The Pomp Podcast - #1066 Lyn Aden Gives A Masterclass On Current Financial Environment

Episode Date: July 31, 2022

Lyn Alden is the Founder of Lyn Alden Investment Strategy. In this conversation, we discuss the macro environment, how we got here, The Federal Reserve raising interest rates, when we may see improvements in the economy, Bitcoin, and where she sees the world going in the coming years. ======================== The number one name in NFT domains and the world’s most powerful wallet are teaming up to bring something new to the crypto and Web3 world: That’s right, Unstoppable Domains and Blockchain.com partnered to create NFT domain names ending in .Blockchain. It’s the perfect ending to show that you’re a believer in a decentralized future. The Blockchain.com community can get one, for free by signing up for the waitlist here. Free NFT domains provide all the benefits of premium Unstoppable Domains, including fee-free, lifelong ownership. Don’t have a Blockchain.com wallet? No worries, these new domains are available to everyone for as low as $5. Either sign up for a free blockchain.wallet or visit Unstoppabledomains.com to buy your domain today. ======================= Valour (formerly DeFi Technologies) represents what’s next in the digital economy -- providing simplified, trusted access to crypto, decentralized finance and Web 3.0 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols, through a single stock purchase on a regulated exchange. Currently listed on U.S. (OTC: DEFTF) and Canadian (NEO:DEFI) exchanges. For more information or to subscribe to receive company updates and financial information, visit our website at valour.com ======================= FTX.US is the safe, regulated way to buy and sell Bitcoin and other digital assets. Trade crypto with up to 85% lower fees than top competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees.   FTX.US is also the only leading exchange that supports both Ethereum and Solana NFTs.   Download the FTX App today and use referral code “Pomp” to earn free crypto on every trade over $10. The more you trade, the more you earn. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Lynn Alden is the founder of Lynn Alden Investment Strategy. In this conversation, we talk about the Federal Reserve, inflation, recession, monetary policy, fiscal policy, Bitcoin, and where she sees the world going over the next couple of years. I really enjoyed this conversation with Lynn, and I hope you all enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. Today's episode is brought to you by Unstoppable Domains. If you're a regular listener of this podcast, I'd bet that the two things are true. First, you're passionate

about Web3 and protecting your personal data. And two, you're a human being. If I'm right, then congratulations, you're entitled to all the benefits of the decentralized web. But here's the catch. As Web3-enabled technology like NFTs, smart contracts, and DAOs dive more elements of our real-world lives online. Proving that you're a person without surrendering your personal data becomes exponentially more valuable and exponentially more difficult at the same time. This is why Unstoppable Domains launched Humanity Check. Humanity Check proves that you're, well, you, without revealing any of your personal data. No matter where you go on the web, you'll have total control over which apps you want to share your data with and which ones you don't.

Prefer to be completely clouded and mystique? No worries. Humanity Check is 100% opt-in. If you want to feel alive or at least prove you are, head to unstoppabledomains.com today and get your NFT domain with Humanity Check. Again, head on over to unstoppabledomains.com and get your NFT domain with Humanity Check today. This episode is brought to you by Valor. Valor represents what's next in the digital economy. They provide simplified, trusted access to crypto, decentralized finance, and Web3 investment opportunities. Institutions and investors can gain diversified,

secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols through a single stock purchase on a regulated exchange. They're currently listed on the OTC at DEFTF and on the Canadian NEO Exchange at DEFI. For more information or to subscribe to receive company updates and financial information,

you can visit their website at valor.com. That's V-A-L-O-U-R.com. Valor.com. Go check them out today. This episode is brought to you by FTX US. FTX.US is the safe, regulated way to buy and sell Bitcoin and other digital assets. You can trade crypto with up to 85% lower fees than top competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees either.

FTX.us is also the only leading exchange that supports both Ethereum and Solana NFTs. Download the FTX app today and use referral code POMP to earn these free crypto on every trade over $10. The more you trade, the more you earn. Go download the FTX app today and use referral code POMP. Anthony Pompliano runs POMP Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of POMP Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression

of his personal opinion. This podcast is for informational purposes only. Lynn, how are you doing today? Pretty good. How are you? I am doing very well. I'm looking forward to speaking with you because I think you've got a nuanced view on inflation. one of the misconceptions about inflation is that it is only driven by monetary policy.

Obviously, monetary policy has a big effect, but you recently wrote a piece about fiscal-driven inflation. Maybe you could expand on that a little bit and explain why is the fiscal component so important given the inflation we're seeing right now? Sure. So a big theme I've had actually for a couple of years now is that the inflation that we're going to get, which now we have, is in large part driven by fiscal spending and the difference you know for for people that that don't know the difference monetary policy is like what the central bank does it's like what are interest rates going to be are they doing quantitative easing or quantitative tightening that sort of thing whereas fiscal policy uh is basically about taxing and spending by uh you

know congress and the president um and especially when you get extreme fiscal policy um like you know unusually large multi-trillion dollar deficits um that that actually puts money out into the broad money supply. And so if you look back at, say, the 2008 crisis, for example, there was a large monetary response. So we saw the base money go up quite a bit, but most of that just stayed in the banking system. It didn't actually really circulate to the general public. It's not like you and me got checks sent to us that we can then use to buy things, right? So it's not like people had more purchasing power. There was not a realistic version of more money chasing the same goods. Whereas what we saw in the 2020 response was in addition to the monetary response, we also

had things like helicopter money, PPP loans that turn into grants, tax, basically just tax cuts that are not offset by anything else. And so that was a large injection directly to people's bank accounts in different ways. We also saw corporate bailouts, for example. And so in that type of environment, you actually have a broad money supply increase. There's actually more money that people could control, chasing the same number of goods and services. And of course, the monetary policy is still relevant because they're printing money to buy the bonds that is enabling the fiscal expenditure. Because if they tried to just issue trillions of dollars of bonds, they'd have problems

