The Wolf Of All Streets - The Famous Economist Who Predicted The Last 8 Recessions Says This Time Is Different | Campbell R. Harvey & Dave Weisberger

Episode Date: March 6, 2023

Campbell R. Harvey, Professor of Finance at Duke University, joins me and my co-host, Dave Wesiberger for today’s Macro Monday show.  Campbell R. Harvey: https://twitter.com/camharvey Dave Wesiberger: https://twitter.com/daveweisberger1  ►►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/   ►►BITGET GET UP TO A $8,000 BONUS IN USDT AND GET MASSIVE DISCOUNTS ON TRADING FEES! 👉 https://thewolfofallstreets.info/bitget    ►►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.

In the past, there have been very clear signals to tell us when a recession is going to happen or is very likely to happen. Of course, one of those that we've discussed ad nauseum, we've beaten it pretty much to death on this channel already, is the inversion of the yield curve. Well, the person most famous for discovering the relationship between the yield curve inversion and incoming recessions is famed economist Cam Harvey, who is with us today, not for the first time. Very excited to have him, but mostly excited because his model using yield curve inversion to predict recession has been right eight out of eight times, the last eight times it happened. But he believes that this time is different. We're going to hear

why. Of course, we've also got Dave Weisberger with us today. It's Macro Monday. Let's go. What is up, everybody? I am Scott Melker, also known as the Wolf of All Streets. Before Let's go. to miss it because I know that he would have loved to have a chat here with Cam because Mike is certainly, as you know, in the other camp, which is that incoming recession, if not incoming, great reset. But that's something that we can discuss today. Now, before I dig in with the guests, there is something I want to tell you guys about because you've probably read the newsletter today, this morning, my free newsletter. Well, I've hinted at it quite a few times and I'm really excited because finally launching that second newsletter alongside the tie. I've showed you guys their

dashboard. They're effectively the Bloomberg of crypto, but it's way too complex for me. I've told you guys that. I use about 5%, 10% of the data that they have there on that. Well, what we decided to do, as I've told you guys about 100 times, is to kind of, I won't say dumb it down, but that's for me, is to make a version for all of you of the most important indicators every day. It's completely AI driven, completely data driven, no opinion, no anything from the likes of me. You can kind of see what it looks like here. trending news based on the most tweeted news in the crypto space. Talks about futures in all markets, what's happening with the top coins, daily outliers for searching for potential trades and ideas. Basically, guys, there's a lot. I don't want to waste our guest's time, but you should check out the dailyclosed.io. It's right down in the description for that,

because it's something I've been working on forever. And finally, it is going live today. But now I'm going to bring on today's guest. I've got Cam Harvey and Dave Weisberger. Gentlemen, welcome. Thank you for sharing your Monday morning with me. Now, Cam, I have to ask you first, right? The most dangerous four words in investing, this time it's different, according to Sir John Templeton, right? But you are actually going out on a limb and saying this time it's different from your own model. Can you explain that? Look, this expression, this time is different, doesn't really impress me. Every time is different. That's just a fact. So when you've got a model, the model tries to simplify reality in a way.

And the yield curve model that I discovered in my dissertation in 1986, it's been very reliable. As you said, eight out of eight is a great track record. But it's not just that. It's had no false signals. So you could be eight out of eight with like 20 false signals. This has got zero false signals since 1968. So the model has done really well, but it's a model. And if you think about it, very simple. It looks like one variable, the difference between a long-term yield and a short-term yield. And that's it. The economy is very complex. And it's naive to think that a model

as simple as this will just continue to produce like 100% accurate forecasts with no false signals, just like going into the future. So I don't think that it's a big surprise that, and it could be the founder of the model like me, going on record and saying, no, not this time. So I'm not trying to talk my trade, right? Yeah, it's my model, but I'm scientific about it. And when I look at other information, I suggest this is most likely a false signal. So then I guess the question becomes, what are the other variables this time that are clearly different that would lead you to believe that it's a false signal in this case? Is it the job data that's been relatively strong, or is it something else that maybe we haven't thought about here yet? Yeah. So there's a number of pieces of information that kind of led me to believe that this is likely a false signal this time. And let's actually start

