The Pomp Podcast - #852 Are We At Economic War? w/ Dylan LeClair

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Dylan LeClaire is the Senior Market Analyst at UTXO Management. He also writes a newsletter with Bitcoin Magazine. In this conversation, we talk about Bitcoin, on-chain metrics, we talk about Bitcoin's price, the market structure, and what to expect in the coming weeks. I really enjoyed this conversation with Dylan, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. This episode is brought to you by FTX US. FTX.US is the safe, regulated way to buy and sell Bitcoin and other digital assets. You can

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Starting point is 00:03:21 I hope you guys enjoyed this one. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment

Starting point is 00:03:38 or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Dylan, what's going on, buddy? Yes, how are you doing? I'm doing great. How are you? Doing great. What a crazy time. Very, very, very, very crazy.

Starting point is 00:03:54 All right. You've got a couple of charts here for us. Let's start first with the commodities index. We were just talking about wheat, oil, nickels in there, a whole bunch of different stuff that just seems to be going up into the moon. What is your read on this? like plus 30% is absurd. Yeah, year to date. And so, you know, for the 2010s, we had a pretty prolonged period of disinflationary commodity trends, kind of riding on the wave of previous CapEx cycles. And so, you know, following the COVID stimulus and that kind of demand shock

Starting point is 00:04:31 that we gave to markets, we started to see rising inflation, right? Inflation is at 40-year highs in November, when Powell said, all right, we got to start to get this in check. And recently, And this is something that, you know, no one really could have foreseen. I guess maybe some geopolitical experts, but this this hot war that's occurring, really the economic war that's occurring with all the nation states and Russia is just throwing napalm on this inflation crisis. I got a note here, 11% of the global oil supply, 17% of global nat gas, 11% of global wheat and 10% of industrial minerals are produced in Russia. So if essentially everyone's black mark, just saying, you know, we don't want your commodities and just kind of holding them hostage. And I think evidently they'll work with China, but there's no way to just snap your fingers and make up that demand in global markets. And so what's the result? Simple supply and demand prices are soaring. And there's pretty wide implications for that. When you look at the bond market, obviously, that has a huge impact as well as this all plays out.

Starting point is 00:05:39 We've seen incredible volatility to the upside to start the year. Similar read on this as well. Yeah. So, I mean, if you think about a fixed income product, right, you're sitting and you're getting a fixed payment in fiat currency. OK, and so if your if your goal as a capital allocator is to maintain or grow your purchasing power, you know, bonds that pay a coupon that's above inflation is a good deal. You get you get a payment and not only you you grow your purchasing power in nominal terms, but in real terms. But if we say have inflation at eight percent, and I think these next readings with these commodity markets going parabolic, these next readings are going to accelerate in terms of CPI. And so you're sitting on a fixed income product. What do you do? well, you dump it, you sell it. So we're seeing massive volatility in the most liquid markets in the world. People think of equities as kind of the driver, but really behind the scenes,

Starting point is 00:06:29 these fixed income markets, these credit markets really kind of set everything else. And so we're seeing just massive volatility in credit markets. We're almost surpassing the kind of COVID crisis. And so there's trouble. And the plumbing is saying there's something wrong in these global markets. and I expect volatility to actually increase. Got it. And then when we start to look at the junk and corporate debt, that seems to be in a free fall pretty aggressively. Explain why that's happening. Yeah. So cover this on the past couple of your shows the previous months. And a lot of people reach out and be like, aren't you kind of interested in Bitcoin? Why the hell are you covering junk debt? Who cares? And the reality is behind the

Starting point is 00:07:17 scenes, there's pretty big implications if these things are selling off. So the principal value of bonds is inverse to the yield. So when these things are selling off, right, because inflation is running hot, you own fixed income, you sell it because it's not a good deal anymore. It's not a good bang for your buck. Well, what happens is the yields rise. And so what this means, and we cover this a little bit later, is not only is kind of liquidity draining out of these fixed income markets, but also the financing costs for these corporates is rising in tandem. So not only are these fixed income investors de-levering, they're selling, they're getting these off their books. But also you see financing costs really rising across the board for corporates. And so we haven't

