The Wolf Of All Streets - Bitcoin Will Dominate The Future Of Finance | Jurrien Timmer

Starting point is 00:00:00 The majority of stocks are going up and have been going up. That's a good time to be an active investor. The market sort of gets hated on by, you know, the Mag 7 and 230, 240, $250,000 Bitcoin. And then the price kind of is like a pendulum swinging around that growing power law. I think you just gave me enough fodder for a five-hour podcast conversation to dig into the nuance. Everyone's talking about the institutionalization of Bitcoin and crypto, but Fidelity was already in the space in 2015, screaming from the mountaintop that this was a legitimate asset

Starting point is 00:00:35 that people should be paying attention to. They've obviously been vindicated. And Urien Timmer, their director of global macro, is really the best person I've ever met at putting Bitcoin and why it is legitimate in context of everything that's happening with the macro. This really is such a compelling conversation with him, as it always is, and one that you absolutely need to listen to if you want to know where Bitcoin likely falls in the portfolio of investors, where it should fall for you, and how to approach it in context of everything happening in macro. In all my years in markets, I'm not sure I've ever seen a time when opinions of what is likely to happen and what is happening are so bipolar. We have people who believe a great reset depression is imminent. We've been pricing in a recession now for 18 to 24 months, but the bull market seemingly continues. So maybe give us a framing of where you stand

Starting point is 00:01:45 at this point. Yes, it has been a pretty unusual time, really. It really started with the pandemic that obviously was a once-in-a-century storm that shut down the global economy. I mean, how often does that happen? And then, of course, the unleashing of just an incredible amount of helicopter money or however you want to call it, that one-two punch of fiscal and monetary policy. And it sort of rendered the market cycle, or at least our analysis of it, somewhat moot because it's just such an unusual period. And we're still kind of getting out of that period, right? So we had in 2020. So obviously, in hindsight, it's easy to say this. It's never easy in real time. But of course, there was a massive fiscal impulse accommodated, if you will, by a massive monetary

Starting point is 00:02:47 impulse from the Fed. And I think in retrospect, we can all agree that the Fed kind of stayed too easy for too long, either misjudging the inflation threat or not appreciating the power of that fiscal impulse. And then because it moved too slowly, it had to slam on the brakes in 2022. And that created, obviously, a storm in the bond market, which created a storm in the stock market. Earnings never wavered that year.

Starting point is 00:03:17 They grew 8%, but the stock market fell 28%, nonetheless, entirely driven by this valuation reset. And then the market bottomed in October of 2022. It's up 55%, 60%. And it's an unusual period because I look at the technicals, breadth, things like that. And the market actually is reasonably broad. 78% of stocks are an uptrend. I mean, the market sort of gets hated on by the MAG7. And they're the only ones that are going up, driving the indices with them. And that's not entirely true. I mean, the majority of stocks are going up and have been going up, but a handful of these mega cap growth stocks have so run away with everything that the relative breadth, so the number of

Starting point is 00:04:13 new highs, new lows of the relative performance has been extremely narrow and bifurcated. It's been a very difficult cycle to sort of unpack. But here we are. We're 93 weeks into a bull market. And that bull market is now supported by rising earnings. We're in the middle of Q2 earnings season. And there's been some notable misses. And we all sort of know who they are. But generally speaking, the usual companies or the usual percentage of companies are beating

Starting point is 00:04:44 estimates by the usual amount. And usual percentage of companies are beating estimates by the usual amount. And the growth rate is now in the double digits. And so when you add it all up, you know, like you mentioned that that recession signal that we were all looking for a year and a half ago when the curve got so inverted, and it's still inverted. But at this point, you think about it, the economy remains in an expansion. The job side is getting softer, but still within the context of growth. We have accelerating earnings growth. We have a Fed that is now poised to finally execute on its bias to ease. So presumably that will be in September. And when you strip away the MAG-7 and you look at the PE ratio of the S&P 500 equal-weighted

Starting point is 00:05:35 index, it's 18x. It's not terrible. So it's really not a bad backdrop for this bull market to continue. The only caveat that I have is these MAG7s are so big that whatever they're doing, they're going to drag the main indices with it, right? And so you could actually see another chapter here in this bull market where the SPX goes down or churns sideways while the broad market actually does really well. And not many people have had that on their bingo card, but that could actually be one of the chapters that comes up here. Crypto investors in the United States face

Starting point is 00:06:20 some major challenges. One of them is that there's almost no way to get exposure to the asset class inside of your traditional investment vehicles. The other thing is the taxes. They are absolutely atrocious. What if I told you there was a way to solve both of these problems? Well, there is, and it's with a self-directed IRA from iTrust Capital. Guys, not only can you open a new self-directed IRA and fund it with the limits each year, but you can actually convert over from your 401k, your Roth IRA, any other IRA that you already have, and you can do that tax-free, just transferring over the balance. And then you can go to cash, buy as much Bitcoin as you want, and not pay taxes when you sell

Starting point is 00:07:00 it. You absolutely have to try this if you are in the United States. Use the link down below. It's bit.ly slash itrust-scott. That's bit.ly slash itrust-s-c-o-t-t. You have to try this now. conversation to dig into the nuance. So I'm going to kind of go one by one from what I heard. But I will say that there were two things that happened recently that were encouraging and I think made the bear case less likely for me, at least in the short term. One was there was a fear that if NVIDIA ever dropped, that it would take the entire market with it. And there was that week where it had a 10 to 15% drawdown. And what we actually saw was a rotation into other big tech, which all then made all-time highs. So the money did not exit the market. It simply rotated. Then we sort of saw tech

Starting point is 00:07:49 writ large topping. But what we actually saw, in my opinion, was more risk gone by people rotating out of those into the Russell and into smaller caps and all of the stocks that I guess were disproportionately damaged by the idea of higher for longer. So I don't think at any point here have we seen people looking to take profit or taking money out of the market. It's just been rotating. And going into those smaller caps is actually, I think, a rotate into higher risk. Yeah, it's more cyclical beta, right? So the MAG-7 is obviously, it's the AI story.

