The Pomp Podcast - #1389 Anthony Pompliano | Why Bitcoin and Stocks Are Declining Fast!

Starting point is 00:00:00 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. 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. What's up, guys? Bang, bang. There is panic and fear in financial markets, and we are here to try to answer all your questions. I have Phil Rosen, co-founder and editor-in-chief of

Starting point is 00:00:40 Opening Bell Daily. It is probably my favorite finance newsletter. Why is that? Well, because I helped him start it. He was a fantastic reporter over at Business Insider, and now he is writing for over 200,000 people every single day on what's going on in finance. In this conversation, We talk about how the stock market is dropping so aggressively, why is it happening, what's going on in Japan, why did crypto go down so much, and what you can do at home to try to insulate yourself from all of these problems. Here's my conversation with Phil Rosen. 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

Starting point is 00:01:26 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. Today's episode is brought to you by Zappo Bank. Let this sink in for a moment. Over half a trillion dollars in Bitcoin has been lost or stolen. Whether that is misplaced hardware wallets or an exchange that went bust, the risks are very real. That's why I think where in how you store your Bitcoin is absolutely critical. Now meet Zappo Bank, the world's first fully licensed and regulated Bitcoin-enabled bank. They're known as the Fort Knox of Bitcoin. With over a decade of expertise in Bitcoin custody, they blend no holdback security,

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Starting point is 00:03:53 Again, domainmoney.com slash pomp. And yes, I might have an interest in promoting domain. So just like any major financial decision, it's important you understand what the service is and if it's right for you. So make sure to see the important disclaimer at d-m-n-m-n-y dot co slash X. How about that? Go check it out today. Go to domainmoney.com slash Pomp. Today's episode is brought to you by iTrust Capital. Are you buying crypto on an exchange because you're excited about the bull run? Well, I hope you're reporting your crypto gains to the IRS because they want you to pay your taxes. That's right. When you buy and sell crypto on an exchange, you need to pay the government taxes when you make profits. That sounds pretty taxing.

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Starting point is 00:05:19 some of the lowest fees in the industry. The bull run has begun and people are starting to see their accounts go up. So start taking advantage of tax benefits with an IRA at iTrust Capital. You can start maximizing your crypto investment today, go to itrustcapital.com. That's itrustcapital.com. So global markets are selling off today. Japan, Korea, US, everything is in the red. And a lot of this started last week when we had the manufacturing data was weak, the jobs market data was weak. And the July report specifically triggered the SOM rule. And that has raised recession fears all over the world. Tell us what you're looking at right now. Everyone's scared. Everyone is scared. But I don't think that they should be yet.

Starting point is 00:06:08 I think there's a couple of different components to this. First of all, we have high interest rates in the United States. Yes, historically, they're not that high, but they're high compared to the 0% interest rate environment that we've had. And so the Fed has had multiple data points. Unemployment's been creeping up. The economy's obviously been slowing down a little bit to cut interest rates, and they haven't done so. And so if you leave interest rates high for a long time, you eventually break something in the economy, right? If you think about the United States economy, it is built for low interest rates and cheap money. That is how everyone grows and growth is the oxygen for

Starting point is 00:06:43 the economy. So that's kind of step one is just structurally, you've got higher interest rates. So that creates a lot of issue. The second thing is that people have been pouring tons of money into the stock market, right? If you have five and a half percent interest rates, but the stock markets at all time highs, that's not supposed to happen. And so obviously people have been very bullish and optimistic. They're trying to front run some sort of pivot from the Fed and they keep pouring money into the stock market. Now, where are they getting that money? A lot of it is because they're getting wealthier because of various things in the economy and there's more cash that they have to go and invest. There's hundreds of millions of dollars that are actually coming in

Starting point is 00:07:16 via this carry trade because what a lot of investors figured out is that the Japanese yen was in an environment where there's a 0% interest rate. So rather than borrow money in the United States at five and a half percent, I'd rather go to Japan and borrow at 0%. Well, if I borrow in Japan, they don't give me dollars, right? They give me JPY. And so what do I have to do is I have to take that and I have to convert it to dollars. So I borrow in Japan at 0% and then convert it to dollars. Well, now I have dollars and I owe 0% on that loan. What do I do? I go buy stocks. Sounds amazing. Well, all of a sudden what started to occur is as I was buying those stocks and it was going up, I felt like a genius. Now there's two things that occurred. One,

