The Wolf Of All Streets - Lyn Alden: Were We Wrong? Will There Be No Recession? | Macro Monday

Episode Date: July 31, 2023

Lyn Alden joins the Macro Monday show with Dave Weisberger and Mike McGlone. Don't miss it! Lyn Alden: https://twitter.com/LynAldenContact Dave Weisberger: https://twitter.com/daveweisberger1 Mike McGlone: https://twitter.com/mikemcglone11 ►►MELD MELD will bring to bear the full power of decentralized financial instruments to the masses. Banks are at the heart of the economy, MELD will become a new set of banking tools that are by the people and for the people. 👉 https://bit.ly/meld-early-access  ►►OKX Sign up for an OKX Trading Account then deposit & trade to unlock mystery box rewards of up to $60,000!  👉 https://www.okx.com/join/SCOTTMELKER  ►►THE DAILY CLOSE BRAND NEW NEWSLETTER! INSTITUTIONAL GRADE INDICATORS AND DATA DELIVERED DIRECTLY TO YOUR INBOX, EVERY DAY AT THE DAILY CLOSE. TRADE LIKE THE BIG BOYS. 👉 https://www.thedailyclose.io/   ►►NORD VPN  GET EXCLUSIVE NORDVPN DEAL - 40% DISCOUNT! IT’S RISK-FREE WITH NORD’S 30-DAY MONEY-BACK GUARANTEE. PROTECT YOUR PRIVACY! 👉 https://nordvpn.com/WolfOfAllStreets   ►►COINROUTES TRADE SPOT & DERIVATIVES ACROSS CEFI AND DEFI USING YOUR OWN ACCOUNTS WITH THIS ADVANCED ALGORITHMIC PLATFORM. SAVE TONS OF MONEY ON TRADING FEES LIKE THE PROS! 👉 http://bit.ly/3ZXeYKd  ►► JOIN THE FREE WOLF DEN NEWSLETTER, DELIVERED EVERY WEEK DAY! 👉https://thewolfden.substack.com/   Follow Scott Melker: Twitter: https://twitter.com/scottmelker   Web: https://www.thewolfofallstreets.io   Spotify: https://spoti.fi/30N5FDe   Apple podcast: https://apple.co/3FASB2c   #Bitcoin #Crypto #Trading The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

Last week, the Fed came out and said they do not expect there to be a recession at all. That, with a number of banks and pundits saying that they expect a soft landing, not sure that's the expectation in this crowd, but definitely worth discussing. Also, oil, could it be putting in a low? Are prices going to go back up? Is inflation going to rise again? We're going to talk about all this with the amazing Lynn Alden, as well as my co-host Mike McGlone and Dave Weisberger today. I really can't wait for this one, guys. Let's go. apologize for that, guys. I hope you're all having a wonderful Monday morning. I'm going to dive right into it since we have all of our guests here. We have Lynn Alden, Mike McGlone, and Dave Weisberger. Good morning, everybody. Hope you are all doing well. The good news is you can definitely hear me. I'm hoping that I can hear you again as well. Let's start here from the beginning.

We've got the Fed saying no recession, right? They're saying that they've effectively thread this needle. No problems, all is well. Let's continue on with our lives. I think I know where Dave and Mike generally stand. So I'll let you start. Give us the broad strokes on what you're thinking.

Sure. I mean, I think one thing worth pointing out is that central banks rarely forecast recessions. The fact they did earlier was kind of unusual because central banks often don't want to be like self-fulfilling prophecy. Also kind of putting a recession there

is kind of a political statement in a way. And so they often don't really forecast a recession, kind of like how we look at the Congressional Budget Office and their forecasts. They also never assume a recession. They look out 10 years and they just give this smoothed outlook. And so I don't think we should really go by Fed analysis of recessions because you're inherently dealing with a semi-political organization. So I think we have to keep an eye on indicators. And those are mixed. I mean, I think some of them are pointing towards recession. Most real figures have decelerated. When, when you look at like the conference board leading indicator, uh, that's very weak. And I think the key thing that's kind of holding it up is the fact that we're still running

very large deficits, uh, for this part in the cycle. Uh, we're, we're basically running the types of recession, like, uh, deficits you'd normally see in the deep part of recession before we're even in one. Uh, and it's not as impactful of a stimulus as say, you know, stimulus checks or childcare tax credits. But it is leaking out into the economy in various ways. And that's kind of propping up at least at least the service sector and some other areas as well. There was a really interesting interview with one of the analysts at Vanguard. And he was saying that

seemingly everybody is pricing in 30 to 40 more basis points of unemployment rise. That's pretty much consensus that will go over 4%. Even the Fed is projecting that. But then the Fed is saying there'll be no recession. And by definition, that would be a recession if unemployment is at those levels. So it seems like they're not consistent with their view, even on their own data. I see you laughing, Mike. Go ahead. Well, we have to point, it's actually the opposite. It's what they say versus what they do. You just look at the New York Fed probability recession from the yield curve, it's the highest since 1982. And like Lynn said, yes, they're political. You can't expect

Treasury Secretary Yellen to say, yeah, we're going to have a big recession. And I knew you would, David, laugh because this is one of those things you have to say, yeah, thank you. Ignore what you say. Watch what you do. The Fed has tightened the most ever from zero. Not just that, central banks. So we have to hope that those rules don't apply anymore.

But I'll let Lynn focus on the economics. The key thing I just got from our morning meeting was our economics team. It's how so balance sheets are great. But the view is we're going to have a significant slowdown. Look at the Fed. That's what their indicators point out. And people are calling for a victory way too early. And that's what I love.

It is July. I mean, come on. We know what happens in markets. Dave knows what happens in markets. You want to. I remember in the trading pits, it was almost every July and August, my boss would look next to me and say, Mike, volumes are killing me, killing us. Because volume goes down, volatility drops, and people go on vacations. And then you get to August, September, and reality hits.