Starting point is 00:08:26 It used to be the work from home story. Then it was the kind of these stocks are immune from the Fed raising the cost of capital because they have so much cash. They don't care what interest rates are. I mean, I'm overgeneralizing here. While the rest of the market was basically kind of like held hostage by the Fed, if you will, because they have weaker balance sheets. They are more sensitive to interest rates.

Starting point is 00:08:50 And now that that weight is presumably being lifted from the Fed, without a recession, at least from my vantage point, being imminent, these stocks can breathe again. And then you get into the nuance of sort of the index math, right? I mean, you know, if money comes in, if new money comes in but chooses a broader swath of the market rather than kind of the winners of yesterday, then I think the rising tide can lift all boats. And the MAG-7 would do OK, but the market would just choose other pockets. And then you have sort of a win-win scenario. If it's a zero-sum game of investors rotating out of the MAG-7 into others, then I think,

Starting point is 00:09:40 obviously, the others would do well. And we've seen this, right? Since July 10th, when the CPI report came out that gave sort of the green light to the Fed to actually start easing. You know, like the MAC-7, I think, is down double digits, but the Russell is up double digits. The S&P cap weighted is down 2%, and the equal weighted is up 2%. So I think what you can see is churn at the top level, but more stocks doing

Starting point is 00:10:08 well. And I mean, that's a good time to be an active investor rather than just sort of hiding in a benchmark because there's going to be low-hanging fruit there. You mentioned earlier that the yield curve remains inverted. This is, to my knowledge, the longest that the yield curve has actually ever remained inverted. If you look historically at situations like this, what you generally get is the Fed pause, which we've had. Then the yield curve eventually normalizes. Then the Fed pivots.

Starting point is 00:10:39 Then the stock market crashes, right? Almost every single time, or the stock market begins to tilt, and then they pivot as a reaction and then it continues down. So historically, actually, that Fed pivot has preceded a lot of downside in markets, even those recessions. So why is this time different? There's so much excitement for this liquidity and for the Fed pivot, but usually that's a harbinger of bad things to come. Not always, but let me start at the beginning. We never want to say this time is different. Obviously, those are the famous last

Starting point is 00:11:14 words, but there clearly have been mitigating factors behind this yield curve inversion that either delays its impact or reduces its impact. And one of them is, again, during the pandemic, basically everybody refied their mortgage, right? And corporates turned out their debt at lower yields, including high-yield corporates. And so a large swath of the economy that is interest rate sensitive is not really that interest rate sensitive right now. Obviously, if this drags on long enough, they will because eventually people move and companies that mature and has to be refinanced. So maybe it's just a matter of delayed response rather than a diminished response. But clearly, that's been one factor.

Starting point is 00:12:09 And the other one is, of course, we know about commercial real estate. We know about the smaller banks, the community banks, the smaller regionals. We, of course, know what happened with Silicon Valley a year and a half ago, or was it not two years ago? I forget. A year and a half. But the mega banks, right? The mega banks where a lot of the economic fuel comes from, they're paying half a percent on their deposits. And so for them, right, new loans get funded by the deposit rate or by deposits. That's how banks work. And so for them, the yield curve is as steep as it's ever been, right? You think about it, they're lending money at 6%, 7%, 8%. They're borrowing at half a

Starting point is 00:12:51 percent. I mean, so that is another mitigating factor why I think the yield curve has not bitten, or at least not yet. And then I'll just mention the other thing. Of course, when we look at history and we look at Fed pivots, of course, the last two times or a few of the last two times that that's happened was, of course, a financial crisis, the dotcom bubble. Those were mega bear markets. Many other times, though, there is some downside. But then when those rate cuts start to work and the economy starts to recover, there's a lot of upside. And of course, in the case of soft landings like we had in 94, 1966, you could even kind of put 2016 in there. The market was off to the races almost immediately.