with jobs because it's misunderstood. So people say, well, it's unlikely we're about to go into recession because unemployment is low. Well, unemployment is low before every recession. It's low and it gets higher in a recession. So that argument doesn't make any sense. And we know that employment is a lagging indicator of the economy. So just looking at the unemployment number, that's not good enough. However, looking inside the unemployment number is important. And one thing that's sharply different this time is the number of job openings compared to those that are

unemployed. So it's like 1.8 job openings for every person that's unemployed right now. So that's different and it's striking. And if you think about the actual mechanism here, that we can have an economic slowdown, which I actually believe is happening already and will continue. So slower economic growth is consistent with a flat or inverted yield curve. But the unemployment or the layoffs that result from that slower economic growth, there is capacity in the economy to absorb those that are unemployed or a large proportion of them. And we know that in terms of the definition of a recession, that the labor sector is very important for that definition. So that's number one that I expect. Yes, there will be a slowdown.

Yes, there will be layoffs. And those layoffs have fairly short duration in terms of unemployment, just given the buffer that's available today. So that's available today. So that's kind of number one on the employment side. There's a second interesting aspect to the type of employment growth that we've been experiencing. And the headlines are filled with, you know, these tech firms laying off 5% of their workforce and things like that. Well, that type of unemployment is different than, for example, during the global financial crisis before we knew that we were going into recession. There were very substantial layoffs in the finance sector. And if you think about it, you get laid off at Lehman Brothers, where do you go? Are you going to go to Bear Stearns? Are you going to go to one of the big banks that has their handout for the government?

No. You were facing a very long period of unemployment, and many were unemployed for years. Now consider the tech workers. So you've got this incredible job at Twitter or Google or Facebook or wherever. And within the tech sector, to get a job at one of these firms is like the ultimate placement. And you get laid off. Well, there's many companies in the US that would be glad to have like an ex-Google person. Like just to have that pedigree

to actually get through and get that placement. Wow. And this means that their, again, their duration of unemployment is a lot shorter. And as somebody pointed out to me the other day that what I was saying was false, that many of these people are not immediately placed. And I said to them, well, you're looking at the data, but again, behind the data is a different story. That these people, and I'm making a general statement, not for every single one. But in general, there's no rush for them to get the new job. They're going to take some time off because the expected time to get the new job, once they start looking really hard, is very short. So why not take a month off and regroup. So again, these people are highly employable. And again, this is

just much different than the global financial crisis recession. And what we really fear here is the hard landing. Okay, so the number, there's many reasons, but let me briefly talk about number three reason. And that is the housing sector, which was very, very costly in terms of the last recession and consumers were super overexposed. And if you look at the ratio of equity and housing to debt today versus before the global financial crisis, it is a shockingly different situation where there's so much more equity in housing. And this, again, provides a buffer where housing prices can go down. It's not going to cause like a massive problem like it did in 2007 and 2008. So that's kind of like number three. And let me jump to number four, which is a big one, and it has to do with my model.

So when the yield curve inverted in 2006, people really didn't notice, or most people didn't notice. And then when the global financial crisis hit, and many companies were in distress. A CEO or CFO at the annual general meeting or conference call could legitimately say, well, we were blindsided. We had no idea this was coming. And oh, by the way, it's not just my company in trouble. All of my competitors within the industry are in trouble. And we're all blindsided by the actions of the big banks causing this horrible economic situation. So after the global financial crisis, people began to notice this yield curve indicator. Oh, well, it's delivered seven out of seven

accurate forecasts of recessions with no false signals. And then it got like a remarkable amount of attention after the global financial crisis, Not before, but after. So now it's in the news. So we talk about the model on your show. So it's been in the news for the last seven months. So what do you do? You're a corporation and you're thinking of making a major capital investment. And you need to borrow to do that.