with liquidity. There wouldn't be enough buyers showing up to buy those treasuries. And so the central banks are monetizing that fiscal. So it's really that blend of monetary policy and fiscal together, as well as, of course, real-world constraints that we've run into. So the fact that we had underinvested in physical goods like oil capex and things like that for a few years was also the supply side of this whole inflation thing. Is it fair to break down the most simplistic analysis being monetary policy drives liquidity into the financial system, but fiscal policy drives liquidity into the hands of

people. And because we got both in 2020, the monetary policy drove the asset bubble and the fiscal policy drove the inflation. So kind of all items went up in price. Some of them were investment assets. Some of them were consumer goods and services. Is that a way to break it down? Or could the fiscal policy actually have also had an impact on the asset prices going up as well? I think you described it well, but I would say that fiscal impacts both. So I think that monetary policy, specifically QE, putting liquidity into the system, is generally pretty good for financial assets, whereas fiscal policy is basically consumer price inflation, as well as because that consumer price inflation is resulting in more revenue and things like that for various

businesses, at least in nominal terms, it's also generally good for asset prices in nominal terms. whether it's in real terms is another story. And a good example of this is Japan, because if you look at their QE, I mean, they did more QE as a percentage of their GDP than like any other major country. I mean, they have their balance sheets over 100% of their GDP, whereas the United States, it's like under 40%. And it looks like a Weimar chart if you look at their base money. But because it wasn't combined with huge fiscal expenditures, I mean, their broad of money supply actually went up pretty slowly this whole time. And if you look at Japan, so they're well known for like their 30-year bear market where their equities are still literally

like cheaper than they were in the beginning of the 90s. But that wasn't like a sideways market. I mean, you had a couple of decades of downturn. And then starting around 2012, Japan actually had a pretty strong equity bull market. It was like one of the, you know, outside of the US, it was one of the better performing equity markets over the past decade. And that's specifically when their QE started really ramping up in 2012. They started putting a ton of money in 2012. They never really stopped. And that included for them, unlike the Fed, buying equities. And so if you look at Japanese equities from 2012 and you look at their QE from 2012, there's a pretty strong correlation with that being very good for their equity market. But it wasn't consumer price

inflationary for Japan because, again, it wasn't combined with things like helicopter money or things like that. When most people look at high inflation in the United States, like we're experiencing now, they point to the 1970s. Your analysis for a while now has been rooted in not comparing current environment to 1970s, but rather the 1940s. Can you elaborate a little bit on what was going on in the 40s that makes it a much more attractive comparison in your mind? Sure. So in the 1970s, a lot of the inflation that we had was from bank loans, right? So there were fiscal deficits, but they weren't the biggest driver of what we're having. there was a demographics boom. So there was, you know, the boomers were going into their home

buying years. And so there's this rapid increase in demand for things. And so that you had a pretty significant money supply growth, but that was because a lot of banks were lending money into existence. And then, of course, you threw on top of that, you know, the guns and butter program. So you threw on some fiscal deficits on top of that. And, you know, that was combined with the fact that the one similarity, the key similarity to the 70s is that we had an energy supply problem. So U.S. oil production peaked in 1970 after like 100 years of constantly going up. And so we became more reliant on the Middle East. And so we obviously had some geopolitical turmoils with that and trouble getting the oil supply we need up against a time of very huge demand that was largely demographics and bank loan driven.

Whereas if you go back to the 40s, the reason that's more similar is because that inflation was not driven by bank lending. Banks weren't really lending a ton during that era. Instead, that was driven by massive fiscal expenditures. And so the 1930s were a lot like the 2010s in the sense that the 1929 crash and the 2008 crash were pretty similar. You had a gigantic private debt bubble blowing up. Then you had this long period of stagnation, rising populism, kind of just rising economic fragility. And then in the 1940s, they were hit with an external shock. Basically, that populism had spread around the world. You got these wars starting to materialize. And so they had to do – they did large fiscal expenditures. And a lot of that was in the domestic economy, and they were building manufacturing facilities.

They were hiring people. When the soldiers came back, they sent 8 million of them into technical school and college and then helped them get a mortgage. These were very large fiscal expenditures, and so you had a huge increase in the money supply. And that was, as you'd expect, pretty inflationary. And then also the key difference is so in the 70s, debt as a percentage of GDP, both public and private, was pretty low. And so when they encountered inflation, they could raise rates to double-digit levels to try to quell inflation and give positive real rates. Whereas in the 1940s, because you had so much fiscal expenditure to fight the war, you had over 100% debt to GDP. And so they couldn't really raise rates to match inflation levels, and so they just let it run hot.

And you had the biggest ever gap between inflation and interest rates. And in fact, they even pegged the long end of the treasury curve, like what Japan's doing now. And so this environment here in the 2020s, I think, is pretty similar because, one, the growth in the money supply is largely a fiscal phenomenon. It's not due to unusually high bank lending. It's due to unusually large fiscal deficits that are monetized by the Fed, which, again, actually they did that back in the 40s. So there was huge QE in the 40s to monetize it. And it's not due to excessive demand or positive demographics. It's due to that more strained geopolitical environment and that strained economic and socioeconomic environment. You mentioned populism and its relationship with fiscal policy. Obviously, social media has made it much easier for people to communicate around the world. And it feels like every day there's some new thing that people are upset about or kind of, you know, cancel culture is running wild or there's virtue signaling going on.

and obviously politicians are not immune to getting caught up in kind of the whims of the flavor of the day, if you will. How much do you think the expansion of fiscal policy that we've seen is just, there's an easier way for folks to communicate. They can tweet at politicians, they can make their voices heard. They've got podcasts and YouTube and kind of all these different platforms. And that means that politicians now are more likely to kind of hear the people. And that leads to kind of bigger and bigger and more severe and aggressive fiscal policy kind of programs? I think it's a combination of that and the debt. So the debt portion is the fact that when debt is super high, when you have hundreds of percent, like so in

United States, we have 370% public and private debt as a percentage of GDP. So if you had corporate debt, household debt, and public debt combined, it's 370% of GDP or so. And that's basically unpayable in real terms. And so the question becomes, how does that default? Does that default nominally? Probably not, because the liabilities are in our own currency. And so instead, you generally are going to get default through inflation, where you're just going to have a long period of negative real rates. And so those bondholders will get paid back, but not in real terms. And so large fiscal expenditures, while holding rates low, are one of the main ways to inflate away large levels of debt. So I think that's the mathematical component.