And that's why this fall could be similar to the Octobers we've had in the past. But the bottom line, from my standpoint, which focuses on what really matters for me is you look at the key sectors I watch, commodities and cryptos, they are clearly tilting towards significant economic slowdown. Let's start with commodities. The Bloomberg Industrial Metals Index is down about 10% this year, gold up about 10%. That's rare that happens without a significant recession. And we see every single piece of data out of China is tilting towards, I would say, disappoint.

And what's going to change that? Sure, they need the economic, they need stimulus. Everybody's depending on that. We heard that back in January when they're going to reopen. And then you look at cryptos. The Bloomberg Galaxy Crypto Index on a one-year basis is basically unchanged. That's horrible when the Nasdaq's up 20% on a one-year basis is basically unchanged. That's horrible when the NASDAQ's up 20% on a one-year basis. So look at the stand, the way I look at it is this biggest sign of liquidity, the biggest indicator, the most significant new technology ever, AI has been

around for 50 years. Some of us remember reading about this in undergrad, which for me was 40 years ago, is still showing there's a problem. And then, so what's the most significant crypto? Bitcoin. Yes, the bullishness we saw a month ago was really my red flag that this is a serious problem. And that is that everybody's calling for victory way too early, despite the fact the number one basis of all markets is liquidity. And the Fed is still taking that away.

Not just the Fed, ECB, the Bank of England and China is scrambling to catch up. So I look at them, good luck. And hopefully the stock market will keep lifting all tides, lifting all boats. But the bottom line is anybody who's getting, you got to be careful long risk assets when you can get minimal one year, 5.25% in a US T-bill. The average return to the stock market over time is 8% to 9%. Sometimes you just have to look over to McGlone and say, yeah, I was dumb. I did what, you know, suggest what McGlone says and stick with T-bills and relax and lay low and get out of risk assets. I mean, Dave, is it the ultimate top signal,

Jerome Powell saying no recession. Thank you. Look, I have a more nuanced view than Mike. I suspect my view is probably closer to Glenn's, although the only time I ever talked with you, Lynn, was at one lunch at Bitcoin 2023. I think that the great delink of Bitcoin is actually going to be upon us over the next 12 months. I really believe it. I think that

we're seeing aspects in popular culture and other things. Even Margot Robbie talking about, I mean, I know I wrote about this this weekend, you can laugh as much as you want. No, she was talking about Bitcoin. The key thing about Bitcoin is acceptance. And the absolute reality is that Bitcoin should trade more like gold, but the market's pricing it at only a 3% to 5% probability of it becoming digital gold. And AI is a huge driver. I mean, I was playing at the Hard Rock, their summer poker open, and someone asked me what I did. I told them, and I can't tell you how many different people came up to me and started asking me about Bitcoin and crypto. I think I orange pilled like five or six people over the course at poker tables. I mean, it's crazy stuff.

But look, the simple fact is, let's get some facts. Mike keeps saying it's the greatest, fastest, sharpest taking away liquidity. While true, it is also true that rates at this point historically are not even remotely restrictive. Some might even say that real rates being where they are is somewhat accommodating. So we don't really have a high rate environment. 5% is just not high by historical standards. So the issue is the velocity of the normalization was the highest ever. That is true. So that's something that's important. But I do agree. I think that the risks are definitely skewed for what people call risk assets. I just don't know where people are going to put money in that situation. I tend to think

that Bitcoin has a very real chance of delinking. I also think that the regulatory, the reason crypto has out underperformed, and it's extremely clear, is there's two things. There's the first thing, all year, with all the lawsuits going on, there is a lot of fear in the crypto community that people are going to be forced to sell because of some regulatory action. It could be Binance going down from the DOJ. Now, it was a paper. The story this morning enraged me and probably should have enraged every person in the crypto industry about what Brian Armstrong said to the FT, that the SEC wanted them to delist every single token other than Bitcoin, which I will go so far as to say that if that allegation is true, it's grounds for removal without any question, because the SEC's core mandate is investor

protection. And they were actually formed because of the 29 crash. There can be no doubt that the SEC people who were saying this were completely aware that the US investors would have been forced to sell in that situation, creating a panic and a crash, benefiting two categories of investors, rich ones who have offshore money and foreign investors. So causing a crash literally is exactly the opposite of what the SEC was created to do. And that is something that to me is just, it's reprehensible. And there is no doubt that Warren Davidson and Richie Torres, because let's not forget, crypto skews more towards minority and poor people than equities do. That was a 25-15 vote on the market structure bill, by the way, which was heavily bipartisan, largely led by Torres. But I do think it

actually has bipartisan support. Right. No, but forget all of that. I mean, the fact is, is those are the reasons. So why crypto has underperformed risk assets is very clear. The US is still 50% of the investable assets in the world. And until there's clarity here, you know, people, you know, there I do think one other point that I always make on this, I make this every week and Mike is probably tired of me saying it, is I look at the yield curve more as a success story by what the Fed wants to do than as an indicator of anything. Now, I want to be clear, the Fed wants the yield curve inverted. Why? They can't afford the U.S. government to finance at 7% or 8% on the long end. They can't. Just do the math of what our deficit looks like and what spending. There'd be no discretionary spending at a balanced budget.

None. Zero. Zilch. And they can't afford that. So they're trying to engineer this way. So when someone wants something to happen and it happens, I don't necessarily think it happens as. Lastly, I will say that what Lynn said is so true.

They are a political organization and their goal is, is to facilitate. And basically if you give him a goal, it would be to not be a political issue. So he wants to slay inflation, but he also doesn't want to strangle the economy. So yeah, they're trying to threaten you. Well, you get to unpack all of that for both of them. I'm sorry. Have at it. There was a lot there and I don't know which part grabbed your attention, but

please have at it. Well, it's complex. We touched on macro and crypto, so it's like two very different. Yeah, I think overall i the the asset class i'm kind of worried about is is uh kind of u.s equities uh because that's where you have a lot of euphoria lately uh you don't see a ton of euphoria in international stocks you don't see a ton of euphoria in value stocks you don't see a ton of euphoria in in bitcoin and adjacent spaces for some of the reasons we've covered here uh kind of the enthusiasm right now is in equities. One of the concerns I'm watching, because there are two directions that can go bad for equities.