And the old curve is inverted. So let's kind of run through the scenarios. So let's say that you pull the trigger on this major investment. You take a lot of debt. The economy goes into recession and your company is in distress, potentially on the verge of bankruptcy. And then you go and talk to the angry shareholders

and say, look, I had no idea this was coming. I was blindsided. And the shareholders start to laugh. Because, oh, how could you have ignored the yield curve indicator? Everyone's seen the model, so how dare you? Yeah, exactly. So this is, what I'm really talking about here is a causality that didn't exist before. So once people have seen the track record of the model,

it changes their behavior. In a way, it becomes self-fulfilling. And let me parse this because it's really important. So you might think, oh, well, self-fulfilling prophecy, that means we go into recession for sure. So let's kind of go through the economic mechanism here. So now let's go back to my scenario where we've got the bet, the firm investment, and the CEO says, what? We need to delay. We can't pull the trigger on this in the face of like an inverted deal curve. And 70% of economists think we're going into recession.

You got to be kidding. Let's delay. Let's wait. And it might be an investment. It might be new hiring. It's dot, dot, dot. Let's delay. And that does lead to a self-fulfilling aspect. So when you've got lower employment growth, when you've got less capital investment,

that does lead to slower growth. Okay. So that's the self-fulfilling aspect of it. But there's another aspect that is more important, and that is these companies are engaging in risk management. So we see these layoffs of 5% of the workforce. Well, and it's actually interesting that if you look at the tech hiring over the past two years or two and a half years, it's been dramatic. And even losing 5%, it's up very substantially since the COVID recession. So when you lay off 5%, to me, that's risk management. So that's, let's, we've hired a lot of people over the last couple of years. Not every hire was ideal. And maybe we also hired into areas that didn't actually work out. So we got good people, but the focus, the area that we're betting on didn't quite work out to expectation.

So let's do a layoff. And 5% is what I call a risk management layoff. And what it does is it puts the company in a position whereby if the deep recession did occur, the company's in a much stronger position and doesn't need to do like a slash. When you slash, it's a very large proportion of your workforce. And that's very, very painful for everyone. So what they're doing is putting themselves into a stronger position. Yes, it does lead to slower growth. But that stronger position means that when the macro economy does slow, these companies don't need to take drastic actions that makes things worse. So it's very subtle. And yeah, it's true that once a leading indicator has become very popular, you see behavior like this where people start reacting to

it early, and the indicator might become less reliable. In my particular case, I believe my indicator, my dissertation focused on the slope of the yield curve and future economic growth. And I believe that the yield curve is correctly signaling lower economic growth. We might actually go into a recession, but it'll be a technical recession like 2001 where we didn't even have like negative year over year growth. So it's, in my opinion, not going to be

deep. And I'm willing as kind of the inventor of the model, I guess I've got some credibility when I say that it's likely a false signal. Dave, you get to unpack that. I mean, you know, it's fascinating. I think the point on the nature of job cuts and the nature of different jobs is a big deal. My friends would call, would talk about structural versus, you know, cyclical versus, you know, secular or structural versus non. It's certainly true that if you were a realtor or you were a broker that got laid off in the global financial crisis, you really had to wait for a new bull market to establish itself, which was, people didn't believe it. People forget what it was like in 2009. Sure, the market had a great year,

but people, like, I'll never forget. I think, I don't know if you ever had Tom Lee on, you know, how many people kept saying, yeah, you're an idiot, you're an idiot. And he was an idiot, you know, the entire way up. But the fact is, is those are much longer. There's two points that are actually interesting. I was listening to Cam. The first is that it is one of the things that's different today. And I don't like the word different in the sense of a binary. It's a continuum, right? So we're not talking about, you know, yes, today the world of yield curve is far more speculative than it was 10 years ago. And 10 years ago is more speculative than it was 10 years before that.

