The Pomp Podcast - #1175 Raoul Pal On Bitcoin And The 2023 Financial Crisis

Episode Date: March 19, 2023

Raoul Pal is the co-founder & CEO of Real Vision, he is also the brilliant mind behind Global Macro Investor. In this conversation, we talk about the recent bank failures, macro environment, how the Fed can respond, why quantitative easing is coming back, and what will happen to bitcoin in that scenario. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. We have no advertisers on this podcast, so it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Raul Paul is the co-founder and CEO of Real Vision, and he's also the brilliant mind behind Global Macro Investor. In this conversation,

we talk about the recent bank failures, what's going on in the macro environment, how the Fed can respond, why he believes quantitative easing is coming back and fast, and what exactly will happen to Bitcoin in that scenario. I enjoyed this conversation as always, and I hope you guys enjoy it as well. Once you get done listening, jump on Twitter and let us know what you agree with, what you disagree with,

what you liked and what you didn't like. The feedback always makes it much better for us to create conversations in the future. Here is my conversation with Raul Paul. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business.

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All right, guys. I thought now in the middle of a crisis, it'd be a great moment to bring on the one and only Raul Paul. I thought maybe the place to start here is how did we arrive at the current financial crisis that we're experiencing? Can you take us back to 2020 and kind of explain how we got into this situation? Well, it's actually pretty contentious because nobody agrees on why or how. My view on all of this is that 2020, obviously, the world shut down. I remember you and I speaking just before it happened. And what happened is the global economy stopped entirely. And to stimulate it, as everybody was at home, they both undertook massive amounts of quantitative easing, but also

they did something different, which was fiscal stimulus direct handouts. So as we started pulling through the business cycle, as the world started reopening, then the inflation genie that comes from fiscal stimulus, which is very common, not from monetary stimulus. We'll come on to that later. That started appearing in the global economy. And the central bank started to hike rates. They started late. They didn't think it was going to come as big as it was. Then Russia invades Ukraine. And obviously, all commodity prices go through the roof. Supply chains get shattered. And that exacerbated the existing supply chains because people weren't back in the workforce, all of that stuff. Factories weren't ready. So we start with this big

inflationary pressure. So the Federal Reserve then decide to hike rates at the fastest rate of change in all recorded history. And eventually, that tends to lead to the kind of negative side of the business cycle. So that starts playing out. The forward-looking indicators start falling, suggesting we're going to go into recession, which everyone's been talking about. And a lot of people have been saying, well, what's going to break? If you raise rates this month, something's going to break. And eventually it was the banking system. And it's all a story as ever of too much leverage. So what's fascinating to me about this entire situation is that when the Fed began to hike interest rates, people called it out. They said, hey, they're going to keep doing this until

things break. Is the Federal Reserve and other central banks when they do this intentionally going to just move until something breaks, but they don't actually know what's going to break and they just figure that they'll deal with it later? Or do they have an understanding that, hey, the banking system will come under pressure later? Like, how aware are they of where the breaking will happen versus they just kind of say, look, we got to get rates up.

We know things will break and we'll just deal with it when they arrive. I don't think they're Machiavellian in we're going to break something. What they're trying to do is slow the business cycle down because that's how you get rid of inflation. Now, always at the bottom of every business cycle, whether it was 1990, 2000, 2001, 2008, 2020, always something breaks because of rates and a slowing economy. So that's just a function of what happens in a business cycle, much like there's a boom at the peak of the business cycle and usually kind of excess leverage and excess optimism.

So I don't think they try to break it. Now, it's coming out that, you know, obviously the Fed kind of knew that the regional banks weren't great. We also know the pension system's a problem. We also know there's a number of things that can be a problem in this system when you've got a globally indebted situation like we've got today. The world has never been this far in debt, and no country in world history has ever been as far in debt as the U.S. is as a percentage of GDP. So it's problematic, but they kind of, that's just a function of the business cycle. When you see what's going on with these banks, let's go right there, because I think that is probably the first time that something broke and people started to pay attention. As a friend told me, they said bodies keep floating to the surface in this entire situation.

Why are the banks under so much stress? Like what has happened inside of a bank that has put them in this position? OK, it's actually really simple. So there's two levels for what a bank is. it is the deposits that they have. That's what makes them a bank. And that's what they do with the deposits. They invest them. So in a normal course of events, banks make business by something called the steep yield curve. So they borrow at, let's say, 2% interest rates, i.e. they pay you 2% on your deposit, and they lend it out to the market at 5%. That's the yield curve. So that's

a longer term duration that they take the risk on. The issue is the yield curve got massively negative. In fact, the second most negative yield curve since 1980. So that means that the banks ordinarily would have to pay you 5% or 4% interest on your deposit, but then they invest it in the bond market in 20-year bonds or 10-year bonds or 30-year bonds, and they're actually getting less money. So they're losing money every day. So what they did is artificially change the yield curve. So they said, well, we're actually going to give you half a percent interest in your money, and then we can lend it out in the bond market at something different, at a higher rate. So they manufactured a steeper yield curve. The issue is, is people have the freedom to move their deposits.

So they can move their deposits out of this half a percent world into a 5% world of CDs, you know treasury direct money market funds so people are incentivized to move their deposits because the rate of interest is actually the highest we've seen for a long time so people are incentivized to do that that means deposits shrink from the system as they shrink you have to unwind the bets that you had at the long end the longer maturity bets now the problem is is those are all underwater because the fed raised rates so much so then they've got losses mark to market losses. But to collapse the deposit base, you have to realize those losses. Normally, you can just leave them on your book as mark-to-market accounts. You don't need to worry

about it. But in this case, you have to do something about it. Suddenly, poof, they're all got no money. So that's the real issue here. Now, there is a big shipwreck going on about what people should do about it, what the government should do about it, what the Federal Reserve should do that. People say, well, if people are getting scared now because they saw Silicon Valley Bank and Signature Bank go under, well, we should just guarantee deposits in the system. OK, sounds great. Problem is, it doesn't get rid of the actual issue. The actual issue is the rates are too damn high. So the banks can't make any money. So if they just guarantee the deposits, people still go to Treasury Direct and get their 4.5% or 5% yields. So it doesn't stop

it slows it down somewhat, but it's still a huge problem. The only answer here, the only answer that they have is to massively cut rates, and I think 300 basis points plus, and also undertake QE. The reason they have to undertake QE is the banks, particularly these regional banks, smaller and medium-sized banks, have another big issue on their balance sheet, and that is they are the largest lenders to the commercial real estate market. Now, if we go back to when we first spoke at the beginning of the pandemic, at that point, we were all going to the office. I was in New York when I saw you because I was going to the office and we had 60 odd people in our office at Real Vision. Now we've got three people in our office. We've downsized once and we still only have three

people in the office and we can't get out of our damn lease. And everybody's got the same issue. Nobody's going back to the office. The world has changed. We can all work remotely. So we used to do interviews like this in person. Now we do them over Zoom. So then we've got massive amounts of commercial real estate that are basically empty. And the numbers are a bit weird because you also need to realize that empty office space that's registered is entirely empty.

But actually, most people are trapped into leases where they've got 10% of their workforce going in. So as soon as those looses come up, people are going to tip those out too. So we've got a second bomb to hit these smaller banks, and that is this real estate market. And the real estate market is going to be illiquid, and chances are it's not going to get solved. I mean, I spoke to one of the biggest managers of commercial real estate for one of the biggest pension funds in the United States, and he's like, they're going to bulldoze over this stuff in the end because people are never going to use this.