One is that if economic data continues to deteriorate and point towards recession, that's generally not good for equities. And then two, if you get a reemergence of some energy inflation, you know, we're seeing signs, you know, crude oil's been been firming up a little bit. Gasoline's been at like year year highs. You know, we the past year you had the SPR drawdowns. You had, you know, Iran get more of their oil to market. There's been a number of supply and demand changes. And if this starts firming up, then you take away that disinflationary component that's

been there for the past year. And if you start putting that into the market, that has implications for long bonds, that has implications for Fed policy, which then can trickle through into equity valuation. And we have to see. So the past several months, the Treasury has been really focusing on T-bill issuance. They've been funding themselves at what is ironically the most expensive part of the curve right now because that's the best for liquidity. That's how they're able to get liquidity out of the reverse repo facility. You know, some of the estimates are that they might shift more towards coupon issuance

later this year. And that could have implications for the shape of the yield curve and for, you know, overall liquidity. Like, you know, where is that going to be funded? Because coupons are not going to be funded with reverse repo. And so that's a a different liquidity environment.

So I do think that there are significant risks later this year. And I don't know if they're going to, say, transfer over to Bitcoin or not, or if Bitcoin is going to do more like a kind of trade more like gold where it doesn't really care about, say, corporate earnings in a way that equities do. It very much tends to be a liquidity play more often than not. So I think that's one of the key things to watch is that equities have two sides of the area to worry about where some of the other asset classes, I think, are a little bit cleaner. Those are some key points I'd like to follow up on, unless you have something, Scott. No, please, I want to ask Lynn something, but after, because I know you want to top oil, so go have at it. Well, she made some two key points, and Lynn, your stuff is great.

Every time you speak, I listen. When you write, I really appreciate it. The key thing I like to point out the difference is my whole career has been a strategist with clients and running real money versus economists. And sometimes what economists do and say things, a strategist, the person running money will do the opposite. And first thing, your concern about equities, I think, is certainly the key thing, particularly because there is an alternative, unlike we haven't had in 22 years. And I'll push back a little bit what Dave said. Yes, rates are high historically, but relative to every single virtual measure inflation, Fed funds rate at five and a quarter, a lower bound is restrictive. And the question is,

what's the bodies in motion trajectory? Inflation is collapsing in some measures. Now the measures the Fed watches is stable, but PPI is actually negative 3% now. So it's currently restrictive. What's the current trajectory? We still expect Fed funds, 20%, they might hike at the next meeting and inflation is collapsing. So that's bad for equities. And there's an alternative. You can buy a T-bill and get 25 and a quarter guaranteed locked in for a year. The key thing I want to point is the potential risk of emergence of energy inflation. I love hearing this from sell side people who have a vested interest in crude oil going up so they can sell product. Yes, I've been there. And from economists, you look at the price of crude oil right now, it's first traded this level, just high 70s and 80s in

2006. And what has MoneySpy done since then? So I'll give you two key facts about crude oil I wrote in my latest outlook. The latest estimates of motor fuel demand, i.e. unleaded gasoline in this country is about 5% below where it was in July 2019, right before COVID. 5% down. Okay. So economies, everything's coming back. The world's changed, yet that demand is still slipping. This is from the world's largest economy. It's been the best indicator of crude oil collapsing since the peak in the bear market. There's been a bear market in crude oil since 2008. And another key factor, Bloomberg New Energy Finance points out total sales of EVs now running around 15% of new car sales. That was about 3% right before COVID. What are those trajectories? So I love when people point out that there's risks of crude oil. We had a massive pump. We had that worse. We had a situation

very similar to when Saddam Hussein invaded Kuwait. And that put in a peak in crude oil that lasted, I think it was for almost 20 years, but it went from 40 and it dropped at almost as low as 11, six years later. We're in a similar situation. So I point out crude oil is one of the most deflationary commodities. It's the most elastic commodities and it has a higher price cure. So key thing is, as Lynn pointed out, if we do get higher CPI and things like this from this latest little spike, I'll just tell you, I'll let it guess. Exactly. What does that do for the Fed? What does that do for the macro?

It's the lose-lose I'm worried about. Now we've had this bounce and everything. It's been wonderful. I didn't think it'd go this far, but it's also the fact you need to point out in the big question. The key thing I want to point out about Dave and I both agreeing a lot, but especially disagreeing. Yes, US regs have been a problem, but not through Bitcoin. That's why I'm focusing more on Bitcoin. Everything from the US regulations is that we might get this ETF and Bitcoin's away from the fray. That's the point I'm making is Bitcoin needs to outperform risk assets on a risk adjusted basis.

If it's not, it's telling us something has changed and something is wrong. What's changed in Bitcoin? Valuability is the lowest ever. Why? It's in the mainstream now. Cash and carry. That's the point thing we pointed out years ago. The minute you can trade futures in BITTO and ARB out that, hedge funds are all over that.

When you can get free 10% return, risk adjusted, and you can hedge in futures, it's done. So to me, Bitcoin is a new world now. It's into the mainstream. We're going to get those ETFs, but it's going to trade more like equities. It's not going to have anywhere near the performance we've had in the past. That's exactly what I wanted to ask Lynn about before you jumped in there is we keep talking about whether Bitcoin will decorrelate, whether it will uncouple. If you look at any metric, it has. So the question to me then will it remain uncorrelated, not will it uncorrelate? We have this debate seemingly

every week, but correlations are extremely low. Bitcoin is obviously traveling its own path. Now we can determine whether that's a good thing or a bad thing. But as you just said, it's reacting to the ETF news. It's reacting to things like Coinbase and Binance suits. path. Now, we can determine whether that's a good thing or a bad thing. But as you just said, it's reacting to the ETF news. It's reacting to things like Coinbase and Binance suits. I want to know where Lynn stands. In my mind, we have decoupled and you can sort of trade Bitcoin in its own world. But listen, if the stock market goes down 30%, I think we know that Bitcoin will probably drop. It is copying. Sort of like we get the correlation on the elevator down, but not when the stops are going up, which isn't necessarily ideal. But I would love your thoughts on that correlation and whether we have decoupled or whether we will.

