The Pomp Podcast - #868 Bitcoin Holding Steady Through Macro Uncertainty 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. Today's episode is brought to you by Copper. Since 2018, Copper has been at the forefront of institutional digital asset

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Starting point is 00:03:22 Dylan LeClaire, ladies and gentlemen. Dylan, what's going on, man? Hey, guys. Let's talk treasury yields. The world has gone mad. Everyone is freaking out. We've got the Russia-Ukraine conflict. We've got all kinds of chaos in various asset classes and treasury yields. They just look like they're going to the moon, like they may beat Elon Musk to Mars. What's going on here? Yeah. So, I mean, we've been talking a lot about bonds lately and people have been asking me, why are we focusing so much on treasury yields, bond markets? If you're more of a Bitcoin analyst

Starting point is 00:03:54 and the reality is that these credit markets are really driving the performance of every single asset class right now. So, I mean, everyone knows the story, right? Record high inflation, 40 near 50 year highs, producer price index just came in at 10% highest reading ever month, year over year. So something's broken and credit markets are telling you. And so fixed income is selling off in a big way. And what that means is that the yields and fixed income and the price are inverse. So when fixed income investors are selling their bonds, the yields are going up. So here we have the treasury market, which is the risk-free, still the risk-free asset in the bond market, the global bond market, and yields are soaring, right? Especially off of the

Starting point is 00:04:37 2020, 2021 lows. So what does that mean? It means higher discount rates across the entire economic system. So whether you're valuing an equity or whether you're trying to get corporate financing, higher discount rates can give you some trouble. And this is because of this inflationary environment. So we have this historically over-indebted economy with yields rising in a big, big way. And so I think that we're going to see some volatility in the coming you know, months, maybe a year. I tend to think that's exactly what this is telling us. If we look at the 10 year treasury yield, the recent spike, uh, is obviously running counter cyclical, if you will, or, or counter to the long-term trend, which since the early eighties, uh, has

Starting point is 00:05:21 just been, uh, down into the right. You've got this great chart here showing us this, what's going on and why is this so important to understand, uh, why this is going up, uh, against the trend? Yeah. So, I mean, since 1980, 81, really, we've been in the secular, everything bull run. But really what's driving us is the bond market, right? So, lower discount rates, lower yields means price of everything goes to the moon. And so, basically, there's a few key drivers here, debt demographics, but really what we see here is kind of a bunch of short-term debt cycles formulating a long-term debt cycle. So every time there's a boom in the economy, everyone kind of levers up, takes on credit, malinvestment occurs. And then somewhere kind of in this eight

Starting point is 00:06:08 to 10-year cycle, and this is more of just kind of an archetype debt cycle, there's somewhat of a crash. There's a credit crunch, a liquidity crunch, and some of that bad investment gets liquidated or there's a recession. But what happens after that is that the Fed, this kind Keynesian economic system, they come in and they lower discount rates, they lower bond yields, and they kind of re-stimulate this economy. And so now, following OA, we hit that zero lower bound on the Fed funds rate. And so they did all sorts of things. They did quantitative easing, they did anything to stimulate the economy. And now following COVID, which was kind of this black swan economic event, they pumped a bunch more money in the system, inflation soaring, but they

Starting point is 00:06:49 don't really have any tools left in the toolbox. And so now, even though the Fed hasn't raised rates and they'll do it probably 25 basis points in the coming day here. Really, the treasury market's doing their work for them. And the yields are selling off in a big, big way. And so we have this kind of 40-year trend in the making here. And if yields get any higher, it's going to spell some trouble for the broader economy. Got it. And so if we start to then break this down by the various types of bonds, you've got corporate junk bonds, the VIX, S&P 500. And looking at these, there's obviously relationships, whether it's a positive or negative correlation between these, what are you seeing here? Yeah. So, um, we have, we have the high yield bonds and then we