Yes, we can repurpose some of it for residential property, but actually it's quite difficult from regulatory reasons and how you fit plumbing and all sorts of weird stuff. So he said, look, we can repurpose some of this stuff, but a lot of this stuff is just going to get bulldozed into the ground in the end. And that's in 10 years time, because there's nobody going to use that real estate. So somebody has to pay that. Now that would ordinarily mean, this is like the savings and loans crisis in the 1980s and 90s. It drags on and on and on. But we've changed the game here because we know the answer. The answer is what Mario Draghi did in Europe in 2013, 12. And I saw this firsthand. I was living in Spain. What Draghi did is say, we'll take all of the

shit on your balance sheet. We don't care what it is. Screwed up bits of paper, anything. We'll just lend against it to keep the banking system insolvent and then slow manage the decline of the banking system. That's the position we're going to have to be in. These small to regional banks will never recover regardless because they've got too much commercial real estate. Not all of them have, but the vast majority have. And then they've got the problem with the current problem, which is the deposits are leaving the system and their investments are underwater. So it's a big mess. So the short-term issue needs to get solved by cutting rates really fast, not backstopping deposits.

Doesn't help. And then we've got the bigger problem is what the hell do you do with all this junk on their balance sheets? And we know the answer. It was invented in 2008. It actually came out of Japan beforehand, is the central bank will put it on their balance sheet in the end. So there's a couple of things in here that I think are worth kind of unpacking.

Let's talk about what I'll call the immediate crisis, which is these bank runs that occurred But really, Silicon Valley Bank, I think, is probably the biggest victim of one of them. But there was a little bit at Silvergate and Signature, I think, that regulators are trying to say that there was concern there. But let's use Silicon Valley Bank as the example. One of the aspects of this that I don't think anyone really understood prior to when that occurred is this idea of a digital crisis. And so in a digital crisis, I don't have to go to the bank and stand in line and wait my turn to try to withdraw my money. I can get on my computer, click a button, and move my cash. And I can move that from my deposit account into a money market fund, into treasuries, some other type of asset, or I can move it from that bank to another bank.

And in this digital world, the velocity at which this can happen obviously led into Silicon Valley Bank having $42 billion of withdrawals in a 24-hour period, which is just an insane number to think about. Backstopping the deposits seems to be trying to address that problem. Is that how you read the backstopping of deposits and why they're making such a big kind of deal about stepping in with these different facilities? Yeah. So let's go back and understand why this increasingly rapid digital issue has evolved. It came out of Occupy Wall Street, where people said kind of enough is enough. They then started coalescing online. And we saw that in Wall Street bets, where people realized that together they could take on the system. And together that they could put the odds in their favor a bit more. So now, armed with the information of what I call the hive mind, which is this kind of mass of all of these smart people saying, hey, listen, we've got a problem here.

Let's do something about it. That also turns into a mob mentality. So it can happen so fast. So the whole world works at Twitter speed now. It doesn't work by going to the bank. You know, if you remember J.P. Morgan back in, I think it was 1909, slowed down a bank run by telling tellers to count the cash twice and do it really slowly. And that slows this kind of massive instant panic. But we're in a very, very different world where information spreads instantly and the hive mind can turn into a mob as soon as they sense fear.

So you have to stop that because that's the instantaneous death of banks. And that's a problem. We saw that instantaneous with FTX. We've seen it instantaneously in the crypto markets. So that is the new modus operandi. So the regulators need to deal with that somehow. So they can either throttle the requests or they can say there's no reason to do that. But it still doesn't get rid of the existing reason, which is the rates aren't high enough in the bank.

So you're still incentivized. And also it's the Streisand effect as well. It's kind of like nothing to see here tells people there's everything to see here. And part of that is realizing that, OK, if the outcome to some of this is printing of money. Well, then the money you hold in the bank is going to be worth less in the future. so people sense that even with a backstop of the banking system it's not going to solve everything it might just stop an instant flight but even that's not guaranteed what i find fascinating about this is uh if you spend a good amount of time on twitter you can very quickly feel when things are changing i think in early 2020 you know maybe by end of february early march it was

obvious that like, hey, something's up. And I think that a lot of people right now feel that way. And they're saying to themselves, the gravity of this situation is unlike something that they've seen in a long time, which that alone, I think, is important to pay attention to. You mentioned FTX. And I actually want to make a comparison here. And I'd love to kind of get your reaction to it. So we know that cryptocurrency companies, and let's use FTX specifically as the example, and banks have a lot of differences, right? There is FDIC insurance for, let's say, a Silicon Valley bank. There is no FDIC insurance for FTX.

We know that what appears to have happened at FTX is that they said they were doing one thing with the deposits and they did something else. And so obviously there's been huge fallout. Sam Beckman Freed has been arrested and there are many allegations of fraud and various other nefarious or malicious types of activities there. But at the end of the day, FTX took in customer deposits. They took those deposits, regardless of what they said they were doing with them, and they bought assets. Those assets did not go up in value or make money. They instead went down. There was unrealized and then eventually realized losses when the bank run happened. And so kind of a bank run exposed bad investments with customer deposits, right, in the most basic form of FTX.

If you now go and you look at a Silicon Valley bank, it kind of sort of looks like it's the same thing. Now, again, there's FDIC insurance. The government has stepped in to backstop the deposits. The bank appears to have said what they were going to do with the deposits is what they did. But they took in customer deposits. They bought assets. They're bad bets. They were unrealized losses.

And then a bank run caused those unrealized losses to become realized losses and kind of expose this. Is that a fair way to kind of look at the similarities and differences between an FTX and a Silicon Valley bank? The mechanism is the same, but there's a key difference. FTX is a brokerage. They're supposed to keep customer deposits separate, and they don't have a right to use yours. A bank is in the business of using your deposit to make bets. and back in 2020 the the treasury changed the rules and said you don't need mark to market accounting because the bond market had become illiquid and that was okay but it compounds this

issue once depositors leave so yes there is a comparison that you took a you took customer money and he made a bet. One is actually allowed. The other one's not allowed. There's also a lot of regulation about what kind of bets you can take. You know, we stopped the ability to have prop trading in banks. That went by the wayside a while ago. But FTX was essentially prop trading with customer money, which they shouldn't have done, which was kind of more what MF Global did when John Corzine essentially took brokerage deposits and bet it on the European bond market and blew up. And he shouldn't have done that.

He was allowed to do it at Goldman, but it's a different business. Brokerage, you don't get the rights to use the customer funds. In a bank, people don't realize is you are the product. And that's very different. So when we go and we look at these banks, you've mentioned that what is likely to happen or what you think will occur is Mario Draghi and the idea of the central bank coming and taking

the assets and putting on the central bank balance sheet. Before you explain how that works, this idea of hold to maturity, I think is quite interesting. Balaji Srinivasan has been calling it hide to maturity. But basically, it's an accounting mechanism that allows the banks to hold assets that have traded down or up in value and kind of market differently. Can you explain and hold to maturity and why that's so important to this whole thing? So we've seen the bond market goes up and down, as all assets do. But bonds are kind of different because they guarantee to pay you back. If it's a US Treasury bond, they can't go bust because they can create money.