Starting point is 00:13:39 So it's not a blanket conclusion that the market goes down once the fed starts cutting rates because it depends on the the context but obviously if if a big recession is looming uh then that's one thing but the fed is now poised to cut while earnings are actually accelerating after dropping modestly last year and that is a that is a pretty good backdrop. So I'm definitely not prepared to say, you know, watch out for that. You know, careful what you wish for in terms of lower rates. So the soft landing is not a myth. It really could happen this time. It didn't seem like it. And listen, as you said, they overshot in the other direction. This is, to some degree, fixing a problem of their own making. But you'd hope that they learned a lesson about overshooting and staying loose too long and that maybe now they're

Starting point is 00:14:29 going to pivot or cut in advance of it being an immediate necessity. Yeah. And one thing to point out that monetary policy is not static, right? It's always a moving target. And it's a hard one to pinpoint because that moving target is based on your view of where inflation is going to go and your view of what a neutral rate is, right? In the old days, we had the Taylor rule, which was beautifully simple, right? Because John Taylor, just back in the early 90s, said, okay, the neutral rate is 2%. Then we add a factor for inflation, we add a factor for growth, and then you have your formula. And of course, during the financial crisis, everyone realized that neutral is not a static, it's not a constant, it's not always 2%. It can be zero, it can be five. And so, you know,

Starting point is 00:15:23 we have our star, which is, of course, an estimate. But if you just look historically, a plus 1% real rate is sort of a fair estimate of what a neutral rate should be in a period of economic growth. And then it's a question of where does inflation land? It's 3% now. My guess is it's going to remain sticky at around 3%. But it could be wrong. The TIFF's market is saying 2.3% as far as the eye can see. But let's say it's 3%. Then you add the 1% neutral rate.

Starting point is 00:15:56 You get to 4%. Well, that gives the Fed five rate cuts right there. And if the TIFF's market is correct and it's closer to 2.5, then the Fed has seven rate cuts just to get down to neutral. It wouldn't even be easy at that point. So I think the Fed sees this. And if the inflation rate moderates, and we need to make the distinction between the price level of inflation, which obviously is still going up, but at a slower rate. Yes, inflation. And the inflation rate, if the inflation rate goes from 9 to 3 and maybe to 2 or 2.5, who knows, then the Fed needs to act accordingly to maintain a spread over that real neutral rate.

Starting point is 00:16:38 Otherwise, it would actually be tightening, even as inflation is coming down, by doing nothing, right? tightening, even as inflation is coming down by doing nothing. Right. And so the Fed, I think, is well aware of that. And that's why it is, you know, it started to poise itself last December and now it is getting ready to act on it. I think there's something that's a bit different this time as well. As you said, Sir John Templeton, this time is different. The most dangerous words in investing, but something else that is slightly different. I spoke to Lynn Alden recently and we had a conversation. I'm a super fan of Lynn.

Starting point is 00:17:10 Yeah, amazing. And we had a conversation about how actually this time, perhaps the monetary side is far less impactful because of what's happening on the fiscal side. When you're adding a trillion dollars every 90 days and we're having bond options, and there's just liquidity flooding the market from that side, it sort of kneecaps the Fed's ability actually to control the economy in a way that perhaps they did in the past. So all eyes are on the Fed, but our national debt just surpassed $35 trillion. Yeah. And Lynn and I have both done work on this concept of fiscal dominance. And we're not quite yet in fiscal dominance, because fiscal dominance means that obviously the fiscal side of the house is dominating policy. And then in its purest form,

Starting point is 00:17:59 the monetary side becomes sort of subservient to the fiscal side. And the Fed is not being subservient, it's actually being quite restrictive, maybe even because of the fiscal side being so strong. But of course, during the 1940s, which Lynn and I have both unpacked in great detail, that was a pure expression of fiscal dominance. The Fed literally just did the Treasury's bidding, kept yields at 2.5, created a steep yield curve in order to entice banks to play the carry trade, which they did. And of course, in Japan, we have another pure version of fiscal dominance where the central bank is subordinate. And during the 60s, it wasn't explicit because the Fed was already

Starting point is 00:18:46 independent since 1951. But that was a period where, you know, the Great Society, you know, the start of entitlements in the 60s. And there was a very big emphasis on full employment. And there was very little emphasis on inflation because, of course, the Great Depression was still in the rearview mirror and the war and this and that. And that was a period where fiscal policy was sequentially loose. Like they ran budget deficits year after year after year. And the monetary side was overly loose as well. And, of course, that ended up with some policy mistakes, and you had the great inflation of the 1970s.

Starting point is 00:19:30 So that was another implicit period of fiscal dominance, not so much explicit. And I really don't have any firsthand knowledge of this, but my sense is that the Fed is very much aware of those policy mistakes and does not want to repeat them. And I wonder if one of the reasons why the Fed has not pivoted sooner is because it's trying to offset the fiscal side, which, of course, is stimulative. I mean, we had a $5 trillion helicopter drop in 2020. And the Fed did accommodate that, maybe not explicitly, but certainly implicitly, right? A lot of that debt was actually bought up by the Fed. And the Fed is no longer doing that. It's doing quantitative tightening. So the Fed is actually

Starting point is 00:20:18 leaning against this fiscal dominance. But I think one of the open questions, not for next month or next year, but the next five or 10 years, if these deficits are as unsustainable or if they're going to last as long as I think we all realize they're going to because very little of the budget in Washington is discretionary. You add entitlements, defense, and debt service, which is now over a trillion dollars a year and rising. There's not really a lot to do. You can raise taxes, but that's like a drop in the bucket. It's not going to really move the needle. And so if we're going to have deficits as far as the eye can see, I think it's a legitimate sort of secular question to have. What would be the role of the Fed five years from now? Are we going to go back to fiscal dominance in its purest form, where the Fed is going to either explicitly

Starting point is 00:21:15 do yield curve control, target interest rates like it did in the 40s, like the Bank of Japan is doing now? Turning Japanese, as we say. Or whether it's more implicit, where it lets the market do its thing, but then the market has sort of a tantrum, an auction kind of semi-fails, and then they have to go and do cleanup on aisle seven, and they have to do some targeted liquidity operations, which is what the Bank of England did a couple of years ago. And so it's probably some combination.

