The Pomp Podcast - #923 Dylan LeClair On Why The Bond Market Is Flashing Warning Signs

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 00:02:57 deposit with our exclusive podcast promo code pomp100 go check them out at betonline.ag all right let's get in this episode 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 Investment. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, we got Dylan LeClaire coming on. Dylan, my friend, how are you? What's up, guys? How are we doing?

Starting point is 00:03:35 We're doing fantastic. How's life? Everything good? Sentiment check on Twitter, all good? Yeah, doing great. You know, not too much has changed in the Bitcoin price action recently, but macro is heating up and it's getting really interesting. Woo! All right, let's jump into, you got the US 30-year treasury yields to start with, and it's going just up. Just looks like it's just taking a little rocket ship ride here.

Starting point is 00:03:57 What's going on with the 30-year? Yeah, more bonds talk today. Like I said last week, and, you know, I've said it a bunch on Twitter, if you want to understand why Bitcoin's trading like it is, look at equities. And if you want to understand why equities are trading like they are, you have to look at credit. You have to look at the bond market where everyone's talking about the inflation prints and really the biggest impact is in the bond market. So we see the 30 year treasury, but really the entire treasury curve bending upwards just today, just before we came on, actually 30 year treasury broke above 300 basis points, 3%. And so I think there's, you know, there's a trend, a secular trend, which I show in the next chart of the 10 year and kind of this lower high pattern that we've seen basically for the last four decades.

Starting point is 00:04:39 And so it's getting very, very, very close to a lot of these kind of to really a break in trend of this lower high pattern. And there's a whole lot of debt out there that needs to be rolled over. This is how our monetary system works. And so when yields spike like this, not only is the value of these bonds getting mark-to-market lower, but at the same time, the financing costs for all of this debt, the hundreds of trillions of dollars of debt in the global economy, is rising rapidly. So there's a lot of interesting stuff happening. What is the issue with the breaking of the trend? If that occurs, what are the ramifications or impact, in your opinion? Yeah. So, I mean, essentially, just to kind of say it again, I think the point needs to be hammered home that all of this debt in the system, all of this money supply, money is debt in the system. Money is created through lending and it's destroyed through debt default or repayment.

Starting point is 00:05:31 And so when debt has to be rolled over, like all debt has to be rolled over, the U.S. government's $30 trillion in debt and they're consistently running higher and higher deficits. They fund themselves through tax receipts, but increasingly it's through debt. And they were relying in 2020 and 2021 on the Federal Reserve to monetize that debt. The Fed's saying inflation is running high. We've got to step out of the market. And now it's entirely up to the market and up to investors to basically to fund the U.S. government. And it's through that Treasury issuance. And so with these yields rising, it's getting a lot more expensive for the Treasury and really everyone else in the corporate world,

Starting point is 00:06:07 to individual investors to say mortgage rates, to finance this debt. And so we're not starting to see the kind of second order implications of this, which is really just kind of a balance sheet crunch. But I think that's to come. And I think that's the biggest story of 2022 so far. Yeah, it's fascinating to watch this happen. You've got this chart here with gold over global bonds. And again, rising very rapidly. What is this telling you? Yeah. So why am I talking about gold? Why am I talking about bonds to Bitcoin analysts? I think really what we see here, this is a multi-decade chart. It's a trend of hard money outperforming soft money. We have fiat-denominated bond markets selling off in a rapid fashion. And I have the Vanguard Total Bond Market Index in the chart after this that we can show. But essentially, gold, hard money, spent hard money for millennia against fiat-denominated bonds.

Starting point is 00:06:59 What's this chart show when we see the trend really breaking a huge decade-long cup-and-handle pattern? Well, it's showing that hard money is outperforming soft money. And so I also like to look at, say, like Bitcoin versus gold, which is the hardest money against hard money, which is consolidating. But I think this trend, this broad trend of hard money outperforming soft money, And I have later in the chart, we can go over this, but it's USD versus JPY, the Japanese yen. The dollar is almost like the cleanest of the dirty shirts. And so while we see bonds selling off, while we see the dollar really depreciating against real goods and services, we see stuff like gold. And I think eventually, in my opinion, Bitcoin, which is consolidating right now, going to outperform in a big, big way over the coming decade.

Starting point is 00:07:48 When you see Bitcoin over treasury bond futures, I know you've got this chart here as well. It looks like it's consolidating. So it's not exploding upwards yet. What's your expectation for this? Yep. So this is a log chart. Important to kind of understand that. It just makes more sense to chart Bitcoin because of its exponential trends and logarithmic scale. But I think this is the chart that Wall Street doesn't want you to see. And I think eventually this is going to break out to all time highs. And it's almost like the battle of treasury reserve assets. The treasury market is that world reserve currency. It is the asset that basically all risk is priced off of. And I think the pioneers, the forward-looking individuals and corporations are saying, I think this Bitcoin thing might be the new risk-free rate. It might be the new Treasury Reserve asset. And while it is super volatile, this is really kind of – I like to denominate assets in each other. I mean, denominating in USD, obviously, there's signal there because everything's priced off the dollar in the global economy, most everything. But denominating assets in each other, I think, is really telling and kind of shows these big, broader trends. So while this does look like pretty similar to the Bitcoin chart alone, bonds have been selling off in a big, big way.