So they guarantee to pay you back. So if a bond is trading $0.90, at the end of maturity, it'll mature at $100. So what the Treasury said is, OK, fine. They move around. You are in the business of long-term investing. So we'll assume you're going to hold it to the end. So therefore, you don't have to accept the volatility in your portfolio, which creates other problems with profitability and other issues. So they change the accounting rules. So that's the hold to maturity model. Mark to market model means that bank balance sheets go up and down, and their regulatory risk capital goes up and down,

depending what the bond market's doing every day now we would have blown up the banks earlier if they had mark to market accounting which is every day you mark your books because yields went up too far and the fed had essentially told them they're not going to raise rates so they all got into the bond market it's their job it's what they do they provide essentially provide liquidity to the treasury to buy bonds and they were massively offside and that happens from time of time. It's a function of financial markets. But the hold to maturity allows you to paper over the cracks and forget you got the bet wrong. Mark to market accounting means you have to take the bet as it happens and the losses. But what happened in this situation is the depositors leaving means

you have to collapse this side because you have leverage requirements. And therefore, this side, suddenly you've got, oh, my God, we've got these huge losses. So it turns hold to maturity into mark-to-market in seconds. And that's a problem. So one of the aspects of this that I find fascinating is that while the banks were taking those customer deposits and they were buying longer duration assets, they obviously were seeking higher yield. We were in this zero interest rate environment. I have seen people immediately point to and say, well, the reason why they were doing that, regardless of risk management or hedging or any of the other kind of knock-on effects, the reason why they were buying those assets is because the Federal

Reserve's forward guidance was that interest rates were still going to remain low out 6, 12, 18, 24 months. And so the Federal Reserve ended up changing their mind in response to the economic environment. And therefore, they went ahead and they jacked up interest rates. And that kind of left the banks holding the bag. Now, I think that is a sympathetic view towards the Fed. I think the critical view of the Fed, people would argue, is, oh, the Fed said one thing and they did another the fed lied right it's kind of the most extreme version of that how do you evaluate the same situation right we know what has happened so far but we have kind of these sympathetic views and then we have these critical views like is one or the other right and does it

even matter or should we just focus on what's to come in the future at every bank there's a bunch of people who run the capital of the bank it's their fucking job to make the right risk and they got it wrong. Not because the Fed told them anything. Their job is to look forward in the business cycle and make a decision. Do they think rates are going up or not? What really happened is what nobody had on their bingo card was Russia invading Ukraine. That's what caused the next big leg up in the bond market. So 10-year bond yields, I'm just looking at my chart now, they were chilling at about 1.75%. Russia invades Ukraine and they hit 4.5%, 10-year bonds. That was the thing that nobody had. And that was the thing that broke

the banks, because they were like, we're pretty comfortable. Maybe bond yields move 100 basis points. That's all fine. We've got some holds of maturity accounting. No problem. Russia invades Ukraine. Massive supply shock. Suddenly, bond yields explode. The Federal Reserve have to fight it. Everyone was offside. And it just happens. But the question I would say is, and this is a contentious one, is did the Fed have any business raising rates as much as they did? Or would the economy have slowed down anyway? Because inflation ate into everybody's pocket books. Companies started to see slowdown in growth anyway. And the supply chains were starting to ease up. So inflation probably would have unwound significantly. So should the Fed be at the kind

level of rates that they are at? Or did they screw that part up? And my view, which is opposite to most people, is I don't think they should ever have raised rates this far. It's stupid. Other people say, well, they shouldn't have kept rates this low. I don't know, because the economy, trend rate of growth in the economy is like 1.5%, 1.75%. Things are really slow. We're straddled with debts. And we've seen every time we raise rates, the economy collapses. And it's not now just a general recession. We expose some big ugly, which is some leverage under the rug. So one of the ideas that I'm fascinated by, and I don't necessarily have fully formed opinion on this yet, but it's a topic that I call financial warfare. And what I mean by financial warfare is

let's talk Russia-Ukraine first, right? Is Russia invading Ukraine, elicited financial warfare from the United States, we went ahead along with NATO and other countries and sanctioned in what is the most coordinated financial sanction kind of regime of any one major country. And for most people, I think they would argue it had great benefit. Some people might argue that it wasn't as effective as we wanted, but either way, we did it. But also, you just mentioned that Russia's invasion of Ukraine essentially created great weakness in the American financial system. It exposed a lot of these banks kind of left them holding the bag it surprised the federal reserve you know all these different components is that the new normal now that we just should see these countries all using

the financial weapons to go after each other not just uh kind of guns bombs soldiers etc yeah for sure everybody knows including the u.s i mean i've spoken to people at the department of defense everyone knows that the issue that the u.s has got is debt and so they know that they've got an angry population they've got debt and you can upset the apple cart pretty quick so i think russia kind of knew some of the economic outcomes and then in retaliation what we did was ridiculous because we also took i mean fine have sanctions no problem do all the things you want to do but taking people's private property without due process was outrageous taking essentially neutralizing the reserves that they have in dollars sows the seeds of demise of the dollar

based system now it's a long way off because 87 percent of all world trade is still in dollars but when you tell somebody your dollars that you've put your country savings in are now not accessible and by the way your private property is going to be stolen from you okay that's not good too. Now, we've also got another geopolitical financial warfare that we know could blow up at any point. And that's obviously China and Taiwan. And the reason why that's so important is the entire world has one big bottleneck. Well, energy is one bottleneck. Silicon chips are another. And Taiwan is like the Saudi Arabia of silicon chips. And he who controls the chips controls the flow of data. And so that's another one. And so I think we've seen from online

activity from nefarious states that they understand that the fabric of society in a democracy in a situation like this is more fragile than in an authoritarian state because the state can clamp down on it. So it's harder for us to break Russian society. In fact, it's almost impossible as Napoleon, Hitler, and everybody else has tried to find. And it's really hard to break Chinese society, but it's much easier to break US, UK, or European society. So there's a psychological warfare, financial warfare, physical warfare, and a cyber warfare all going on at the same time. So a lot of folks, when they hear financial warfare, they will think internationally. But I then want to bring it home domestically. I would argue that a version of financial warfare,

although it wasn't fought by states, was the whole meme stocks, GameStop, the Reddit crowd, et cetera. These are people who came together. They were able to coordinate resources and they were basically able to affect change in the market to express their view. Now, that view may be one of optimism for a company. It may also be one of potential destruction of a company, right? And so we saw this kind of weaponization of retail investors with their money. But I saw something over the weekend that made me pause, and it was the first time I'd ever seen this, and it made me say to myself, we are headed towards a world where there is digital crisis and financial warfare domestically that we must be aware of. And it was a tweet from an individual. It had about 10,000 likes on it, so it's a quite popular tweet. And he basically said, referencing the potential arrest of the former President Trump, he said,

wouldn't it be a shame if all of the Trump supporters went on Monday and conducted a bank run? And again, forget for a second who they're talking about in terms of the presidential candidate. Forget the politics. But this idea that a group of individuals, I don't care if it's for politics, if it's for religious reasons, if it's for some sort of social cause, whatever, but could recognize that the American banking system or the financial economy could be at a point of weakness and then essentially use their own capital as individual citizens to weaponize it, that scares the hell out of them. We are not prepared for shit like this, and we'll come to AI later. The classic way would have been to vote or protest in the street,

But as you mentioned before, the world works at Twitter speed. You can create false information or high quality information instantaneously, coalesce enormous numbers of people at the same time. And we're seeing this with this banking situation now. And we also know that there is a people versus the state. I mean, what Balaji is doing is trying to get people to understand it's not about a million dollar bet or Bitcoin going to a million dollars. It's about, listen, people, we can do something about this. It's incredibly empowering when it's the hive mind. So in Balaji's view is, listen, the fractional reserve banking system is not good. We have a parallel system that's been built. Now's the time to use the parallel system. Totally agree.

