The Breakdown - What Happens When Currencies Fail? Featuring Preston Pysh

Episode Date: March 13, 2020

Yesterday, the Federal Reserve announced more than a trillion dollars in liquidity injections into the market. In the coming weeks, many observers expect trillions of more in stimulus in a variety of exotic new intervention tactics.  While this will (hopefully) stem the still emerging economic fallout from the pandemic, it creates its own new set of problems. In this episode of The Breakdown, @NLW is joined by “We Study Billionaires” host Preston Pysh to discuss: How bond markets will react to the wave of stimulus  The challenge of global coordination for a new Bretton Woods Why in the wake of stimulus some governments might turn to bitcoin  The three factors that lead to currency failure 

You have other countries that have put up with dollar dominance for the last 80 years. And that has not been advantageous for them. So imagine if you have one of these nations step in and buy $40 billion worth of Bitcoin, right? That can happen. And in fact, I kind of expect it to happen. And if it does, you're going to see the price, you know, it's going to be kind of insane. Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk.

Welcome back to the Breakdown. It is Friday, March 13th. Friday the 13th, but how could it be crazier than yesterday, right? We are at the end of a week that will be written about for a very long time to come. Yesterday, in the wake of Trump's speech on TV and the NBA and the NHL shutting down and huge numbers of cancellations across domains and the country finally taking the threat of coronavirus seriously, the market had its biggest sell-off since 1987's Black Monday. Bitcoin, for its part, had one of the absolute wildest days I've ever seen, going from

nearly 8,000 before Trump's speech to at a low last night of 30,000. 3,800. In fact, while we were recording this podcast, the price of Bitcoin veered between 3,800, and 5,100, and back and forth a bunch of times. So there's no doubt that it is just absolutely wild times out there. Now, my goal with the breakdown is to help you look at that from different angles and think through implications, think through what it might mean, and hopefully help you figure out how you feel about these markets. In some ways, my guest today, Preston Pish, is a great foil for my guest earlier this week. When I had Ben Hunt on on Wednesday, we discussed market narratives and how the collapsing narrative around the coronavirus is going to actually

have impact on a collapsing narrative around the ability for central banks to continuously prop up economies. My conversation with Preston is about what happens on the other side. It's about how bankers are effectively locked into mass-scale intervention just to prevent complete meltdown and about what sort of second-order effects that might have. Preston is an extremely thoughtful guy. He's an incredibly eloquent speaker, which makes sense. He runs the investors' podcast. podcast network and host the incredibly popular We Study Billionaires podcast. So this conversation was a blast to have coming off of such a crazy day last night. By the time you're hearing it, you know, 12 hours or whatever after it was recorded, it'll probably be completely out of date.

But I hope you enjoy it nonetheless. Now, a couple caveats. One, as always, nothing that we discussed should be taken as any sort of financial advice or recommendations. This is more than just spoiler plate, it's incredibly important for me. My goal is not to help you navigate short-term financial decisions. It's to help you make sense of a complex and crazy world. Second, this interview was one that I wanted to let be as long as it wanted to be. And so we end up talking for over an hour. Because of that, we've edited it very lightly so you can get the full sense of our flow and our conversation. So without any further ado, let's dive in. All right, Preston, it is so good to have you on the show.

We're recording at 10 p.m. Eastern time on Thursday night, actually. And we're just kind of sitting here watching Bitcoin continue this spectacular in maybe all the worst ways action and talking about like what's going on and how to feel. So I guess let me start there. First, thank you for being on the show. But how are you feeling after this day, this week, the last. couple weeks. I mean, whatever time period you want to pin it on, but how are you feeling right now? Well, I'm feeling pretty good, but I think that most market participants are especially younger ones.

I mean, if you're probably 35 or younger, you've probably never seen anything like this. And I'm talking more just the market in general, not just specifically to Bitcoin or anything. I mean, this is, this reminds me so much of 08, but in my personal opinion, it's going to be a little bit worse than 08. Well, it's going to be a lot worse than 08. So let's dig into this a little bit. I guess, you know, maybe let's start from the markets as a whole. As you've been watching over the last few weeks, you know, what has your thought process been about markets reacting or not reacting, right? Because we had this weird period for about, I don't know, I guess pretty much all of February, where we knew that this thing was happening in China. We were getting reports. We started to see millions quarantined, but we were still printing all-time highs over here. And they created this very interesting psychic disconnect in some way.

So I guess, you know, let's go back to how you were thinking about this then. So back in January, I recorded a show with Eric Townsend about the coronavirus because, early on I started reading some stuff out of China and then my modus operandi is who are some of the leading experts on whatever the topic is and then let me follow those people and let me try to follow people that have two different opinions on it. And so I started following some accounts out of China that were slipping videos and comments underneath of the firewall. And I saw really quickly that what we were seeing over there looked like a. military biochem exercise as far as all the stuff that they were wearing, the dead bodies inside of the hospital, the fact that they were basically conducting a warlike triage on some patients and the other ones, they were letting them die. And so I was looking at that scenario,

the fact that they barricaded a city with 9 million people in it, and just to put that in context, New York City's probably around 7 million people. So the fact that they barricaded an entire city of that size off and just cut down the whole supply chain and everything. I was looking at that and I was saying to myself and Eric Townsend was another person who was saying it and that's why we recorded our conversation back in January. We said this is going to be absolutely destructive to just the economy, the global economy because of the supply chains are going to totally melt down. And for anybody who conducts large scale purchases, call it a $100 million purchase for a system or whatever. I mean, there's massive

of supply chains that are all dependent variables on it, call it the iPhone or whatever. And so when I was looking at that, I said, this is not priced in at all. In fact, the market's at a total euphoric stage. You got the entire bond market is priced at a level that is obscene because there's no yield left. It's been bid at just epic levels and there was no yield left anywhere in the world. a little bit of yield nominally here in the U.S., but as far as real yields, they were negative

across the entire duration of the bond yield curve. So when I was looking at that, I was like, this is absolutely nuts. And so, you know, I wasn't to the point where I think you sell everything back in January, but then by the end of February, I have a tool that, you know, we sell subscriptions to a tool on our website,

and it's a momentum tool that I wrote the software for. And the tool really looks at long-term volatility trends and then provides momentum recommendations based on those momentum trends. And on the 27th of February, the tool turned red, which was basically saying, hey, this is a two-standard deviation move on the volatility, on long-term volatility. And so that was on the S&P 500.