Starting point is 00:07:56 the Japanese started to tighten their financial conditions. Oh, hold on a second. It may not be 0% interest rates now. I may actually owe something on this money. That's a departure from why I did it in kind of the original environment. The second thing is as stocks have kind of pulled back some, then I now have essentially leveraged bets in the stock market. If those stocks start to trade down, I now get worried about some sort of margin call. And so what I have to do then is sell stocks to go pay back my loan. But if I'm selling stocks, and so is a lot of other people, it further pushes prices down, causing more of a cascade in the market. And so what you get here is you get a number of different dynamics that are all coming together that are leading to these

Starting point is 00:08:35 lower prices. Now, maybe the most important part of all of this is we live in an economy where the structure of monetary policy is going to constantly push asset prices up. But because we've essentially removed risk from the market, people will do things that take on more and more risk, right? Imagine if you could go to the casino and you knew you couldn't lose, what would you do? You would just start wagering more money. But on the off chance that the Federal Reserve is not paying attention, like when they have interest rates at a high rate for a long time, then what you start to do is you start to introduce more of that risk, but people still are convinced there's no risk. And so stocks start trading down, they're caught with their pants down because

Starting point is 00:09:16 they're over levered. And so then you get panic and fear. It's hilarious to me. The S&P is still up double digits year to date, yet people are acting like it's down 20%. Well, something that I was watching was the VIX, the fear gauge on Wall Street. I think that's up maybe 230% or something from the last week, which is crazy. And it's right now at levels that we've only seen, I think, during the great financial crisis and in 2020. Do you think this market reaction is maybe a well-timed correction or is it a overreaction? Well, it is always funny to me that our grandparents prayed for days like we have in 2024 where the stock market is up double digits halfway through the year, right? With a stock

Starting point is 00:10:03 market that compounds usually at 7%, 8%, maybe 10% on average over the last 50 years, that's a year-long return. We were annualizing close to 30% of the S&P at the half-year mark. And so because of that performance, people got used to everything goes up and to the right. And so the first sign of, oh, wait a second, stocks don't only go up all the time every single day. If you go and you look, I think the S&P didn't have a 2% drawdown for a year. And so when that occurs, when you get the 2% drawdown, everyone's forgotten what it's like when stocks go down a little bit. And if you then take not only the stock performance and kind of the fear that's driven there, I do think that there's a lot of people who are looking at the presidential election

Starting point is 00:10:47 in November, and they're trying to understand who's going to be the president. If you overlay the chart of the S&P with the prediction odds of Donald Trump becoming president, when Trump's odds go up, the stock market goes up shortly after. When Trump's odds go down, the stock market goes down. And so what's hilarious about this is that people are almost day trading the gyrations in Trump's prediction odds in the stock market, whether they're doing it implicitly or not, they are trying to better understand are stocks going to accelerate or is there an incoming recession? And the short answer is nobody knows for sure, but we do know that You're not supposed to have an all-time high in the stock market with interest rates this high.

Starting point is 00:11:30 What do you think? I didn't know that about the prediction markets with Trump and the stock market correlation. Something that I think is, it was a big topic the last few weeks was Trump coming into office for a second term and how that would fuel markets. But I think that's really left the conversation now that people are thinking about recession and the labor market is weakening. I think the Trump trade is really sort of old news at this point. And I don't know how relevant it is, or at least it's not being talked about or reported on the financial press. I haven't been writing about it. I've been writing more about the economic

Starting point is 00:12:11 indicators. But before we go any further, I have to ask you about crypto. Of course, Bitcoin is down 20% in the last week. Ether is down 25%. Solana is down almost 30%. percent. What are you watching there? And what should we know for the coming weeks and months? If you don't get excited when the assets in your portfolio go down in price, you may not actually understand what you own. And when I see this go down... Now, take something like Solana. Solana has gone from $40, $50, $60, $70 when I started to buy it last year and ran all the way up to 200, came back down. It actually went to like 125, went right back up to like 180, right? It's come back down, whatever. And so what you want to do is you want

Starting point is 00:12:59 to constantly be allocated to your portfolio. And if you buy things with a very long time horizon, when the price draws down, you don't worry, right? So last night when everything was kicking off, it was almost like you just kind of sit down and you're like, here we go. Here comes the fun. But you're not worried. You don't have leverage. You're not worried about getting liquidated. You're not worried about what the day-to-day price movements are, even if it goes down 50 plus percent, because you're saying to yourself, I'm holding this for years. And if I'm going to hold it for years, who knows what's going to happen? Ritz-Ida shouldn't worry about today.