And then the more social component is that populism. And generally, that kind of goes back to the fourth turning concept of people build these institutions, and those institutions last for decades. But then over time, as the founders, they die, and then as you get kind of the third and fourth generation of these institutions, they drift away from their original purpose or they become corrupted or societies change and no longer respect those institutions, usually a combination of all these things together. And so in that period of rising populism, they generally feel that the institutions, the frameworks that we've constructed are no longer working well for the majority of the people. And so you start to get a lot of pushbacks on it. That could be the government. That could be media. That can be certain corporations basically, certain international organizations. And when you start to get that pushback on that, you get just broad distrust of that sort of thing, and you have just kind of like that very fragile system from how much debt is there. And so I think in that when they're hit by an external shock, I think they err on the side of basically money printing because in their mind, it's better than debt collapse. And so generally when you get the end of a long-term debt cycle like we're at now, it tends to die in fire rather than ice, meaning that you tend to err on the side of high inflation rather than deflationary collapse. You mentioned both public and private debt.

What's the relationship between those two, and how do we kind of go back and forth between having more public debt or more private debt? Is it important to watch kind of the percentages or the balance between public and private, or do you just analyze it all as one big bucket of debt? I think they're very different. And it's because private debt is actually more deflationary because if you start to default and you don't pay loans back or things like that, that actually destroys broad money. And so both of the biggest private debt bubble collapses in American history, which would be the 1929 aftermath into the 30s and the 2008 aftermath into the 2010s, both of those were pretty disinflationary periods. And the same thing for Japan, right? So their late 1980s debt bubble basically spent then decades just like melting as that private debt bubble kind of just worked itself out. And a general theme is that private debt bubbles slowly get resolved by pushing that up to the public level, right?

So generally a private debt bubble precedes a public debt bubble. And then as that private debt bubble is kind of melting and people are getting all disgruntled, that's usually when they come in with larger fiscal deficits, they do very stimulus. And what eventually happens is that private debt bubble kind of diminishes but then shows up on the public balance sheet, so larger sovereign debt relative to GDP. And that tends to be more inflationary because that is never going to be defaulted on because it's in their own liabilities. And so that's where it eventually gets expressed through the currency. The only way that that debt gets discharged is by currency devaluation and basically defaulting in real terms. And so we saw that in Japan, right? So you had that gigantic, absolutely huge private debt bubble, spends a decade melting, run persistent moderate deficits that are constantly being monetized.

And instead, we've had actually deleveraging, for example, in Japanese corporations, but all that debt is now in Japanese government debt. And then we saw the same thing in the U.S. 1930s and 40s, and we saw the same thing in the U.S. 2010s to 2020. So now we're in more of the public debt bubble phase of this, which tends to be a more inflationary period. When we look at the last, I don't know, two years, one of the things that sticks out around the central bank is that the Federal Reserve was holding interest rates artificially low at 0%. And they also were conducting quantitative easing, even though inflation in the summer of 2021 got over 5%. And by the end of the year was over 7%. What is the importance of realizing in hindsight that that probably was a mistake. Is it something that you can kind of ascribe

a level of severity in terms of the problem we're experiencing now? Or how do you kind of analyze that action? That's such a crazy thing in hindsight that they were still doing that. How do you look at it? One of the challenges I find is determining what is a mistake and what is intentional, right? So if they know that they're super high debt levels and the only way to discharge them is through inflation, you could make an argument that it was a mistake. Um, whereas it's kind of like, are they smart, but then being misleading or are they actually dumb? Right.

So it's kind of like one or the other. Um, there was a BlackRock paper written in 2019 before the pandemic. And it was like, you know, the next downturn monetary policy is not going to be enough because interest rates are so low and debts are so high. So we're going to have to do significant fiscal stimulus. Um, but that can be inflationary and drive rates up. So they're going to have to keep rates low through monetary policy. So you're going to have to have coordination between fiscal monetary policy.

But then the challenge is that that can cause runaway inflation, so that's got to be managed very carefully. So they actually kind of laid out the whole playbook ahead of time, and that was both BlackRock and it was advised by Stanley Fisher, former Fed official. And, of course, they didn't predict a pandemic, but – so it's kind of even bigger than that paper would have suggested. But we actually followed that playbook almost step by step in terms of watching what these policymakers are doing. And so I think that they certainly overdid it. I think even in their view, I think part of the original one, they wanted to let it run hot for my first reason, that they wanted to burn some debt away. But I didn't think that they thought it would get this hot this quickly.

And I think if they did, they probably would have done certain things differently. And I think it's because a lot of their models are just not great. I don't think they're looking at oil capex, the real world supply side stuff. And I also don't think they're making a great distinction between broad money supply and base money supply as its impact on inflation. I just think that a lot of their models are out of date and that the models are kind of bureaucratic. I mean they're these large institutions, a lot of academic input, and I don't think they have like the rapid learning effect that you see more in like the business world. When we think about this inflation, I want to talk about two specific contributions. So we're talking about the data and how they didn't think that inflation would get this hot this quickly.