Starting point is 00:07:30 have, um, like we talked about the kind of the inverse, uh, is those yields, right? So you can see every time these kind of, uh, the bond market rolls over specifically, you know, corporate bonds and it should be noted that now we're in a, we're in a time in 2022, um, compared to say the previous couple of decades where more of the corporate bond market than ever due to just kind of the, amount of debt they all have on their balance sheet are in this kind of junk rating, triple B rating. And the VIX, for those that don't know, is the S&P 500 Equity Volatility Index. So the higher VIX means trouble for equities. So you can see this pretty interesting correlation as bonds sell off and as yields soar, volatility spikes and equities get killed. And so now,

Starting point is 00:08:13 if you're just looking at the chart, looking at corporate bonds, they're really rolling over. You see those yields, those junk bond yields really bending upwards. So that means higher financing costs. It means for those historically over-indebted corporates, they have to roll that debt over, and it's coming at a much higher rate. And the crazy thing is a junk bond, right, that means you're a poor credit. It means that you could default on your debt. But yields are only 6%. We have CPI that's going to come in here at 8% probably with this next CPI reading.

Starting point is 00:08:43 So even before default risk, this isn't like a sovereign, this isn't the United States government. So they can nominally default. So even before default risk, there's a negative real yield. So yields have a long way to go, and the debt markets are still very, very mispriced. So what that's telling everybody is that unless the Fed comes in, and I think ultimately the endgame is some form of yield curve control, there is a lot more pain to come in these debt markets. And expect volatility. Expect volatility is a great way to put it. You've got a chart here of the Vanguard total bond market ETF, and this thing just seems to be in a free fall.

Starting point is 00:09:22 What is that showing you? Yeah, so just kind of another one of these things to watch. BND is the ticker. It just takes basically all bond market and just kind of compiles it into one ETF, gives you exposure and you can you get a kind of a coupon dividend payment if you hold this ETF. But really just looking at the chart, especially since COVID, you see that kind of rapid fall and then Fed comes in, saves the day and a quick rebound. But this is falling off a cliff. So in terms of just like the overall market to leveraging that we're starting to see, and we're going to get to Bitcoin in a second. But just talking about the kind of the global liquidity environment that the kind of across asset classes performance deleveraging is kind of in the making here. And so it'll be really interesting to see what that pain point is for markets, for the Fed, for the broader economy, because it is coming.

Starting point is 00:10:11 Liquidity conditions are tightening. Financial conditions are materially tightening. And it's because of this record high inflation environment where fixed income kind of paradoxically high inflation is not good for asset prices because these fixed income instruments really, really sell off. And the second and third order effects of that are large. Absolutely. We've got the Bitcoin kind of data as we've looked at this, and you've got the futures three month annualized rolling basis. And this just appears to keep going down over time, over the last, you know, call it six to eight months or so. What is that showing you and why do you think this is so important? Yeah, so I kind of have three prongs to my market analysis, especially with Bitcoin. You know, the first part and what's driving really everything right now is the macro backdrop.

Starting point is 00:10:59 And so we have kind of this long view, this thesis that the global fiat currency environment is so over indebted that the end game is essentially, you know, perpetual inflation, perpetual monetary expansion. That's the macro environment. And we're kind of in this secular or this, you know, little intermediate term kind of risk off environment so that the macro is the first prong. The second prong is kind of the supply side dynamics on chain. We can look at all this really cool stuff. We have this secular adoption of Bitcoin, the asset itself. And the third, and it's really important for price action, is derivatives, right? And so you can see here during kind of the two bull runs we saw in 2021, we saw this kind of derivative market speculation really, really pick up.

Starting point is 00:11:46 And so this annualized rolling basis, essentially what it is, is you can sell futures contracts or Bitcoin, and you can short this and you can long the spot instrument and you can capture kind of this risk-free neutral yield. So in April, you could get like a 45% annualized return by just selling three-month futures long the spot, capturing the difference. This happens in other commodity markets as well. You see like oil will trade ahead of the current spot price or below the spot price, which is called backwardation.