But you can also get anybody to do anything online. And we saw it over COVID, the narratives, the false narratives, the mistaken narratives, the narratives that were deemed to be false and then proved to be true. I mean, it's a mess. And humanity is just playing out on Twitter and Reddit and TikTok and everywhere else in a way that we can't comprehend as a society. How fast, what is the unintended consequences? What happens if they get something wrong? you know you'd argue that the the insurrection and the storming of of um the government buildings was all part of that where suddenly people got deluded and thinking this was the right thing to do and suddenly before you know it the hive mind turns into a flash mob there's nothing wrong with having a hive mind that's based on conservative ideals and etc and they're trying to all put

together ideas of how to move forward how to move the economy how to move their own thesis of the world forward but when it turns into a mob then it becomes a real problem and it's too fast for anybody to deal with it's not like the police can just show up and say hey guys can you go home this is dangerous it happens as you said 42 billion dollars can disappear overnight and we don't know the outcomes of that and if people realize they have this power what is the backlash from the state as well because it's good to have this power but it's also power is dangerous and And then the state are going to feel threatened and they're going to try and get more power, which is one of the big battles we've all been facing is state overreach.

How does this all play out? I mean, one of the ways it's going to play out, I think people are dead right in the financial markets is eventually we get rid of all of the smaller banks. We end up at bigger banks and eventually they become conduits for the Federal Reserve via central bank digital currencies. The US is going to be last in that equation. the Europeans, they're going to be much sooner. We're already seeing it rolling out in many, many places. And that is a way of kind of this financial weaponry between the state and the

people, which is concerning. Now, there's upsides to central bank digital currencies, too. I think they do a great job in certain things and terrifying in others. And this battle will mean that the state takes more power than it should do in a way to keep itself relevant. So is your base case right now that these individual banks in the private sector, the smaller ones, fail, get consolidated, kind of disappear over time? Everyone gets concentrated into the major banks. Those major banks essentially get nationalized and then are used as part of the central bank digital currency in the Federal Reserve System? Or is it more of, hey, there's only four or five of you major banks, and if you want to kind of play with us, then you just are going to execute on our plan or our technology,

but the government doesn't actually have to nationalize them in order to be able to do it. Yeah. I think it's the latter. I think the latter is we're the regulators. You do what we say, you can get rich, but we will, we will make you dance. And it's as simple as that. And that's the end of autonomy. And we're seeing that blurring of autonomy between the federal reserve and the treasury as well. That happened in 2020.

So all of this is becoming a, the financial construct is becoming a political construct as well. And again, you know, this is one of the reasons, and we'll get into crypto I'm sure later, why crypto is hugely powerful in positions like this. It's a way out. It's a life raft, as I've called it. The last thing that I want to talk about on the macro side is the Federal Reserve at the end of 2021, kind of the top of the market. They said, oh, you know, this is hot from an inflation standpoint. we need to go ahead and tighten financial conditions. And so we're going to start to execute on that. I don't think a lot of people believe them or was listening at first. And so it definitely caught, you know, many people by surprise. But if we now look maybe, you know,

15 to 18 months later, the Federal Reserve has taken interest rates from zero to 4.5% or so. And they have dumped about a trillion dollars off of the Fed's balance sheet. But they never got the official cpi reading below six percent and if we do head back towards some sort of quantitative easing loose monetary policy regime is that a major problem like they basically threw as much as they could at this thing and they never got it below six percent yet that seems wildly concerned okay this is the problem is there's too many non-macro people talking about macro and just you know i've been in this business for 32 years and so many new people have come into the market. They check a chart of 1970, say that's going to repeat. They then make wild claims

that monetary policy is inflationary and the cost of goods goes up because of monetary policy. That doesn't seem to be the case. It inflates asset prices. They then look immediately at 2008 and say, see, this is what's going to happen. And they don't do the work on all of this. And the work on of this is, firstly, there is a clear path that has been in existence for the last 60 years of the lags and leads of economic indicators. So, for example, currently, the China credit impulse leads by, I'm just looking at my chart here, about 17 months. And then looking forwards, we've stuff got like new orders, less inventories. That leads by about three or four months. But when I go back and see what lags, well, CPI lags by at least six months,

wages by 13 months, and shelter by 16 months. If you look at the trueflation, which is this on-chain inflation metric, they're showing inflation in the US is currently 4.1%. My forward-looking indicators based on all of the work on the business cycle, and it's not really voodoo, it's pretty straightforward, that stuff is showing we get to 2% or even below by the summer. My work suggests we've got a decent chance that inflation goes negative. What we've got is a bunch of people on Twitter looking at inflation today and saying, oh, my God, it's 6%. But in fact, actual real-time inflation is 4.1%, and forward-looking inflation is probably below 2%. And this is what the Fed gets wrong. It always tightens for the public narrative. And the public narrative is rates, inflation is too high. If you look at the commodity prices, almost every single

one of them is now down year on year. They're deflating. Some of them, like NatGas, are down 75%, contrary to the public doom of which they were saying, well, the Europeans are going to be chipping their frozen bodies off the streets in the winter because there's no gas. The opposite happened. So people just think that this inflation that they see today is the future, and it's wrong. It's wrong every time. I mean, I've studied every single inflation episode, the speed of which it comes down. It's based also on a hypothesis that, OK, the world has changed, and we're deglobalizing, and that's inflationary. OK, well, let's check that fact. The fact is that global trade has been trading sideways since 2008. So it hasn't contracted, and it hasn't

grown. Then there's a kind of nonsense argument at the BIS that, oh, an old population, they're suddenly inflationary because they spend money. And that's utter garbage because anybody who's had their parents retire realizes you're faced with, I've got a fixed pool of assets and an unknown longevity of life. If I run out of my money when I'm 85 years old, that's the worst thing that could possibly happen. So all they do is they collapse their spending. There is no inflation spending boom to come out of retired baby boomers. They're terrified of running out of money when they're older. So I don't see that argument as well. Then there's the, well, there's a structural supply issue with commodities and therefore commodities will go up. Now, that's

true. But commodity inflation is not inflation. Shelter and wages are. They're the more structural side of inflation. And commodity inflation is cyclical. So will we have inflation rising again in the next upside of the business cycle, maybe 2025, 2026, for sure. Is it going to exceed what we've just seen? Almost zero chance, because we would have to see a rate of change increase higher than we just had with the Russian invasion of Ukraine and the supply chain shocks post pandemic. So the probability is we will always see inflation pick up in the cycle, but it's nowhere near what people think. Trend rate of GDP growth has been falling for 60 years now. If GDP is measured by productivity growth, population growth, and debt growth,

the debt growth of the equation has basically stopped. Debt growth is just there to pay off existing interest payments. Productivity growth, that's been declining because of an aging population and will continue to do so until technology kicks in fully. And population growth, will that stop too? A, because the world has now stopped producing as many people and most countries have closed their borders somewhat. So we've got falling GDP growth. We've got a demographic that doesn't want to spend money. We have an overly indebted system. And I think the probability of creating inflation like we've just seen is a false narrative. Creating asset inflation from debasing currency, yes, that's likely to happen. So I think the Federal Reserve

to call victory so Jay Powell can put himself on the front cover of a book and hero worship his God, Paul Volcker, is very simple. He just wants to see inflation fall below Fed funds rate. Now, is he going to get that chance before he has to cut? I don't know. But current inflation is below Fed funds rate if you believe that true inflation forecast, which is like hundreds of thousands of real time prices on chain and totally accessible and understandable. So I think they've got to that point of super tight monetary policy. And also another thing people don't realize is we've got two other big things happening on the inflation front. One is a banking crisis is about the single biggest deflationary event you could possibly have because it stops banks lending.