The first one is what I'll call kind of external events. So obviously the pandemic is one that you mentioned. There's also been supply chain disruptions that have kind of come in the wake of that. There's been geopolitical conflict with Russia's invasion of Ukraine. how do you anticipate them either trying to see these events coming to analyze them in real time like how much of an impact do these external events have on changing their policy or is it something where they just have their policy they're going to execute their plan and although these things happen they don't really either pay attention or they end up not actually being willing to change the plan uh regardless of what happens externally i think these external things eventually changed their plan, especially as expressed through markets. And so the Fed has to kind of put out fires as they come. And so these events kind of, you know, end up showing

up in markets, which then ends up having to be the things that the Fed has to respond to. So, for example, they, you know, in 2019, I bet none of them expected what they'd be doing in 2020 at the scale they were doing it at. And so they had to, you know, I mean, they had an emergency meeting in March 2020, and they were kind of changing their plan because the Treasury market broke, which I don't think was on their 2019 bingo cards. Things like what we're seeing geopolitically, it's challenging because it becomes self-referential. Usually, the problems are like when you have long-term debt cycles blowing up and then you have more inflationary periods, that leads to more discontent and more geopolitical struggle, which then leads to

more inflation. And so it's kind of that vicious cycle. That's generally what you see in these periods. And so one leads to the other and one leads back to itself. And, you know, when it comes to, for example, what we're seeing in, say, you know, Ukraine, Europe's energy prices, so natural gas prices in Europe, which if anyone has looked at them, they look like a Weimar chart. It's like it's a horrifying price chart, you know, compared to what we're experiencing in the United States in terms of energy prices. So no, natural gas prices soared. But that happened in late 2021. They were already encountering challenges with that. And then, you know, the whole Russian invasion just added more problems on top of that. It didn't create the problem initially. It just

added layers of additional risks and insecurity and additional volatility and inflation on top of what was already a physical constraint in terms of natural gas and other things that were happening there. And so I think that's going to be the theme of the 2020s is basically problems feeding back on making the problems even worse. The second piece is the data they're actually looking at. So you mentioned the models are outdated, maybe even bureaucratic to some degree. there's now been what I'll consider public conversation or mainstream conversation around just how the data is collected. There's been articles that show, hey, they only have a couple hundred people that literally physically go to the store with a tablet and they're like manually

inputting prices. You can look at something like the CPI, rent methodology, where they're essentially using outdated census data to call people on the phone. And really where this gets highlighted is we have companies like Square or Zillow or apartment.com and, you know, various other what I would consider more real-time, much more robust data sets, how do you evaluate the maybe accuracy of the data they have? And then how do you compare it to other data sets that are out there that they may just be ignoring or they don't want to use? How do you kind of evaluate it? Basically, I do what you just said. I look at what the public models are doing. So I look at what official CPI is doing because, of course, that's a lot of traditional markets. Like the bond

market will look at things like that. So they're relevant to know and to understand what's happening in that data. But then I also do go out to things like these real-time rent indicators and things like that. And it's a couple of things. One is it helps you determine the accuracy or the inaccuracy of things like CPI. Two is it lets you predict what's going to happen with CPI. So one of the reasons I was expecting CPI to go up is because I saw the rent component happening in real time. And I was like, this is going to start showing up in CPI because CPI kind of incorporates that over time, but like with a lag and smoothed out and, you know, somewhat inaccurate, but it still ends up getting into there in a pretty significant way. And so I think that looking

at that mix of things is super important because the, you know, the government statistics are important for traditional markets responding to them and knowing how policymakers are going to try to respond to them and how they're going to signal around that. But then, yeah, those real world uh faster time updating ones are super useful for for accuracy there's also things like you know there's uh services that track what used car prices are doing it comes out you know every couple weeks instead of you know with a lag and it's in my view pretty accurate and like you said there's really good rent indicators um things like that as we moved into 2022 kind of at the end of 2021 we started to see the fed talk tough and then they actually started to act in 2022 uh and the

overarching theme is basically destroyed demand. They keep using that phrase, destroyed demand, destroyed demand. They now have done a number of aggressive interest rate hikes. They also have stated that they are going to do quantitative tightening. How effective can they be in destroying demand? And maybe even what does that mean in terms of the experience for everyday Americans or financial institutions? If the Fed says they're going to destroy demand, what exactly does that entail? And then how effective can they be? So I think they could be effective in the near term. And I think to some extent they already have been. They contributed to the housing market seizing up, for example. Basically, if you make financing costs a lot higher, that does impact companies' ability to get capital, consumers' ability to get capital, you know, to borrow things, to buy assets and to buy other things.

And, you know, there's also like a wealth effect. Right. So going into this period, U.S. household net worth was six times as high as GDP. You know, it got up to four and a half during the dot-com bubble. It got about the same height during the 2007 housing bubble. But going into this period, it was six. It was six times. And so when you, you know, the Fed is able to put downward pressure on asset prices by doing things like ending QE, doing some mild QT, trying to raise rates to prudent time. And if people see their asset prices going down pretty quickly, that can also change

their discretionary spending levels. And so I think a lot of these things combined do impact demand in the near term. But the problem is that because the economy is so financialized, because there's so much debt in the system, and because the supply side is not really being fixed, especially if you look at the energy component of that specifically, it's kind of short-sighted in the longer term. Basically, the only way out of this is improving the supply side. um and so i you know again if you go back to does the fed not know or do they know but they're signaling differently um and so if they're fighting this like the 1970s i think that's an error i i think instead they have to they have to be aware that in many ways it's more like the 1940s um and so 1970s attempts are likely to backfire and uh just just lead to more pain ahead i think it's

gonna be a i think we're gonna have this inflation issue i think it's gonna be something that that reoccurs for a period of time. Famed economist Milton Friedman has said for years that sometimes the government solution is actually worse than the problem itself. If the Fed is treating this like a 1970s situation, and that is an error in their policy, what would the ramifications or impact be? What would you expect the problem then to become? I think that they can cause a recession and then you start to get problems and stay at the treasury market or things like that, and then they have to reverse course

and then it damages their credibility. And then they basically, ironically by tightening, they can impact the supply side. They can make it harder to bring on new supplies of things that are short and contributing to inflation. And then therefore they can lead to even another inflation spike when they eventually have to reverse

and turn dovish again. I think the problem itself goes back to the root of price controls. I don't think that they should be doing price controls. And if you ask most people, should they be doing price controls, and people would say no. But that's essentially what the purpose of a central bank is. They do price controls on the price of money.