Starting point is 00:13:29 And so the long-term mentality is actually this great anecdote to the fear and panic in these moments. And then I also think that when you see something like crypto drawing down, because it is so volatile, it bounces really hard. So earlier today, we saw Bitcoin drew down. I saw a $49,000 print, right? I think it was like 49,700 bucks. I looked maybe an hour later, it was back to $54,000. And so when you see those kind of hard drops, it's the reflexivity in the market. So you see something go down very, very quickly and it comes flying right back. That literally could not happen in the stock

Starting point is 00:14:05 market because of the circuit breakers. And so they constantly are interrupting these kind of violent moves in either direction. And so a free asset like Bitcoin or the crypto market shows you much more about human psychology and how markets are supposed to work. And so I think that's actually one of the advantages that the crypto world has. Although the traditional finance folks look at it as a negative, they say it's too volatile. They say it's too much of a free market. That is, as an investor, that's what you want. You want an unencumbered signal as to what's going to happen in the world. You want to be able to take a bet on that versus have to analyze not only what is the financial asset, what is the market conditions,

Starting point is 00:14:41 but then, hey, are they going to intervene in some weird way that's going to change the financial performance of this asset? Do you think that because there's no breaks or stoppage in crypto markets that it's too prone to panic selling? I think it works in both ways. There's nothing like Bitcoin on a day where people are are enthusiastic and the euphoria is flying around because it'll go up thousands of dollars. The reverse happens as well. It'll drop thousands of dollars, right? I mean, people go back. I saw some people being like, oh, this is like March 2020. March of 2020, Bitcoin dropped from $8,000 to under 4,000. 50% drop in a single day. That is very difficult to happen in the stock

Starting point is 00:15:23 market because of the circuit breakers and a bunch of this stuff. There are times where they'll even just shut down trading of something and just say, I'm going to just go home, right? And so when you see this happening in the Bitcoin and crypto world, you just have to remember that as these people get wealthier, and as these people get older, they will start to diversify into more traditional markets. And so we're really training an entire generation of people to be better in terms of understanding volatility, being long-term oriented, and prepared for these moments. So I wanted to pivot to the Fed. And last week, Jerome Powell did not adjust interest rates. So they're still at two decade highs and two days after yeah truly um and the market's reacting

Starting point is 00:16:06 right now he said that the labor market looked still fine essentially and then two days later we got the week july jobs report and now you have calls i think uh warden's jeremy siegel this morning was calling for an emergency rate cut and he said he wants to see a 75 basis point cut where do you stand on whether the fed has made its policy error and if we're going to see an emergency cut? The Fed made a policy error when the Fed was created and they let it intervene in the market. In a market, you're supposed to allow the free market to do it. It is an arrogant belief of human beings that we can intervene in the market better than the free market forces. And so what the Fed is ultimately doing in 2020 and 2021 is they are artificially

Starting point is 00:16:53 suppressing certain conditions in the interest rate. And they are also, along with their other colleagues, artificially inflating the money supply at a rate that is unnatural. And so what do you get? You get massive inflation, right? The official number being almost four times what the actual target is, right? Or almost five times the actual target. Now we have the opposite problem, which is we are artificially inflating the interest rate. And we are also, at least from the Fed's perspective, trying to deflate or decline any sort of easing in the economy. Now, their colleagues didn't get the message because they still had printed tons of money, right, with the debt over $35 trillion. But I do think that that intervention is the first policy

Starting point is 00:17:38 error. Now, the second policy error is they over-rotated and they didn't step in before the inflation really hit. Now they've over-rotated in the other direction and they've kept financial conditions so tight that yes, they're going to keep doing it until something breaks. I think this probably counts as something breaking, right? Is you literally have the largest decline in the Japanese stock market since 1987. If you look in the US, some of these stocks, I think AMD is down 40% off of its recent high, right? How many stocks in the tech sector have to trade down until people say, you know what, we probably should look at this. And so I also saw that I think a thousand point drop in the Dow happened this morning, which had never happened