It is also a indicator of massive deflationary pressure because you've got a debt deflation. So that is underway. It would not be happening otherwise. That's why the savings and loan crisis happened as well, came out of the big inflation on the other side as rates had gone up too far and it broke the banking system. Additionally, you've got to throw in the nuclear bomb that we just set off with AI. gpt4 is easily the most deflationary global event the world has ever seen in the shortest period of time and i just do not see how you can generate inflation i don't think a lot of these tech jobs

or knowledge economy jobs are ever coming back it's kind of like car workers from pittsburgh i mean steel workers from pittsburgh car workers in detroit or steel workers in sheffield or coal miners in england their jobs never came back and i just don't think that's going to happen i think there's hundreds of thousands of accountants lawyers artists video editors producers everything i mean sorry for anybody watching this to realize is the world has changed so fast that we can't even get our heads around it why does the federal reserve continue to use the official cpi number versus more of these real-time data points like a Truflation, even if they were calculating, let's say, shelter

rather than kind of doing the antiquated call people up and ask them what they could rent their home for. They could just maybe use one of the internet services that has hundreds of millions of data points in real time. Like, why are they still using the old data set if it is so clear that the more accurate, kind of more modern, more real-time data sets or telling them something that may be different than the official number?

I kind of guess it's a political process. So, you know, one of the things the Biden administration wants is inflation to be lower so they could say, we beat inflation for you. Don't we manage an economy well? You know, all of this kind of stuff. So, and he'll say, you know, this came out of a pandemic and they can blame it on the Republicans, whatever it is, right? So I think it's actually a political process.

and we're seeing that political process playing out with Liz Warren who's going after as are others going after Jay Powell saying so what you want to do is get inflation down we get it but you want to get people out of jobs well unfortunately that's how you slow down an economy and that whole process I think is a political process as opposed to an economic process I don't believe the thousand PhDs at the Fed are that stupid I mean anybody with a you know excel spreadsheet can see the forward-looking data and they know it's there so the fed know it too but i think that also they don't mind in bringing interest rates lower than it should do so they try to absolutely kill inflation to bring interest rates right down because then they can service the

debt and that's a bigger issue is how to service the debt the interest payments on the debt both at the private sector level and the public level. So right now, the US economy, if you take the private sector debts and the public debts, are about 220% of GDP. GDP grows at about 1 and 3 quarter percent a year. So if interest rates, let's assume just for easy maths, let's easy maths say the economy grows at 2% a year. If interest rates grow at 2%, 2%, well, the private sector alone, because GDP is all the activity in the economy that pays the interest. So if GDP is at 2% and interest rates are at 2%, then the private sector eats 100% of GDP growth. But the government also needs to fund itself at 2%. And that would take away from

GDP. That's what debt does. So what happens is, and I've worked this out mathematically, is that basically the Fed monetizes anything in excess of GDP growth. OK, fine. So as GDP has grown and debt has grown, that difference was about $9 trillion, which is, lo and behold, roughly what the balance sheet was. But when you take out the pandemic payments, you can see that actually what is happening is the Federal Reserve are issuing new debt to pay the interest on the old debt, and then putting it on the balance sheet. And it happens three and a half years later. And there's some beautiful charts I discovered, I built myself with my colleague Julian Bittle, that show that three and a half years later, the Federal Reserve monetized the

interest payments. So why is that? Well, that's to do with the whole world resetting rates at zero in 2009 so everybody starts at zero everybody refied then and we've got most people have some long-term debt and at least 60 percent of all debt is in this two to five year sector which is three and a half years magically and that every three and a half years is the peak of the business cycle it's also the bitcoin halving cycle they're all correlated to the same thing which is this debt cycle. And so when you need to stop paying the interest, the Federal Reserve have to get interest rates down. Because if not, you keep compounding negative GDP. Because the interest payments, if the private sector is paying 4%, the state's paying 4%, well, that's 8% of GDP. And GDP is

growing at 2%. Well, that's negative 6% of GDP growth. And that just keeps compounding. These numbers don't change. You cannot change this trend rate of GDP growth until you finally get a productivity miracle, which I think is underway, but it's going to take another 10 years to get there. So it's a really complicated process of both politics, debt management, and then kind of hiding it from everybody what they're actually doing. One of the questions that I've gotten probably the most over the last couple of weeks is the Federal Reserve was dropping $1 trillion dollars off their balance sheet over the last 12 months and then the week that silicon valley bank collapsed and kind of ended the next week the balance sheet increased by 300 billion dollars

or so it was like 297 billion dollars is that quantitative easing is that back to loose monetary policy is that something else this makes me laugh every time there's always somebody saying well actually it's not quite quantitative easing or actually quantitative easing doesn't quite make it into the markets and blah, blah, blah, blah, blah, blah. Any increase in the central bank balance sheet is debasement of the underlying currency. The S&P 500 is 97.5% correlated to the Fed balance sheet. Actually, even better, the G5 central bank balance sheets. It's 97.5% correlated. If you divide it, the S&P, by the Fed balance sheet, there is zero growth in the equity market it looks just like the european equity market so all of this is is optics

but it's all one sense of easing is just forget the term is are they printing money or not and then there's a lot of well actually people on twitter will say it's not printing money because it doesn't do this doesn't do that does it debase the currency has it got an observable effect on asset prices, because when you debase a currency, you debase the denominator, the price of assets optically rises. They don't actually rise. It's because you've lowered that. That is measurable every time within ridiculous statistical significance. But yet people are arguing over the stupid terminology idea. The Fed balance sheet went up. Therefore, equities go up. When we see $300 billion in a week, one of the things that jumped to mind immediately for me,

and I think it was quite shocking, is it took us 12 months to get a trillion dollars off the balance sheet, and we basically gave back a third of it in a week. Should we continue to expect the central bank's balance sheet to expand and eventually $10 trillion, $15 trillion, $20 trillion and just kind of continue going up over the coming years? Yes, because they have to pay the interest on the debt. So you pay the interest on the debt that keeps increasing the balance sheet. So it'll go up another couple of trillion over the next 18 months or so. But if you get any shock in the middle, it actually boosts it more because they need to do extra, which is why the pandemic tacked on another two and a half, three trillion on the balance sheet. So maybe this will

tack on another trillion on the balance sheet, $2 trillion. We don't know. We don't know yet. We need to see. But the commercial real estate market on these smaller banks is about $2 trillion. Now, obviously, not the whole lot's insolvent, blah, blah, blah. But easy to assume there's another trillion dollars tacked on here, plus the payment of the interest payments. So it wouldn't surprise me if we don't see the balance sheet at $12 trillion in two years' time. So it just keeps going. There's no way to stop it. You can't reduce the balance sheet, which is increasing the value of the denominator, without asset prices optically going down. People say, oh, the Federal Reserve, they want to kill this asset price inflation.

