The Pomp Podcast - Tavi Costa, Global Macro Analyst at Crescat Capital: What Will Happen To Crypto During a Global Recession

Episode Date: July 17, 2019

Tavi Costa is a Global Macro Analyst at Crescat Capital. In this conversation, Tavi and Anthony Pompliano discuss Bitcoin, cryptocurrencies, the current U.S. economic markets, China, precious metals, how central bankers handle recessions, and what Tavi thinks is most likely to occur in the macro world over the next few months. -----Curious about Cryptocurrency but don’t know where to begin? Storm Play is a free and fun way to start earning in exchange for you time. Simply download, register and discover microtasks that meet your interests and be rewarded with Storm Bolts. These Bolts can then be converted and withdrawn into your favorite cryptocurrency, including Storm Token, Ethereum (ETH) and Bitcoin (BTC.).  Earn cryptocurrency rewards by playing new games and trying out cool products! Download the app to start earning crypto here! https://bit.ly/30pSxh9 (Available for iOS and Android). -----If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe.This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Tavi Costa is a global macro analyst at Crescat Capital. In this conversation, we discuss Bitcoin, cryptocurrencies, the current US economic markets, China, precious metals, how central bankers handle recessions, and what Tavi thinks is likely to occur over the next few months in the macro world. I really enjoyed this conversation and I hope you do as well. Are you curious about cryptocurrency and you don't know where to begin? I've got a great way for you to try. You can use Stormplay, a free and fun way to start earning in exchange for your time.

That's right, you don't necessarily have to make a financial investment to begin. You can simply download register and then discover these micro tasks that they present you that meet your interest and then you're rewarded with these storm bolts the bolts are then converted and can be withdrawn into your favorite cryptocurrency including the storm token ethereum or my favorite bitcoin if you go and download the storm play app today you can earn cryptocurrency rewards by playing new games and trying out cool new products it's worth a try and it's a great way to get started remember go check out storm play in the app store today anthony pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast

are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I am super excited. This might be one of the podcast episodes I've looked forward to the most. I've got Tavi here with me and he's going to do his best to share kind of a bunch of data and thoughts around answering the question, just what is going on in the global macro environment? So thank you so much for taking the time to do this. Hey, Pom, thank you very much for having me and

I look forward to the conversation as well. For sure. For those that don't know, maybe let's just start with your background and kind of where you work and everything. So they understand the perspective that you're coming at this from. Yeah. So I was born and raised in Brazil. I moved to the U S right in the midst of the whole global financial crisis. I was back then recruited to play tennis in college at Liberty university, Virginia. Um, then I moved to a private school in St. Louis, finish up my bachelor's degree, moved to Denver, start working for Kresge capital, I've been working here for about six years, and my job was initially on the emerging markets side of things. And I kind of graduated from that and started covering more global macro research.

And so today, along with Kevin Smith, we managed Crescet's portfolio. We have three strategies there, a global macro fund, a long short, and a large cap strategy. Um, and, uh, as part of the investment process, I, I build a lot of, uh, macro and equity fundamental models and, uh, that really help us to, to develop macro themes, uh, that then we invest accordingly. So, um, uh, and it's a few things that I've done. One of them being, uh, the Crescats macro model that I think was a big, uh, uh, change in our investment process in the, in the, in the recent years.

Got it. OK, so let's get right into the meat of this, which is what's going on in the global environment. I think there's a lot of folks in crypto who they frankly hear the pro crypto or pro Bitcoin argument. And the part of the conversation that gets left out a lot in that Bitcoin and crypto community is the global macro environment. So maybe just start with, you know, your take on are good things happening, bad things happening, and then any data that you can share around maybe some of the warning signs that you're seeing. Yeah. So, you know, we work on three major themes in our portfolio today, which I think helps to understand the macro environment we're in. And the number one being how we think U.S. stocks and almost like global stocks are historically overvalued in so many ways, fundamentally speaking, especially public markets. But also there are a few private markets that look the same way.

The second thing that we found is China being kind of the center of a lot of the macro imbalances, especially regarding the credit levels that they have built since the global financial crisis. And we think that that's kind of in the process of reverting. And China being, you know, this world leading economy that helps the world to grow is unlikely to continue in the following years. And the third one is this kind of safe haven aspect of assets that we're very excited about, which is, in our view, ends up being precious metals. But the whole idea really is, you know, if you want to boil down to a phrase, is that there is a disconnect of several asset prices that are near historical levels or at historical levels with, you know, all this debt imbalances that we see globally across government, household, business sectors. And there is a strong potential for a brutal worldwide financial downturn that we think it's likely to happen in two to three years here horizon. Got it. And so as you look out across the various markets, maybe like what are those major warning signs that you're seeing or data points that you're really paying attention to and you're pointing back to and being like, look, this specifically gives us pause or concern. So there are multiple ones we build. We're now actually putting out a few, you know, what we call a macro deck that has, you know, a deck of charts of what we see as macro signs. And I'll go through a few of them. Here in the U.S., we found initially that U.S. stocks are at historical levels in terms of valuations in eight fundamental factors, five of them essentially all-time highs, and three of them are pretty close to it.