Starting point is 00:21:51 And I think that's an interesting question to unpack. As a Bitcoiner, I dig into all of this and I find it so intellectually stimulating. But also when you hear all of the levers being pulled and the maneuvers that they have and the ways that they sort of artificially inflate things, it's terrifying for when that officially the music has to end eventually, right? I mean, eventually the music has to end. It's sort of the Taleb idea that if you don't burn all the brush, the eventual forest fire is going to be much bigger. We know that a lot of companies and individuals, as you said, refinanced in that ZERP environment, but that national debt, which is over a trillion in debt

Starting point is 00:22:29 service now, is going to have to be refinanced theoretically at higher rates soon. If that was financed at 1% or 2%, you're still looking at even with cuts, 3.5%, 4%, 4.5%. How is that possibly sustainable? How do you not look at this and just say that this is a massive debt spiral? They could cut every entitlement to your point and it would be a drop in the bucket. They can make taxes 65% and it would be a drop in the bucket. Yeah. So there's four ways to get out of debt, right? There's default, which of course no one's going to do. There's austerity, which tends to not be a politically winning strategy, nor, like you said, would it really matter because most of the budget is not discretionary. Then you have inflation and devaluation, which is one of the older tricks in the book.

Starting point is 00:23:17 And then you have growth, which, of course, is the ideal way to get out of debt. I mean, you're not getting out of debt, but people measure debt as debt to GDP, right? So if your GDP is growing faster than your debt, then your debt is sustainable, right? I mean, if you're a company and you're borrowing money to grow your business and your business grows, then there's nothing wrong with debt. But of course, I don't know if that's the case here. But this is why the AI story is interesting. I mean, it's interesting for many reasons, of course. But one of them is that if this really leads to a CapEx boom, and it certainly is within the tech industry, and that CapEx boom unleashes a wave of productivity growth, then maybe that offsets the decline in demographic growth enough to at least

Starting point is 00:24:08 kind of keep pace with the debt, right? And maybe that doesn't happen. But remember, the debt in the US is not a US only issue, right? Everyone has too much debt, Europe, Japan, China, you name it. And then it becomes a question of sort of who is the cleanest dirty shirt, if you will. And the US, of course, has the reserve currency status. I mean, the share of reserves in US dollars has been declining. It's at 58%. It was in the 60s a decade ago. So in that sense, you technically have de-dollarization going on for some time. But you look at kind of this is a worldwide issue, right? The US is not

Starting point is 00:24:55 like an emerging economy where the debt is mostly funded by foreign capital, right? If you take your typical EM country debt spiral, right, it's the debt is owned by foreigners, they bill, the currency crashes, and like you get sort of that kind of debt spiral. I don't think that's likely in the US or the EU or even Japan. In Japan, of course, the debt is mostly self-funded. In the US, it's not, but it's more so than it has been. And so it's a question of growth plus inflation is what drives nominal GDP. And actually, debt to nominal GDP since the pandemic has gone down because nominal GDP has really rocketed, of course, in part because of inflation, but also the recovery from the

Starting point is 00:25:45 pandemic. So it's a tough question. If the US was the only country in the world that had this debt dynamic, then clearly it's like, OK, that's going to be a debt spiral. You look at the demographics. But everything is a pair of straight, right? The dollar is a pair of straight against other currencies, including Bitcoin. And obviously, Bitcoin, in my view, is a play on this sort of liquidity monetary dynamic. And liquidity is likely going to be robust because of this deficit spending. And neither party in Washington, not to bring politics into this, but neither party seems overly concerned about the deficit.

Starting point is 00:26:36 And I think no matter who wins, this kind of fiscal emphasis, industrial policy, things like that are going to continue. So I do think it's a reality that we're all going to have to live with. And when you look at the price of gold in recent months, it should have been going down because real rates were going up. Instead, it broke out to new highs. Well, why is that? I think it's a play on M2 and on fiscal dominance and, of course, Bitcoin.

Starting point is 00:27:05 I view Bitcoin as a different player on the same team. I like to call it exponential gold. But I think they're both expressions of that view. Now, we're going to get into the idea of exponential gold next. I love the idea that you shared. It's sort of the dollar milkshake theory. As others collapse or have problems, the dollar is where they go. So the dollar can only do so poorly. It's like the story of the two friends in the woods and a bear approaches them. And one of the friends slowly starts to

Starting point is 00:27:33 put on his sneakers. And the guy says, why are you putting on shoes? We need to outrun the bear. He says, I don't need to outrun the bear. I just need to outrun you. Right. And so that's the United States is the guy with the shoes on. Right? And the bear is going to get everyone else first. Yeah. And just to follow up, not to interrupt, but again, the Fed's role in this is very important, right? Because the dollar has been strong. And I think the reason it's been strong is because the monetary side has been on the

Starting point is 00:27:59 opposite side of the spectrum from the fiscal side. And so you get the economy getting stimulated from fiscal policy while the Fed is keeping rates high and producing positive real rates. That's an environment where capital is attracted. If that were to change, right, if you got fiscal dominance in its purest expression, meaning the Fed lowers rates for no other reason than to make the debt more financeable, then I think you get into a situation where the Fed loses its credibility. You get this monetary acquiescence. And then I think you look at the M2s and the money supply data, and that's a different ballgame, but we're not there yet.