That is true. So it's not like a binary thing. But the simple fact is, if you're a company and you want to borrow you want to borrow long and so at the end of the day because that's where your obligations are and if you are a lender uh you want to lend short uh because then you know you can get your money back and whatever so a inverted yield curve actually fits the real economy uh companies want to do far better right particularly when you look at the rate of inflation etc the reason the yield curve inverts is because people speculate that they're going to have to cut rates uh there

was a really great thread by royal pal this morning uh which i'm also unpacking where he's talking about a very very top top level thing. Population growth plus productivity has to equal, you know, how does he, it's okay, let's get it right. GDP growth equal population growth plus productivity growth plus debt growth. And he goes through this entire explanation of what's going on. So what I've said many times, and Cam, I don't know if you ever heard this before, but at the beginning of all the rate rises, good thing about the internet, it's all there so you can see it, is I talked about the fact that what the Fed really wants

to engineer is higher short rates to pop inflationary expectations, but keeping the long rate down. That's what they want. That is their clear goal. Why? The government borrows long, although they haven't done so much toward the end of things. But the fact is, is governments can't afford deficits. And if you look at the amount of interest rate debt service, even now, what would it look like if we ended up with like the 70 style double digits? I mean, they can't afford the long end to not be what it is. So they want a negative yield curve, which is the other big input into your model. And why I think that what you're saying what you are, because it's, it's, it's clearly intentional. It's, it's what they

want to engineer, and whether or not they're capable of it, well, obviously, they've been so far. So Dave, can uh just on your number one reason um and it's it's really interesting and it has to do with my number five which i didn't actually get to okay go ahead and i'm glad i'm glad i didn't actually because you just set it up perfectly all right and and it has to do with the financial sector. And we all know that the financial sector does not like inverted yield curves. Just think of a simple banking example where people deposit money into their savings account and you get paid a short term savings rate. And that is, in the usual situation, a lot lower than the long-term rate. And that's what the bank actually lends out to companies. So you want the maximum gap between the long-term and the short-term, and that's very correlated with the profitability of banks.

So one thing, again, that's different this time is the health of the financial sector. So if we think of the global financial crisis, the big banks were acting like hedge funds that highly levered positions. And then when there was a small perturbation in the economy, it was devastating given their leverage. That is a completely different story today. And it is a fact that it's the banking health is much stronger today. And the probability that the financial sector makes things worse in a slower growth situation is really low. So if you were like highly levered and and you got this inverted yield curve and in 2006, that that was like a lot of trouble for for the banks today. I do think it's different on your point about what the Fed is doing. The Fed is, in my opinion, it's got like one blunt instrument, the Fed funds rate. And yeah, it's true. They're trying to push that up. And the danger, of course, is that

if the whole term structure, the whole yield curve increases. That's devastating for the payment of the debt. And that's something that's far different than, let's say, in the early 1980s, where Volcker could jack up the Fed funds rate to near 20%. And other interest rates going up dramatically. The size of the debt to GDP was much smaller. Today, it's large. And surely the Fed understands that. And surely the Fed doesn't want a situation where they increase the rates sufficiently that the government needs to print the money to pay off the debt. Because that we've seen many times in other countries, and that could lead to the so-called death spiral. So nobody wants that.

And the Fed is playing a very dangerous game right now. Indeed, the major factor that could put us into a deep recession is what the Fed is doing right now. Overtightening. They were late to the game. They were asleep at the wheel. And now I actually think that we've run the risk of overshooting. I think there's-

Haven't we already over? I mean, Dave, couldn't you say we've already overshot? I mean, not even a matter of overshooting at this point, that even if they stop now, we could potentially have overshot. I mean, it's certainly possible. I mean, look, there's a couple of points in here. I mean, that have to be said. The first, let's go backwards. The first thing we talked about, you talked about banks borrow short, lend long, great. Keep in mind, and this is, I looked it up as a bank rates March 1st weekly survey, the average yield on savings account is point two, three percent. Now,