There is no asset price inflation. It's the denominator going up and down. so and even PEs are a function of this and I can come on to that later so if they lower the value of the assets shit blows up duh it's collateral right in a debt system you have interest payments and you have the collateral if you lower the value of the collateral guess what this part blows up And so they can't do it because the U.S. is 220% of GDP in debt at that level, then add financial debt and it's over 350% of GDP. So you cannot allow for the collateral to go under. It can't fall too much. You know, if the collateral fell 50% this time around, the meaningful collateral of the system, stuff like the S&P 500, equity stuff or real estate or stuff like that, they can't allow it because the whole system breaks.

So what they need to do is they can bring it down somewhat to slow down the economy. It tightens credit standards, but then they immediately have to reverse and go the other way and they have to go further than they've been. And it's just an endless stair step of them doing this. And there's no way around it. You mentioned earlier that inflation is 4% or so with true inflation. You see forward looking is below 2%, potentially even negative. I think somebody like Barry Sternlich, he thinks that it'll be negative over the summer. Kathy Wood, very worried about deflation. In light of what is going on with the banking crisis, what does the Federal Reserve do here? if they step in and they shore up these banks, they continue to do what it appears that they're

doing. Does that create the inflationary pressures? And would you expect us to go kind of back up? Or do you think asset prices respond by going back up, but the actual kind of consumer inflation would likely just go sideways or potentially even continue in the trend that it is and continue dropping? Yeah, I think my view is the Federal Reserve probably do 25 basis points this time around because they want to show this relationship of, hey, we got Fed funds above inflation so you can forget about inflation expectations. And the next move from the Federal Reserve will be 100 basis points emergency cut. And it might even happen as soon as June. Just depends what happens to the banks over the next few weeks. And then they just keep cutting and

QE comes back. So that is why the equity market has not been falling. It's something I've been talking about for a while is equity market is forward looking. The Nasdaq is more forward looking than the S&P. The Nasdaq already priced in a recession and it priced it in by October of last year. And it's forward looking. So it's starting to say, well, liquidity is coming back into the system. Crypto is even more forward looking. And that's why a lot of crypto bottomed in June. The rest bottomed in October. So that's forward looking. So asset prices will go up because you're lowering the value of the denominator. So optically, it goes up. The only two that actually outperform the Fed balance sheet is crypto and tech, because they've got

secular trends behind them. Does it bring inflation? OK, so let's say the Federal Reserve cut 300 basis points, do quantitative easing to take some of the shit off the balance sheets of the smaller banks and help the larger banks. Well, are they going to increase the lending or not? There's almost zero chance. We've seen this exact playbook in Europe. It's the same thing. So Europe 2012 is exactly the US in 2023. And what happens is they stop lending and they'll never lend again. And so that's the end of that story. And so if there's less lending available, then inflation is not available you've also got as i said the massive we've got unemployment to come rents to come down wages to come down it's all part of the that flow of time how this happens

so the probability is look if they do all of this stuff in 18 months time we're dealing in the inflation numbers because of this lag with rents coming down and they're going to come down a lot because we've seen it from the zillow stuff wages also so in 18 months time we're still going to see massive disinflationary pressures, even though commodity prices might have bottomed and started rising. And that tends to be why the Federal Reserve and the central banks end up doing loose monetary policy for at least two years after the bottom of the business cycle, because you get these lagging effects of unemployment and rents. And unemployment is so political that they have to show that they're doing something, because in the middle

of this is every two years in the US is this political cycle as well. So it's a complicated mess. I don't think it's inflationary, but I do think asset prices rise significantly. How fast, I think, is the next big question that people will have when it comes to asset prices. Obviously, Balaji Srinivasan very publicly coming out and saying he believes that Bitcoin will hit $1 million in the next 90 days. Not just saying it, though. Also, I think he's up to $2 million that he's bet in this public manner that it's going to happen. I think there may be some confusion or debate in terms of whether he is claiming that there is going to be hyperinflation or there is simply going to be kind of an awakening globally of Bitcoin's value proposition,

which would then drive the price higher. How do you look at how quickly asset prices could rally on something like this? And then what is your current view of Bitcoin itself? So generally speaking, over time, the observable relationship, because it's a 97.5% correlation between the G5 central bank balance sheets and the S&P 500, is every time it grows by 1% or shrinks by 1%, the equity market moves by 2%. So we've got a clear relationship. And so I don't know, we just increased the balance sheet by whatever it was, 5%, let's say. So therefore, equity markets go up 10%. That's roughly how it works.

However, NASDAQ goes up at a multiplier of about 1.4 times the S&P because it's got a technological uptrend. And it's probably accelerating as AI, robotics, and all of these things come in. And crypto has got a much bigger multiplier. So let's go back to the last time we saw this, which was December 21st, 2018. The Fed just stopped and said, right, we're not going to increase the balance sheet. We're not going to raise rates any further, not going to decrease the balance sheet, not going to raise rates any further. Over the next six months, crypto was up 300 percent. So Bitcoin did 300 and something percent.

Then exponential age stocks, which are the really kind of growthy arc style stocks. They were up about 25, no, sorry, 30%. The NASDAQ was about 22%, something of that magnitude. The S&P was about 15%. And so we can see that relationship happens. So my view here is I got into Bitcoin. So assets will go up according to the balance sheet. I think the balance sheet goes up significantly.

30% plus over time. Therefore, the equity market can go up 60% in the S&P, maybe more. So new all-time highs in the next 12 months or so, maybe a bit longer. NASDAQ gets there sooner because of its relationship. Crypto moves very fast. I got into Bitcoin in 2013 because I lived the European banking crisis and obviously the financial crisis. But the European banking crisis was very similar to what's happening now the local bank in the village that i went in went under and took everybody's deposits they bailed them in um we had a run on deposits liquidity issues they were invested in things that were illiquid which was real estate real estate market had come under pressure very very similar too many small banks in europe um and so

draggy backstop the whole lot. That whole situation. I've forgotten where I was going with this now. The banks are why you got into Bitcoin. Yeah. So I saw this and I realized that there was no trust in the financial system. I nobody knew who owned what when Lehman went under and they were terrified of others going under because of the same issue, because the daisy chains of collateral everywhere in this market. And then when you realize in a bank, you don't actually own your money. And people are now realizing that. And the treasurer and the Fed are like, well, we'll just pretend that's OK. That drives people into this parallel financial system. I got into Bitcoin in 2013 for exactly this reason and have been an active participant

of the market ever since. And so I think what Balaji is saying is, listen, guys, here's the life raft. You can take it. Now, Bitcoin's relationship with the Fed balance sheet is really interesting because it goes up exponentially. So if I look at it versus M2 year on year or the Fed balance sheet year on year, it massively outperforms in the bull markets and then pulls back when the liquidity comes out of the system again. But it keeps going up. So, yes, I think there is a potential setup here for Bitcoin and the whole crypto market, actually, to be shockingly strong. More like 2013 than 2019. 2019, we had that big correction, and that was partly due to this G5 central bank balance sheets.