Yeah. So when you look at equities and Bitcoin, what they have in common is that they're both heavily tied to liquidity in the market. That's a correlate variable. But then there's other variables that are obviously different for them. So obviously equities care about things like earnings. Bitcoin doesn't have earnings to worry about. Bitcoin has its own unique industry specific things like ETF approval or not that can substantially move the price or perceptions of how it would move the price. And so it's got its own margin to its, it's kind of marching to its own beat. I am bullish with like a three-year view.

I don't really have a view for the next six months because that's going to come down to, you know, there's various human decisions like is Yellen going to issue more coupon, you know, bonds? And is that going to suck liquidity out of the banking system, for example?

And, you know, put some pressure on all risk assets the next six months, possibly. There's so many individual factors that can influence in that time period. So I don't really try to guess that. But I think most of the on-chain indicators point towards bullishness over the next couple of years. The amount that is being held, like the hodling behavior that you see, the dollar cost averaging

compared to issuance, most of these things are bullish. that is being held, like the hodling behavior that you see, the dollar cost averaging compared to issuance. Most of these things are bullish. Obviously, certain catalysts like an ETF approval, a spot ETF could pull that forward. Delays in those types of things can push it back. But I remain bullish on the asset. And I still think that it's not going to be the type of liquid spikes you saw earlier in Bitcoin's price action. But I do think that it's, you know, it's not going to be the type of, you know, in liquid spikes you saw earlier in Bitcoin's price action. But I do think that it's still a long way off. It's kind of total adjustable market. And I think there's a range of total adjustable markets that it could eventually reach.

And I think it's still just not anywhere in that ballpark yet. So I think it has a number of cycles to go through. You know, it's mainstream enough that everybody knows about it, but it's not mainstream enough that everybody understands it, I think. That's kind of a segment that we're still kind of crossing. And I think there'll be more cycles ahead where more and more people will understand it, especially when we look out globally, when you see all these currencies kind of running into issues around the world.

And they can say, well, I have a couple options. I have gold, I have stable coins, I have Bitcoin, I have illiquid local real estate, in some cases, whatever their decision might be. And this is like a new option that's available to them that really only in the past few years has made itself known on a broad scale. Yeah, I think, go ahead, David. I was just saying, I think everyone here agrees that on a long-term time horizon, we're all extremely bullish. I know that. When I repeat something, I say almost also. Option on its own adoption, future adoption. Is that what it is? You're talking about trading options.

People need to understand that options trade differently than other assets. And Bitcoin undeniably is trading like an option. As I said, at this price level, it's between 3% and 5% likelihood of becoming digital gold. It's just pure math on market cap of what the monetary value of gold is. And every time people ask me about monetary value of gold, the argument that I use this weekend, which is the one that people understood the most, is platinum is 30 times more rare in the earth crust than gold, has better industrial use, is more valued in jewelry, and yet gold is worth more per ounce than platinum is. And the reason for that is because of its historical monetary use, full stop. And when you understand that, you understand that of the whatever $10, $12 trillion of gold market cap, at least 80% of it is at least monetary value, and there's virtually no dispute. So the question is, where does that go? In a digital world where

AI is becoming the dominant narrative, the machines are going to need a purely digital form of money. Once again, shout out to Crypto Hayes, Arthur's most recent missive, which he could get away with titling it called Massive. You can't say Massive. Sorry. Well, it is. But people should Google it. I mean, look, I often say that he's brilliant, so I understand that. But the fact is, is he lays out an extremely compelling case as to why this is all true. Now, why do I care about this? Because every time people do selection bias events and statistics, it drives me fucking batshit crazy. And I am telling you that you're not valuing Bitcoin on the basis of a year's worth of data the way it is as an asset. You're valuing it based on its option value. There is a reason why Bitcoin's volatility historically is so high. It's not because it's more risky of an asset. It's because

it's an option. And options have a totally different distribution curve of volatility. Bitcoin's volatility, if you actually look at it, is gaps surrounded by lots of boredom. It's actually very similar to what I spent my weekend banging my head against the wall, which is tournament poker. Tom McAvoy once made a very famous quote about tournament poker. He said, it's 98% watching paint dry and 2% being on the most high intensity roller coaster. Well, that's what Bitcoin is like. It is in normal times, not volatile. And then it gets volatile when speculative juices come in and people start seeing it. That's because it's an option.

So I really hate a statistical analysis based upon realized price pattern. What we're seeing is aterm accumulators who are not aggressive, who think they can get their orders filled sitting at levels that we're kind of at. And we're seeing an absence of speculation. I mean, it's like crazy. And it's pretty obvious. And you see that in Bitcoin. And look, we've seen one of the interesting things about crypto over the last three weeks is we've seen a lot more volatility in other assets. The Bitcoin dominance, you don't necessarily see it because stable coins skew it.

And Ether hasn't been that volatile. But if you go outside of Bitcoin and Ether, the volatility has been dramatic. I mean, there have been multiple coins. Every week, there's coins with double-digit percent moves. Sorry about that. Not a good thing. But yes, not a good thing. But my point is that

it's not like there's no volatility in the market yeah the coins called named after brian armstrong's head doing 30 000 percent overnight on a chain where people can't even get their money out that's not good but yes i was not but it's no different than you know you know look we can go there. I don't want to talk about the stock market. You don't need to. Sorry. But my point is that I tend to agree with Mike on the economy and about the stock market. And I would be extremely cautious where I'm investing, where I'm trading in the market. I think what Lynn was saying is right. There are lots of things to be worried about in the growth sector of the economy, things getting over their skis, and it wouldn't take much to cause an unraveling. But I do think it's important that from a meta view that we zoom out to a high level and understand what's going on. And I think it's really important for people to get that.