And I was like, all right, well, that's a sell. And sure enough, this thing has just continued to cascade like we have never, ever seen, in my personal opinion, in financial markets. And I would even describe this maybe as being a little bit more monumental than the 1929 crash simply because you didn't have this situation where you've got a virus that is literally shutting down everything. You know, when you think about how your body works and how it basically exchanges the chemical ATP, which is your energy chemical.

throughout your body, you know, if you have an organ that seizes up, whether it's your lungs, whether it's any one of your organs, right, your kidney, you name it. If one of those organs seizes up, it's pretty much the death of the body of the person. And what we saw happening in China initially, and now what we're seeing pretty much around the world is, for me, very similar to like how your body works, where you, that exchange of currency amongst the organs and amongst the cells in your body are seizing up and they're saying, hey, no more flights. Hey, we're not shipping anything to this country now. And that is a absolute recipe for disaster that's just further laid on top of the currency

crisis, I'll call it a currency crisis because you're at the end of this long-term debt cycle that's been running for 80 years. You're laying those two things on top of each other. And I just, I don't think anybody who's participating in the markets, I don't want to say anybody, but a significant amount of people that are participating in the markets have no idea what's what's on the horizon from here. Yeah, well, so this is the interesting thing, right? You had even up until Monday of this week, right, people saying, this is a short-term correction. Government will step in and fix it, right? In some manner of speaking, there's some version of that narrative.

And the question is, so far, the market has rejected what they've seen. And we haven't even begun, I think, to your point, to deal with not sort of the market and security ramifications of this, but the actual economic fallout from entire municipalities, being shut down for weeks or months at a time and what that means for people's real lived lives, right? It's actually, so one of the things that I think we will look back at this time on as a time when narratives broke down. And one of them that I think is quite poignant is the idea of an economy as something that is separate from the political scorecard of the stock market or asset prices. I think those things are going to unravel in a big way. And unfortunately, I think that we've

only barely begun to start to see that. Yeah, I think one of the things that's happening right now that so few people, and I mean so few people understand, particularly people in academia and people on Wall Street, do not understand the fact that currencies fail. In my opinion, currencies fail when three conditions are met. First, when you have a currency that is not pegged, okay, that's one of three conditions that have to be met. The second condition is when you have the currency, I'm sorry, the government is spending at a rate that far exceeds the tax revenues.

Okay, that's the second condition of three conditions, that all three have to be met. The third condition that has to be met is that the debt that's denominated in that currency. So for the U.S., this would be their treasury in our bond market, right? That debt has reached a yield of 0%. When you have those three scenarios that are met, that's whenever you start to see the currency that's underlining all that starts to go into a failure. Now, academia has said for, you know, decades that fiat currencies, they don't need to be pegged to anything. And they're right, but they're not right in the long term. They're right in a certain time frame. And so we've watched that, you know, whenever we came off the gold standard in 71, you saw interest rates peak in the 1981 period of time at around 16%. And you've seen them progressively go down, which the Fed has completely managed that, right? They've managed that drawdown, and now we're at zero percent.

And we're not just zero percent here in the U.S. We're zero percent globally. And there's nowhere for Japan's money to basically flow into these other markets where yield existed. And so when you have all of these fiat currencies, none of them are pegged, all of the governments have a habit of spending way in excess of what they bring in for their tax revenues. And you have interest rates at zero percent. You have a currency failure. And so I believe we're there right now. And I think what you're about to see is printing an economic stimulus that has, like, people

cannot even comprehend the amount of stimulus they're about to pump into this thing. It's going to be, and I don't think they're going to do it just at the QE level. I think they're going to do it through UBI, universal basic income, where, hey, you filed your taxes last year. Congratulations, here's $5,000 into your checking account that you used for that. whatever the form is, it's going to be something that has to stimulate and it's going to stimulate in a way that we just, we can't even comprehend because we've never seen it in our lifetimes. So let's actually play this out a little bit in terms of what that might look like, right?

Because I think that this is a feeling that more than just you in this space have that we're effectively going to get sort of some version of MMT by default almost by necessity. So in the short term, what does that look like? And then, you know, one of the things that I want to make sure of is that listeners from this show, just like participants in crypto markets, don't all come from a finance background. They come from all over the world. It's one of the things I love about Bitcoin is that it's a place where it collects people who want to have sovereignty over their economic futures, right? So what does it actually look like? Why can't?