Starting point is 00:07:54 even really seen that come into play yet. But this isn't just a kind of a corporate debt or investment junk or investment grade debt corporate thing. This is just basically all fixed income products because, again, inflation is so rampant. And so eventually, and I think what hasn't been priced into markets yet, unfortunately, is that these inflation risks and these kind of the credit sell-off eventually leads to liquidity and solvency risk in fixed income markets, as no one can get cheap financing in a historically over-indebted economy. And so these markets are spelling trouble. Got it. And so when you start to look at things like the corporate credit spreads. It seems that the drop in the S&P 500 being inversely correlated to these corporate

Starting point is 00:08:43 spreads. You've also overlaid here the VIX on top of it. How do you kind of navigate the complexity that's involved with the relationship between these types of measurements or assets? Yeah. So, you know, why look at these at all? What can they tell you? And so I overlaid corporate credit spreads, which are essentially it's the yield on top of the treasury yield. So the treasury market is that kind of risk-free global fixed income market. It's really still thought of as a global safe haven, despite a lot of people saying, I would never own bonds. It still is that risk-free rate in the global economic system. So we see this corporate credit spread, meaning when this is going up, the corporate credit spread, it means that

Starting point is 00:09:24 financing costs for corporates, and this is BBB corporates, is rising farther than the actual that treasury yield. And so that means that it's harder to get financing for these companies. And so overlaying that with the VIX, you can see there's a pretty tight relationship. Obviously, there's a lot of volatility in the VIX, which is a volatility index itself. But there's a pretty correlated relationship between these two things. And I highlighted whenever both of those metrics or indicators are rising, I highlighted what happens to the S&P 500, what happens to equities. So equity market volatility explodes. And it's more so kind of a function of the lack of liquidity in credit markets, which is reflected in the credit spreads. And what happens? The equity

Starting point is 00:10:08 indices dump. And so there's a lot of things happening behind the scenes here. But recently, with I think the NASDAQ is 20% off the highs. I'm not sure what the Dow or S&P is, but uh, really the credit markets were starting to say there's a problem back in November. And now with all of this inflation happening and the kind of madness in the commodity markets, uh, you know, the equity equity markets are, are teetering. Uh, I think that's what's going on. Got it. And so when you start to look at things like the 10 year, uh, yield curve, uh, how much are these still like a clean signal, uh, for inflation expectations and other metrics versus are these becoming distorted by the complexity of the market?

Starting point is 00:10:51 Yeah. So here we have the 10-year and the 2-year yield curve. So subtract the 2-year yield from the 10-year yield, and you get what most people refer to or credit traders refer to as the yield curve. And basically, this indicator, this metric has predated when it inverts, when it goes below zero. It's called a yield curve inversion. When it's gone below zero, it's predated every single recession since the 1960s. And even before that, it just missed one in the 60s. It was a false signal. Because why? If you think about how the credit system works, most creditors, lenders in the financial system, they borrow short. So like banks, they'll borrow short and lend long. They'll take on short-dated liabilities and acquire long-dated assets. They'll borrow from the Fed

Starting point is 00:11:37 for a year or whatever it is and lend for 10 or two and lend for 10. So when this yield curve inverts, when you can actually get a higher yield by holding a two-year treasury note than a 10-year treasury note, there's problems. Because traditionally, that yield curve, you'll get a higher yield the farther you go out in duration. So when this inverts, there's pretty big liquidity problems in the market. And so recently, it hasn't inverted, but we're seeing a pretty massive flattening of this curve. And it looks like, if we just focus on the trend, it looks like an inversion is coming uh and so and this is the crazy thing is uh whenever these yield curve inversions start to happen traditionally we've seen the fed start to loosen financial conditions

Starting point is 00:12:19 but now we're sitting here with raging inflation uh and a yield curve control a yield curve inversion potentially coming and the fed funds rate is still at zero uh so truly historic and honestly the fed is completely trapped in what they can do uh and i you know i would not want want to be Jerome Powell in this situation. That's what we're talking about earlier is I don't think that there's a single off ramp or out that is positive. It's a lose-lose situation. You either get recession or you get inflation. And in some crazy way, you may successfully navigate both of those in quick succession and end up causing quite a bit of harm. But again, if you go back to what is the right answer, I don't know if there is a right answer. And so I know you and