Starting point is 00:28:47 I think we just did an exceptional job of setting the table for a conversation about Bitcoin, aka exponential gold. Now, Fidelity, obviously, and yourself have long viewed Bitcoin as a superior version of gold. Fidelity has been in the Bitcoin industry longer than any other institution. You've written- 2014. Yeah, incredible. Mining. I mean, you've written endless reports about it. One of my favorite was the Bitcoin and everything else, right? Kind of framing the entire crypto market as Bitcoin and basically a bunch of speculative VC investments, which is fine if that's the direction that you want to go. But we still have these sort of

Starting point is 00:29:25 arguments as to whether Bitcoin is idiosyncratic, what it does for your portfolio, whether it's actually just correlated, whether it will always correlate in a downside event as all correlations go to one. I personally have always viewed Bitcoin largely as uncorrelated, and there's times when it obviously recorrelates. But we still have people saying it's a risk asset that trades like a tech stock. And others that say it's digital gold. But if you really look, it doesn't trade like either. It certainly hasn't traded like gold.

Starting point is 00:29:55 No, it is completely uncorrelated to gold. And it used to be uncorrelated to equities until the pandemic. And we got that massive infusion of liquidity. And then Bitcoin started to trade as a meme stock, right? Like this is 2021. And then, of course, that meme stock bubble burst. The market went down. Bitcoin was correlated to really more the NASDAQ, but also the S&P.

Starting point is 00:30:22 And that correlation has been coming down ever since. It's still correlated, but also the S&P. And that correlation has been coming down ever since. It's still correlated, but it's like 25%, 30% instead of 60%, 70%. So the numbers are coming down. The volatility actually is coming down as well. It's still high, but it's gone from like 80% to 40% or 45% or so. And Bitcoin is extremely unique, of course, which makes it so fascinating, right? It has the supply characteristics of gold even more extreme than that because it really has a harder cap or it has a hard cap, which gold technically does not. But it has that boom bust feature of any emerging asset. And it's a network asset, right? So you got this network,

Starting point is 00:31:16 this power law curve of a growing network. And I've done a lot of work on historical S-curves. I'm sure you've seen it. Yeah, we've discussed it. And Bitcoin is following in exactly the footsteps of internet adoption, mobile phone adoption, whatever you want to use. And at the same time, it has this supply cap. And these things kind of create a very unique environment where you get 1,000-point rallies followed by 80% drawdowns. And my conclusion is it's earned its place on the menu, right? I mean, people, investors have to figure out whether it's for them or not. And in order to figure it out, they need to go deep. They need to go down the rabbit hole.

Starting point is 00:31:56 You can't spend 20 minutes reading an ETF perspective to think that you figured it out. You got to go deep and you got to learn so that you have the conviction to hang on when the inevitable next drawdown happens. And so that's part of the growth curve for investors. But I think it's earned a seat. It's 15 years old. It survived every winter. If this was truly a bubble, it would have died and it would have stayed dead because bubbles do not come to life. Actually, one of my favorite examples of this is when you look at the meme stocks, like the Goldman Sachs Nonprofitable Growth Index or their high retail favorites basket.

Starting point is 00:32:44 Goldman has all these different equity baskets, you know, they all bubbled up in 21, they all crashed, and they're still at the lows, whereas Bitcoin followed that path and has gone from 15,000 to 73,000 is now at 66 and a half thousand. And so by definition, like I would not put it in a bubble. There's obviously something there. And then it's a question of, you know, is it for you? Where like where does it go in a portfolio? Right. You mentioned the the you know, the other the other cryptos. Those to me go on the ultra grossy side of an equity portfolio like VC, like you mentioned. Bitcoin is kind of, you know, it's a store of value, in my view, or an aspirational store of value.

Starting point is 00:33:33 So, therefore, it should come out of the bond side. And it doesn't. But it also has risk characteristics of equity. So, maybe I would take it out of a cross-section of the 60 and the 40. I agree. Right? It's been interesting. And then there's the question of positioning, right? I mean, is 5% too much? Is 1% too little? And that's an individual question that investors need to answer. I mean, you can backtest the Sharpe ratio of portfolios with all of those, and the higher,

Starting point is 00:34:00 the better so far. But that doesn't mean that that projects into the future. But it's interesting because RAs have long touted the 60-40 portfolio. We know 2022 was the worst year in history for that, but it has somewhat recovered. That's 60% equities and 40% bonds for people who may not understand. And I think now that we have the ETFs, which Vitality is one of the leaders with the ETF, obviously, I think most people have been taking that from the 60. They've been buying it as an equity in an IRA or something or 401k or just for their stock portfolio. So it's becoming out of that. But to your point, it probably, if the narrative is more digital gold, should be coming out of the 40. But I think the bigger story is that RIAs still don't even allocate to gold, right? At 60-40, it's not, you know, 59-39-2. There are no hard assets because they don't really make money recommending them.

Starting point is 00:34:52 But things like Bitcoin have never made it into the portfolio that an advisor would necessarily allocate. So it's a really interesting spot. Yeah, and so I think of, so we all grew up in the 60-40 world, right? And bonds haven't always been negatively correlated during the 60s and 50s and 80s and 90s. They were positively correlated. They're positively correlated again now.