And that's not a surprise for a lot of people, but the argument is stocks can get as expensive as they can, but that doesn't necessarily mean that we're at the end of a cycle. What we start seeing is things like the credit markets start showing some real signs of weakness, and especially on the yield curve signs. And we calculated, there's a lot of people that try to look at yield curving versions and spreads between the yield curve. And I think that that's very important, but we try to come up with a much more comprehensive way of looking at the yield curve. And we calculate all the 44 possible spreads in the yield curve. But we see somewhere close to 60% of the yield curve in the U.S. today is inverted, which is just as high as it was at the peak of the housing and the tech bubble. So that for us was a big warning sign that we built this called the macro model, Crescet's macro model, which kind of includes 16 factors, which is, you know, some of them are economic indicators, fundamental factors, and also a few technicals. It's a very simple model, just, you know, acknowledging there's not one single factor that works throughout history to predict recessions.

But if you can accumulate all of them into one and give a score, you know, where are we right now? So we found out that we're somewhere close to the, you know, what we see as very near, like two percentage points away from record levels, which means record level is obviously as high as the score, the closer you are from, you know, being at the business cycle. And this model did a very good job at predicting the previous recessions in the tech and the housing bubble. And it really started to turn, you know, this late stage cycle in late 2015. But that in line with the yield curve inverting in a big way, when we find stuff like consumer confidence being near all-time highs and record low unemployment rate, which are both contrarian indicators that tend to look great at the peak of a cycle. And, you know, things like 60% of PMIs, manufacturing indices around the world right now are below 50, which is a recessionary level. JP Morgan, global PMI, now below 50 as well.

You know, and then the other thing really is two-year yields. Two-year yields are a must-watch, and everyone's monitor should be given a huge emphasis to that research because it's very simple, and it has a perfect track record. If you look at two-year yields all the way back to the 1970s, and you do it in a log version, and you connect the tops, and it creates this resistance, multi-decade resistance line. And every time the two-year yields touches that line and starts to drop significantly, that means that we're either late in the cycle or already at the beginning of a crisis. So the point here is that what is the credit market telling you when you look at the two-year yields? Is they're telling you that there's a chance that the Fed is going to start easing significantly here in the near term? And when you see that at record valuations and late in the business cycle, obviously that never ends well. That's always, has always been a problem for markets.

The other one that we found that was, you know, that I actually tweeted today, which I think it's extremely important, is the convergence of policies of the Federal Reserve versus the ECB. And there, it's an interesting, you can calculate that in different ways. One way we found is looking at the yields. If you can, if you just calculate the spread of US five-year yield versus the German five-year yield you can see that they tend to converge as you as you get very late in the business cycle and it's again another macro sign here flashing uh you know warning signal again um and you know

we're now breaking down from a multi-year trend line and it's and it's very scary it's another one not not not to mention the other things like you know those divergences that we're seeing in U.S. stocks versus the rest of the world index or small cap stocks or transports or this copper. Copper is diverging from U.S. stocks by over 35 percent. So, I mean, the list goes on and on and on. And it's just incredible to us how disconnected asset prices are. And we think it's a huge opportunity right now to be, you know, one way you can do a trade here is that we like a lot is being long precious metals and short stocks. And that ratio just started to work now.

And we think there's a huge opportunity for that to move up in the upper way much, much further here. Got it. And so maybe let's go to the inverted yield curve because I think a lot of people hear that, but they don't actually understand what that means. Maybe can you explain what that means and why it's so significant?

Yeah, there's a lot of explanations for that. Well, first of all, the most famous one is looking at the 10-year yields versus the two-year yields. And idea being, well, first, you know, Fed tends to hike interest rates, kind of approaching the late stages of the cycle here, which happened in the last two years or so. And as that happens, the short,

the front end of the curve starts rising and therefore, you know, starts to cause an inversion. The second thing you start seeing is that people or investors in the credit markets, we tend to be sort of a bellwether for stocks and the economy, especially in the long end of the curve, the 10-year yields, the 30-year yields, they start to lower or fall apart because investors are just, you know, searching for a safe haven and they're concerned about the, you know, the long-term conditions of the economy.

So you start seeing that, you can see that the results of, you know, either long-term rates start dropping and then you can see that the front end of the curve starts rising a little bit and that causes the inversion the one thing we haven't found yet is is this inversion the 10 versus twos which is one of the most popular and people you know and that that really was was a flaw in in in in the bearish thesis that we had and and for me that was will cause creating this this more comprehensive research of looking at you know all possible spreads in the yield curve and how many of them are inverted but you know there are so many ways you can look inversions. This is a very interesting research from Professor Campbell Harvey, Duke finance

professor, and he was looking at 10-year yields versus three-month yields and five-year yields versus three-month yields. And then when they invert for a full quarter, in other words, 90 days of inversion, it tends to lead to an economic crisis in 12 to 18 months. That has a perfect track record as well. We're now over 120, I believe 121 days that the five-year versus three-month yield is inverted today. We put out a chart on this. It's very interesting. Every time that that happens, we've seen a recession follow. So those are all important parts of the yield curve that I think everyone should be paying attention to. And the other argument we hear a lot is that, okay, well, yield curve inversions happen and then it takes another

one or two years until a recession really materializes itself and that's not true at all people are just using one sample here which is 08 or really 06 when that inverted and it took another one or two years until things really start manifesting itself but if you look back in 2000 2000 the inversion happened exactly precisely at the time when when the markets start falling apart The same thing happened in the 70s. So there are other years or other periods in history that the yield curve tends to take a little longer to really trigger a recession, but in other times that it doesn't. Actually, you know, it's actually precisely at the same time. There was one time in history that the yield curve inversion happened even, you know, right during the period of a bear market rally, which was in the early 70s as well, which we thought that we were in this in the beginning of the year. So, you know, there are several ways of looking at a yield curve.