Starting point is 00:09:01 And so this is actually outperforming and looks better than just the USD chart. When you look at the Vanguard total bond market ETF, just down, down only over the short term here. What is this telling us? Yeah, this is just showing that fixed income investors are getting their face ripped off, essentially. And Bitcoiners, they were kind of chirping at bond investors, why would you ever hold bonds through 2020, 2021? And this is why, in an inflationary environment, really fixed income gets absolutely killed. And so if you bought fixed income, whether it's Vanguard total bond market ETF, treasuries, et cetera, and locked yourself at a 1%, 2% yield, not only is inflation just killing your real returns, it's actually negative, but also because of the duration of these instruments, the longer dated the bonds, as yields rise, that the value of those ETFs themselves fall. And so you lock yourself into a low yield and the principal value of your holdings decline in the meantime. And so fixed income investors, really, I think I saw a really interesting stat this morning.

Starting point is 00:10:08 There's 500 or so fixed income bond ETFs that trade on the NASDAQ or in U.S. markets. I think there's only eight that have a positive year-to-date performance, and they're only like 1% to 2%. So fixed income across the board, because of these big, broad trends, treasury markets selling off in a big way, fixed income across the board is getting murdered. So people will say, you know, Bitcoin's struggling to perform, but the biggest markets in the world where there's $80, $100 trillion of assets, they're getting murdered. And so it's important to kind of keep that in mind when you're looking at these markets. How about the U.S. dollar currency index? That seems to be pretty telling as well and kind of fits alongside this exact same thought process. Yeah, so here's the trend.

Starting point is 00:10:48 We have the dollar debasing against real goods and services, but we have most all other currencies. I mean, not everyone, but a lot of the biggest currencies in the world that are depreciating against the dollar. So again, the dollar is the cleanest of these dirty shirts. So important to note that the dollar is the world reserve currency. And so most investors, there's a ton of capital around the world that's implicitly short dollars. They have dollar-denominated liabilities. And so they're selling, whether it's their exports or some central banks are selling

Starting point is 00:11:15 their currencies for dollars. Essentially, their dollar-denominated liabilities can create the short squeeze. If you look at what happened in COVID, at the same time that every asset on the planet sold off, what happened to the dollar index? There was a super spike, right? So we're not there yet, but this is kind of indicative of tightening financial conditions. And really, it's showing that weaker fiat currencies, the euro, the yen, are selling off faster than the dollar. And so I think like kind of my case and what a lot of other investors in Bitcoin kind of think is that the dollar is failing, but it will be the last fiat to really fail, to collapse. And that sounds somewhat dark, but in essence, all these fiat currencies are weakening and are designed to weaken, are designed to debase.

Starting point is 00:11:59 But the dollar is, again, just the strongest of these weak currencies and because we are in this world reserve currency status. And so if you want to look at like Bitcoin's chart in a lot of these, you know, emerging market currencies or just other currencies or say like the Japanese yen, the gold denominated in yen, the chart looks way, way different than a dozen dollars. And so as a U.S. centric investor, it's important to kind of understand that there are other markets and that the dollar, even though it's weakening, a lot of other countries have it a lot worse. So when we take a look at this last chart, we have JPY, BOJ, and then the relative fiat decay. And this is just a continuation of what you're describing? Yeah. So my kind of thesis and what I've kind of repeated on this show for the past quarter, really all of 2022, is that Bitcoin's consolidating. It's in the accumulation phase. All the on-chain metrics that we show didn't go through any today, but all the on-chain metrics that we show, most of them show the hodlers are stacking and the free float supply is kind

Starting point is 00:12:59 of constraining. Bond market's selling off. Bitcoin's correlated with the NASDAQ. These are kind of the big ideas. And my case, my thesis is that eventually the bond market breaks because inflation is at multi-decade highs and something, you know, whether it's, you know, kind of under the surface, something in the credit markets break in the plumbing of the financial system. And what happens? Because of the lack of tools the Federal Reserve has, right, they've only lifted rates by 25 basis points and they've done a decade of quantitative easing. It ultimately leads to yield curve control. So what are we showing here? We're showing the yen against the dollar. And look at the chart. It's broken multi-decade highs. So why is that? Well,