Starting point is 00:13:03 I have a agreement on the idea of Bitcoin being a pretty good solution. You've got the Bitcoin price chart here going back to kind of beginning of 2020 when it was down in the, you know, five, six, seven, $8,000 range. What's your read on where Bitcoin is now and how it's reacting to all of this? Yeah. So just on everything I'm seeing in credit markets, kind of commodities, equities, big picture, global macro, it looks increasingly likely, in my opinion, and I could be wrong here, that we're kind of headed for some sort of deleveraging or liquidity event. Okay, so what does that mean? And as a Bitcoin bull, how am I positioned? Well, I kind of, you know, funny, I put an arrow at the bottom, kind of at that COVID crisis chart. And I said,

Starting point is 00:13:47 you know, Bitcoin is dead, it has failed as a store of value. And what I mean is I don't, I'm not calling for Bitcoin to go to 20,000 or 15,000 or to get cut in half overnight, like it did in March of 2020. I don't know. And so, you know, I am holding some cash, and hoping to buy blood as a long-term Bitcoin investor. But I think more so is I believe when we're talking about the Fed being trapped is ultimately what we're referring to is if there is a deleveraging event,

Starting point is 00:14:13 the Fed is going to be stuck with basically yield curve control as an option, meaning they're going to monetize any amount of debt they need to to keep this game going, to keep this credit market functioning properly. And they'll probably come out and use all sorts of jargon

Starting point is 00:14:28 to explain why they need to do it. But ultimately, this is kind of the end game of this system. You referred to Volcker right before I came on, I was watching. Well, in the 1980s, I think federal debt to GDP was about 25%. Right now, it's 120%. So in terms of what they can do and how high rates can go if this deleveraging event occurs, well, because if you sell anything in a liquidity crunch. And so what does that mean? It means higher financing costs. It means a huge recession. And honestly, this sounds really dark, but just on the debt loads, it means a depression. And so the Fed isn't, I mean, not that they're not going to let it happen, but there's going to be some response. And ultimately, I believe the response is mass debt monetization

Starting point is 00:15:17 and the mother load of stimulus, which makes 2020 look like a joke. So takeaways, the response to all of this madness. A non-sovereign global store of value that has absolute scarcity and a production cost is a pretty good bet. Over the short term, expect volatility, both to the upside and to the downside. And for that reason, I would say if you have any mark-to-market leverage, meaning exchange rate risk, if you have Bitcoin in cold storage, you're fine. You're insulated. You're going to be OK. Go take a nap for a year and come back and tell me what Bitcoin's price is that. Um, but over the short term, yeah, I think there potentially is a, is a, you know, chance for some, some, uh, some craziness and some liquidity crunch type conditions. So for dip buyers, uh,

Starting point is 00:16:06 you might get a pretty nice opportunity, but, uh, nothing is a sure bet. That's just kind of what I'm seeing. When you start to think about, um, Bitcoin price, I think in the short term, we saw Bitcoin rise, you know, at first maybe it was up or I think it went down actually the night of the invasion, it went down, you know, a couple of percent, then it was up as high as 25% from the start of the invasion. Now we're probably sitting somewhere in the, you know, 10, 12, 15% range. Is that what you would expect in this situation? Do you think that it was a less severe move than you would have expected? Is tax selling coming into April 15th still, you know, kind of part of this? Like just talk to me about the price and what your expectations have been and kind of how

Starting point is 00:16:48 you see this playing out moving forward. Yeah. So 2022 has been kind of a landmark year in the sense that we had the Canadian trucker convoy with the government explicitly just freezing bank accounts, seizing money, seizing assets, and then followed up by kind of an order of magnitude or two larger than this. And yes, it was a sovereign nation that kind of committed some sort of war crime. Yeah, I understand that. But Russia had its foreign exchange reserves frozen. So that was kind of for a lot of macroeconomists and kind of followers of this incumbent petrodollar monetary system, they were saying, whoa, this is a huge line in the sand. Sovereign foreign exchange reserves, if they can just be frozen, are they really money? And I think that kind of

Starting point is 00:17:35 has made the case for not only Bitcoin, but I mean, I think gold is close to breaking all-time highs today for, you know, bearer assets in general, something that's not someone else's liability. And so at the same time, you have people that are kind of trading Bitcoin on day-to-day timeframes are trading correlations. They're trading it based on dollar strength, which increases during kind of financial condition tightness. But on the other hand, you have people that are saying, wait, I think the end game to this is going to be more money printing. And honestly, I don't think that there's many things that you can truly own in this environment, whether you're a political dissident or whatever the case may be. Maybe you just want freedom