It's obviously a problem. And I think ignoring that is at your own cost. But we see this as an issue. If you look back, inversions tend to be very positive for safe haven and precious metals, especially every time you have an inversion in the yield curve, you start seeing gold to S&P 500 ratio to rise. We've seen that throughout history, which I think is the best trade. Why? Because you don't know. I don't have a crystal ball when U.S. stocks are going to peak. But what I do know is that gold to S&P 500 ratio starts to rise, especially in 06.

So 06, the inversion happened. The recession didn't happen until, you know, 08, 07, late 07. So, you know, but if you're long this ratio, you actually made money while waiting for the recession. So those are, you know, a few instruments one could use as a way of finding opportunities out there. Got it. And so when we look at this and we say, let's believe the indicators, right? You know, the inverted yield curve, et cetera. And we say, you know, there is some sort of downturn that is on the horizon. How do you think about evaluating the severity of a downturn, right?

So it's one thing just to say, we've been in one of the longest bull markets, if not the longest bull market in history, things just continue to look like they're going up into the right, but that's going to change at some point. Okay, we think it's on the short horizon. Is that a 10% drop, 20, 80, like we saw, you know, kind of in the global financial crisis? What do you see there? How do you measure and think about that? Yeah. Howard Marks did a great job at describing this, but talking about how markets tend to move like a pendulum. In other words, if we're expecting valuations to go back to normal levels, especially in public markets, which is a more immeasurable way of looking at quantifying where we are. Well, right now, to go back to the medium levels of S&P 500, you know, fundamental factors, you would go back, let's say, 40% or so contraction in S&P to seeing prices to see we go back to normal levels. But, you know, as we know throughout history and how our markets did a great job at this, as I said, is that it tends to move like a pendulum. In other words, it tends to move farther than the median level. So, you know, if you would, you know, if you would believe in that and believe that history tends to repeat itself, we're likely to see further than a 40 percent decline in U.S. stocks to go back to normal levels. I think that once it reaches the 40% to 45% level, if it does happen and we're managing money and we're seeing this happening, I think that that would be a time to start looking at taking the other side of the trade. Right now, we're not even close to that. We're on the other side of it still. And bear markets, they have phases. You have to watch out. When you have like a 20%, 25%, even 30% drop, you have to take some of the table and wait for a little bounce, which happens quite a lot.

The bear market rallies, sometimes, at least in the last four sessions, we've seen kind of a bear market kind of broke down in three phases. So there's a first lag of the bear market, 20 to 25% decline, and the markets kind of retrace back like 15% and it falls again. And the third part of the bear market tends to be the most severe that really, you know, everyone panics. And that's the time when you want to start taking off or covering your shorts and start taking other positions. And everyone's talking about recession, that we're never going to see asset prices rising again. That's exactly the time to do the opposite. But we're not seeing that yet. We're way far away.

I mean, if you looked at just the global stocks in general or just the rest of the world, the rest of the world is essentially already in a – I wouldn't say – and maybe it's going to be proven in a few years if the bear market really started. But I think the bear market started for the rest of the world. The U.S., you know, it's still obviously all-time highs. And we're seeing a few, you know, a few things like I mentioned, you know, transports and small caps already diverging from the S&P, which I think already started to show some cracks that this recession is really close to starting here. A lot closer than a lot of people think, I would say. Got it. And so when this occurs, you know, both from a historical perspective and also kind of what you're seeing right now, is this something where we see the recession kind of kickstart in a single geography or jurisdiction and then there's kind of like a domino effect around the world?

Does it all happen at once? Like what is your kind of expectation or belief as to how it actually sequentially happens? It's a good question because we've been so far in this conversation focusing more on the U.S., but we look back in China, you know, we think that that's, you know, China is already having huge issues. I mean, it's probably the largest credit bubble we've seen in history. It's a $45 trillion banking system on balance sheet assets with another $45 or so trillion of off balance sheet assets. um you know so in absolute terms and relative to gdp terms is just a massive bubble and you know we're seeing already this not yet or you know in the official numbers i want to be i mean it's perhaps not official uh or or or true um but you know the gdp numbers are still going higher

obviously but we see you know significant uh changes of let's say you know the fourth quarter of 2018, the median stock price in China was down 40%. I don't know in history, any other country that had a, you know, its stock market declining in such a severe way, and that didn't cause a recession. But hey, you know, China is still showing, you know, that everything is mostly fine, and they're not yet in a recession. Obviously, you know, China was responsible for over 50% of GDP growth in the world since the global financial crisis. If we're seeing a reversing path of of that you know obviously we think that the global markets are going to be in trouble so um i think that you know that's that's the one part of the of the puzzle that is very

important is china right china being this this massive credit bubble that is about to burst and what we've been wrong about this is that didn't burst at all at once it's bursting slowly but surely um and you know you're seeing other cracks in places like canada and australia look at canadian housing prices or australian housing prices is starting to to uh to decelerate or decline and depending on the area which you know our countries that had you know a significant um most of the capital outflows from china have been exacerbating house prices in places like australia and canada and also hong kong um so when we talk about yield curving versions for instance in the U.S., as I was alluding to, which is a big deal, this is not only a problem in the U.S.,