I don't like using words like collusion or well, I do like words like oligopoly when it comes to the banks. But we're in crypto. So, crypto. So we kind of understand that we're fighting a guerrilla warfare against a situation. And keep in mind, look, I spent 14 years of my career from Salomon Brothers, ended up working at Citigroup and before that at Morgan Stanley. So believe me, I spent a lot of my time in these institutions. And there's a lot of good people doing a lot of good things. And there's also a lot of people who really enjoy power. And the fact that we could have a national savings, savings accounts are still 0.23% tells me banks are just dandy. You know, and it's kind

of funny because, you know, like we run our corporate treasuries, you have a choice. You could leave your money in a savings account in a bank and get 0.23% or you could buy three month T-bills and get four and a half percent. It really, that gap, I've never seen anything like that. That is different from this time, from any other time. It's never been like this. The prime rate and where you could get, that is a big difference. Now, why? I'm not going to go into because I don't have any direct knowledge of it. But the fact that it's true changes things. So that's thing number one. So yes, you're right. It would normally be bad for the financial sector. But not only is the financial sector less leveraged and therefore better able to handle it,

they're also not experiencing it. They aren't paying that. And so the extent that people are dumb enough to leave their money there, I mean, so be it. It is what it is. So that's thing number one. The other thing that's going on is we had, and I'm very curious what you think about that. My working theory has always been, and yes, I'm going to admit that despite going to Northwestern, I believe I was an adherent of Milton Friedman of the Chicago School. I've always believed that inflation is a monetary phenomena. But I think that what happened is a bifurcation over the last 40 years is that inflation, we always think of, because we've been trained to do so, as consumer prices.

Yet the reality is asset prices going up is just as much inflation as consumer prices. We just consider it good. And the way I look at it is it effectively by having rates, real rates below the rate of inflation, i.e. real rates being negative. And we've had negative real rates. We still have them now. It basically what it does is it prioritizes capital over labor, and it allows companies to afford to invest in technology that they might not otherwise have been able to do so if the investment wasn't free, which, of course, decreases, is a disinflationary impact. It also allows the upfront funding for the cost of switching toward more globalized workforces, which in the United States, at least, is an importation of disinflation. And so we've had those. The genie, in my opinion, got let out of

the bottle the day that the Trump administration, and it was bipartisan, decided to start putting stimulus checks in people's hands. And that is a very big difference. That was the very first time through a massive monetary expansionary period that the government said, hey, okay, instead of giving it to the top down and having it trickle down, et cetera, et cetera, and we can talk about that however you wish constrained and therefore there was less goods to produce. At the same time that they were giving much more generous unemployment benefits, et cetera, et cetera, which, of course, in turn made the supply chain worse because there weren't people willing to work, was basically the moral equivalent of pouring gasoline and lots of it, maybe even jet fuel, and then lighting the match by doing it. And to me, when it happened, I thought inflation was inevitable because that's what I've been thinking all along. And now, two years later, we're trying to suck the genie back in the bottle. And it's an interesting scenario because if I'm right, then it means that they don't need to push very hard to slow the economy down and cause a hard landing in order to get inflation to reduce as long as they can reestablish, you know, capital investment and offshoring and all of those things, which are

the disinflationary effect, which, by the way, is easier said than done. But it's something that I talk, you know, I've seen Joe Wiesenthalhal you know the stalwart on bloomberg talk about a lot you know he talks about the idea that if the fed that actually easy money in some respects is disinflationary and what he's basically unpacking that into those two effects i was talking about so i'm going to stop there i'm really what you think so i largely agree with you um so the number one point uh about that savings rate it's disgusting i've got like a like a even like more incredible story where i got notice from my big bank unnamed bank that they were going to auto renew um a cd that was set up by my grandmother for my daughter. And the Auto Renew, it was like a five-year CD, and it auto-renewed at, get this, 0.03%. So three basis points on a five-year CD.

And I phoned the bank and said, what's going on? That is totally inconsistent with market rates. And they said, well, you can cancel, but there's going to be a fee for the cancellation. And all of this is just market power. So we've got a highly concentrated commercial banking sector. Yes, there's 7,000 banks, but it's really a small number of banks that they can do this. It makes one wonder, I have to interrupt and say something that just to pick on my favorite pinata in the Senate. It makes one wonder, you know, anytime anyone ever says Elizabeth Warren and her entire cadre are the ones who are trying to keep the banks honest.