But there's no doubt. Look, if we get a crash in September, October in the market, the plunge protection team will come back in and we'll pull off the gas because going into an election year, there's no way in hell they're going to want to preside over a deep recession. So that's what they're trying to do. And we all have to understand that. But there comes a point where they can't control that. Well, the last point is one that I want to make very, very clear. And I've said this before, and Mike and I agree on this. The Fed put with regard to the stock market is gone, at least gone for quite some time. I mean, you got a long way down before you get a Fed put. The Fed put is totally alive and well, however, when it comes to bank and systemic liquidity. Exactly. I just want to follow up. Two key points there. First of all, my background is options.

I used to be an option trader in the trading pits in the 80s. That's how I got to New York, is trading options in the 90s. And not only is it just Bitcoin and option, it's a call option without decay. That's a significant statement as an ex-option trader. Every time Mark would go my way, I was right, But only after my options expired, if I was long premium. But there's a key thing I want to talk about here in terms of, first of all, a micro and then the macro. If all this hope, I love that word I've learned from crypto people like you, Scott, thank you, about a Bitcoin ETF, which is a matter of time. We all know it's a matter of time.

It just might have been accelerated because of BlackRock now has a vested interest in that space that Mr. Fink pointed it out. My thought is if I'm a strategic trader and I look over at things like one of the best performing assets this year is GBTC

and you can still get Bitcoin at a one-third discount. And if they approve an ETF for BlackRock, well, then how's GBTC not going to convert? And I look at that as, well, okay, if you're looking at strategically, risk reward is maybe that's the better asset if you want to get exposed to Bitcoin, because that one-third, you're getting Bitcoin in basically a one-third the price. So the key thing I want to focus on right now to the macro is, I have never seen, I'm only in 58, a point in

my life where there's more risk for everything, the global economy akin to 1930, that the stock market has to go up. Like you pointed, it has to go up. If it doesn't, everything trickles down. Everything. Housing's already started. Inflation's already started. Everything has started. If the stock market just starts to give up. I'm not talking about a crash. A normal period of underperformance. Now, Dave and I have experienced two key ones since the stock market crash. The peak in 2000, the peak in 2008.

And it's just a question I want to ask everybody who's been managing money and who's been only doing it for 20 years versus 40 years is, do you expect in your lifetime you're going to get an elongated period of underperformance in equities? And if you don't, I'd say good luck because it always happens. And it always happens. It hurts the most people and it takes people on. I've just never seen a better environment where the Fed is still tightening. Everything's starting to roll over and the stock market's different this time. I look at it as don't fight the Fed. We've heard that before, but it's still happening, which is what scares me. And then I look at all my indicators,

the commodity market tell you, yeah, this is a global problem and you probably should just be careful. Preston Pyshko And I don't know if people realize, but actually retail traders have been effectively completely absent from the stock market for the last three to four months. One of the biggest shortcomings ever this year has been. And yeah, rightly so. Because what was it? And it was, you know, worry about expectations. The whole world, including me, we're all tilted way too much towards recession.

What's the pendulum in swamps? Way too far the other way. We're not going to get a recession. We're fine. Oh, by the way, as Dave said, the Fed's not going to save you if we do get it. Unless things get really bad, which means that's your lose-lose. Yeah. I mean, every indicator in my brain that says correction is coming says correction is coming, but good luck finding the exact top before that happens. But that's the way I look at it. Forget about crash correction,

elongated underperformance, period. Sure. That's a better term. What I find interesting, though, is we, as you pointed out, we don't generally get the Fed giving these predictions of a recession in general. You talked about the beginning, but we do get the predictive markets kind of hinting at when we might get a pause or when we might get a pivot. They just keep delaying the inevitable, right? This pivot, it was supposed to be three cuts by the end of this year as of three months ago. Now it's maybe March. Mike would argue that we don't get easy money environment anytime soon, I assume. I mean, do you think that we're going to see a pivot? And even if we do, that that would actually be a good thing? Yeah, i'm not expecting a pivot anytime soon uh but like mike i i expect

generally like equities to not have very good performance and that doesn't necessarily mean a crash you just you can have a choppy range for a while um and you know this particular rally has gotten say higher than i would have guessed but even if it touches nominal new highs, I just don't think that basically measuring from the late 2021 peak to, you know, five plus years after that, I don't think that's going to be looked back upon as a very good, you know, period of equity returns. And I don't know that the path we're going to go along to get there. But when you go into with high valuations, and then you run into some of these headwinds, the fighting against you, some inflationary pressures. It's kind of a recipe for not great performance. And I think when we look at the economy itself, one thing that the market has been consistently offsides on for the past few years is the power of fiscal. So there's been so much focus on monetary policy, but I think it often underestimates the power of fiscal. And so the amount of inflation and stimulus that the 2020 and 2021 fiscal injections did

were underestimated until they started materializing. And then even now, even with that period behind us, the sheer size of the deficit we're still running, I think is a key variable for why a lot of this keeps getting pushed out beyond what the market thought. Because it's a different type of fiscal, but it's still a type of fiscal. And then it's offset partially by, everyone's kind of surprised by China's lack of oomph in their reopening. And again, it's large a fiscal question. Basically, they've been in the opposite where they're running very tight fiscal. And that's been a key variable

for why they've been slow out of the gate. And so I think the kind of the main thing to follow on a lot of this is what's happened fiscal because I think the market's just been generally offsides in terms of either when it's either working in your favor or against you,

is just the sheer power that fiscal has compared to other variables we can look at like monetary and elsewhere. You talked about nominal new highs being possible with stops. Every time I think about this now, I think about when Bitcoin hit 65, corrected back to 28 or something, then went to 69. And myself included, the entire world said it's going to 100. And that nominal new high was the top of all tops before retracement back to $15,000. It just echoes of that to me. So I just say that people should be cautious because even a slight new high, Mike points it out every week, that doesn't mean that all of a sudden we're going to be in a bull market for the rest of time. Lynn, I want to ask you, you're talking about fiscal and monetary