it's a problem globally. Hong Kong yield curve is close to 80% inverted today. Canada is close to 70% inverted today. So we're seeing issues all over the world. Today, about 17 economies have their 30-year yields lower than overnight rates in the U.S. I mean, every time we've had this in history, we had a global recession, a global turmoil. We're now seeing political issues in places like China, especially Hong Kong. I also don't know any time in history, and I'm from Brazil, and I had a situation very similar in 2014 when Dilma Rousseff was impeached. What happened with the currency? The currency was demolished. It declined a ton. Sure, u.s stocks went up at a cost i'm sorry not u.s stocks um brazilian stocks went up but at a cost

the currency got uh in in serious trouble argentina was the same problem so there are several ways and when it manifests itself obviously every time the u.s catch catches a cold here uh the rest of the world is is in trouble um so you know we know that the u.s being this historical and when i'm talking about historic i'm talking about for decades the u.s has been kind of lifting the world economy for a long time um and you know if we're very pessimistic in in this in a domestic market here uh we obviously think that that's going to have serious consequences to the rest of the world but china is a big one and now we're seeing this sort of a huge fight between the u.s and china politically or geopolitically speaking which you know just also accelerates the whole problem

There's no way we're going to see any, in my opinion, we're going to see any significant deal agreement between the two countries that will, you know, become prosperous for the whole world. I mean, China still is an economy that depends on exporting goods. I mean, that's the real truth. And when people say, no, it's kind of moving away from that economic model. Well, look at retail sales and car sales and so forth. Everything is either, you know, 15-year lows or, you know, or plunging. So, you know, we're not seeing that transition at all. So I think that that's, you know, the puzzle really is U.S. is, in my opinion, in trouble here.

We're overdue for recession. We have all those warning signals domestically. Globally, we're seeing issues as well. So what are the places that are most, you know, perhaps overvalued or places that look more troubling? I think there are, you know, Australian banks, Canadian banks, some Hong Kong and Chinese ADRs. They're still all-time highs. I'm not talking about the domestic companies. They're all in, not domestic, but the companies that trade in the A-list of shares and so forth.

I'm talking about ADRs, you know, the Babas, Alibabas of the world. It's still, you know, near record levels. So, no, I think that that's all going to, unfortunately, it's part of cycles. It's part of the business cycles. It's not that I'm a perma bear or anything like that. I just think that we're overdue for a downturn in the economy. And then things are going to look bright again. And it's going to be a great time for you to be a long investor. Absolutely. And so as we look out of outside the US, right, so China specifically, one of the data points that I heard recently, and it just blew my mind was, so globally, the debt level is three times that of GDP. in china if i remember the data correctly it's 150 percent of china's gdp and it just blew my mind that compared to the u.s etc china's debt level was so high as a percentage of gdp yeah i mean it's uh uh just a banking system is is for me um you know i don't think we've ever seen anything like this. I mean, it's over 300% of GDP, just the growth in banking assets from the global

financial crisis is close to like 400% in normalized terms. I mean, we haven't seen anything like that yet. And it completely dwarfs places like Japan, ECB, or just the Eurozone, US, Canada. I mean, it's really a big problem. And, you know, we're starting to see a few things there, you You know, also there's divergence in monetary policies of the PBOC, the Chinese central bank, versus the FED is a big deal. You can see that by calculating the spread between the federal funds rate versus the SHIBA rate, overnight rate. And you can see that that spread is at the highest level since the global financial crisis. In other words, the FED funds rate is a little bit too high relative to the SHIBA rates. And remember, they have a pet currency system, right?

So they're supposed to be matching the monetary policy very closely and they're not being able to do that. And why is that? We think that that's because they're not able to raise rates significantly. Otherwise, the whole thing is going to collapse. They can't tighten too much. If they tighten too much, things fall apart. We've seen that. We've seen many times when they do that, that it causes, you know, bankruptcies or just defaults of major banks in China. we've seen things like that before in the last three to five years so um one of the major ones was in 2015 uh when you know when when there was a mini devaluation of the the chinese currency the truth of the matter is that we don't know as nobody knows how it's going to play out necessarily

but one thing we know is that if you look back in history and that's why i like precious metals specifically because it has a long term of of history here that you can look at um gold Sure, some periods of emerging markets, credit bust, you can see a currency devaluing significantly versus the dollar. Some others you see, not that, you see a currency stays at the same place, but equity markets take a fall. Like the Asian crisis in Hong Kong, the currency didn't fall at all. But what happened was 60% decline in Hong Kong stock prices. So we don't know which one is going to fall apart, right? Sometimes it's both.

It's what we call the twin crisis. The one thing that we found, the pattern that happens throughout history is that gold prices in local currency terms tend to rise. And when people tell me, hey, gold has not worked for the last five years or so, it hasn't worked in dollar terms. Look at gold in Brazil and Real or Argentinian peso or Venezuelan peso. In all those places, gold has been a great performer. Why? Because you had issues politically and economically in those places. China, if you looked at gold in renminbi terms, it's kind of starting to break out, which is obviously a very important sign. And we're very long that security as well.