Starting point is 00:35:19 And generally, when inflation is above average and when the volatility of inflation is above average, the 40 is positively correlated to the 60, which means that bonds, although there are plenty of reasons to own them now that real rates are positive, diversification isn't necessarily any longer one of them. And so for me, the new 60-40 is more like a 50-30-20 or a 50-20-30, where things like commodities, cash, right, if we're in an environment where cash is no longer trash, gold, Bitcoin, tips, high yields, you know, bank, like you can throw a lot of stuff in there that is not necessarily negatively correlated, but at least is uncorrelated and sort of alternatives, right? I mean, I think of Bitcoin as an alt, basically. But you've got managed futures. You've got hedge to equity, hedge fund strategies, risk parity, absolute return.

Starting point is 00:36:25 You have all these different little buckets in there that I think in some ways are replacing bonds, not with a negative correlation, but with an uncorrelation. And they have a similar place on the efficient frontier. And so I think we just have to cast a wider net. And again, that's not to say that we shouldn't own bonds. I think bonds are compelling, maybe the belly of the curve. I don't know that I would want to own 30-year bonds in an emerging era of fiscal dominance when we don't know what role the Fed will play.

Starting point is 00:36:56 But five years, no problem. If the Fed's cutting rates, that area will do well. But I put Bitcoin on the menu in the old bucket, whether it's 20% or 30%, not Bitcoin, but the overall bucket. And then it's a question of solving for what is your risk budget, right? What do you want your tracking error to be? I mean, a typical investor is not going to necessarily think of those terms, but an institutional investor will. An RIA is going to look at, okay, I'm dealing with this demographic. The tracking error shouldn't be more than 200

Starting point is 00:37:31 basis points. And how much of that tracking error should come from any one investment, right? So if you have too much Bitcoin, it's going to consume all your tracking. You get into the nuts and bolts questions like that. But it, to me, there's no question. It, it, it earns, it's earned a place on the menu. And then it's just a question of positioning and, you know, are you more, do you want the real goal? Do you want the exponential goal? Like those are kind of follow-up questions. You said it has a place on the menu. As we said, Fidelity has long had it on the menu, but it took kind of Larry Fink and a number of other institutions pushing

Starting point is 00:38:10 and the ETF finally getting approved, I think, for the world to see that stamp of approval. And now we have this wild environment where politicians are touting Bitcoin and playing to this community. I mean, in my wildest dreams, I didn't think that this would be the situation in 24 that we would see such incredible,

Starting point is 00:38:29 at least narrative tailwinds. I mean, did you expect that we would be here now after doing this for nine or 10 years and screaming from the mountaintop while very few people listened? Yeah, no, it's pretty amazing. And of course, the rhetoric has come from both sides. And you always have to discount this stuff a little bit because it is a politicalcosm of a larger discussion. And that discussion is about the direction of the economy, the role of the government,

Starting point is 00:39:11 right? Fiscal policy is essentially the government executing what it thinks its role is and how investors can protect themselves. And of course, there is still a backlash even from, you know, 15 years ago in the financial crisis of the Fed doing QE and pushing yields down and, you know, and then investors, you know, don't get as much income and is the system rigged and all this stuff? I don't think it is. But I think it's these political conversations about Bitcoin, they tap into a much deeper sort of zeitgeist that, you know, we wouldn't be having the conversation if this was really just another emerging asset class. And all it was, was, OK, you do a discounted cash flow analysis and you say, you know, it's obviously more than that. It's Bitcoin is kind of a religion, if you will.

Starting point is 00:40:05 Some people might say it's a cult, but it digs a lot deeper than just sort of the math of, OK, do I buy this asset or that asset? My friend Dave Weisberg likes to refer to Bitcoin as an option on its own future adoption, which is a term that I sort of like, which gives it a little more, I guess, pep than just another emerging asset class. Yeah. And the adoption, that's what it comes down to. You have this network. It's growing, of course. It's growing exponentially. That's the power law part of it. And if the adoption curve continues to grow, as I think is likely, then that informs you of the value of the network,

Starting point is 00:40:50 whether it's Metcalfe law or some other valuation approach. And if the adoption accelerates because of whatever monetary or fiscal policy or some other reason, then that means certain things for the valuation. But when I look at the price action and people ask me, you know, like how high is too high, how low is too low, I compare to the growth of the network, right? So you have the growth of the network is this exponential power law. And then the price kind of is like a pendulum swinging around that growing power law. And if it swings too far above, then, you know, you get one of these winters. And if it swings too far below, you have a tremendous buying opportunity.

Starting point is 00:41:34 And I think real rates is part of the story. Obviously, the inherent adoption in terms of its monetary purposes or its medium of exchange purposes, things like that are other factors. But that's how I think of it. And Bitcoin should mature. I like it, right? It's kind of an adolescent, you know, the way gold was in the 1970s.

Starting point is 00:41:57 But it's becoming a more mature asset. That power law curve is starting to become more asymptotic, which makes sense, right? I mean, eventually, this is the whole premise behind adoption curves, whether it's like television sets in the 50s or internet adoption a couple of decades ago. So eventually, the slope should become less steep. And that's where we are on Bitcoin. And as investors adopted more, and as that growth rate matures, Bitcoin should become less volatile, and it should overshoot less to the upside and undershoot less to the downside, right? And you have a futures market, you have an ETF market, it's just it's a maturing market.