We'll go really rudimental. Why can't governments just print money to infinity to solve this and then we'll sort out what happens on the backside? Because another way of saying this is what happens on that backside. Well, they can and they will. I mean, they're going to have to because that's how when you don't have anything pegged and you're in this situation, like I've described as three factors, they will not allow a deflationary bust. There's a book called This Time is Different and it profiles. all these cases throughout history where, you know, the currency fails and you get into these situations. The book has, I don't know how many examples, probably 50 more examples throughout

history where this has happened. So this is nothing new. So when this happens, the governments get into this situation where right now, right now we're experiencing a deflationary bust, okay, but they're going to print. And they're going to print until they actually get reflation, and then they're going to print beyond that. And that's where the thing just comes off the rails is you're going to get, they always end through an inflationary bust in the end when you're in this situation where all the currencies have failed. So, I mean, my expectation is that the coming week,

you're just going to see just crazy stimulus packages. They're going to somehow, they're going to start buying the stock market. You know, I think that's something that people aren't even prepared for. I think that they're going to have meetings in Congress. They're going to have to change the laws. They're going to have to start buying the stock market to bid the price in order to stop mass chaos, right? That's that's kind of what they're going to have to do with this because of people not working. I mean, think of it from like the airline perspective or, you know, these cruise ships or the small businesses in Main Street that have no one walking past their store anymore.

Like all of those businesses and people are going to have to be subsidized just to survive. Yeah. I mean, I think this is the part. The fascinating thing about when we're having this conversation is that literally up until last night, there was still this debate popularly around whether this was just the flu or whether this was just a thing that it hurt old people. And now we're having this conversation. Obviously, those of us who have been paying close attention have been kind of fighting against or bristling against that level of discourse. But it really, we are basically 24 hours or so.

Now, 25 hours, you know, 25 hours post Tom Hanks, 25 hours post-NBA cancellation. And it feels like a lot of folks out there are still really just trying to wrap their heads around what this might mean for, you know, for us collectively, but for. for them individually as well. I totally agree with you. So let's go back to the flip side. So we continue to, or we have this massive government intervention. What does, you know, for those of, for folks who haven't spent a lot of time on what happened in 2008 with sort of the QE, a lot of the problems came when,

after, you know, saving the markets from themselves, basically, the markets wouldn't allow that stimulus to go away, right? So what was a crisis time policy became a permanent policy? Is that the fear with what comes next and this is sort of increasingly exotic forms of intervention into markets? Absolutely. And the thing that I think people kind of got lulled to sleep over the last 10 years with the QE stuff is because there was, when you go back to 2008, there was a ton of credit in the system. And so the tool that they were using was, hey, let's swap $1 of real cash. You know, let's increase the monetary baseline. Like you have a certain amount of money in the system that's monetary baseline and everything else's credit. The thing is,

is both of those spend exactly the same. So people think that the credit is actually money when in fact the monetary baseline is the money. And you're watching that liquidity crunch to the baseline money right now. But back in 2008, what you had happened was the central bankers are like, all right, there's an absolute tank load of credit in the system. So let's do this. Let's swap real dollars for the credit and we won't see inflation if we do that because it's a one for one swap. And they did this through the bond market. So if you are a rich company or a highly capitalized company or a rich individual when you sat on a billion dollar bond tranche, which you learned over the last 10 years is that here comes the Federal Reserve,

they're a buyer at pretty much any price, and they're going to bid that bond market up to ridiculous levels, which means the yields get pushed down to nothing, right? And they make out like bandits. And so your liquidity insertion point was straight to the top. And that's why you're seeing the political dynamics play out that you've seen play out in the last 10 years. The problem is, is now, after they've exercised that tool of this swap of real monetary baseline for credit for 10 years and they've pushed rates to 0%, and this has happened globally, this just isn't in the U.S., right? They've done this and they've exercised that tool to the point where you can't use the tool anymore.

It's like a video gamer that uses like a Zelda sword, right? They've used it so many times and then the thing stops working and you can't use it anymore. Well, that's kind of where they're at with QE. So now they have to transition to a different instrument. Well, so here enters the universal basic income, where instead of providing all the liquid to be to the top, let's start just putting it into the hands of all the citizens, which is an insertion into the bottom. So where this gets crazy is that everyone hearing that is like,

all right, I'll take $5,000 or I'll take $10,000 or whatever they're willing to give me. I'll take that right now. But when you look at your inflation gauge, it's based on all those metrics of spending that's going to happen at that level. And here's another important point. They're not swapping a one for one at this point like they were doing during the last 10 years, where if they pull a dollar of credit out and they put a dollar of real money or newly printed money into the hands, you don't see inflation. But now that that tool has been completely utilized and now you're going to transition into the masses, now what you're going to actually see is for every dollar they put into the system, it's going to be inflation.

And so what is the one thing that the bond market hates more than anything? It's inflation. Because if you have a bond that's yielding 2%, and there's 2% inflation, congratulations, you made 0% with respect to your buying power at that point. You have zero gain, but you're locking up your capital into whatever the duration of that bond. is. So I think where the Fed is looking at this and they're saying, all right, this is going to be catacalismic is they're saying every dollar we now implement via UBI is going to be inflation and it's going to melt down the bond market because all that inflation is going to start getting priced into the bond market and you're going to have this just neutron star explosion in the bond

market. And I don't think anyone is prepared for this. I mean, hell, you've seen all these, you've seen all these Wall Street experts bidding the living hell out of the, out of the 30 year and every, every duration in the bond market has been bid over the last three weeks up until the last three days. And all of a sudden, the bond market's starting to sell off here these last two days. And I think there's a few smart people that are starting to get it. Because they're going to try, when I think about the size of the bond market, it makes the stock market look like a freaking pimple, right? And so when you're trying to push a bond market the size of a flipping elephant through a pinhole,

you're going to see the biggest limit down sell in that market that the world has ever seen, in my extremely humble and personal opinion. Do you think, so going to who is getting this now, is there anyone, are there any kind of clarion voices in the traditional markets that have either been sounding this warning or at least coming to it now? And what are they saying if so? I mean, most of the people that are in the Bitcoin space for the most part, I think know that what I'm describing here is like you just can't keep printing, right? I think everyone's got that into it. They might not understand the mechanics of it, but I think they understand it, and that's probably why they're own in Bitcoin, right?