Starting point is 00:18:20 in history before. And so some of this is financial moves, but I think another important part of this whole analysis is we lived in this hyper-connected world. And so the information velocity is unmatched. Historically, on a Sunday night, you would have no clue what happened in Japan. Maybe you worked at a big financial firm that had a desk in Japan. And so somebody would pick up the phone and call or send an email and say, hey, things are looking a little shaky out here, right? And you might not even know what it was, but you would at least say, okay, maybe something's going on. When the stock market opened in Japan yesterday, all of Twitter knew exactly what was going on to the point where they were calling out percentage point ticks of the decline,

Starting point is 00:19:05 which then creates fear, which creates this uncertainty, right? Which creates this panic, which then starts to spread everywhere else. And you can literally see, if you were to plot the velocity of tweets that were talking about this stuff with the decline, my guess would be that as the tweet velocity increased, the sell-off accelerated as well. Because people said, oh my God, I read on Twitter that the Japan stock market is blowing up. Well, tomorrow, they're going to open up the American one. I'm going to go sell something. And so that velocity of information is actually a huge driver of financial performance in a way that we've just never seen before. And so I do think that that's a big element that they're not

Starting point is 00:19:43 going to be able to change. And as individual investors, we should prepare for that only to get worse over time. I think a lot of the panic right now in markets is going to have some influence on what the Fed does, even if they claim that it doesn't. But if you look beyond markets, there are pockets of consumer strength, which I thought were really interesting. I read this over the weekend. The following are not in a slowdown. Restaurant bookings, hotel demand, TSA air travel, tax withholdings, Broadway show attendance. So with that in mind, those things don't point to recession, but recession is all of a sudden come back in the conversation. Where do you stand on this? Those things are what I would put in the bucket

Starting point is 00:20:26 of false signals. And what I mean by that is people only stop going to Broadway when they're told there's a recession. People only stop traveling when they're told there's a recession, but the average person doesn't pay attention. They just live their life. And what they've been told for the last four or five years is you're getting richer. And so what ends up happening is they keep thinking that they're wealthy. They keep thinking they have more and more cash, right? And so they just keep spending money and spending money and spending money. And some of them are doing it on credit, but many of them aren't. And so when you see that, if all of a sudden people started to be like, we're in a recession, that stuff would dry up quickly. And it's this very fascinating conversation around, is it the signal that we should look at that then signals that we're in the recession? Or is it the psychology of the behavior change once people are told they're in a recession? and my guess is it's more the psychology change people's consumer behaviors change once they're

Starting point is 00:21:23 told something bad is either coming or here and you can see this with you know the psalm rule everyone started freaking out and then i saw claudia psalm who literally invented the metric she went on cnbc and was like uh i think it's a false positive like actually here's the reasons why and everyone's like nah she didn't know what she's talking about like you know we're in a recession 100 uh you know uh perfect uh prediction ability and so it is this very crazy thing where if you were to ask me what's the biggest problem right now in finance, it's that short-termism is like a mental disease. Everyone is looking at what's going to happen in the next 12 hours. And that's not me being bombastic at all. Literally half or more of all option volume

Starting point is 00:22:03 in the stock market is for zero-day options. People wake up in the morning and they bet, what is the price of the stock we're going to be at the end of the day? That is insane. And so if you look at that, and then you look at things like the uses of derivatives, right? You can see that exploding. You can see things like the carry trade from Japan. Like we are just becoming a entire society of gamblers. And the reason is because inflation is higher than expected. People feel like they can't get ahead. And so they, as they slowly degrade their hope, they just say to themselves, well, screw it. I got to do something. And so zero day options is the perfect example where we went from a world of, Hey, there's going to be

Starting point is 00:22:41 quarterly reports 50, 60, 70 years ago to now literally you can bet on the price of the stock market at the end of the day. And that kind of acceleration from long-term thinking to short-term thinking has deep, deep roots in so many of the different problems that we have in the financial market. And until that gets fixed, which it won't, but until that gets fixed, you're only going to see more chaos, uncertainty, volatility, et cetera. Well, on that note, thank you for having me. Thanks for doing this. Thank you.

The Pomp Podcast - #1389 Anthony Pompliano | Why Bitcoin and Stocks Are Declining Fast!

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