Starting point is 00:42:41 And I don't want to ever say that Bitcoin is going to become boring, because I don't think it ever will. More boring. But it should become more boring than it has been. And that might frustrate a lot of Bitcoin enthusiasts. But I think it's a good thing, because if you want to play on the team of viable asset classes, you need to act like an adult. And Bitcoin is becoming an adult.

Starting point is 00:43:08 We don't even have options on the ETFs yet, right? Which should eventually give people more breadth of ways to trade it and probably dampen volatility as well. We've seen it in this cycle already. You sort of talked about this boom and bust cycle that we've had every four years. It aligns with election cycles. It aligns with quite a few things in the macro, but we have this halving cycle where the halving comes, summer doldrums, six months, and then parabolic move overshoots to your point, mean reversion,

Starting point is 00:43:36 drop 80%. On this move up from 15-ish to 74, I think our largest retrace, which we actually just had from 74 to just above 50, it was about 27%. Every cycle, those seem to lessen. It used to be that you got 50%, 45%, 35% seven times in a run-up like that. Now we're getting 18% to 27%, and the 27% at the top, which is not that surprising. that could mean the upside is dampened as well, to your point. But it does show, I think, that the asset is maturing. Yes. And this is a good thing, right? The swing should be less. A pension fund is not going to go in, and I'm not speaking for any pension funds. But if you're an institutional investor, right, and you have an investment committee to answer to, like you want your asset classes to behave themselves a little bit like mature adults. And so otherwise it becomes really hard to defend because, you know,

Starting point is 00:44:40 fiduciaries of endowments or pensions, they're not interested so much in knocking the lights out. You want to have stability. And if you're an endowment and you're drawing 5% on the three-year average balance, you want to reduce your volatility. And again, as I mentioned earlier, most institutional investors have a tracking, they have a risk budget, right? This is my sandbox that I can play in, in stuff that is not in the benchmark. And so commodities is always a good example because they have a tremendous amount of volatility. And over the very, very long term, their return is the inflation rate, right? By definition, that's commodities. So it's not a great asset to own like passively forever, but there are periods of time when they really perform and that's when you want to own them, but they immediately consume

Starting point is 00:45:36 all of your risk budget when you do. And so Bitcoin has to like coexist in that risk budget for, again, not individual investors necessarily, but for institutions. And so the Sharpe ratio, of course, as you mentioned earlier, is very compelling. But you're going to have drawdowns, and you need to be able to manage that stuff. And that's why I think Bitcoin is maturing. It's coming of age. It's doing all the right things.

Starting point is 00:46:07 The extremes are becoming less. And that's a good thing, I think. Is there a world where you get the extremes to the upside, but not to the downside that people would dream of? We have Saylor recently, actually, at the Nashville conference gave a speech where he said for 2045, so his 21-year price forecast, the bear case was $3 million for Bitcoin. That's the bear case in 21 years. Base case was $13 million. Bull case was $49 million by 2045 per Bitcoin. And I mean, I can't imagine how high inflation would have had to been for Bitcoin to do that. Well, at least it's not the $1 billion that I still get misquoted on. Oh, $1 billion, right?

Starting point is 00:46:45 And then we've had a lot of people, Cathy Wood and others, say a million by 2030. But with this full institutionalization, this dampened volatility, that seems to be rationally a bit less likely unless it's in the environment where we get a full-on economic collapse and Bitcoin is the store of value that people rush to.

Starting point is 00:47:05 Or the dollar gets hyperinflated away and the denominator is just so. I mean, during economic collapse or during periods of economic prices, if you will, the dollar usually does really well because it's the source of funding around the world and everybody wants their money back. So the bid for the dollar tends to be very robust. But in a period of ongoing monetary inflation, like we had in the 70s, I think that to me is the kind of the nirvana scenario for gold, silver, Bitcoin, etc. But I think one thing that I don't see discussed a lot, and I was on

Starting point is 00:47:46 another podcast, and the question was, will Bitcoin just eat everything else? And I don't think that's going to happen. I think it's doing it in a way right now, and it has been. But it's not going to replace real estate or equities or other assets to such an extreme that Bitcoin is at millions or a billion and the S&P is at 500 or gold is at 500 because it has cannibalized everything else. Because at some point, I think prudent investors are going to look at relative value and they're going to say, OK, Bitcoin is now at 200,000 and gold is at 1,000 because they got cannibalized by Bitcoin. You know what? I'm going to buy gold at 1,000. I think that's a good value, right? And so I think at some point you're going to get,

Starting point is 00:48:36 like you have the gold to silver ratio, right? And when it runs out of whack, people will substitute. I think that will happen at some point with Bitcoin, as it should, because it's one of several assets, and they should all be valued against each other and against the economy and inflation, et cetera. Yeah, I mean, depending on the price on any given day, and obviously, they'll change into the future. But right now, what is gold? $13 trillion-ish total, somewhere in that ballpark, and just over a trillion for Bitcoin. So Bitcoin at 12 to 13x to match gold, which would be a massive accomplishment. And that's still putting us under a million dollars a coin. Yes. And I've done, actually, I did a deep dive

Starting point is 00:49:17 on that, looking at purely the supply side of gold and what it could mean for Bitcoin. And it was kind of like a stock-to-flow type of analysis, but looking at the scarcity of gold versus Bitcoin and then applying that scarcity premium to the price of gold to arrive at Bitcoin. And my conclusion was that Bitcoin could be a good quarter of the gold market in the next, whatever, five years or so. And that has obvious implications for the price, but also kind of the overall valuation. And so I think that makes perfect sense. $230,000, $240,000, $250,000 Bitcoin. I don't think that's wildly unreasonable.