Gold in renminbi terms is one of our trades. I think that that's one likely development in markets in the next two to three years as well. As we've seen, if you looked at gold in renminbi terms, it tends to rise. And there was a situation in 1993 when the renminbi devalued close to, it lost one third of its value in one day. And it was December 31st of 1993. And we're not calling for a one day devaluation. I'm just saying that has happened in history many times in China. China for the last, you know, since the 1900s has changed, it's reset its monetary system. In other words, has created a different currency nine other times. Why is this time different? You know, now on top of that, we have this huge credit imbalance.

So I think that, you know, that, you know, when you couple that with all those issues that I was talking about, I think that we're very close to devaluation of the yuan or a rise in gold prices in renminbi terms. Got it. And so when you think about these safe haven assets, I think the first thing is let's kind of go over how historically have the safe haven assets performed in these market downturns. And then moving forward, what do you think is kind of their role in this market downturn that seems to be on the horizon? yeah it's a it's a good question so there you know if you looked at gold for instance which one that you can go back in history a long time there are times when uh gold may not perform as well as a safe haven even though it doesn't get demolished but i mean sometimes like in october of 08 if i believe i'm right on this date uh there was a significant decline in gold prices that then

you know as the fed started to ease even further and doing a kiwi one kiwi two and we saw gold and silver going parabolic at the time, you know, which I think it's a very, you know, we could be in a similar scenario here. So I think that, you know, gold itself is an interesting asset because, you know, it can get hurt over time as well during the recession, especially gold mining stocks. Now, you know, that's why I like a lot the ratio of gold to S&P 500 ratio is key is because that's probably one of the most reliable ones that we've had in history that tend to do really well when we see crisis. Now, right now, we're not seeing, obviously, there's a lot of people link back gold with inflation, for instance. I think inflation will be just a

cherry on top of the whole thesis of precious metals and safe haven stocks, like mining stocks in general. But one thing that you should look at, I think, or everyone should look at is the two-year yields, as I said, when they drop, but nominal rates when they drop, it causes real yields to drop as well. And if you look at real yields in an inverted version versus gold prices, they follow each other very closely. And for instance, the five-year yield, real yield in the US in an inverted version, if you looked at that chart, it just broke out from a downward trend, which, you know, it would give another support for gold prices to continue to rise as well. So I think that that's, you know, gold here is as historically has done a great job of storing

value. And, you know, what I like about this whole Bitcoin idea of cryptocurrencies in general is obviously we, you know, we have similar views in terms of it's very similar ideologies in terms of both of us, you know, the mining, the gold bug mentality and the crypto mentality are both desperate for for a better solution than what we have in terms of fiat currency that is backed by you know monetary systems that are completely backed by a corrupted and crooked um um governments and you know so it's kind of a um i agree 100 with that the only reason i like gold more is just because gold has more history and i can really rely on that but um so i think that that's all, you know, I'm very happy to see more people getting behind this thesis that

governments shouldn't be running, you know, global fiat anymore. And we should maybe be searching for another alternative for that. So I think that's real, the whole idea of like gold, you know, let's say gold standard, for instance, it's a very interesting thesis, right? The whole point of that is to bring back discipline for governments. Look at how much money we've been printing and how much debt we've got into here in the U.S. and globally. I mean, it's insane. I did a research that since the 1970s,

so since the gold standards, we left the gold standards in 1971, there was only one presidential term that I was able to grow real GDP growth net of government debt. I mean, for me, that's the algorithm of a good government, right? Okay, you're going to grow the economy. Sure, grow the economy, but at the same time, please don't grow debt. I grew up in Brazil, and that's been the problem my entire life, just watching that. And then when I looked at the U.S., it's the same problem.

We've only had one presidential. I don't want to get political on this at all. This is a very apolitical statement. The point is we lost discipline. We lost our minds. We're just printing money and creating more and more debt. At what point are we going to see, you know, currencies losing, you know, a destruction of value of fiat currencies? I think we're getting very close to it, especially because people are starting to really cause this disbelief of central banks in general, especially from the crypto community.

I mean, I like that a lot, sympathize with that idea a lot. Got it. And so, you know, look, I have said this before, but I really do think that folks who are interested in gold and precious metals tend to have drastic overlap with people who are excited about Bitcoin because they tend to agree on a lot of the structural challenges and frankly, failures of the legacy financial system. And as part of that, you know, one of the things that I think a lot about is there's two separate components to the legacy financial system that really stick out in my mind. There is the central banks and governments, and then there are the financial institutions, right? The four banks, the financial service companies, et cetera. One of the things that has recently come about is pressure on the independence of those central banks, right? So we see in Turkey, for example, the removal of the central bank, right, central banker, and they replace him. Here in the US, we see the president really kind of pressuring the Federal Reserve and chairman, etc.

And then something caught my eye recently on Twitter, where there was an economist, I think his name is Art Laffer, who came out and said, well, maybe the idea of the independence of the Federal Reserve shouldn't actually be in practice, right? maybe it actually is the government and the president who should be in charge of kind of monetary policy decisions, et cetera. And that line kind of took me back, right? It almost felt like that idea of independence of the Federal Reserve is like a sacred cow to some degree. But then I read into his argument, what he basically says is, look, the policy decisions of the non-economic elements of government are all under the control of the president and the government. So why would this be any different? Right. And the reason why I'm asking this question, I want your opinion on it is because then I want to talk about what central bankers

can do, what the tools they have when we hit these market downturns. But first, just kind of comment on how you think about central bank independence versus maybe some other of these theories or proposals that are now surfacing given the current environment. Yeah, I just I'm a big fan of um of of discipline and why i like um some sort of gold standard or you know a similar idea to that in which would force um governments and and central banks to not intervene too much in in equity markets or not at all why do we need intervention on that um i think as we soften cycles and or try to soften cycles we end up making bubbles more extreme um we've seen now I mean, literally almost every asset class is at all time highs, you know, aside from precious metals and other things.