As far as like some people that I would consider huge influencers in the space, like Raul Powell, that dude gets it. Grant Williams, he gets it. Pomp, I mean, that dude gets it. And there's many more. And you know, you look at Adam back. He's very technical, but the dude gets it. So there's people out there that are, in my opinion, voices of reason. But unless you've kind of really studied the living heck out of this,

and you come to the table with the mindset that what is being done is not fair and not necessarily, you know, the universe doesn't necessarily really give a crap about whether something's fair, it's functioning in a way that should align with the greater good of the whole. And so I think people that are approaching it with the mindset of saying, hey, this is not good for the whole. This is good for unique individuals based on the way that it's configured, are looking for how is this going to be resolved? And I think a lot of them are arriving at the step of Bitcoin. How much do you think that this, this is a lot of is a crisis born of almost a normalcy bias or something where the traditional markets are full of

actors who have just come to assume that this is reality, right? Where they just have become convinced by their own narrative in some way. So, Icarus paradox, the thing that made you wealthy, the thing that puts you at the lap of luxury is the same thing that will, that will, that cause your undoing. And so think about how many people, especially on Wall Street, they have absolutely benefited from this model more than anything we've ever seen. And so that's their Achilles heel, is that they've benefited from this because they're looking at something like Bitcoin and saying, that's for a bunch of idiots.

Like, who actually thinks that that could possibly hold and like, oh, that's going to get slaughter? They just totally write it off. They don't want to learn the technology. They don't want to, they just see it as a joke. And, you know, in my very humble opinion, that's going to be the downfall for a lot of people is because their success in what has led to their success isn't necessarily their skill or their talent. It's more where they sat for that moment and time. and if they don't start questioning some of their underlying assumptions,

it could get pretty crazy for them. I mean, can you imagine if, and this is something people lose sight of a lot, is you have other countries that have put up with dollar dominance for the last 80 years, and that has not been advantageous for them. So imagine if you have one of these nations step in and buy $40 billion. worth of Bitcoin, right? That can happen. And in fact, I kind of expect it to happen. And if it does, you're going to see the price, you know, it's going to be kind of insane. So let's actually talk, let's shift over to Bitcoin a little bit from the larger markets. One of the big

points of conversation over the last few weeks, right, has been the, uh, uh, uh, uh, uh, uh, uh, this back and forth debate around the uncorrelated narrative or the safe haven narrative, right? And so first it was, all right, well, we didn't actually mean safe haven. We meant uncorrelated, which I think I actually even did a podcast about how these two narratives got conflated and why they might look the same in practice, but they're actually very different in terms of what you would expect them to predict for an asset's behavior in any given situation. And then Bitcoin obviously started following along with everything else that was liquid and where people are now in kind of the state of the conversation in the Bitcoin world is, well,

look, what we're dealing with is a crisis where absolutely everything that can be sold is being sold, you know, and so Bitcoin is a part of that. But how does or how has the behavior of Bitcoin over the last couple weeks or last 24 hours, whatever period you want, either defied or reified your expectations in this type of scenario? So I've felt like for a long time, most people do not understand kind of the mechanics of what's taking place right now. So mechanically, what's happening is you have everybody bidding fiat, whether the, you know, and I think a lot of people in the Bitcoin space are saying they might have to rewind the tape. Did he just say that they're bidding fiat? Yes, everyone is bidding Fiat right now.

And so what I mean by that is if you were a bond holder and the bond market was selling off today, right, that's denominated in Fiat. So if you took the wrong side of that position and let's say you were in the derivatives market, well, all of a sudden you have to come up with the underlying Fiat in order to make good on that poor investment and that margin call. This goes for anything, whether it's the stock market or anything. It's all denominated in fiat today. So as those positions are unwound and they're going in the opposite direction of what people were expecting, that's malinvestment. It's total impairment. And in order to adjudicate that, you have to come up with fiat. You have to come to the table with that fiat in order to deliver and adjudicate that transaction between both parties.

And so what you're having right now because because central banks haven't stepped in yet, you have a total bid on Fiat. There's a total demand for the underlying Fiat, not the credit. It spends like the real monetary baseline money, but it is not. And when it dries up, it causes impairment on the other person's balance sheet and you're set in this position. So now when the central banks step in, you get the exact opposite situation. play out. Instead of the the fiat getting bid, now you have just a total overabundance of it. And it, and then all that fiat infusion goes into the scarce resources, currencies, if there are any,

call it gold, Bitcoin, right? All of that starts getting plugged into those locations. And that's when you have this whipsaw effect. And so you can understand why so many people don't understand what's going on is because you go from a total bid of Fiat to a total, how can I get rid of this and own something that actually has some scarcity to it because it's gotten totally debased in the blink of an eye. It happens literally like at the snap of a finger. Now, as far as like market time that it plays out during the 2008-2009 crisis, you had this liquidity crunch, right? The government steps in, they print like crazy, and you saw that all get adjudicated. within, I don't know, I would call it two months that that flippening of getting bid in Fiat

to total debasement happened very quickly. And you saw gold, people don't realize this, but if you go back and you look at gold in 2008, it went down 30% during this liquidity crunch that occurred. But then as soon as that flippening of the QE and all the easing that the central banks did, as soon as that bottomed out, which took a couple months, as soon as that bottomed out, it flipped the other way. You saw gold go, I think gold went 200% plus. So that's what's playing out right now. And it's going to continue to play out until the central banks step in in a major, massive, unprecedented way. Let's, okay, now let's flip back from Bitcoin to the larger markets. Because I still am so

interested in this. Like I said, I think people are going to be spending a lot of this coming weekend trying to game this out in their heads, right? So it feels to a lot of folks, like central banks are going to have to step in even faster than they did in 2008 with this massive action. And to your point earlier, in very different ways that aren't just the toolkit they used before. How long, I mean, the thing that's crazy about this is we're still experiencing the underlying catalyst, right? we're still coming to grips and barely coming to grips with the underlying catalyst in this disease. How does that factor into what the timescales for these challenges actually even look like? So this is really hard to answer, but I'll tell you how I see things playing out sequentially, right?