And so you're kind of in a period of perpetual price controls. And so, of course, the question is, if they set the price at the wrong level, either too high or too low, that has huge ramifications. And so I think the deeper question is kind of like, should central banking in its current form even exist? But the nearer term problem, I think, is that as you get to the end of a long-term debt cycle, so as you get to lower and lower interest rates and higher and higher debt as a percentage of GDP and higher and higher asset valuations as a percentage of GDP, you've really financialized the economy. And then there's no clean way out, right? So I often ascribe the problems that they have now are somewhat less about what they're doing right now, right?

So I'm not like I'm blaming Powell for all this inflation. It's decades of kind of policy compounding. And then here, it becomes a series of bad decisions, right? Are you going to choose one bad outcome or are you going to choose another bad outcome because they've already kind of painted themselves into a policy corner? We're recording this at the end of July of 2022, and the Fed has already been conducting a number of actions to create these tighter financial conditions. we're in a year where there'll be midterm elections. And I think most people have given

up on the idea of this soft landing. How likely is it that they can continue in the direction that they are without pivoting or kind of waving the white flag through the end of this year? And then how likely do you think it is that there would be some change of kind of strategy before the end of 2023? Like what is your expectations of, you know, can they break something in the short term? Is it to be more of a medium term? What do you expect them to do over the coming months and years? So I think by late this year or by early next year, they probably would have pivoted their policy to some extent, especially post midterms. You know, right now, for example, you know, they're releasing the Strategic Petroleum Reserve. That's obviously a finite thing that they can only

do up to about the election. And it's something that they can't keep doing after that. So that, I mean, that's not a policy. That's a fiscal side. That's not a monetary side. In terms of monetary tightening, I think that, you know, they can tighten until one of a handful of things happen. Either the treasury market goes illiquid, like it did in March 2020, or credits or repo markets encounter problems, or you start to get a severe labor weakness with unemployment going up, you know, say 100 basis points compared to what it is now. And I think those are kind of the three things that could really cause them to have to pivot. And I would certainly expect that to happen before late 2023 and potentially by late 2022. One of the statistics that I saw recently was it's like 80% of countries around the world are experiencing high levels of inflation or materially higher than they historically have. How much of this is a U.S. problem versus just the entire world is suffering at the hands of supply chain disruptions, geopolitical conflict fallout, and kind of other issues? So high debt levels and that whole idea of having to flay debt away are a theme throughout most developed markets, so the United States, Japan, and Europe at this point. So that's global, at least for the huge areas of global capital.

And then commodities are a global market. And so if you have years of underinvestment in energy capex, that becomes a global problem. And then it becomes an issue of kind of game theory because let's say the United States, for example, prints a ton of money and gives it to people, and those people can go out and buy things and consume energy. If there's another country that did not print money, their energy prices are going to go up too because the Americans printed. And so it becomes a global thing pretty quickly. So it spreads around because these economies are so interlinked both in terms of their debt similarities, their financial connections, as well as the fact that global commodity pricing is a global supply and demand market. So we saw earlier this year the ECB kind of broke from the Federal Reserve in the interest rate kind of actions. They then capitulated and started to follow. How much emphasis do you place on the difference of strategy between kind of individual central banks versus this debt load ends up over the long term? They're all going to have to inflate it away, and so they may be able to hold out for short periods of time.

But the kind of longer-term trend just outweighs everything that they're doing in the short term. So I think the longer term trend is that all of these countries that have well over 100 percent public debt to GDP are going to be inflating that away over a period of time. But it does become a question of is it is it disorderly or is it orderly? What is the order? You know, does one have to kind of go first? Does one have less room to kick the can down the road than another? Those become relevant questions. I think the ECB is in the most challenging spot because they have a more acute energy crisis than most other developed market areas, and they have a monetary union without a fiscal union, meaning that they set monetary policy for the eurozone, the ECB does, but individual countries have significant control over their own fiscal policies more than, for example, U.S. states. And so that kind of fragmentation is just – it's a really challenging environment to operate in.

And then you have countries like Italy with 150 percent debt to GDP, so they need assistance monetizing their sovereign debt. But then you have other countries that are like, wait, why are we doing that? Why can't we – that's not fair, for example. And so the ECB is just – there's more moving levers there that can go wrong compared to the United States and then even compared to Japan in my view. So I think that there are some differences, but they also have the same general theme of too much debt, so it's not going to be fully paid back in real terms over the long run. One of my favorite books is The Dow of Capital by Mark Spitznagel. And one of the key themes in that book is basically human intervention in markets ends up throwing the market off, right? A very kind of Austrian view of the world. How valid is that perspective,

given what we've seen just even over the last two years of kind of, we went from a pandemic to asset bubble, high inflation, now we're kind of going the other way. And it's very obvious that this is being driven by human, kind of central bank-led intervention, does that just validate the Austrian view of the world and say, hey, look, maybe we should stop doing this? I think partially, but I also think that in terms of just reality, governance is a vacuum. So governance fills, you know, where centralization does not exist, it tends to move in that direction. One way I've been describing this whole era, meaning going back 100, 150 years, is that it's mostly a technological shortcoming, right?

So because the speed of commerce due to telecommunications channels, you know, starting with like laying undersea cables in the late 1800s and going from there, that basically allowed commerce to occur very quickly, whereas bearer asset money was slow. And so it got abstracted, centralized, arbitraged. And so it just became inherently centralized

and controlled and political. And so I think that it's understandable that people are angry at that phenomenon, but in some ways it's the order of technology made that almost inevitable. And it's not a surprise that we saw that model spread to like every country in the world. And so I think it's more constructive to focus on technological solutions that can provide alternatives. Like if someone doesn't have an alternative other than you shouldn't do this, but the natural incentives are for people to do it, then it's just – you're going to kind of like be shouting into the wind. And so I do think it's true that when you have centralized pools of power and they're human and they have human levels of bandwidth dealing with something that's more complex than any of us can realize, billions of weekly transactions, for example, that there's inevitably going to be errors. And that longer term, I think it's about finding ways of using technology to decentralize things. I think we might finally be at a point where we have technology that allows us to get around some of the hurdles we've had over the past 150 years of commerce moving faster than money.