Starting point is 00:50:00 And that's probably the ballpark for that, depending on how much gold comes down or up and how much of that money comes out of gold. There are some out of gold. We've talked a lot about how it does trade, how it could trade. I think there are some potential game-changing situations. Listening to Trump and then Lummis say that Bitcoin could be added as a strategic reserve asset. Trump said strategic stockpile and that we would just hold the Bitcoin that we have. But Lummis then came out and proposed a bill, which I do not believe in any way, shape or form will pass. But talking about the central bank adding Bitcoin as a strategic reserve asset, her proposal was a million Bitcoin in five years to be held for 20 years. So 200,000 Bitcoin bought a year. Now, whether that does or does not happen, doesn't

Starting point is 00:50:46 that to some degree put central banks around the world on alert even to hear that rhetoric? And couldn't it be a game changer if they add Bitcoin even in small amounts like they did gold? Maybe this is a huge jump, but it's being said. I mean, it's a bill that will be presented to the Senate. It's on the docket now. I personally don't see that happening, but that doesn't mean it won't, of course. But, you know, the Fed, the Federal Reserve, of course, owns gold. Most most central banks do. And the amount of gold that they have owned has been static for for decades. I mean, you know, Russia and China have been adding gold, but nobody else really is.

Starting point is 00:51:25 And that's what's, you know, why we have a fiat monetary system. But to your point, for the Fed to say we're going to add Bitcoin on our balance sheet, in a way, would be kind of admitting defeat, if you will, that they do not have the credibility. And the Fed does have credibility. It still does, even though they've kind of had some wild swings here with QE and zero interest rate policy. But you look at the TIPS curve from one year to 30 years, the implied break-even, meaning the implied inflation rate, is like 2.4%. So that is sort of primary evidence, if you will,

Starting point is 00:52:07 that the market believes the Fed is still credible. And so as long as the Fed has that credibility, for them to add a private asset that was created by some dudes, and like, I just don't see it. I could see them creating their own Bitcoin and adding that. But I find it to me, it's a stretch to think that it will be a strategic asset. And again, I'm not a political analyst. So I don't know to what degree the Senate or the House or the president can even tell the Fed what to own. I guess they could, right? If there's congressional legislation, maybe they

Starting point is 00:52:52 could. But again, in a political season, I always discount these kinds of statements. Not that Senator Loomis is not highly credible, of course, but I think it's a leap to get from here to there. Now, if the Fed was in a position where it had lost its credibility, like it had in the 70s, and it really needs to shore that up, then I could see something like that. If it's too damaging to raise interest rates, which is typically how a central bank would regain credibility, you know, adding hard assets to the balance sheet, that could be a way, right? And if then the Fed believes that Bitcoin is a viable hard asset, then OK, then I can

Starting point is 00:53:41 see it. But we're pretty far from that. Or maybe we're not. Who knows? But I don't think it's where the Fed is right now. I definitely don't think it's where the Fed is right now. I think it's a great talking point to play politically to the Bitcoin community. But I would hope in my fantasy world that it's putting the idea into the heads of people

Starting point is 00:54:03 around the world as we see it really on the main stage in the United States. It's part of the democratization of Bitcoin, right? And I think it's a good, I think it's really good to have the conversation, right? And the ETFs, of course, democratizes as well. I mean, RAs still have to do the due diligence. They're not going to buy it on day one, right? Wirehouses haven't even approved it yet. I mean- Exactly, right? RAs do not buy, advisors do not put anything in there that isn't on the short list from their company. But these things take time and there's nothing wrong with that, right? I mean, there's nothing wrong with that at all. But I think the conversation of what Bitcoin is

Starting point is 00:54:41 or is not, I think is a deeper conversation than just, you know, is this an asset? Is this not an asset? Does it have a cash flow? Does it not? Like things like that. This is a good conversation because it delves much deeper into how, you know, the economy works, how monetary and fiscal policy works.

Starting point is 00:55:00 And of course, there's a libertarian kind of angle to this, of course, that we're all familiar with. So I don't think there's any downside in having these conversations at all. It is a much deeper conversation, and I'm glad that we can somewhat semi-regularly have that conversation together because you always bring such incredible insight. You really do put it into perspective of everything else that's happening, which very few people, I believe, can. Juergen, where can people follow you after this and keep up with your work? Thank you. I'm on X, at Timur Fidelity, and on LinkedIn as well.

Starting point is 00:55:34 Same content, just search for my name. I'm the only Urien Timur on LinkedIn, as far as I know. One of my favorite follows on X, for sure. Obviously, reading Fidelity's reports, but you have incredible threads that really help, I think, frame everything. So thank you so much for your work. Thank you for everything Fidelity does. I look forward to hopefully having this conversation, not a few years down the road like last time. Thank you for having me. Appreciate it. Thanks so much. That's dope.

The Wolf Of All Streets - Bitcoin Will Dominate The Future Of Finance | Jurrien Timmer

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.