First, what you're going to see is you're going to see the massive stimulus that we've mentioned, right? next, you're going to see the bond market blow up because all that stimulus is going to start creating this inflationary piece that, you know, if you ask any person on Wall Street right now, whether there's going to be any inflation in the next 30 years, they'll laugh at you. They'll say, no, that's why, you know, that's why you can go out and get a mortgage right now at 3% or less, right? Okay. So they're all pricing as if, and that's be, and that's nominal, that's not even real, right?

if you account for 2% inflation, which is going to be way more than that, okay? And that's a very highly controversial statement that many people will disagree with. But if you account for that, like, I mean, that's 1% that the bank's making on a 30-year mortgage. That's the, how can they possibly stay in business with that, right? So for me, the next sequence of events after they start printing, then you're going to see the bond market start selling off. you have never seen a sell-off. And then you're going to get into a point where people are saying,

hold on, there's something wrong with this currency. Like, this is a currency failure. And then you're going to, and then it's just going to be like, holy hell. What can I own that doesn't,

you know, and I think you're going to see, you're going to see some countries that start stepping in and start seeing what in the world's happening. And I think they're going to actually start taking, even if they take for a country, it's a small position.

to go ahead and buy, you know, a billion dollars worth of Bitcoin, right? And that's a hedge if that becomes the next global money. I mean, what else are they going to buy? What else, what other, what other currency, let me rephrase that. What other settlement currency is there other than gold? Okay. So they can do that. And they have been doing that. But now you, you've, you've got a wrinkle in the equation because you couldn't go to Starbucks and spend an ounce of gold, right? Like, or a small portion of the gold. So now you've kind of turned this on its head and where you've even turned it on its head in a way that's so different than anything we've seen in history is I can take physical possession of it immediately. I don't have to wait to receive it, right?

So I think central bankers in some other countries that are looking at this and they're seeing a meltdown in Fiat and specifically the dollar and the euro are saying, wait a minute, maybe we just have some small exposure. Then all of a sudden it just kind of starts going in a direction that nobody was expecting, at least people that are outside of the Bitcoin space. So this actually segues into something that I wanted to ask you about too, which is we are, again, based on just our proximity to where in the crisis cycle we are thinking about this largely from a U.S. standpoint. But this is a global crisis. And obviously it is revealing and reminding of just how interconnected things are. How does this play out in other parts of the world? We're looking at these major. economic dislocations and potentially fundamental changes to the way that the economy is run. But it stands to reason that some of these fallouts could be even more disastrous in other parts of the world. Yeah, that's hard for me to really speak intelligently on. I totally agree with you.

I think it's really hard to pinpoint where the most pain is going to be felt. I think from a, I will say this, from a medical standpoint, I think that the people that are handling this probably that are going to come out of this the best are the ones that are the healthiest, from a from a generalization of the population, the ones that have great work ethic, the ones that are equipped medically to be able to handle all this from the cost of medical and all that kind of stuff. And so when I look at the U.S., unfortunately, I hate to say this, but I think that we're in a pretty precarious situation to handle this medically. You know, if you have preexisting conditions, this virus is, you know, from my vantage point, this virus is kind of like a war of attrition. If you get it, and this is from some of the stuff that I've read out of China, if you contract the virus, you kind of hold on to, you have those symptoms for. a month or more. And then all of a sudden, it starts to take a toll, this war of attrition on your body, and then organs start to fail, call it your kidneys or your lungs. But your body can't continue to fight it for that long period of time. And that's what's causing the delay. So I think

you got tons of people running around with this thing in the U.S. already. And for a healthy person who has a great nutrition, is in shape, they can continue to fight it for a longer period of time, but for people that aren't necessarily what I described, they're going to have a much harder time surviving this thing. And the toll that that's going to have on our medical facilities, the toll that's going to have on our insurance industry, my God, I can't even, and I know I sound like a total doom and gloom,

but, dude, I live in reality. I just look at the numbers. I look at the facts and the stats. And, you know, I position myself on the market based on that and I move out. And so when I'm looking at this, I'm saying this is this is nuts, absolutely nuts. This is a once in a lifetime kind of situation. Well, we hope it's a once in a lifetime kind of situation. Yeah, yeah, we should.

It sure do. Yeah. I mean, if I'll tell you this much, if South by Southwest survives, they will buy very different type of insurance from here on out. So I, you know, let's actually, so you. you kind of made. I want to say something about it real fast. I'm sorry to interrupt you.

No, no, no, no interruption. So when you look at how, so I follow Berkshire Hathaway really closely, right? And so Berkshire Hathaway, Warren and Charlie talk about this every year at the shareholders meeting

about how competitive the insurance industry is, right? And how, where the monies to be made is on their float. So they get all this money. They invest the float into safe investments. And so they've been complaining in recent years because a lot of the times you'd put that into fixed income securities, right? And back before 2008, they were yielding higher than 5%. Right. And so now the fact that you got zero percent interest

rates and you've got this, this like insane amount of competition at the primary dealer insurance level, right? I don't know how they're going to be able to cope with the claims that are going to come out of this. Like, dude, it's insane. Well, I mean, this scares me a lot. I think about, I've thought about this from, even just from a small consumer dimension, right? So we have a family member who's supposed to get married in New York City in April. And my wife was like, well, what if we, what if they have to cancel the hotel? We'll have to, you know, reimburse them, right?