Starting point is 00:12:13 Ahead is called contango. So really right now, these contango yields are almost nothing. It's like 3% annualized. So it's trading like in the three-month future, it's trading like barely 1% over the spot price. So all of this kind of derivative speculation native to the Bitcoin, to the crypto markets, what this is telling you is it's gone. It's basically all gone. It's completely unwound since November. And so, you know, there's not really kind of that chance for a huge, huge deleveraging event.

Starting point is 00:12:40 You know, liquidity event in the legacy markets aside, that speculation and that, you know, kind of open interest that leads to these really huge, long liquidation cascades. it's it's it's looking pretty healthy in that regard. Makes sense. And then we've got a realized price and MVRV. And one of the things that I love looking at is just that realized price seems to be a pretty strong floor. What's this showing you? Yeah, realized price. That's just kind of this average Bitcoin cost basis for every UTXO, for every, you know, technically that that Bitcoin, that individual Bitcoin on the network. This is just that average cost basis. So right now it's about $24,000. And, you know, that essentially has served as like kind of the ultimate floor generational buying opportunity if it dips below that. You know, people ask me, how low can Bitcoin

Starting point is 00:13:24 go? I don't know. But I guess my kind of on-chain framework, historical framework is that $24,000, $25,000 threshold is like, you know, hand over fist buying opportunity. Don't know if we'll get it. But, you know, just looking at that realized price trend, that's, I think, the most kind of pure form of looking at Bitcoin's monetization process. Got it. That makes sense. Joe, what questions you got? Dylan, good morning. Thanks for joining us. There was news this morning that Saudi Arabia is in talks with China to start pricing and selling oil in the Yuan. What would this mean if this was to go through for markets globally? Yeah, I mean, ton of implications there. And I think your next guest will dig into that a lot,

Starting point is 00:14:07 Jason Lowery. Huge geopolitical implications. Petrodollar system has been in place since 1973 basically just uh you know kind of drove a lot of demand for treasuries and afforded the united states this exorbitant privilege of being the the world reserve currency and kind of giving like that that international that foreign demand for dollars um so it allowed us to have basically a current account deficit as well as a budget deficit so it allowed our our biggest export in the u.s is dollars it's not oil it's not it's it's it's treasuries and that's been the case the last four decades, five decades, really. And so we're seeing a shift here. You know, the implications of the Ukraine-Russia war and, you know, talks heating up about basically energy

Starting point is 00:14:54 exporters pricing their oil or their energy in anything but dollars. I mean, I don't think that the system is necessarily over today. There's going to be some time for that transition to occur, but definitely really, really big kind of geopolitical implications recently. Gotcha. John, what do you got for us? Dylan, lots going on in the market right now, but clearly interest rate hikes are one thing that people are talking about. What is the ripple effect across different asset classes

Starting point is 00:15:21 with this potential rate hike going to happen tomorrow? Yeah, I think for the most part, I mean, I'm not sure. There could be a knee-jerk reaction if the Fed hikes a little more than expected or maybe they don't hike at all. I think the consensus is just one rate hike, 25 basis points. But I think more broadly, it's that you see kind of the Treasury market is really telling the Fed what it's going to do. It's already tightening for the Fed.

Starting point is 00:15:43 So a 25 basis point hike is more so just kind of the Fed signaling that it's doing something. But really, I think everybody knows, and I'm watching these credit markets. I know for damn sure that the Fed and everybody is watching these things as well and watching financial conditions tighten. And so I think they're really going to move slow with this. They don't want to break things. And even at 100 basis points, 200 basis points,

Starting point is 00:16:07 It's like a 2% Fed funds. Real interest rates are still deeply negative. And so we'll see what happens. I think that first hike is more just signaling than anything. But I'm really interested to see how far they get with this hike cycle because I think it's not going to last too long. Yeah, I saw Goldman came out this morning and said they're looking at seven rate hikes of 25 basis points.