But it's it's insane. You know, at some point, you know, we're going to we're going to see something very bad here. I think that governments, the problem of governments and not so much of central banks, I think yet. But I think that that can be transferred to central banks, too. But mainly, I just want to make the point that mainly governments and presidents in general, it's a political interest, right? Everyone is running for the four years and they want to do the best they can to not let the whole thing collapse in four years. And it doesn't really matter. We're not here running for the long term.

We're running for the four years. Obviously, when you see policies like this, you know, like, for instance, forcing the central bank here now, the Federal Reserve, to mocking the Federal Reserve to drop interest rates. I mean, why are we dropping interest rates? I don't I don't understand that at all. I think that that's that's just going to exacerbate the problem. But so in terms of having a more a more independent version of central banks, I personally I'm on the camp of we don't even need that. We don't even need to subscribe to somebody else's view in terms of who is out there who has any crystal ball to understand what's the right decision to make. Obviously, as a money manager and putting my political views aside, which I'm not very actually opinionated on that, I have to think about what are the opportunities of what we're seeing in terms of reducing interest rates and possibility of reversing this pattern of depleting assets of the Federal Reserve and perhaps start printing money again, if we start seeing things like that, I can't see a reason why precious metals would not be, you know,

your best asset to perform in a situation like that. Throughout history it has been, so why wouldn't it be today? And then when you put that together with being, you know, the safe haven aspect of precious metals in terms of that, you know, then it makes absolute sense of being long, things like that. So I hope I answered your question, but I'm not for some reason, you know, I'm not a big fan of intervention at all of markets, especially when I know of, you know, there's no skin in the game for a president, right? What's their skin in the game, is to get reelected. So there's no skin in the game in terms of improving the prosperity of

the economy over the long term. All they want to do is to make things better for the short term. And most of those policies are short-driven policies or end up just making this what we call, or not us, Jesse Felder did a great job of calling this the everything bubble. I mean, it's everything. But I'm not overly pessimistic about everything. I'm just saying there's obviously, we reached extreme levels of valuations all over the world. And at some point, that's going to matter. And perhaps we're getting close to it. Got it. And so as we enter into market downturns, historically, central banks have really had two tools, right? They've been able to cut rates and then they introduced quantitative easing. Maybe comment a little bit on, do you

think that that's the two tools that they'll fall back on uh if there is this market downturn um in the short term uh and then are they going to be effective or do you see other tools maybe entering into what central banks can do that's a good question so you know we've heard a lot of uh of our argument or counter arguments to our thesis that you know i think you guys are wrong because we're living in a different world and we're going to see money printing and um you know and to another level uh that we saw in back then and and that's going to cause markets to go up but i want to remind everyone if you look back in aggregate all central banks balance sheet back in uh in 20 2005 or so right at 2006 all the way to like mid 2008 we printed close to over a trillion dollars

of of assets uh back then or of money at the time and um so you know that did not prevent the whole global financial crisis to really started to unfold. And then as we got into the crisis, and this is not including the first QE from the Fed, as we start really getting into the crisis, we printed over, you know, close to $3 trillion from the peak of the bubble, from the bottom of the crash. And, you know, that's quite interesting to see how, you know, how money printing, When cycles turn, it's, in my view, impossible to or inevitable to really control it. So in terms of interest rate cuts, it's another part of the argument of, well, they're going to start cutting rates and it's going to cause stocks to go parabolic or whatever. First of all, stocks have already reached, you know, extreme levels in almost any way you can look at of valuations.

So, you know, recalling for, you know, another, do you want to squeeze this other part of the juice here? I think it's extremely risky to do that. But, you know, some people were doing it. The one other point that I want to point out here is that, remember, January of 2001 and July of 2007 were both the last times that we saw interest rate cuts by the Federal Reserve. Both of them were pretty much at the peak of the tech and the housing bubble. And we're seeing now, again, 100% probability, and we're probably going to see interest rate cuts here coming up soon. And that's all alarming. That's all alarming.

That's just, you know, Jay Powell just said it today. I mean, it's obviously an acknowledgment that there's weakness in the economy that is probably going to see further problems happening. The other thing that I think it's in terms of more of different alternatives of policies, and I don't know exactly what could be, but it's the problem of inversions. Inversions or yield curve inversions is a big problem. And I suspect that there are going to have to be some sort of policy to, you know, cutting rates is one of them, to reduce the amount of inversions that we see in the yield curve today. And that's the scary part, you know, because when you look at the yield curve inversions, especially of those arguments of people that say, you know, yield curve inversions matter, but when you invert to take one or two years until something materializes itself. okay, well, go back in those two periods and see when the crisis really start to fall apart. It was actually when yield curving versions are not, you know, increasing, they're starting to decrease.