It's like, well, but who, like, the hotel is, is they, do they have to do that for everyone? You know, like, I was like, there's no scenario. And I was looking at the smallest micro example of this. there's no scenario in which everything doesn't go to litigation to figure out who has to pay for what and who's responsible because it's so outside of the norms of everything, right? This isn't in the normal cancellation policy. And think about it from the hotel standpoint. This is not their first rodeo for that scenario of a cancellation. So when you sign their contract, you better darn well believe that thing's wired tight that says whatever the terms and conditions are.

I mean, I've dealt with quite a bit of contracts in my life, some very large contracts, $100 million plus type contracts. And let me tell you, there are no dummies. Like the Hilton's and the Marriots and all these companies are not stupid. So are they going to be forgiving with some of the coronavirus stuff at first? Maybe. But in the long game, when it comes down to their survival, dude, they are going to stick to the T's and Cs, the terms of the contract. Exactly. I mean, that's the thing is there's a point at which it's not a question from a financial standpoint about whether they can have forbearance around hardships. It's a, if we do, we die, you know?

I mean, that's the scenario that I can't. It's just going to play out. I mean, everyone should just get University of Phoenix law degrees or something right now. you know, use this time. Yeah, it's a, I just, that's the kind of scenario that I just keep thinking through. And that's, I feel like that's where a lot of people are now is really trying to play this out, right? Because there's, think about one of the things, one of the hallmarks of this type of expansionary period we've had since 2008 is the disconnect between the asset prices and perception of economic gain as, as related to the feeling and reality of economic mobility that people who aren't able to own much of that pie feel, right?

And so you have all these folks who are not watching the markets right now because they don't feel at least yet, you know, maybe they have a 401K through their job or whatever, but they're still young, who are thinking about what happens to their jobs, you know, or scared because they're, they don't want to go to work at the place that they're physically in contact with people, you know? One of the things that when you get in the financial valuation that you were talking about and how the market's been pricing things over the last 10 years, the thing that your CAPM models, and this is discount cash flow, cap M models, right?

That every business school in the world teaches this. The one fundamental flaw that every one of these have is it's based on the assumption that you're dealing with a sound currency, right? All of this is based on the idea that you're dealing with a sound currency, all these valuations. And so you have people that have been watching the bond market. And so when you price this stuff, it all goes back to the bond market, right? The bonds are yielding, let's go back to the 2008 time frame. They were yielding around 5, 5.5% back then before the crash. So if the bond yield is 5%, well, your cap M, your discount cash flow models on how stocks are valued are based on a premium to those interest rates. Well, as those interest rates go lower and lower, guess what happens to the asset price under this cap M model that they teach in business schools?

The value goes up. So as these bond prices get pressed to 0%, the asset prices of everything in the globe, whether it's a bond or a stock, goes up. But no one in those models is assuming that the currency is about to fail in those models, right? And that's, that is the biggest, if I was going to say there's the biggest misconception in the markets today, that, my friend, is it. So here's a question. I'm trying to think of the right way to phrase this. but so there's a bear with me for a hopefully not too extended analogy.

There's this episode of West Wing when Martin Sheen, President Bartlett, has just become president. And he's dealt with a military issue for the first time where an asset has been bombed or an airman has been killed. And it happened to be someone that he was personal close to as his personal physician. And he has a very emotional response where he just wants to bomb the hell out of the place. I can't remember if it's Iran or wherever, right? and the joint chiefs bring him a plan, and it's basically taking out a few kind of low target assets or whatever, and they call it a proportional response.

And he freaks out, and he's like, I don't want to do this. I want to do something else, and I want to bomb them off the face of the planet and all stuff. And where this all lands is effectively the head of the Joint Chiefs of staff telling him the proportional response isn't good. It's not that we like it. It's not that we think that this is a wonderful thing. It's just the only thing.

This is the only thing you do as the world's power in the place that you are. And I wonder, is there anything, is there a right thing to do for policymakers for the Fed next? Or is there just the thing? Are we in a scenario where there is no choice? There's just only the thing to do is the thing in front of us in terms of of these massive interventions. Yeah, I think that's a good analogy.

And I think you're right. I think that they have to. They are in a situation where they have to print in order to, I mean, I use the analogy. It's like an engine, right? If you don't have any oil in the engine, you can run it. But then eventually it's going to seize up. And so what you have happened in the economy right now is the oil in the engine is the liquidity. and you have that seizing up right now because all that liquidity has nested itself into all these securities

and, you know, it gets to a point where when you have so few people that are controlling all that liquidity and they don't need to sell because they have, let's just say it's a stock and they own it long, they don't have to sell that position. And so that starts seizing up the, and when you see all volatility, especially in the derivatives market, that seizes up and that takes the oil out of the engine, right? And so they're in a position where they have to provide that liquidity. They have to put the oil back in the engine or else it will seize up. And so, yeah, they're in a position where nothing is going to be the right decision. But it's going to transition. This will transition to a new form of currency, whatever that is.

My opinion is that Bitcoin's going to have a huge part in that. I could be wrong, but at the same time, I don't know what else there is out there other than them, other than all these countries coming to the table and agreeing that an SDR is pegged to gold or something like that or you have a new Bretton Woods. And I think that the reason that those two scenarios are not, highly probable, but could happen, is because you have to have all these countries that come to the table and agree that they now are going to be fiscally responsible in the way that they're spending. I think that the habits that have been established from a macro standpoint,

congressionally fiscal spending wise, has grown to, it's almost like a person who just has a really bad eating habit, right? They just eat nothing but junk food. And they've been doing it for 40 years. That's where you're at with the spending habits, not just in the U.S., but globally, they have been spending at a rate that is uncontrollable at this point. So I just don't know how they're all going to come to the table and agree that they're now going to be fiscally responsible, and they're all going to agree on a common currency that's all pegged like we had back with Bretton Woods. I think that was a different scenario than when we got now. Well, you know, it's fascinating.