Starting point is 00:18:13 money. The reality is there's not many things that you can completely control. And really, there's nothing else that you can completely control that you can guarantee no one can arbitrarily create more of or dilute kind of the total supply. And so in that case, the bull case for Bitcoin has honestly never been stronger. There's just kind of some short to medium term headwinds, I believe, that could lead to somewhat of a good buying opportunity. If we get that and at what time frame, I'm not entirely sure, but this is just kind of what I'm seeing. So long term bullish, I still have more Bitcoin than I ever have, and I'm feeling really good about it. Joe, John, what questions you guys got?

Starting point is 00:18:50 Dylan, what's going on with gold, man? It's at an all-time high or close to it, at least. What are your thoughts on gold bugs celebrating what they should be looking forward to and so on? Yeah, I mean, congrats. The gold and Bitcoin communities bicker back and forth, but I think, really, they're on the same kind of mission of sound money and something that governments can manipulate. I guess maybe you could argue that the paper gold price could be manipulated, but something

Starting point is 00:19:18 that's outside the hands of, you know, 12, 12 men in a boardroom, uh, deciding, you know, whether to arbitrarily increase the price of money or decrease it. And so, you know, congrats. Uh, I think, you know, we, the gold and Bitcoin community has more aligned than, uh, many of the gold investors think, and maybe even Bitcoin as well. But, uh, I have my bets placed on, on, uh, where the future is going. This is the only gold I own, uh, but I'm happy with it. John, Dylan, when you look at what's happening in Russia and stuff is everyone, they can't really seem like you can go to stocks. They don't know if a recession is coming or not. Is this a big event for Bitcoin in the sense of like, this is the perfect storm. People should be running to

Starting point is 00:19:57 this asset, um, and not kind of putting their money elsewhere when they need liquidity. Yeah. I mean, I, I honestly, I'm a, I'm a in favor of right now, just continuing to auto stack Bitcoin, but also stacking a little, uh, you know, stash of cash. I don't think that's a bad idea. Cash over the long term, I believe, is trash. Ray Dalio has been saying that. But when you have this kind of debt system or this monetary system as engorged in debt as it is, you're going to see these rapid unwinds, these rapid deliver things that happen, right? March of 2020, everyone thinks it was just the COVID lockdowns. The reality was that the system was so over levered that some sort of volatility explosion, liquidity event likely would have

Starting point is 00:20:39 came. It definitely wouldn't have been as bad, but it would have come. It's the same thing that happened in 08. It wasn't a function of this thing or that thing. It was just kind of a mathematical event that happened because there was credit impairment and counterparty risk and balance sheets unwound. So I think that's what we're experiencing. Obviously, the commodity event and the Russia-Ukraine war has a pretty major role in this, in the inflationary spike. But yeah, I mean, in terms of kind of a boon for Bitcoin over the long term, yeah, the Rubicon has been crossed, in my opinion, in terms of the legitimization of this asset. And so short term, headwinds, long term, never been more bullish. And I think a lot of people are waking up to it.

Starting point is 00:21:26 Dylan, when you start to think about Bitcoin's price, what do you think drives kind of change here? Is it just literally more people being educated, more time in the market? And it does its thing. Do you think that there's some sort of inflection point that occurs, whether it is, you know, a nation state buying it or whatever? Like, how do you kind of look at into the future various events around Bitcoin? Yeah. So, I mean, I've had a lot of people in my replies and DMs being like, hey, you know, you're not posting as much on chain stuff. And the reality is the on chain supply dynamics look fantastic. I think more so just in terms of if you're looking at the market right now and what's driving everything, it's this macro backdrop that we're describing. But off the top of my head, and don't quote me on this, but I believe in terms of Bitcoin held over the last three months, 86% of supply hasn't moved.