That's the time when the front end of the curve starts to not move down as much as it was before. And that causes the yield curving version to steepen a little bit. The steepening of the yield curve is, you know, is another thing that tends to happen depending on the case here in history is, is the one thing that tends to, uh, to lead to, uh, to, uh, to a crash. Um, so, you know, I've, I, you know, I'm, I'm on the camp that I don't believe that there's this time is different that we're going to, um, central banks will be able to prevent the business cycle from turning. Um, and, uh, and I, you know, obviously have history on my side in terms of that. Um, but you know, policies are getting more and more extreme as, as we, uh, as, uh, you know,

since the eighties or so just compare the eighties, uh, policies versus today. I mean, it's insane. Um, you know, we're, we're taking to another level and I don't suspect that we're going to take it to a new level now. Uh, and why I think that, you know, uh, precious metals are in a very interesting position here. It's a very beginning of a move in my opinion on gold and silver and things like that. Got it. And so, you know, part of this is, uh, if there is things like interest rate cuts and, um, the printing of money. One, uh, you know, if you listen to like a Ray Dalio, for example, uh, there's talk of modern monetary theory, right? And I think his is, uh, whether you like it or not, it's inevitable. We're going to go there.

Maybe just comment a little bit on, um, how you see, uh, MMT interacting or intersecting with some sort of uh global macro event on the downside i think jim grant did a great job explaining some similar type of um campaign or whatever you call that um the theory that was uh heating up at the time i think was in the late uh or early 40s or so um and um the idea being that you know that That kind of theory tends to come in every – during the century. This is not the first time we're seeing things like that, that people start saying we're never going to see inflation again, that this is – we're going to be okay not having discipline and money printing is not a problem and debt is not a problem at all. But I think that that's all, at some point, that's all going to, in my opinion, is going to have to translate into inflation. I believe that the technological moves are obviously very deflationary, positive deflationary for the rest of the world. But at some point, I think that that's going to have to translate into inflation, especially when you looked at just centuries of history of inflationary forces as they come and go. and we haven't had one in a while so at some i'm not calling for inflation the next two to three

years i'm just saying at some point we're going to have to see it that's that's what new history has shown us that that's what what happens and um so at some point you know guys like gun launch are going to be right in terms of interest rates are going to start rising and and that would be the worst that's what worries me the most is the fact that you know is if we have an inflationary crisis like 1974. So those are brutal. There's almost no place to hide. You know, you're, you're smart enough to, you're going to go and buy some smart safe haven assets, but some people are going to be buying bonds and, and, you know, and they're going to be in trouble. You know, bonds are not your, your safe asset if there is an environment,

such an environment like this. So right now it's been working great. We also have some bonds in our portfolio. But we know that at some point, this thing is going to reverse. It's also some sort of a bubble driven by central banks. The only difference is that central banks are likely to print more money and buy more bonds. And that's going to drive yields lower. That's the only difference of those times. But at some point, when we start seeing the eyes of inflation, they're not going to be able to do that again. They're not going to be able to drop rates anymore. And the whole thing, it's going to be a, you know, it's going to be a very different macro scenario. That's, you know, you're going to have to, you know, housing market, how's that

going to look like if we have interest rates or mortgage rates a lot higher than they are today? You know, businesses and private equity, especially businesses have been relying on very cheap source of capital today. And, you know, would Uber exist in the 70s? I don't know. It's a good question. Or would companies be able to be running with so-called zombie companies that don't make any money and be able to be surviving for a long time? I don't think they would survive the 70s. I'm not saying Uber itself, but several companies are out there today. So I think that the monetary theory is another one of those that starts to rise at this time of a cycle, not necessarily calling the end of the cycle or anything like that, but it's a pretty normal thing that happens throughout history of people that have lost their minds in terms of what's the right policy. The one thing I want to say that I thought was interesting because I come from a country that is being very socialist for a long time and I think it's interesting. It's nothing political at all. It's just an interesting topic. When you look at, for instance, what we're hearing about sort of a social dividend, if you will, of some candidates now talking about giving away, let's say, $1,000 to every citizen or a citizen at a certain level on the tax bracket should receive a dividend from the government to be able to spend money. You know, those sorts of policies, as we've seen throughout history, especially in emerging markets, they always translate into inflation in the short term.

What do you think people are going to do? What do you think is going to happen if you give $1,000 on a monthly basis to everyone? Everyone's going to spend money, sure, but that's going to cause prices in general to rise. And, you know, if we do have, I think we're playing with fire, in my opinion, politically, given where we are in the economic cycle. If we do have a situation like that, I think that we could see inflation rising. That could be a real problem. I think people have no idea, you know, that goes to show how people completely forgot, you know, the fears of inflation. And they lack that.

You know, this whole, the millennials, I'm a millennial, my generation doesn't know what inflation is unless you come from Brazil. I've seen inflation. I know how that works. I know my parents trying to grow a business and they can't, you know, you can't find credit because, you know, credit and just raising capital in general is too expensive. That's not the case in the U.S. um but you know i you know i'm a believer that things come and go and you know and perhaps we're uh we could be getting close to something here got it let's um let's wrap up here but before we go uh just your thoughts on um bitcoin and gold right i think a lot of people uh previously

and most likely inaccurately have assumed that it's a binary outcome but maybe you actually agree with them. How do you see the relationship between the two assets today and then maybe in the future if a lot of what we've talked about today becomes reality? First of all, to start when I talk about Bitcoin cryptocurrencies, I have to say that I'm not the most knowledgeable guy in terms of the technology of it. And I think that I love the fact, as I said, of both looking for an alternative of fiat currency. And I think that obviously gold, as somebody else actually mentioned, is gold being the father of this idea. And I'm a big believer in that. I just don't believe that, you know, this whole theory of drop gold and all that, it's, you know, and revolting