Starting point is 00:13:38 if you look at the last candle, it's kind of wild, right? What happened there? Japanese, the Bank of Japan implemented yield curve control. They're saying, we're going to buy these bonds. If you let it get above this rate, which means if the bonds sell off below a certain level, we're going to buy an unlimited, in theory, amount of them. And so this is two, again, This is two relative fiat currencies. So they're both decaying in real value, but the yen is depreciating rapidly against the dollar. So if you want to do this thought experiment, when the Fed inevitably flips course, and

Starting point is 00:14:08 they will, it's a matter of not if, but when, you have an absolutely scarce monetary asset in Bitcoin against a fiat currency that's, in theory, going to be printed ad infinitum to keep the bond market held together. And so that's why holding an absolutely scarce asset in the face of yield curve control and theoretically, an unlimited amount of debt monetization is very, very powerful. We're not there yet. And the Fed's still jawboning saying they're going to tighten and they somewhat have to. They're kind of they have that political pressure to do so. But bear none, all kind of roads lead to yield curve control at more debt monetization and credit expansion. This is the

Starting point is 00:14:44 endgame of the long term debt cycle. We're living through it. And, you know, the days and weeks go by and it feels like nothing's happening and Bitcoin is doing nothing. But make no mistake about it, hodlers understand this end game, they're quartering the market. And if not when, or I'm sorry, when not if yield curve control comes, Bitcoin's going to make this yen chart look like a joke. One of the things I've been thinking a lot about for like the last 24 hours, so I'll take this with a grain of salt, is recently Mohamed El-Iran, the Alliance Chief economic advisor and the former CEO of PIMCO. He went on CNBC yesterday. He started talking about the raising of the Federal Reserve's inflation target rate. So right now it's 2%. He started

Starting point is 00:15:31 talking about, well, what if they raise it to 3%, which 2% to 3% doesn't sound crazy until you're like, well, that's a 50% increase in the inflation target for the world's most trusted, largest central bank of the world's largest, most powerful economy in the world. What is the impact of stuff like that? How crazy would that be if that was to occur? Yeah, well, I mean, I think at the very least, the Fed's credibility, if they had really any left or any smidge of credibility left, has really taken a hit. The repeated line of inflation is transitory. 2% is our long-term target if it overshoots a little bit. And now inflation is at 8.5% and continuing to accelerate month over month. There's a problem. And the worrisome thing is that really, I don't think

Starting point is 00:16:21 monetary policy is the correct tool here. There's a constraint on real goods and services. There's a commodities crunch. There's an energies crunch. There's a ton of CapEx underinvestment over the past decade. And so these things aren't going to be resolved easily. Potentially, we're kind of at the crux of this, you know, four decade long trend of globalization reversing. And so the all these things are super inflationary. If the US wants to onshore manufacturing, good luck with CPI, you know, averaging at three, 3% over the next decade, it just doesn't seem doesn't seem too feasible. And so the reality is, and these are, again, we're repeating these big, big, big picture ideas here. There's hundreds of trillions of dollars of assets that are priced

Starting point is 00:17:05 off of basically negative real yields. And so there's a problem. There's a big problem. And so every investor on the planet needs to continue to ask themselves how am I positioned? Is my capital not just in nominal terms, but in real terms, in purchasing power terms?

Starting point is 00:17:19 Am I insulated from all this? And I truly believe even at these levels, if you're holding fixed income products, even if you're holding just a lot of equities that are valued off of these negative real yields, are you insulated? And I would say, in my opinion, no. Now you're not completely insulated. You may be in nominal terms, but in real terms, you're losing purchasing power at a rapid rate. So my position is I hold Bitcoin and I continue to buy Bitcoin every single day. That's unchanged. I'm not marking my position to market every quarter and any leverage if there is on the position is very minimal. So volatility doesn't worry me.

Starting point is 00:17:54 Joe, John, what questions you guys got? Dylan, when you look at what's happening around the world, we saw that Australia today is announcing that they are going to go ahead and approve a spot ETF that is linked to other spot ETFs. What are your thoughts around how that can affect the market moving forward? Yeah, I mean, I saw Barry Silbert quote retweet Gary Gensler today. You know, I think it is somewhat kind of crazy or asinine that we don't have a spot ETF in the United States. It's definitely has nothing to do with investor protection. And I think it's a matter of, you know, it's a matter of time until we get one. I imagine like Grayscale Trust with 600,000 plus Bitcoin will be converted. How that works in practice is something that I'm not sure of the details. But, you know, the floodgates will be open when that happens. There's a whole lot of capital that can't just go buy Bitcoin on Coinbase. the institutionalization of Bitcoin. There was kind of that landmark of 2020 with MicroStrategy as the first publicly traded company, but it's still not too mainstream. It's still very hard