and obviously sort of the relationship with liquidity to how these markets behave. The Bank of Japan has been somewhat the big story here over the last weekend, loosening their yield curve controls from 0.5 to 0.1. Of course, then they bought a bunch of bonds on Friday, right? You're saying that, but the Bank of Japan seems schizophrenic. But a lot of people, at least in the background, are messaging me, is this a big deal? Is this finally, is the Bank of Japan going to be the trigger or them taking away more liquidity? Do you think that this is a big event or do you think that this is sort of just the natural cycle? So I classify it as a moderate event. I think it's more impactful for certain financial prices than for the economy. And so we look at their yield curve control. They kind of struck the middle ground. So instead of actually increasing5 and 1% yield, they're never quite sure if

there's going to be an intervention or not. It's kind of like the game they play with their currency over the past year, where they could come in with an intervention. And so probably the right price for it to settle somewhere between those figures. And when we think about the purpose of raising of raising rates, uh, in the face of inflation, uh, there's, you know, there's kind of two main ways to think about it. One is that if they're trying to slow down bank lending, which I don't think Japan's trying to do, uh, cause they're not exactly known for their rapid bank lending environment.

Uh, and then, and then two, uh, it's, it's, you're trying to firm up your currency. Uh, you know, you're trying to, you're trying to improve the your currency. You're trying to improve the yield differential. You're trying to bring capital home versus have it go out. I think that's obviously the bigger story that they're trying to go with. And so to the extent that they're successful in that, that does around the margins bring a little bit of capital back to Japan or at least stop some of the outflows, which has implications for global bond pricing and then has implications for global equity pricing. So it's another risk factor among the other risk factors we've been talking about for things that could derail the equity rally. But I don't think it'll be hugely impactful for Japan's economy around the margins because we're talking about a fraction of 1% here.

Yeah, I think a lot of people are concerned with exactly what you said, which is how it will affect things externally if it's just yet another sucking of liquidity out of the system. I mean, Mike, is this just another symptom of the same thing you keep talking about over and over and over again? This is something that's changed in Dave and mine, anybody that's been around the entire crew. I've just never seen this. And we all knew it was going to happen. At some point, you hit the point where you can't just keep pumping the system with liquidity and it ends. What did it end with?

Inflation. Most inflation we've had in 40 years. And what's happening to that inflation? It's collapsing in some measures, yet the Fed's still tightening. So the key thing is that liquidity, what's it going to take for it to come back? So I look on the Bloomberg Terminal, the Fed funds shows that by we get to the November 1st meeting, it shows we're going to have a 40% chance that they're going to hike another 25. So hopefully we'll get to a period that some point

they're not going to hike. And the key question you have to ask yourself is what's going to take them to stop hiking. And number one thing I think as Dave has pointed out is just a little bit more, okay, credit's contracting. We know that and why it's still going to contract with the Fed tightening, but probably a stock market correction or plunging inflation. But that's the key thing I want to tilt over a little bit to Dave and Lynn is I enjoyed hearing the comment this morning from our equity strategist. We all know Gina Martin-Adams. We all know that inflation is declining. We all knew that was good, but what do you expect in recession? So to me, this is part of that silly stage where in some measures it's collapsing and it certainly should. It will.

It's just a matter of time. And it's actually deflation now in terms of producer price indexes and it's deflation in terms of all commodities. The only thing that make commodity go up is currency debase. And I can show you that in other currencies other than the dollar. But the key question is, what do we do to stop this transition from disinflation to deflation? To me, that's the silly stage we're in right now. And it's just a matter of time the market realizes, everybody realizes, oh, this is what happens in recession. We go from excessive inflation to deflation to disinflation to deflation.

To me, that's the trajectory. And I see no signs of that stopping. I wonder if we could get some insight on that. But that's the polite way of saying that a depression is coming, not a recession. Exactly. Well, a severe economic contraction worthy of the biggest pump in liquidity ever. Study your history, go back a couple, two, 300 years. It always happens that way. And what stops it? Typically, liquidity pumping, we're still taking that away. I mean, liquidity is an interesting word. Lynn made the point, I think it's really important.

We talk about fiscal. What we're basically saying is the government, let's say it runs, the deficit gets to, it's half a trillion to a trillion, a trillion dollars. So let's just say they spend more money, a trillion dollars more. Where is it coming from? That's liquidity. I may not be, the price of that liquidity, which is their Fed funds rate, is one thing. But the actual wall of liquidity is coming because the government is spending a lot more than it's taking it.

So that money is going somewhere. So it's really unfair to say the greatest, I can't go along with the comment, the greatest liquidity suck out of the economy when the government is literally running at historic deficits. And it's really important that people understand, yes, and then there's another huge point here, which is when you look at consumer inflation. I mean, we had 30 years of raging inflation, just no one cared because the inflation all showed up in asset prices. And so rich people who had assets outperformed poor people. And I'm not going to get out of progressive soapbox because generally people would be

stunned when I do that. But it is a fact that we had 30 years of raging asset inflation at the same time that those same forces caused consumer deflation because as assets were going up, it created much more supply of the things that people buy. It outsourced. It allowed to afford for the fixed cost of outsourcing and opening up factories overseas. It allowed for more and more technology to create, you know, to be faster, better at, you know, to the extent that not only more and more technology

to be faster, better in the lower prices, but ones that without rates being low or without the money flowing into the system, they would be able to afford doing that economically. It wouldn't make sense, but it made sense at those interest rates. And so we're sitting in a situation that if all you do is look at consumer inflation, you're only getting a part of the picture. It's like the five blind men and the elephant parable. You're looking at what you want to look at, but consumer inflation is only part of the picture. And look, it could go the other way. You're right, but it is important to understand that as long as we are running and the entire world outside of germany is running in a massive fiscal deficit they are still liquidity getting pushed into the system someplace the question is does the fed sterilize

it uh are they going to cut their balance sheet enough to sterilize it or not that's really to me the question i'm curious when you think about that because you were going down this radical yeah same same well i think that's the framing to think about is because you were going down this rabbit hole. Yeah, same, same. Well, I think that's the framing to think about is that basically we have, the fiscal side is still, you know, pro-inflation, pro-expansionary, and it's being offset by central bank, you know, trying to be restrictive.