Just even to game theory this out is I would actually say that it's highly likely that they try to do something like that. Yeah. Right. And the fascinating thing is that there's going to be, there's going to be some portion of people that watch that effort. And by people, I mean, not just individuals, not just institutions, but actual governments as well. who the difficulties, the follies, the in the unlikelyhood of that process actually working is what drives them to go seek kind of market provided alternatives. So this is important. You've got to think of the time frame. So Bretton Woods happened in 1944. You had the Great Depression back in 29 and I think it bottomed in 33.

was it 31 or 33. I think it was 33 that you had the bottom of the Great Depression there. And so you had literally 11 years after the bottom hit that Bretton Woods occurred. So to think that and think about, look globally, look globally at the leadership that's in charge right now. And I'm not calling any specific country out. I'm just saying globally, look at the. leadership in charge and look at the anger of the population and the, the aggressive self-interest of every country.

I think by 44, you were at a different point in time where everyone was like, all right, maybe we need to all get along here and we need to start being conservative with our spending habits, right? You had a whole decade that played out of just severe pain on so many different fronts before you got the Bretton Woods. You don't have that at all today. Not even close. Yeah, I think that's an interesting point in terms of the preconditions for something like that having any chance of working, right? Especially because it's hard to imagine that scenario.

And I feel like we're now in minute 48 of this conversation, which means we're allowed. to get into a weird political science theory and stuff. And anyone who's done with us can be done with us. And that's very reasonable. Thank you for listening. We'll see you on Monday. No, but it is interesting. You have to imagine that any scenario in which other players came to the table, it's hard to imagine

to imagine a scenario in which they weren't negotiating for lesser power of the dollar, which is going to be an a priori non-starter, right, for the U.S. to some extent, right? It was sold on the premise that all the other countries were pegged to the dollar and the dollar was pegged to gold and therefore the dollar doesn't have an advantage over us was how it was sold. But the way that it was gamed for the next 40 years after 1944, well, not 40 years, 30-ish, right? was that the U.S. took advantage of the basically spread the dollar and created economic growth by adjusting the money multiplier, which was a ratio off of the gold. And so all the other players that continued to peg their money to the dollar were laggards in that policy. And that's why you saw such, you know, I mean, historians will tell you it was because of all these other. factors of how great, you know, I think it's interesting when you go back and you read some of the

narratives on why America had such a boom throughout that period of time. And some of them are valid, but you can't neglect to look at the fact that the dollar was being manipulated through the money multiplier and how much reserves the banks had versus the amount of gold in the coffers. So, you know, and then in 71, it got, it got. It got. out of control that if all those dollars that were out there that had been created came back home and were swapped for gold, there wasn't enough gold to do the swap anymore. So that's why they came off the gold standard. And so when the U.S. came off of it, well, guess what?

All those other countries that were pegged to the dollar, they now had to come off. They were off the gold standard too. And then you just had this floating fiat. Right? And so that can work. Remember, I said there's three things that cause a currency failure, and one of them was zero percent interest rates. Well, if you have positive interest rates, and I mean, go back to this period of time, you're talking double digit interest rates. There's a lot of room to maneuver to take those interest rates lower and keep everything still afloat.

But once they get to zero, well, then the jigs up. What do you think, if anything, so we're talking about the currency ramifications. of this when currencies fail. How do you think this shifts in the short, medium, or long-term the conversation around basically digital Fiat, government digital currencies, right? Central Bank digital currencies. Well, it's based on how much you trust them don't to debase it. So as long as they control the protocol, it's no different than what you got today. Now, there's going to be tons of people that think it's different because it has digital money or it has crypto in the name of it, like the crypto dollar or whatever.

Like people are going to say, oh, it's all fixed, right? But it's no different if there is an entity that can tap into the protocol and adjust the unit new mayor, meaning the monetary baseline inside that protocol, congratulations. It's no different than what we've got right now. Absolutely nothing. And so the fact that you have this alternate digital currency that does not, have a controlling entity that can manipulate the monetary baseline, Bitcoin, they're going to be held accountable to that. So they can create their digital, you know, currencies. And they will.

They're absolutely going to do that. They're going to force people to make their tax payments at the end of the year in that currency. But lo and behold, their buying power as a nation is going to be completely based on how much debasement occurs relative to Bitcoin. If my own underlying thesis and assumption is valid that Bitcoin becomes the new currency. Do you think Bitcoin is ready for this? I sure hope so. Very honest answer. And to be honest with you, my least favorite word in the dictionary is the word hope.

You know, I look at this as being everything that I can look at from a technical standpoint yes, it's ready, right? I mean, we're looking at today, from a price standpoint, just total meltdown in Bitcoin. I mean, this is disgusting what this chart looks like. But as far as the protocol functioning,

I mean, it's looking at this like, there's nothing abnormal whatsoever about today to the Bitcoin Protocol. There is, in fact, when you look at the, The difficulty adjustment, this is the thing that I found really fascinating about today. So I'm looking at the price. I mean, it's down like 40% or whatever craziness happened today.

But when you look at the difficulty adjustment that's coming in for the next two weeks, it's at a plus six. And it just, in the two week period, just started. So although the price is getting absolutely bludgeoned, you have all these miners out there that are basically saying, you know what? the price went down 40% today, but I'm still willing to to spend all of this money, all this Fiat money for this electrical power that I'm receiving in exchange for the whatever probability I have of actually receiving so many Bitcoins as the block reward. They are, they are turning on

more mining rigs in this scenario. Your tweet from earlier tonight where 76% of the people participating in the buying and selling. You have 76 people that are willing to buy for every 24 that are selling. Okay, and the price is going down. So that tells you those 24 people have very large positions, and the 76 people that are buying do not have nearly as much capital as those 24 had. But the numbers of people that are buyers versus sellers tells you something very important. that is very abnormal for that type of price move.