You recently had a Twitter thread about separating state and money, and you compared it to the separation of church and state decades ago. Describe a little bit more about why that is such an important idea right now and why you think now is the time that that could potentially happen. Because I think for the first time we have credible technology to potentially make it happen. I don't think it's guaranteed, but I think it's a very interesting kind of time to be in for that concept. You know, if you go back long enough, the idea of religion and government being separate would have been considered odd. It would have been outside of the Overton window of discussion. But eventually that was kind of separate. You'd have – okay, people have their religion, and then you have government, and it's not tied to any one religion.

Obviously, the whole world doesn't operate in that model, but a number of countries do now. And when it comes to separating state and money, people have a natural idea in their mind that if there's a government, they must be the issuer of currency, that that's an inherent thing that a government has to do. And I think as we saw, I mean there are some dollarized countries, for example. There are small countries that for one reason or another, they don't have their own currency. Maybe they failed their currency so poorly that it just got dollarized. Maybe it's because of a decision they made. There's a handful of countries like this. And just even ones that are not dollarized, there's a really poor track record when you look around the world of most government-issued currencies.

I mean the dollar and the Swiss franc have been like some of the best ones. And even those have had their own problems. When we look globally, it's a huge problem. And it's quite possible that technology and adoption will get to the point where it becomes increasingly hard or not ideal for governments to be the issue of currency. And I think it would start at the periphery, the types of countries that are dollarized now. I think there could be more of those that become private monetized, we can call it, and that it could spread towards the core. But I think it's a trend to watch and to keep an open mind about the role of government, that separating money from state doesn't mean anarchy, just like separating religion to state didn't mean anarchy. It just means a different model and a different division of powers.

When I think about these dollarized nations, they basically are having a different country that is focused on a different economy, create the monetary policy, which affects their country. And so it's pretty obvious how that could be difficult or not necessarily ideal. But when it comes to countries that do have their own nation-state currency, one aspect is the single best position to be in would be to control the global reserve currency. Do you agree or disagree with the statement that the second best position to be in would be for the world to use a non-nation-state currency if you are not in control of the nation-state currency? I think that's a good way to describe it. Yeah. If you have the power to have the currency that everyone else relies on, that's obviously the best place to be in. Whereas the second best choice for everyone is to use a kind of a neutral objective currency. And then the funny thing is, even as the global currency reserve issuer, it's not like everyone in that country benefits equally. Some people are actually harmed by the fact that others in their country are issuing the global reserve currency. And so that goes down to the whole trepidus dilemma that I've kind of written about and talked about a lot, which is basically right now, for example, the cost of the United States maintaining its global reserve currency is that we pretty much have to run structural trade deficits to make that work properly. And so that obviously, it benefits you if you're near the issuance of that currency. If you work in government, Wall Street, if you're in a very high margin business like technology or healthcare, you're generally shielded or even benefiting from that situation.

Whereas if you make physical things in the United States, you really get no benefit and maybe some downside of being in the currency reserve issuing country. And so the fallback for many people is, yes, kind of a separate neutral currency, but only if the technology is there to make it possible. I mean, a lot of the reason why gold was eventually moved away is just because it was too slow, and it allowed for policymakers to arbitrage that and get people to use something that devalued and that they had more control over. How do you think the transition would occur? So let's say this does happen and we transition from a kind of nation-state-led monetary policy or currency to a decentralized version of it or a neutral kind of agnostic to any nation. What does that look like? Is it kind of a parallel adoption similar to what we're seeing in El Salvador where they're dollarized and they create another legal tender and then they kind of live with two for a while? Is there countries that you would anticipate will just kind of rip the Band-Aid off and say, hey, on Monday, we're moving and everyone get on board? How do you see this playing out? I think it's probably a parallel option because – I mean if you use Bitcoin as an example, right now it's too volatile for a whole country just to use that as their entire currency.

And so I think it would be something that just grows in parallel. And the longer it lasts, the longer the Lindy effect goes on, the more that organic adoption occurs and then a couple of countries acknowledge it and maybe use that as reserves, maybe make it legal tender. I think it grows from there. And again, there's no guarantee of that worldview happening. It's just an observation of the technology itself, what's possible, what the risks are. I think in a pre-Bitcoin world, I think eventually probably gold would get some degree of prominence back as a number of these currencies failed. I think that, for example, gold would be more used in reserves and that you'd have more like gold as kind of the neutral currency that various fiat get kind of either pegged to again or at least like that they all float kind of against gold and gold is kind of the core of the system. But now I think we have some other alternatives like Bitcoin that I think are – have a shot at changing the way that financial systems work 20 years from now.

And so as you start to see this play out, obviously, Bitcoin appears right now to be the most likely candidate to kind of fill this role. Are there other aspects, technologies, digital currencies that you think could potentially fill this role or is it just Bitcoin? And that's kind of the one shot we have for kind of a nation state agnostic currency. So I don't really say anything other than Bitcoin that has the qualities to be like a reserve asset or like a global neutral money. I mean, I categorize a lot of other things as equities. I think some of them are doing interesting things. I think, for example, stable coins are something I've been bullish on for a couple of years now. They also serve like an intermediate term role where it's a way for people in different countries to access dollars, even if their local banking system doesn't really want them to or their local government doesn't really want them to.