Some of them were contracting over that period of time, and it pulled back the crypto market. This time around, I don't think we're going to see that. I think we're going to see all of the central banks falling into place because there's banking issues both in Europe and the US and China has its own issues so that they've all got the same issue, which is debt. They're all going to have to stimulate. So I think it's more likely to play out like 2013, which is very squeezy than sideways consolidation, then very squeezy, because, you know, every time we go through these cycles, more and more people understand what the benefit is of Bitcoin. And now we've got 300 million people that have used Bitcoin and other crypto. The next time around, it'll be a billion people or 600 million people or whatever the number is. And those people will have been awoken to the fact that there is another way out of this. Now, the issue is, as we all know, is Bitcoin is extremely volatile.

So it's very hard to think of it in terms of, well, it's a wealth preservation asset because people's mind time horizon is too short. But if you hold it long enough, it does extremely well. It does better than the Fed balance sheet, better than any other asset in existence. But people get freaked out by the up and down move. But if they just zoomed out, they see it does a phenomenal job at opting out of the financial system over time. But, you know, maybe you need to keep liquidity and other stuff for when you need it, as opposed to the crypto cycle, which can be quite vicious. When people hear that Bitcoin could go up aggressively in price, there's a cohort of those individuals who then jump and say, well, the government may not want that. The government may try to stop that from happening.

People will point to politics. Some people will point, though, to capital controls that usually happen when there is some sort of high inflation or hyperinflationary event and everyone is trying to get out of a currency. Those capital controls get put in place and basically try to lock in the citizens. We've seen that literally happen the last two or three years in various countries around the world. Is that what your expectation would be as well, is that there would be some sort of capital control, whether directly or indirectly, that people wouldn't be able to get out into crypto? Or do you think that that is more so just Twitter fodder and not necessarily a concern? So if we get back to our conversation earlier about bank runs, and we said, you know, you either kind of guarantee the system or you try and throttle it. My view is the U.S. understands crypto, understands that it is the answer to the future.

but they need to throttle it because if you create the bank run on the entire system then the unintended consequences are simply gigantic that's kind of everybody losing their jobs the entire system breaking apart the entire system of the united states has been the world leader or europe and all of this falls apart they don't want that but i think they understand that there is a future here but there's a battle to get people across because some people can't stand it they don't like the idea of it other people understand it but don't want it to happen too fast. And I get that. So I think that there will be an ongoing war. And if Balaji gets across what he wants to do, which is get more people to move out of the system into the Bitcoin market,

we'll see the pushback coming. But it happens very quickly because the mob is pretty fast, as we know. And the mob with a hive mind who's deciding, let's go to the parallel financial system, they can move really fast. So the government's going to try and stop it. But But, you know, they do have, you know, as Punk 6529 talks about, there is a freedom to transact here. You need the ability to do that. And if they go against that, then they're really trying to change the political spectrum entirely. And I think that the pushback would be so gigantic. But it is going to be a fight. But within this fight is a bigger world. The U.S. has been down this route before. it tends to get self-protectory at various points so after the the after nixon left the gold standard

the u.s essentially had capital controls and foreigners wanted dollars and they couldn't get them and the flow of dollars and foreign exchange was restricted by the u.s because they were protective. So what happened was England came up and went, well, we're going to have the FX market here because we don't have the same regulatory issues. We will create regulation to allow it to come. And it became the biggest market on earth. They then innovated again and basically invented the euro dollar market. And London was the center of the euro dollar market. The euro dollars are all dollars that are traded that are outside the US system. And it's gigantic. It's much bigger than the US system itself. And that came out of London. And then it spread to global

centers. But London was always the epicenter. Then after that came the derivative market. The US had its listed derivatives. And it didn't want the banks to get involved with structured products and OTC derivatives and all of this stuff. The swaps market, the whole lot all went to London because London said, we'll change the regulation to get this. So London was the largest financial center in the world by a big margin for a long time then comes brexit and then comes basel 3 the u.s cheats on basel 3 and says we're only going to let the big banks have to be um have to be regulated in this way so they can't fail but the small banks they can do what they want guess what suddenly it blows up europeans force basel 3 on everybody as did the uk

so they don't have some of the same issues they've got different issues obviously so that whole mechanism plus brexit meant that the capital the world's capital markets went back to new york and they were and they they've been in new york for the last 10 years or so but the uk is looking like it wants to regulate crypto in a very sensible way they understand regulatory arbitrage better than any country on earth. You see, once the U.S. screws up and misses an opportunity, the U.K. has the rule of law, the language, the ability for Americans to go and live and work there. It's a global capital center. It's connected with Singapore, the Cayman Islands, Hong Kong, the UAE, all of the places that matter. It has a broader relationship on a

on a less aggressive policy. So my guess is, we don't know whether this government will last in the UK or not. But if it does, the UK will probably eat the US's lunch. And we'll see Coinbase, we'll see Kraken, we'll see Circle, we'll see everybody relocation to the UK, because it's an easy, easy change to have. And don't forget, this is a trillion dollar industry. It's $3 trillion at peak. What's it going to be at next peak? Five, 10 trillion, probably. So of course the UK wants it because it's lost relevancy. So the US has to be very careful what it does here. I don't think it stops the people per se getting involved. I think it tries to regulate that. That's all well and good. I think it's trying to stop the infrastructure layer being built and becoming

too powerful, too decentralized. So they can regulate Coinbase and maybe they can regulate circle, but they don't want too many moving parts in all of this. But if that's the case, if they're too heavy handed in a global world, that capital is going to flow elsewhere. And then every pension fund, sovereign wealth fund, hedge fund, anybody else wanting to do business in cryptocurrencies will go to London and they'll go to Singapore, they'll go to the UAE, they'll go to Hong Kong. That's the way the world works. Should the United States Federal Reserve by Bitcoin today and put it into those reserves as a hedge against all of the chaos, all of the uncertainty, all of the problems that we talked about? Or do you think it is either too early

or not prudent for them to do that right now? They don't need to hold reserves. They're the world's reserve currency. They just print dollars and build gunships and space rockets. So no, they don't need this. Do other countries do this? For sure. We've seen it. We've seen it. And we know the Middle East and others have woken up to this because of what happened to the Russian dollar reserves. So other countries may be incentivized to do it, but it's a very volatile asset. So really, and I've talked about this in the past, sovereign wealth funds, it fits better in than it fits in bank treasuries because it's just in central bank treasuries because it's so volatile. So I don't think the US does it. More contentious question is, who owns all of that

Satoshi Nakamoto stuff? My theory has been from day one that this was a combination of the GCHQ in the UK and the NSA in the US that built this. I spoke to the Department of Defense several times over the years, and they don't know where Bitcoin came from. But they kind of are open to the idea that it came as a parallel system that was built as a just-in-case by state actors themselves, knowing that it's decentralized, but if they can play a central role in it, it's okay. So I don't know, maybe that's the stake that they already own. Who knows?

It's very interesting to think about what people perceive to happen here in the future, especially in the coming year or so. What are you doing differently in your portfolio? Are you selling certain types of assets? Are you buying certain types of assets? Are you trying to hold certain things based on your worldview kind of coming into more of this crisis? So at a top level macro position, I haven't cashed out of a single penny of crypto.