And yet she spends her time, you know, railing about things that could actually decrease the banks and that no one on the progressive wing of the party has said boo about this to me is is almost mind blowing. Well, it would be mind blowing if I thought she really actually cared about taking on the banks, but it is mind-blowing. But it's not. So we talked about the centralization and the market power of banks. And, you know, I've got this book on decentralized finance and the possibility of injecting real competition. And yes, I agree that Elizabeth Warren's been very negative on that. And it's inexplicable to me because this is a technology, a financial democracy and inclusion. Yet she's focused on the negative aspects. But this is not just a financial situation. We've got market power all over the place. There's duopolies, triopolies, and they are strangling the economy. The reason that we have such lethargic growth, even in what we consider good times, is because of all this monopoly power that consumers are getting like a poor deal. And when they have to pay too much,

there's not enough money for other things. The banks are not funding investments that they should fund. And all of this feeds together to cause a slower economic growth. And this is not cyclical. So this is slower economic growth as a result of the financial frictions that are induced in our economy? Oops, I just want to make one comment there. Once again, I always hate when people start talking about regulation. They say, well, this may have unforeseen or unintended consequences. There's a big difference. Unintended, perhaps. Unforeseen, no. The fact is the regulatory structure in the administrative state as it exists today, and this is probably if I had time to write a book, it might be about this. There's just so many examples. Virtually every single agency that writes rules, and I'm most

familiar with the SEC, having spent lots of time running broker-dealers and working with them. The amount of regulatory capture across every agency is so high that what does that do? What it does is it creates natural barriers to entry for smaller companies and natural advantages to larger companies. Companies that can afford to spend $10 million lobbying and or working with regulators to write rules don't mind the big Byzantine rules. They claim they have the vapors about it in public, but privately they're happy because that trade-off of spending that means they don't have to worry about themselves getting disrupted by newer, smaller, more nimble companies. So what you described, that monopoly power, I would argue, is a direct, not unforeseen, but actually direct and easy to foresee consequence of the rise of the administrative state.

Because, frankly, the more you regulate a market, if you look at what's going on in crypto and DeFi, for example, at the one time, there's tons of building going on. I mean, you know, my firm, you know, we're focused on providing. In fact, I think we are the only one that does it, providing in a single order, a single trading algorithm to be able to trade on DeFi exchanges as well as centralized exchanges as well as market makers. But, you know, this isn't easy, this stuff. I mean, you know, you're doing lots of plumbing to make all this stuff happen. And we've talked to hundreds of firms that are trying to do this.

At the same time, the regulators, you know, are pushing. I mean, if you look at what Gensler said about crypto the other day, basically, he finally, what's the old expression? They're not even pretending anymore, Scott. thinks that 100% of the industry, whether it's Bitcoin or Ether or any other coin for that matter, the way it's traded, should be traded by big banks and brokers or the exact same market structure that we know and love. And that's just a tiny little example. But that's happening in literally every sector of the economy. And so, yeah, monopoly power, of course, goes up.

It's oligopoly power, but it's augmented by the government instead of where you would think the government's idea is to break that up and to actually create competition. But that power is eventually disrupted by one of those smaller players that you discussed. Inevitably, right? I mean, if you look at the top largest companies in the world in 2005, they're very different than the largest companies in the world in 2023. And I think all of us here, although we may not look like the classic proponents of DeFi, I know that like Cam mentioned, he's written a book on it, Dave, we've talked about it extensively. You even see Coinbase launching a DeFi protocol to disrupt their own business, knowing that that's likely what's coming. So I want to, Cam, maybe you had a comment there. I don't want to just interrupt you. But after that, I do want to dig into the importance of DeFi then and how it can disrupt and potentially solve a lot

of these problems that we're discussing here. Yeah. So this is so difficult. And I think that I do think that having some sort of regulatory framework is useful. The problem is that we don't have it. So with respect to decentralized finance, we have to rely upon the 1933 Securities Act and a decision by the Supreme Court on orange groves in 1946. And this is obviously a time where there's no computers. And to have the regulations based upon these archaic rulings and acts just doesn't make any sense. And we're in this awkward position where we're regulating by enforcement. And that's what the SEC is doing. And the sort of analogy I like is that you're driving, there are no rules. And then you get pulled over by the police and they tell you you're going too fast.