Because their stable coin issuers are centralized, but the centralized hub is outside of their country. And then due to technology, they can access these digital representations of dollars that are ostensibly collateralized by pools of assets. And so I think that there are a number of things here. But yeah, the only one I see that actually can reserve – I think that has the security of being like a global reserve asset is something like Bitcoin. And as you look at kind of Bitcoin and crypto, I think you've done a great job of kind of highlighting the differences where Bitcoin is something very separate and distinct to the rest of the market. Talk a little bit more about how you see the differences in Bitcoin and everything else. So I think that a lot of other things have some similarities to equities in the sense that if you try to remove the energy component, you're basically putting in more governance. A lot of them are more centralized.

And so they end up looking like equity, like platforms that have some degree of centralized development, a handful of stakeholders that can kind of control the network, which in my view is a lot different than what Bitcoin does. So I think that the way I generally categorize it for a couple of years now is that Bitcoin is money. It's like a digital commodity and that a lot of else what we see in the space is kind of these hybrids or these digital equities that might have value in their ecosystem as serving a purpose, but they should just be thought of rather differently. and when you start to look at a number of these other areas one of the kind of interesting ones that doesn't seem to get labeled obviously as bitcoin doesn't also get labeled as kind of crypto is stable coins they really aren't trying to issue something new they basically are just a digital token that's backed one-to-one to dollars on many platforms whether people want to use them or not if you want to buy bitcoin many times when you deposit fiat in it sits in a stable coin then

you have to purchase Bitcoin. How do you look at their role, maybe just in like the Bitcoin and crypto ecosystem? And then we can talk about central bank digital currencies. So stable coins are serving two significant roles right now. One is, as you point out, unit of account for a lot of trading platforms, either centralized offshore exchanges or in some of the DeFi markets, basically digital representation of dollars. It's still dollars. It's just like, you know, I'm not talking about the algorithmic variety, but the actual fiat collateralized variety those are just dollars in in in this kind of you know more efficient wrapper and the second use case the one that actually interested me more is you know people

in emerging markets or frontier markets in countries with failing currencies um you know stable coins are useful for them to to hold for kind of intermediate term savings so let's i mean i had an argentinian describe it to me very well he's like you know money that i'm going to spend in under a month, I'll hold in local currency. Money that I want to hold for several months, I'll hold in stable coins. And money that I want to put away for three to five years, I'll put some of that in Bitcoin. And so I think that there's a demand for dollars globally, and stable coins just happen to be the technology that it enables to allow them to get their hands on dollars, like I said before, even if their governments and their banking networks are not

making them available or trying to restrict access. So I do think that stablecoins have that purpose this decade. And that's why I also think that there's cool things like Tarot on Lightning that could potentially bring stablecoins over to Bitcoin. And it just becomes whatever network is most efficient to transact those dollars around because those are less about pure decentralization and more about what can give people access to a cheap ability to access that foreign central hub of dollars. Central bank digital currencies are, I think, a whole nother thing entirely where it's in many ways kind of the antithesis of Bitcoin. Those are more about centralized control, more about programming restrictions on how to use the money and kind of even pre-programming like

inflationary policy. And so I think that there are some countries like China that obviously are pursuing the CBDC route pretty rapidly. And then it's possible in the United States, you see other kind of public-private, you know, partnerships. Maybe a stablecoin kind of gets treated as like a CBDC because, of course, stablecoins are vulnerable to regulation and control and regulatory capture. So I think over time, those could potentially merge more in some of these countries that don't want to maybe develop their own CBDC. But I think it's still a very fluid environment at this point. And so it's hard to sort of lay out a direct course of how some of these things go. Yeah. When you start to look at maybe the situation that we're here, if we bring

it back to the United States, it seems like estimations are anywhere between maybe 12 to 15% of American citizens have some sort of relationship or ownership of Bitcoin. If you look at other places like in Nigeria, self-reported is somewhere over 30%. I would handicap that and probably say again, probably 10% to 15%. And so it seems in countries where there is a decent amount of internet penetration, there are smartphones, and there is a reason, whether for speculation, whether because of a collapsing native currency, somewhere between 10% to 15%. If we kind of hold that as like the adoption level, what would your expectation be through the rest of this decade? Is this like a 10% to 15% goes to like 80% to 90%? Do you expect it to maybe go 10% to 15% to

30%? How do you think about growth and adoption of an asset like Bitcoin given where we are in the global macro environment? I think avoiding major tail risks like a huge bug in the code or something like that, I think it's going to trend towards higher double digits globally. I think you could have different adoption rates in, say, China versus Nigeria long term. I think they can maintain a pretty big difference there in terms of adoption rates. But I think as long as it continues to be successful and do what it's supposed to do, I think it's, you know, over time it becomes more widely held and then making it more widely held most likely makes it a little bit less volatile over time. I mean, it's still going to be volatile for quite a long period of

time, but we do see very small amounts of reduction in that volatility since the beginning. And I think if it was held by, you know, five times more people, 10 times more people, that starts to get pretty significant. So right now, I mean, that double digit percentage is not even in every country, right? So it's like you said, there's countries with high internet penetration, countries that for whatever reason, it's spread there culturally, but less so in other countries. For example, we don't see it as much in Egypt as we see it in Nigeria. And so I think that kind of the low hanging fruit is that we'll see low double digit penetration in most countries, more countries. And then from there, I think that some of the countries that have these higher

penetration levels could go much higher into the double digits. When you start to analyze the state of analysis around the current financial environment, it feels like there is a bifurcation that's occurring. I'll call one the mainstream consensus. This is where you see talking points from the White House, you know, it's not a recession, inflation is transitory, and those similar types of phrasing and kind of message. And then you have what I'll call like the internet. And it feels like those two conversations or those two bodies of knowledge are almost getting pulled in opposite directions, like, like, we're getting more and more extremes. And, you know, recently, the conversation around what is a recession, Wikipedia has 30 plus revisions to

it in a couple of days. Just a blog post from the White House is somehow the number one search result almost immediately. How do you start to think about maybe just the conversation about the data versus the internet and what appears to maybe be a little bit more intellectually honest pursuit of like what is happening? I think that goes back to the whole fourth turning concept of growing distrust of institutions and kind of the gradual entropy, the gradual decay of the perceived value of institutions and the usefulness of institutions. And that's why institutions get those cycles of destruction and being rebuilt in a way that I think reflects kind of the more modern era each time.