Starting point is 00:16:29 We'll see if they get there. Dylan, when you start to think over the next two to three months, what are the things that you're explicitly looking at? Is there something that every morning you're waking up and you're checking from a data point? Is there a specific event outside of the interest rate decisions that you're looking at? Like put us in kind of the tactical seat as to what you're thinking about over the next 60 to 90 days. Yeah. So, I mean, obviously, the Bitcoin market's been quite boring, just kind of chopping around in this sort of range. It seems more like recently it's just kind of been crypto market traders, you know, PVP.

Starting point is 00:17:02 There's just it's just zero sum kind of liquidity games, trading games, bitcoins chopping around. If you're trying to actively trade this, you're getting you're getting chopped up and probably losing capital. So what what really I'm looking at is more so, you know, given that I think the macro environment is a driver at this point, I'm looking for somewhat of a kind of volatility spike, like leverage sort of capitulation and equity markets. And I think that's coming. I think we're in the process of a sort of deleveraging event. And I think ultimately what leads the Fed to kind of this end game yield curve control, you know, implementation is a really just a huge capitulation event in equities. And that sounds pretty dark, but just looking at kind of just even the charts itself of all this credit market, you see just this deleveraging occur. And so ultimately, I mean, I'm happy to buy Bitcoin in this range, really cheap, nearly 50% off the highs.

Starting point is 00:17:57 And I think long term, it's a fantastic stacking opportunity. But I think really like the generational bottom comes in Bitcoin when we see this, you know, broad based capitulation volatility spike in the legacy markets, you know, something like like we've seen in previous sort of recessions, which I, you know, I ultimately believe we are we are headed for a recession. Got it. And when you start to think about Bitcoin's role in that recession, I guess my last question is just like, how do you see it performing? Should we expect it to sell off if there's some sort of liquidity crisis and then recover similar to what we saw in the recession of 2020? Or do you expect something else? Yeah, I mean, so I think what people have to understand is that, you know, BTC is, you know, ultimately the denominator, you know, the second the second input in that trading pair is USD. And during a recession, you know, during a credit contraction, the United States dollars is ultimately increasing in value. And so while fiat are basically, you know, politically programmed to debase over time, what we see during credit contractions is that temporarily reverses.

Starting point is 00:19:01 And usually it's actually in a really sharp manner, a violent manner, if you want to think of it, where kind of every asset sells off in tandem because of this broad-based leveraging event. So, you know, I don't know, like I don't have a specific price target or, you know, timeframe for when this all occurs. But I think ultimately the response is going to be the same Keynesian response we've seen and really the only politically acceptable response, which is more stimulus, more monetary debasement and credit creation. And so I think we are, you know, somewhat close to the end game here in the fiat world. And that sounds somewhat crazy. But I think the kind of the tail risks of fiat, kind of the fiat currency system of deflationary depression, deleveraging event, and hyperinflation. And unfortunately, this sounds quite crazy, but I think those tail events aren't really all that kind of improbable or as kind of tail distribution as you would expect. I think the Fed is really, really trapped where ultimately they have to let this thing, this entire system completely unwind or implement yield curve control into inflationary impulse in a commodity shortage. And that would kind of the implications there would be massive. And so, you know, short to medium term, a little cautious with the Bitcoin price.

Starting point is 00:20:21 But long term, I've never been more bullish. And I think really it's kind of the only escape out of this fiat currency trap, if you want to think of it like that. Yeah, I tend to think that you are more right than wrong, my friend. Where can we send people to find you on the Internet or sign up for the newsletter? Yeah, so you can find me on Twitter. Just the newsletters in the and just in my in my bio there, the subscribe link. I post a lot of my thoughts on Twitter just kind of you know

Starting point is 00:20:49 fully transparent not right about everything definitely not but I think you know like to document my thoughts on markets and you know you can find me on the bird app. Hi see you later buddy Peace. Thanks so much for listening to today's episode I really hope you guys enjoyed this one make sure you're subscribed

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The Pomp Podcast - #868 Bitcoin Holding Steady Through Macro Uncertainty w/ Dylan LeClair

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