against precious metals in general. I don't think it's a smart idea. I think we have bigger fish to fry out there but um um in in my view of of of bitcoin what i um i think that it's it's quite interesting the movement you see especially i i follow very closely how bitcoin has kind of become this this this kind of a uh higher uh beta uh version of of gold it's it's moving higher obviously smaller mark cap so it's kind of like oh if you're going to be long stocks well if you're very bullish on stocks, you think that, you know, most times the small cap stocks might outperform the large cap stocks. The same idea here with Bitcoin and gold in terms of that.

But I think that I appreciate a lot the gold history of its credibility. And, you know, it goes back centuries. And that's for me is I think that, you know, I wish some of the crypto people would appreciate more because it's the same idea, really. Now, one thing that I think Bitcoin, especially Bitcoin, has done an incredible job at is to serve as a vehicle for places like they have very communist places like China or Venezuela and helping people to be able to get their money out of those places and becoming a storage of value for those citizens that don't have an option to get their money out of those countries. I think that that's, you know, that serves a better purpose than gold, personally. And when I saw Bitcoin starting to move higher, I thought initially it was, and I'm probably wrong on that, but I thought initially it was something related to the problems in China really start brewing. But no, it seems to be a real move. It seems to be that cryptocurrencies have a fundamental reason to be rising. I personally don't hold Bitcoin and people might hate the fact that I said that.

And that's just because I have a principle, which is, you know, unfortunately, if I don't fully understand something, I just don't invest in it. But trust me, I am trying to understand it because if it is a real move like gold is, I think we're in the early stages of it. So, yeah, I think those are my initial thoughts. But, you know, I think gold in general is attractive in any way you look at. One important way that you can see that is just looking at the relationship of gold versus things like, you know, like Russell 3000, like the broad index for stocks in general. Russell 3000 and like silver, the high beta version of gold, which is perhaps Bitcoin now, I don't know. But if you looked at that ratio, that just retested the 2000, the crazy, insane valuations we saw in the tech bubble. And we're now kind of retesting those levels and starting

to drop again. Now, there's so many ways you can look at commodities versus the S&P 500 ratio commodities index by the Goldman Sachs index. And you can see there are close to a 50 year lows of that ratio way below the median of that. So I think commodities are here for a run. And obviously, Bitcoin seems an interesting idea as well. I love it, man. Look, I think that you are incredibly reasonable and frankly, can articulate the advantages and disadvantages of not only the current economy and environment, but also the safe haven assets and what many would think are in some cases even speculative assets but uh it is um it's always prudent i think to share the thoughts of like look if you don't understand it don't invest in it right and then all the kind of

the normal uh disclaimers around uh folks shouldn't be putting in more money than they could lose or that they could uh afford to lose etc so i think that it is um it's this weird balance between uh what's going on and understanding what's going on is uh the first step the second step is then what you do about it right especially if you're trying to protect your wealth or grow your wealth so i think you've done a fantastic job of just helping us better wrap our heads around you know what what is actually going on in that global macro environment and hopefully uh people find this incredibly valuable well thank you very much and i have to say you also do a great job spreading the word in terms of uh of of the technology of the of the whole crypto community

i think in my view you're my uh top follower of this whole um idea and um and i'm uh you know i'm trying to educate myself if you ever have anything to uh at least send my way that helps me to understand it better um but um i i really appreciate your your thoughts on on the whole crypto markets as well you're um by far my top follower in terms of uh of uh of this whole market i really liked uh uh following your thoughts so um uh thanks for that as well i appreciate it when i come out there maybe i'll uh i'll come meet up with you in person and give you a little bit of Bitcoin so that we can say, maybe you don't own a lot, but then you own just a little bit. I would love to. I would love to. That would be incredible if we can meet up and you

pitch me Bitcoin. That would be awesome. I would love to see that. I would love that. No, Tavi, look, man, I really appreciate it. It's been incredibly valuable. I've learned a ton and really enjoyed this conversation. So thanks again for taking the time to do this. Thank you, Pomp. I appreciate having me and look forward to talking to you again. Where can people find you on the internet, on Twitter, anywhere else? So I've become a lot more active on Twitter, and I try to publish charts and ideas almost every day. If I have the time here, I'll publish charts on Twitter. My Twitter handle is at Tavi Costa.

And I also kind of started a YouTube channel, which is starting now to get traction. It's very low, but nothing compared to what you do. But if you just type Tavi Costa on YouTube, you'll find me. And Crescat is a hedge fund, so we have a pretty open website. We publish most of our ideas and letters there. Crescat.net is the website. And yeah, you can find a lot of ideas there as well. Awesome, man.

Well, thank you again so much, and we'll have to do it again in the future. Thank you so much. I appreciate it. Are you curious about cryptocurrency and you don't know where to begin? I've got a great way for you to try. You can use Stormplay, a free and fun way to start earning in exchange for your time. That's right. You don't necessarily have to make a financial investment to begin.

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To review, simply go to the Off The Chain homepage, scroll down until you see the five blank stars. taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts i appreciate you listening and see you next time on off the chain Thank you.