Starting point is 00:18:55 per se, these credit funds, these fixed income funds, maybe pensions to allocate to Bitcoin itself. They can allocate to publicly traded companies with Bitcoin exposure, but it's still really hard to get exposure to the asset itself. So I think in terms of Australia's capital markets having access to it, they're expecting, I think, I saw a billion of inflows. So not too significant, but the expected US equivalent of that would be 100 billion. And so that's significant. We're not there yet. But again, just a matter of when, but not if. Gotcha. Joe, what do you got? Dylan, how do you think about timing for the Bitcoin market in general? We've obviously moved sideways for a period now with some greater uncertainty when it comes to the global economy

Starting point is 00:19:37 and interest rates and so forth. And we've moved in line with equities. How long do you think this last? And more importantly, what are you looking at when it comes to a breakout? Yeah. So really my kind of base case is I'm watching more of legacy markets than I ever did in terms of volatility indices. So the VIX, I'm watching credit really closely and watching for better or worse, the kind of the positioning of the Fed. They're still in the kind of tightening mode. They haven't even begun to withdraw or to kind of taper their balance sheet. And so I think we're in for another kind of quarter or so, maybe longer of volatility and likely drawdowns in equity indices. And I think it's really a matter of time until we get a Fed pivot. The exact

Starting point is 00:20:20 timeline is unknown. But for the Bitcoin investor, I mean, you can set limit orders a little bit lower, likely to fill, maybe not. Personally, I'm very comfortable with continuing my dollar cost averaging strategy. And on a personal level, as well as with the fund I work with, which is just Bitcoin, a Bitcoin denominated alpha fund, the whole goal is to outperform Bitcoin. And so when that time comes where, you know, it's peak fear, maybe we see equity market capitulation, credit market capitulation, something in the kind of the plumbing of the financial system really breaks. We're looking to actually increase our Bitcoin exposure and likely adds, you know, a good amount of leverage. Not there yet. And that's not something I'm

Starting point is 00:20:59 advising for the average person. Simply stacking spot Bitcoin to cold storage is more than enough. and will definitely insulate you from this kind of debt monetization and monetary expansion that is to come. But yeah, that's, you know, that's what I'm completely comfortable with. I think anybody that's buying Bitcoin today shouldn't be thinking in terms of days, weeks, months, even quarters or years, but just have a really long time horizon. And if you do, you know, you'll do great. Dylan, my last question for you before we let you go is if you had to think out over the next, I don't know, two, three years, uh, you get to pick one chart to pay attention to, to understand both the macro economy, but also Bitcoin. What's the one chart that you're

Starting point is 00:21:41 like, man, this is the one I would pay attention to. This is the one that I would put the most importance on. Yeah, that's, that's a really tough, that's a really tough question. I mean, I would say, I would say, um, you know, even though we didn't even show it today, just probably the Bitcoin chart itself, price action is definitely important, but if not that, then I I would definitely probably choose maybe the VIX or some credit market kind of tool. I really think that these are the tells that the legacy system is in. It's not last days because, again, this sounds like very, very doomer. But in terms of the macroeconomic backdrop, we have to remember that the world's more over-indebted, the U.S. and the world, than it's ever been.

Starting point is 00:22:23 Interest rates, maybe not now, but as of a year ago, were lower than they've ever been, especially in real terms. And so really, the only way out is for financial repression to continue, meaning inflation higher than yields. And so this is basically every capital allocator's dilemma. And I think, again, just to continue to repeat myself, I feel like I've been beating the drum on this for over a year now since I've been doing this job full time, and especially since I've been coming on here. But this is what every capital allocator needs to ask themselves, is how are you going to outpace the financial repression? And my continued response is Bitcoin. Yeah, I think that that so far has proven to be a pretty good strategy. We'll see how it plays out moving forward. But we appreciate every single Tuesday you coming on and educating us. My understanding is that you're going to be gone for a couple of weeks.

Starting point is 00:23:17 so what was it a three-week uh no dylan or maybe lost at sea without you there buddy yeah headed to europe for uh for a few weeks to have some fun but i will be that just sounds cool headed to europe like i'm just going over here i'll see y'all later uh what what's uh what's up with the uh the follower account how uh how are we looking on that even when price down slash sideways uh account still growing right oh 155 yes sir yeah i like it i like it um all right where uh where oh there we go and obviously the newsletter as well

Starting point is 00:23:50 anyone who wants to go check out Bitcoin Magazine Pro provides an in-depth look at the Bitcoin market daily content etc I appreciate you man

Starting point is 00:23:58 any last words you want to leave the people with no appreciate you guys as well and we'll catch up in a few weeks alright have fun

Starting point is 00:24:05 stay safe cheers thanks so much for listening to today's episode I really hope you guys enjoyed this one make sure you're

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The Pomp Podcast - #923 Dylan LeClair On Why The Bond Market Is Flashing Warning Signs

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