And that's the way you find out what the speed limit actually is. Or you're going too slow, or you make a left turn on a red, you have no idea that that is against the rules until somebody pulls you over. That's just really inefficient. And that's what's happening right now. It's regulation by enforcement. And what we don't have is a regulatory framework. And crypto has been around for quite a while and and people are saying we need a regulatory framework that is efficient okay so uh and let me give it another car analogy so suppose we've got a large highway four lane highway and there are no lanes. There's no lane markers. So no painted lanes. And then we've got all these exits and there's no signs whatsoever. So it's just all

blank on this highway. It turns out that you can't go very fast on that highway because it's basically chaotic. But when you put some lanes up and put a few signs up, then it actually increases the efficiency. And right now we're in the situation where we have no painted lanes, we have no signs, we've got a lot of police cars. And again, the, this is not the way to do efficient regulation. And the result, of course, is that the best ideas in the U.S. are going offshore. So you might say, well, if there's really harsh regulations, that's going to drive innovation offshore. Well, it turns out that people anticipate and given the uncertainty today and given the lack of, I think, generally underestimate what is in store in the future. And people generally don't really understand what Web3 is.

And in my opinion, Web3 is the major innovation that's coming. It's not just focused on cryptocurrencies, but all companies. So Web3 is Web2, which we've got today, with a decentralized infrastructure, decentralized finance infrastructure. And that means that you can do payments, you can receive or send in a very efficient manner without the banking system. And there's companies in the space that are focused on the key industries that we have today that have monopoly or duopoly power. When you think of search, you think of decentralized social media, think of decentralized music streaming, video streaming, video calling, decentralized computing, decentralized storage,

decentralized ride sharing, decentralized mobile communications, decentralized Wi-Fi. All of this is coming and will attack the major players. And all of this is good for consumers. It puts money in their pocket. It makes the monopolies less powerful, and it increases the quality of service. And the U.S. does not want to be the country that pushes Web3 offshore. Strange, because it feels like the U.S. does want to be the country that pushes it offshore. Sadly, I know that that's not across the board, but our policies certainly are. And so that begs the question, Dave, I'll just ask you this.

But what you described, Cam, if you can sort of predict what's coming, whether you think we are going to get hard regulation, easy regulation, it doesn't matter. The fact that we have no reason to believe we're going to get any regulation. Doesn't that mean it's already too late? I think, first of all, no, because I think we're still in relatively early days in terms of, you know, a lot of the applications that are going to be part. I don't like Web3, is it, because so many people stuff so much into it. But let's just talk about a couple of key things that Cam was referring to. So, you know, one, you know, ownership or the ability to have ownership of networks and products so that you are, you know, so that you can own it and control it and it's not under centralized control through a range of information products is incredibly obvious to people, but obviously it's not, it's not easy to do because once you have a critical mass on, on Twitter, for example, you know, moving that to something else

is not, not easy, but just as easily in the industry, we talk about the financial industry, you talk about oligopolies, you know, one of my favorite example is securities lending because the technology in securities lending really hasn't improved a whole lot in 50 years. It's still a bunch of guys with very thick New York accents sitting around controlling the securities lending markets from the eight or so biggest banks. And the way that it works is every one of these companies that have retail accounts or other accounts where the securities are held, and they loan those out to hedge funds or borrowers, about 90% of the economics go to the middleman. You get about 10% to the lender, the borrower pays too much,