And so right now, I think that representation of how we're being told to interpret weak economic data, how we're being told to interpret inflation, and then seeing very different analysis online and elsewhere, I think that's a symptom of the era. And that's not to say that the online version is totally accurate either. I mean misinformation can also spread very quickly online. And so I think it's important for people to check sources and to do a lot of their own analysis and to look for pockets of credibility. But yeah, in general, I think that crowdsourced kind of intelligence is something that is really sniffing out a lot of the weakness in the institutional narratives in this day and age. And it's something that is new compared to the last time the world went through this kind of era. In the 1940s, people couldn't send around memes of the central bank doing yield curve control and QE and all the different things it was doing. It was a much slower distribution of information, and so I think that that can make things rather hard to predict and rather nonlinear as you try to figure out what's going to happen the rest of this decade.

As we look forward over the next decade, what are one or two things that you're looking at or forward to that maybe other people haven't put enough importance on yet? I think traditional markets still think this energy inflation is transitory. And I think the underinvestment in energy capex is going to be one of the biggest themes of this decade. The heart of that right now is in Europe, but I think it's largely a global problem. And that's not just oil and gas. It's also like if you want to have more EV penetration, you have to have better electrical grids. And it's about getting energy in all the ways it's made to where it needs to be. Nuclear is also, I think, a big component of that conversation. And so I think energy security, energy abundance are going to be like an ongoing issue that, you know, even years from now, I think we're still going to be dealing with. And I think that that's underappreciated and underpriced by analysts that are not close to the ground in terms of kind of the physical reality of the engineering situation and the complex political situation, all the different factors that go into that lack of CapEx.

The last thing I want to talk to you about is your process for producing the research that you do. LynnAlden.com, you put out these monthly reports that are absolutely fantastic. They're incredibly robust. And I think what makes people so impressed by them is not only the thoroughness of the analysis, but also your ability to kind of articulate the ideas so that people who are much less smarter than you can understand them. What is that process like and kind of how do you put those together? Usually what I do is I work on projects in parallel over the course of a long period of time. And so instead of just kind of like working on one piece and then getting it out like week by week, I really sit on each piece usually for quite a while and I play with it and I kind of sculpt it over time. And I shift back and forth towards whichever one is kind of drawing my interest or that has a deadline approaching and kind of move around like that.

And I think that that – the amount of kind of – if you spend one week full-time on something versus one month part-time on something, I think that at least the way my mind works, it comes out better if I spent longer time but part-time on it because your opinion can change in a week, right? You might have had an idea that you thought was cool, and then a couple days later, you're like, what did I publish? That's not how I would write it today. But I think if you really sit on something and play with it for a while, it becomes, I think, a better reflection of what you think because you're basically taking a longer sample size of what you really think about something, and that allows it to be more true by the time it's published. Where can we send people if they want to read those weekly – or I'm sorry, those monthly research reports or if they want to get the rest of the work that you're putting out? So I'm at lindalden.com. People can find me there. And I'm also active on Twitter at lindaldencontact. Awesome.

My last question for you is a little bit more of a fun one. Are you having fun, even though it's a bear market in Bitcoin? And kind of as you look around the world, there's lots of issues. I'm doing my best. One thing I didn't do enough of over the past couple of years was exercise. You know, there's the whole pandemic, you know, gyms were closed and, you know, I was overworked. And one thing I've been I've been really focusing on in the past couple of months is making sure I'm getting outside more and getting exercise because then it circles back

and makes me enjoy my work more as well. So I think people have to have to find ways to be healthy and to have fun, even though we are going through kind of, you know, just very challenging times globally. Well, that's an interesting point, which is what would your ideal day be like? Like how would you structure it? Balance between work and kind of exercise going outside? What would that look like? Ideally, pockets of both, right? So instead of just doing nothing but work for eight or 10 hours and then getting exercise, it's trying to mix it up, trying to, you know, go outside, stretch your eyes, think about something. You know, if you get up, you know, do some work, kind of do your high impact work, and then you go out for like a long bike ride,

it gives you time to think of what you just did. So by the time you maybe go back for like your afternoon session, you know, you kind of look at things from another angle. And so I like that that kind of intermixing it together approach. Yeah, that's a great point. I lied. I actually have one more question out of personal curiosity. What's the most important book you think you've read over the last couple of years, whether it's finance and investing related or something else? Probably Lessons of History. I might have brought that up on probably my first or second appearance in a show. I think it's like 100 pages that kind of encompass like 5,000 years of human history and trying to draw a couple of big conclusions or just

big observations from it. I think it's a pretty important piece. Yeah. You did mention that one and I've read a piece of it and it is, it's pretty incredible. Awesome. Lynn, thank you so much. I really appreciate it. You, you continue to be signal among the noise, which is greatly appreciated. I know a lot of folks in the, in the audience, they subscribe to your research and they really enjoy your insights. So thanks so much for all the hard work and we'll definitely do this again in the future. I appreciate that. Thanks for having me. All right. Sounds good. Talk soon. Thanks so much for listening to today's episode. I really hope you enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking

to transition into a brand new job in the Bitcoin or crypto industry, we've got you covered. Head over to thecryptoacademy.io. My team and I have been working with the top HR teams in the industry to develop an intensive three-week training program with over 50 live events. We teach you exactly what you need to know to break into the industry, including live interview prep and resume review. Our students have been hired at over 75 of the world's best Bitcoin and crypto companies. Go to thecryptoacademy.io to learn more.

Again, that's thecryptoacademy.io. If you enjoyed today's episode, make sure you share it with your friends and I'll see you all for the next episode.