And I do think that the balance sheet reduction is probably having in some ways a bigger impact than the rates, you know, at least around the margin, the fact that that balance sheet reduction is still going on. And so the question is, if you have significant fiscal expansion combined with that monetary tightness, that's when you risk the crowding out effect. And we saw it manifest in the banks. We can see it manifest again in other areas. That could be a catalyst for the next stock market correction, is that if you're still issuing more and more treasuries, those have to be funded and that

has to come out of somewhere. And if it's not coming out of the Fed, where is it going to come from? Right? So that's one variable to kind of, I think, watch. And so I think you can have an environment where it's somewhat similar for the economy, those fiscal deficits, but not similar for asset prices because it's not combined with the central bank money printing. Now, should they run into a hard liquidity problem like they did in September 2019 with the repo spike or March 2020 or the guilt crisis of 2022, if they have an event like that or the banking issue earlier this year, if they run into one of those types of events and they have to reverse their balance sheet reduction

and then flip towards monetary expansion at the same time, you still have the structural background fiscal expansion. That's what I think it'd probably be off to the race, a second wave of inflation. But until then, I think we're still in somewhat of a disinflationary period. Most inflationary decades came in waves. And the one time where you didn't was like, say, World War I, you had this huge spike in inflation. Then the war's over and you had that kind of post war recession period of deflation. You kind of settle at a higher plateau of prices. Both the 1940s and the 70s, inflation came in waves. And the way I've been characterizing it this time is we've been in this period of falling

PMIs, economic deceleration, not as quickly as people thought because of that fiscal backdrop. I think that as long as we're in this kind of economic malaise, the risk still trends towards disinflation. But once either we get a liquidity problem or some other event, and we start to have a period of reacceleration, I think it's likely to come back with some inflation on the side because some of the structural drivers are still there. There's still the background fiscal deficit. I think there's been generally underinvestment in some of the energy and commodity markets. And I think that there's still more waves of that probably to come ahead, but that you have to actually watch the data to see if that monetary stimulus comes back.

I think the fiscal loan is more that crowding out effect. That's kind of why we're in this like twilight zone right now. I want to pose a question then. Okay, we don't usually do this. We've all complained about the Fed and how they obviously overshot in one direction and now potentially are overcorrecting. But here's something we never do. Given the scenario and not judging them for past action, but then I'll make you go first. What should be the Fed's policy, tri-fee policy, fiscal policy. In the current scenario, what would be the best way out for any given government, specifically the United States at this point? Because I feel like we're just very critical and I have no ideas for how they can actually fix it at this point. Yeah. Often people have asked me what I would do and I'd say resign. It's just not an attractive

position to be in, especially the central bank head. So the risk of fiscal dominance, when you have this much treasury issuance, monetary policy becomes less impactful. And sometimes you get forced into decisions that are outside of your mandate because you now have this other variable to deal with. So you're trying to solve for both unemployment and inflation. And then it's like, well, here's walls and walls and walls of treasury issuance. What are you going to do about it? And that's just something that they have to deal with now. So I think when you have public

debt levels this high, historically speaking, those bonds are not going to likely maintain long-term purchasing power, right? Basically, there tends to be the fault. Now, there have been some exceptions. One exception was the United Kingdom in the 1800s. They got up to something like 200% debt to GDP, and they managed to sharply reduce it in real terms. But they had the tailwinds of an energy revolution, right? So the whole industrial revolution, giving them massive real growth, and then they also add all sorts of colonialist extraction from elsewhere. And so those two variables gave them like an exception. The length with which Japan is held out has been some of a historical exception. The fact that they've been able to maintain debt levels this high and this long, I think that's starting to bite them now.

But still, they managed to push that longer than most. But normally, when you get up to well over 100% of the GDP, some of that's just not going to be paid back in real purchasing power terms. And so it kind of comes down to managing that as graciously as possible. And I think a big political error that they're going to have to deal with is, you know, social security funding, things like that, right? Because when you look at the social security's forecast, they expect that the fund will be out by the mid 2030s. And at that point, either the spending gets cut

or taxes have to be raised or something. Means testing, I don't know the answer. But I think both from a monetary and from the Treasury Secretary's side, these structural deficits, there's no clean way out. You're choosing all between bad answers, which is why I tend to be more critical of some of the early central bankers that I think that there were more choices back then that got us into this position. And now it's a Kobayashi Maru. Now it's just varying types of bad decisions. And I wouldn't know what to do.

It's like being an American voter in a presidential election. You just have to choose the best of the worst options. I love the Kobayashi Maru analogy because the fact of the matter is, I think Powell is actually doing a good job. He's trying with what he has. I think he understands inflationary expectations and he's trying to manage towards that, but understands full well what the hell's going on underneath the system. I'm not sure that he could do a whole lot. But look, the single most important thing that the government should do, and it's a stark difference,

and it's why I vote the way I do, is it's about regulation. Massive increases of regulation will crush productivity and will decrease. The only way out of this, there's only one way out, it's through economic growth and embracing technology. It's literally the only way. And you can't get out of, you know,

Mike likes to talk about unleashing human creativity. You can't get out of this situation without, you know, where we have structural deficits that, if you include Medicare and unfunded Social Security, are already well over 200% tied to GDP. There simply is no way out without massive monetary— Why does nobody mention the military? Sorry. Well, yeah, that's right. I mean, clearly, that another thing is to be really happy spending more. We spend double per capita on medical care, and we do so because lobbyists intruded and insurance companies and lawyers have a lot to do with our medical care system.

