India or Latin America to develop

in a world of commodity, scarcity, and pollution. and climate change in the growth of the carbon market will be the new moral framework to suppress industrialization in those regions. Debts must be paid. Everyone cannot print at the same time. Globally, a new tax regime will come into place within three to five years that will punish shareholders in a way which I think will resemble what is happening right now in China. Sure, the elites will get out first. I own Bitcoin. The final breakdown of the Superbubble isn't so much a crash in markets, so much the crash in the premise of the monetary-fueled bailout capitalism that has been on fever pitch since 1987. The market isn't a machine.

There will be inflation, then unrest, then control, then tax. Thus, we are not in some techno-utopian dream world. Climate, Web3 meme stocks, Bitcoin, and the fusion of big tech with the government isn't some panacea for millennials. It's incredibly dark and will only get darker. It isn't time to rejoice. It is time to prepare for battle. Obviously, these are two extremely, extremely different takes on the optimistic side and on the pessimistic side. I think the thing that matters to me is the ability to rationally flip between these things and hold in our minds the possibility that both could be true simultaneously. What I like about what Raul is saying is that the kids today aren't wrong.

They're playing a different game because the way that the previous generation played the game isn't going to work for them. It reframes what some see as cynical or nihilistic as hyper-rational. The thing that I would add to that, because I'm a careful monitor of this sort of market nihilism discussion, is that there are many, many people who are willing to play a game that is absurdist in nature, to take advantage of that absurdity, but who do understand, in fact,

the difference between real value and paper market games. It is not impossible to invest in memes while also not being invested in memes. Now, what I like about what Alex is saying is that he points out that everything that is a potential tool or seems to be a potential tool of unlocking a new financial era or of gutting a repugnant old system can also be used by the power in the old system to preserve something akin to the power they have today, even as the system that gave them that power crumbles. This is the quandary of morally agnostic tools, technologies, and financial instruments. It is what we do with them and how we understand them ultimately that matters.

I love the space of discussion between these two threads, and I hope we spend more time there. Until tomorrow, guys, be safe and take care of each other. Peace.