Starting point is 00:22:17 I think that's an all-time high or close to an all-time high. Over the last six months, I believe it's around 75%, almost an all-time high. And for a year, 61% hasn't moved. I think that's also, if not an all-time high, very close to it. So you have a really kind of squeezy supply side in terms of the free float isn't all that much. And my personal kind of thesis here is that if we see, and I believe when we see some sort of liquidity event deleveraging, Bitcoin's exchange rate will take a hit. maybe there's some derivative market liquidations, price goes down, the skeptics come out and say, you know, it's dead. It's not a store of value. It couldn't stand a recession. It couldn't stand a liquidity crunch. Whether or not the Fed response time is fast or not, I think Bitcoin

Starting point is 00:23:01 forms a bottom. And ultimately, I believe the monetary using will come back. But regardless, that stackers of last resort and just how kind of tight that free float supply is of an absolutely scarce asset. I think on the other side of this, Bitcoin rips unlike any other asset, similar to kind of maybe not a direct repeat of 2020, but kind of a pretty similar central bank or fiat system unwind with really solid supply dynamics in Bitcoin leading to kind of a parabolic run. That's kind of my base case. And so I'm happy to stack at a discount. And I think that's on the other side of this is when Bitcoin truly kind of everyone comes to realize it's the thing that you need to own uh during kind of this mass debasement of fiat currency it's uh it's pretty crazy to

Starting point is 00:23:48 watch this um let's go to the extreme is the dollar failing as the global reserve currency is there another currency that replaces it other than a non-sovereign uh you know currency like how do you think about uh just more of the like geopolitical and like nation-state currencies reserve status, et cetera, as this all unfolds? Yeah. So, I mean, if you, you know, some people have been saying, and I think Dalio's thesis is, you know, the CCP and the renminbi and all that. And I personally, I disagree with that because in order for a world reserve currency, you have to keep your capital account open. You have to allow for free trade and, you know, capital inflows and outflows outside of your borders. And so I don't see that occurring. And in terms of,

Starting point is 00:24:37 you know, the euros cooked and there's really no other kind of legitimate option other than the dollar. Like we, we rag on the dollar a lot, but the reality is the dollar is the best of the worst in terms of, in terms of stability and kind of holding its, holding its value up. There's so much dollar denominated debt out there that during kind of these financial crises, the reason that everything sells off and the dollar actually spikes, you can think of it as a dollar kind of bidding is because that dollar denominated debt. And when debt defaults occur, that dollars are being like actively destroyed. And so that's why kind of the dollar still is king, even though even though we think the end game and I truly believe that the end game is that, you know,

Starting point is 00:25:19 it's melting in value. We have kind of super spikes in this in this dollar value. But in terms of legitimate replacements, nothing else even really comes close, which is why a lot of people are talking about kind of a commodity backed currency in the east in terms of like Russia on China and a basket of commodities. Some are saying gold, some are saying trade weighted basket. I personally believe the end game is Bitcoin. And I don't expect Putin to come out and say, I'm a Bitcoin bull tomorrow or even say it at all. But I think the game theory points to Bitcoin in this kind of trustless environment being embraced eventually by individuals, institutions, and sovereigns everywhere. But we're still pretty early in that game, I imagine.

Starting point is 00:26:00 yeah it's uh it's pretty incredible um all right we got to let you go but before we do that how are we looking on uh on followers it's like your super bowl man you've been all over this i feel like uh what what oh 133.3 that's a lot of threes in there maybe we next the next three stop is 300 000 because everyone who's watching this right now is going to follow you on twitter obviously that's i think i've been shadow banned to be honest i some people were replying to me And they, and then people replied to them and they couldn't see the tweet above it. So I don't know, maybe, uh, maybe that's, that's hurting me. Maybe not, but.

Starting point is 00:26:37 Well, that's the Twitter platform that you can send them to your newsletter, the deep dive. You're thinking, right. Let's go. Yeah. Subscribe to the deep dive. We cover all this stuff in depth every day. Uh, and we're putting out monthly reports that are 30, 30 pages long with a bunch of

Starting point is 00:26:55 charts. And so if you find that valuable and you like some of this stuff that we cover, make sure to check it out. Awesome, man. Thank you so much for coming on. You always got tons of great information and the world is changing quickly. So as as I always say, keep your eyes peeled, your head on a swivel. You never know what's going to happen. Right. Indeed. See you later.

The Pomp Podcast - #852 Are We At Economic War? w/ Dylan LeClair

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