Extraordinarily abnormal. Now, I mean, this was so fascinating to me, and I actually have to give it to Hunter Horsley from Bitwise, who caught this earlier in the morning when it was at 72%. So it actually went up over the course of the day, which is really another important wrinkle on this, another important note that means that it has gone. And we'll see what it is in a couple hours when they update it again,

In the span of this conversation while we've been on the call, by the way, we've been between 3,900 and 5,100 where we are now. And so what does that remind you of? For me, it reminds me of the 2017 top, right? We saw the exact same thing. We saw the price go from 200,000 down to 16,000 or something like that. Like the moves were astronomical. So if you see those kind of moves on a top, why wouldn't you? see those kind of crazy jumps on a bottom, right?

It's just so similar, but inverted. Yeah, I mean, I think what's profound to me, and, you know, one thing that I obviously nothing that we say here, you know, normal caveats, there's no financial advice here. It's just opinion and conversation. But I do think that one of the things as I was doing my podcast today that was profound was to look at that one statistic as one of a number of indicators that part of the maturity, the growing maturity of Bitcoin as an asset, is this set of people who, you know, they've been called huddlers of last resort, right, who are convicted and strong in their

conviction of this system and in its relevance in the future, that they're literally, I mean, lots of telegram groups where people are kind of posting their, their, war buys as we've been going down the chain today, right? But they're like, you know, look, I've got conviction. And I think to your point, it's exactly right that in a weird way, part of the fact that so much of the top has blown off is an indicator as well that the last couple years of evangelism for this asset inside the vaunted halls of traditional institutions has been working, right? that argument that people should get off zero as Morgan Creek talks about is working.

But the problem of that or one of the challenges of that is that in this type of scenario, you're going to see that, right? It reflected in the price as that set of actors with a very different set of priorities has to move and do what they have to do. Think about the people that are buying right now. They have massive conviction, massive conviction to be buying it after a 40% drop. think about the people who just sold it. They had, nah, so-so conviction.

So as these buyers step in with that much conviction, and they eat up all of those sale orders, right? You even get a semblance of an upside. All those speculators, those weak hand speculators, are coming back into the market to try to run this and capture their loss back. right and so that i mean that's just how markets function this is just normal stuff if it feels absolutely gut wrenching terrible well then you probably should be doing the exact opposite of how you feel on whatever it is well i think i actually think too to to your point about those institutional

weak hands you got to think too that there's actually a bunch of folks in there who press that buy button you know or sorry that sell button with the heaviest of hearts because they just had to do what they do and that they actually are strongly convicted. And maybe that's, even if that's only 10%, that's still a powerful, you know, countervailing force at some point. And so what in the world are they going to do whenever they do get their next liquidity injection via Fed ops, right? They're coming straight back to that thing that was so painful for them to sell, but they had to. This was forced selling today, whether people want to, you know, call it that or not. It is. If you have a margin call, well, guess what? You got to cough it up

from somewhere, regardless of how good of an investment you think it is. You have to supply the Fiat money that is demanded of that denominated security that you, that went the wrong way. So we've now, we've run an hour. I could pick your brain and talk about this for, you know, a long, long time, but just to kind of, for those who are listening who are, you know, they're not worried about their conviction in Bitcoin, they're worried about the kind of world that they're seeing. What gives you a sense of optimism at a time like this? You know, it's almost like, I guess I look at everything in cycles. I think that's how the universe functions. I think that when you break it down into the most subatomic level, everything kind

revolves and works in a in a in a manner that's in a cycle right and so I mean just look at like an electron rotating around a nucleus so when I look at this situation right now especially for Bitcoin folks they're looking at this and saying my God this is this is the end right this is this is midnight this is the darkest part of the night right and the way the universe functions is it daylight is coming. It's going to start getting lighter and then it's going to go through that cycle. You have to understand where you're at in these cycles. When I look at where we're at right now, could it get worse?

Actually, I think it can. I think that from a market perspective, I actually think it's going to get a whole lot worse than where we're at right now. But the night is getting darker. We're going to eventually get to a fever pitch where it's, pitch dark, and guess what? The light's going to start showing up. And so I think having faith, which is a much more powerful and important word, much more, it's the antithesis of hope, right? I think people have to have faith that they're being led in a direction that is for their own good, that you are going to come out of this better. You have to have that faith that, you know,

the good Lord has better things for you on the horizon. And I think when you have that and you think in a positive direction, the universe has to set itself up and function in a way that it supplies it to you. And I think that that's going to happen for a lot of people. Can't imagine a better way to end than there. So Preston, thank you so much for hanging out late night. And I'm sure that we'll have to come back to this conversation and probably a week because it'll be out of date by then. The biggest thing that stands out to me after that conversation with Preston is, the enormity of the times that we are living through. No one can truly claim to know how the next

few months or even years will play out. All we can do is use our models both mental and economic and mathematical to give our best guess about how we see things playing out. But the world is ultimately full of people and people have agency and people make decisions. And often those decisions counteract the models that we expected to work. The point of this is simply to say that the best thing you can be doing in this situation is exactly what you're doing, educating yourself, thinking, taking in different perspectives, and trying to form your own thesis about how you believe the world is going to change. I hope these types of conversations are a useful tool in that process. So until next week, thanks for listening, and I will be back to break it down for you

on Monday. Peace, guys.