We spend more than double per percentage GDP on military spending. And those are things we can do, but the simple reality is at real interest rates of, at normal historical levels on the long end, there's no escaping. You literally don't have, without the significant economic growth. And so if you look at how we got in the mess, well, we got in the mess because we said, well, inflation is really low on the consumer side while we were letting assets explode. I mean, look at the percentage. Look at the dollars that are involved and the multiples by every measure over the last 30 or 40 years,

the amount of financialization of the economy, the amount, the value of earnings in tech, and what they were. I mean, it's dramatically higher. And look, it all makes sense, but that's why I laughed at Lynn's answer of resigning because the only real answer is to try to structurally rework the economy. Now, why did the British get out of it? And I think there's a little thing called the Industrial Revolution, which was a massive, massive unleashing of human capital and productivity and literally that is the only way that you do get out of these things without you know or as she aptly pointed out you just go to

the british museum and you can see how many that the british empire literally pillaged the entire planet at that time but yeah well that's true and i'm not suggesting that but yeah no i mean it's it listen outside of that, I don't know. No answer. I got it. I agree, by the way. I'm glad you mentioned the British Museum. One of my favorite exhibits there is the stashes of precious metals they have, particularly the Hoxhny Hoard, which was found in a field in the 90s.

It's ancient Roman. What's the stress? And that's why I'm still bullish gold. I mean, I think there's a good sustainable case for being very bullish gold in that environment, particularly what both Lynn and Dave point out, where we're getting this major dichotomy between restrictive monetary policy

and expansive fiscal policy. What's happening now? We have a split Congress, we have an election, and the people in the House are not going to be happy with them trying to support the Biden. They're going to try to get, I hate to say it, but Trump elected. But there we go. But here's one number I want to leave you with, 93. That's the average PE of the top five stocks in the S&P 500. Price earnings ratio. Now I've learned, I'm kind of old, I guess.

I learned that you want to buy PE around typically in bear markets gets around 10. Look at this. The top Apple's 33, Microsoft's 34, Amazon 142. No problem there. Nvidia, it's the fourth one. It's 227. Then we have some, and with Googles around 27. So I look at that as all this money that's been allocated to there and it's been told. Everybody said, you got to be in it for a long haul.

Just my lessons in life. You always learn those things have to be for good bull markets to start. You need to get a period of disdain, a long period. And we're nowhere near that. We had it for maybe a couple months, about a year, but I mean, multiple years. So that to me is a big picture problem. And roping in the cryptos, I mean, yes, I completely agree. Bitcoin, digital gold is going to be more like gold, but show me the beef. I mean, I like to see a little bit of that positive performance in addition to the fact that it's already been the best performing asset in the history of mankind.

And now that everybody's so bullish, you got to be careful. And so that's why I still think enduring wise, I see gold's up almost 10% this year. That's pretty good. Industrial metal's down 10%. That's bad. What stops that? I still see every central bank is still tightening and we're hoping that China will do something to help us. NVIDIA is feeling like the most gratuitous, obvious short opportunity

since Elon Musk went on Saturday Night Live and talked about Doge, but I just haven't had the balls to do it yet. I don't want to get blown out right before it. Think about shorting. I think I learned about shorting. You get stopped out in actual shorts. You can use like put ratios, which I was kind of my thing. A lot of times they expire, but that's what happened this year so far is we all, the consensus was don't get out of the market, get short, use

derivatives. And a lot of people did that. And now they're getting stopped out of their shorts, major stops. So what does it mean for market? You get back in at the highs, and we all know what Stanley Druckenmeier did. And then things, it's got to be difficult. If it's not, something's wrong. Yeah. Lynn, you get the final word here before we finish, but we go around the horn and the smartest people I know, everyone says, quit your job, resign, don't take that job. Nobody would want that job. We're screwed. Everything's bad. It just makes me err towards, either that means we're going to have the greatest depression nobody would want that job we're screwed everything's bad i it just makes me air towards either that means we're gonna have the greatest depression of all time where we're all just too depressed and this is gonna know new highs because we just see a path out sense of a shift i have no idea let lynn final words i think i think a key thing to focus on you know

and mike's touched on this is that you that TINA is not really here anymore. We have T-bill yields over 5%. When you look at the market, the top five, as I point out here, are super expensive. There are other ones in the market that are not expensive. And I think this is just a period to consider overall risk, you could still be long and diversified, but I think it's a time to focus on, you know, avoid concentration in what is popular. And, you know, I think this next decade, I don't really look at it as a depression, but I think it's just going to continue to be filled with unusual things. I think one of the outcomes, you know, that is less bad is that they're just going to get stuck with above target inflation for a while in waves. And sometimes they're not going to have the best tools

to deal with it. And it's something where the economy is still going along and the central bankers look foolish, which is why you wouldn't want that job. But that it's not necessarily as doom and gloom as some of the worst-case scenarios. I think it's more just like a job where hitting your mandates is going to be very hard because you just don't really have the tools to reach those mandates easily in the current environment. Okay, I'll take it. That's a nice hedge.

I feel like I'm okay now. Maybe we won't have a Great Depression next month. Thank you. Lynn, we would love to have you back literally anytime, by the way. You're always invited. I know you're extremely busy and popular these days, but I thought this was one of the best conversations that we've had. Dave, Mike, you guys agree?

Come back? I appreciate that. I'd be happy to. Really, really, really amazed with your breadth of knowledge and insight. Really, really, really amazed with your breadth of knowledge and insight. Really, really impressive. So guys, and everyone else, in 15 minutes on Spaces, I'm interviewing

Mair Suarez from Miami, actually. We've got about 45 minutes with him. Obviously, I had RFK last Wednesday to talk about his Bitcoin policy, and we're going to be focusing on that with Mair Suarez today. So that should be really, really interesting. And of course, I will be back tomorrow morning here at nine o'clock a.m. Eastern Standard Time. Lynn, Mike, Dave, thank you all so much. Really appreciate your time. See you all next time. Bye, everyone. Let's go.