And all I've done is use the cycle when the liquidity cycle hits the long term uptrend that started happening in June of last year to just add to my positions. That's all I've done. Now, there are some trading opportunities around like bonds, because I think bond yields go from 4% to 1.5%. So can you make money? Will you make more money in crypto? For sure. But people don't want the risk. And people are some dicks online about the kind of risk you have to run to do it. But yes, there's traditional answers. You could buy gold. You can buy bonds. You can probably buy technology stocks. Or you can buy crypto. and you skin the cat any way you want it in terms of what risk profile. And I've talked about my

risk profile is, you know, I have income, I have assets that are paid for, so I can take more risk with the liquidity that I have. You know, I don't do VC because I don't like a 13-year payout. I like to be in control. I'm a hedge fund guy at heart, so I like to be in control of my liquidity. And so I haven't changed anything at all in terms of my asset allocation, apart from increasing it. using the leverage. So why am I doing this? And this is a really important for people to understand. So I first bought Bitcoin at $200 in 2013. It went straight up to $1,000. And I'm like, I'm clearly George Soros. I'm the best investor the world's ever seen, 500% in three months. I'm a genius. It then falls 87%. And my time horizon was like five years plus. So I'm like,

maybe probably 10 years, because I wrote that first ever macroeconomic strategy paper about Bitcoin in 2013. So I said, OK, fine. So it's a call option. I'll let it go up and down. So it fell. Didn't do anything. Watched it. It rose. 2017, I got confused over the staking wars, the forking wars. And I'm like, I don't know what's going on here. I'm going to take my money out. And I sold out at something like $2,000. So I've made 10 times my money. One of the best bets I'd ever made and watched it. Now, I was still interested in crypto, but I thought it was in a bubble. And it was. It shot up 10x more to 20,000, then collapsed 85% or 82%, whatever it did that time around. And then I bought it again really well in kind of April 2020 when it fell

into the middle of the wedge pattern. I bought it right at the right level. I didn't get the absolute low, but let's say I got in about 6,500. And then I put in a much bigger bet than I did first time around, and great. So I went back recently and looked at it and thought, why haven't I just kept my original $200 in its original size? Because it looked like I traded it really well. I bought it here, I sold it here, and then bought it there. Problem is, is the here's and there's were all higher, because I sold at $2,000 and bought back in at $6,500. I fucked the whole thing up. Really, if I just held it, I'd have made five times as much money. And then the real magic unfolded is if I use the liquidity cycles

and bought them every time we've had that kind of M2 fall down, M2 growth fall down, global M2 growth, bringing it back to the long-term uptrend, and you just bought then, i.e. crypto winters, even if you just missed the low by 30%, maybe more, I still would have done over 20 times better, even accounting for the fact I put a lot more in in April 2020. So I've learned, many of us are having to learn how to trade a exponential asset that's in a logarithmic uptrend that is cyclical. But that's how I just deal with it now. I just use that simple framework. Is the adoption going on? And where are we in the liquidity cycle? And just use that. What is your best argument for why the United States dollar will end up continuing to

be the global reserve currency? And then what would be your best argument as to why you think it will not in our lifetime be the global reserve currency? 87% of all world trade is in US dollars and a vast majority of global debt is in US dollars. The US economy itself is the largest indebted economy as a percentage of global GDP in world history. But then everybody else has dollar debt. So the world is something like 400% of GDP in debt, of which at least 50% of it, maybe more, maybe 70% of it is US dollar debt. So you need dollars or everybody goes bust. That's why the dollar keeps going up. People just don't understand is that everybody has dollar debts, and all trade is in dollars, so you need dollars. And the less money there is in the system,

the more desperate you are in that game of musical chairs to get those bloody dollars to pay your debt, or you go bust. That mechanism is not going to change. In fact, it may get much worse. Over time, we're seeing the Chinese, the Russians, others trying to move away from this. but it's really hard because if your debts are in dollars if you're south korea you don't want bloody yuan you want dollars you need dollars for your entire banking system so i don't see a route by which that changes and the u.s is also a geopolitical force the largest geopolitical force and they will force people to use dollars by coercion so can that fall apart It can if you debase your currency enough, which is kind of, it's not hyperinflation,

but it's a different route to it, and it can lead to the same thing. Bloody difficult to do with this much debt around, unless they suddenly printed $50 trillion. So I think it happens over time. And it happens because the dollar is too strong, not because it's too weak. And the stronger the dollar gets, the more it chokes and forces people to find alternatives, whether that's cryptocurrency for a lot of people. I think Bitcoin will work for a lot of people over time once the volatility of it comes down as the adoption keeps rising. And others will form regional trade groups and will have made global currencies. There's no reason we can't start creating global currency baskets as on chain, as a stable coin.

doesn't have to be a US dollar stable coin. And if we think about the euro dollar market, the stable coin market is basically the euro dollar market, except it's democratized. So everybody can get hold of the dollar. If you're in the Philippines or in Nigeria, you can get your $2 and send it to your aunt instantaneously. The euro dollar market doesn't allow that. You have to go to the bank and say, please, sir. And they said, no, you're not big enough. You don't deserve the dollars. This is the politics. But this democratizes access to dollars no real reason that the UK let's say let's say the UK actually goes ahead doing this doesn't create the the euro dollar market on chain the euro stable coin market and we could

have baskets of currencies which was not really done before so therefore you could trade a commodity basket currency or a technology basket currency so it matches your customers with your needs. Because like, let's say South Africa, their currency goes up and down because it's a poorly managed economy, but they're also beholden to the commodity cycle. And that's driven by the dollar. But if they dealt directly with China and the EU, maybe they don't need to have the dollar in the middle of it. So I think it happens over time. That happens because the dollar is too strong and it forces people to do it. It doesn't happen, I don't think, in a collapse of the dollar i think it's the opposite which this dollar milkshake theory that brent johnson

calls talks about my last question for you is uh bellagio's one million uh dollar bitcoin in 90 days uh begs the question what do you think happens to bitcoin in the next 90 days maybe 12 months and then maybe five years are there price points that you look at you and i know to give price projections online right now is the way that the the hive mind turns into a mob and tries to lynch you assuming that like what we speak is the truth and we know exactly where it's going to go so my answer is he's got 0.0 chance of being right but what he is doing is spending a million bucks or two million bucks on marketing what is an important concept and i think that is that is fine i get it um my my general thesis is the market's going to be squeezier than people expect

so i think we probably get to 50 000 faster than most people expect when that is is it this year is it is it within 12 months probably don't know and over time we just keep the adoption curve and it keeps going so you know where does it go at the peak of this cycle i don't know again i don't want to be hung by dicks online for all of this but you know over time does it take out 100 000 does taken 250 000 of course it does it's just a matter of when and the timing part is the red herring you know if you've got a long enough time horizon and the trend rate of adoption and the rise in the price of the asset over time beats all other assets you're under no motivation to do anything else but hold i think that is a great place to end well thank you so much for doing this uh every

time i talk to you especially in moments of crisis i always learn something and find the uh the The conversation is both entertaining and informative. So we will definitely do it again in the future, hopefully next time in a raging bull market and not during a moment of crisis. Yeah, and my takeaway for people here is this is not 2008 all over again. It is a messy, ugly credit crisis,

but we have a magic bullet, which is quantitative easing. Quantitative easing plus rate cuts will stop the financial crisis exactly as Draghi stopped it in 2012. However, they'll debase your currency by doing it. And we know the answer and the outcome, and that is what Bitcoin is there for. And if you don't like Bitcoin,

then there are other assets to own, such as technology stocks or even gold, that will do okay. They will rise to offset that debasement of currency. So that's what's coming. Either way, you lose your money in the bank, or they devalue your money by devaluing the denominator.

So just be prepared for that and then you can just chill through this whole mess. I appreciate it very much. We'll definitely do it again in the future. All right, my friend. Good to see you.