and the economics go to the prime brokers. Now, there is no competitive industry in the world where the middleman makes anything more than probably 20, 25%, believe it or not, except for maybe real estate. But the fact is, is it's been held that way for a long time. I have a good friend who started a company called, actually, I know a few of the people involved in it called Quadraserve back in 2000 to automate the securities lending market, and they ran into a brick wall now with secu with defy on the other hand it won't run into a brick wall if people who own stocks are allowed to take ownership of stocks so imagine a world where uh all assets trade digitally like they do in crypto today where rules that don't allow it which is one one of the reasons that my personal pet peeve, Cam,

you don't know this, but my personal pet peeve is why people should give a flying fuck about whether it's called a security or not is solely because we have securities rules that are written to effectively create this oligopolistic business. And people just assume various pieces of it. Look, I am a market structure geek from way back, and I know all of my ex-friends, well, they're still friends, but all my ex-colleagues at all the firms are up in arms about the 1,500 pages or so of rules that the SEC has just dropped as proposals, many of which basically that you could describe the entire thing as, how would an academic want to rebuild the financial system, assuming that they can only move the needle so much, and make sure when we write these rules, we ignore everything that practitioners have to do with.

And you're going to see the comment letters on this stuff is going to be incredible. So just to be clear, you use the word academic, but certainly not an academic from the University of Chicago. No, definitely not. I already said my homage to your predecessors, so we all know where I come from. But what I'm getting at is these rules. If you think about it, what do we want rules for the transacting and investing in financial assets, securities or whatever we call them? What do we want? We want four things. And most people would agree with this. And frankly, even Gensler doesn't disagree with it because he talks about it. The first thing you want is to be

able to protect customer assets. It sounds obvious, but it isn't because we have this whole in-street-name process where if you buy IBM, you don't own IBM. In fact, your broker doesn't own IBM. It's in DTC and street name, and your name is on a ledger associated with that, and you're given protections. It's a very arcane, expensive way of protecting your assets. But at least if your broker goes bankrupt, you don't have to worry about it. You're going to still own what you own. Second, we want fair and orderly markets. We want to be able to surveil against manipulation i did a a video last this past weekend which uh i know scott you liked it on you know last thursday's uh drop in bitcoin i called it a master class of manipulation and explained exactly how the manipulators probably committed the crime but

we have no regulatory structure to be able to deal with that. We could if regulators cared about principles. Third, we care about protecting all aspects of fiduciariness. I personally like the best execution standard, but there's lots of them. Know your customer, et cetera. There's lots of fiduciariness stuff that we think is reasonable. And then there's other stuff that's completely ridiculous, but that's besides the point. And last and definitely not least, probably most important, we want a disclosure regime. We want people to disclose what risks people are really taking. For example, not to rub salt in a wound that Scott gets mad about, but if Voyager had told their investors that instead of acting as an agent to lend out their Bitcoin to people who want to borrow Bitcoin

in a market, they were writing a blank check to a hedge fund in Singapore, people would have pulled their money. And they knew that and were finding that out. But the fact is, is understanding disclosure of risk is very important. The other thing is you want to know disclosures about financial investments. If you're a company, you have financial statements and things in Edgar that you need to do. Now they are hopelessly outdated, but it's still useful. If you're a foundation or if you're doing a tokenomics, there's not a rule the SEC has in a playbook to understand the economics of those assets of foundation, open source type assets and things. So you need to modify. None of those four things that I just said can be done with the current rule of that. None of them. Yeah. So I've got, so many of the things

you said, I agree with. But, but to me, I think of it differently in terms of the overarching objective. So I think that this needs to guide where we're going. So all of the four things are reasonable. It is complicated by the fact that this is a global economy. And when you look at the crypto world, especially, it's global. So what Voyager is doing, yes, it's true, the FTC could have come in earlier, and they kind of waited until the bankruptcy to say, oh, well, that's misleading. They could have come in earlier, but it was offshore right now. FTC was offshore. So again, this is a global issue of making it much more complicated. But the overarching goal is to have an economy that is growing,

where if you've got a good idea, and it doesn't matter who you are, how much money you've got, but if you've got a good idea, that idea has a fair chance of being financed. And with that, we can take the U.S. economy and put it on a different growth footing. Everybody wants growth. The government especially wants growth. They've got a massive amount of debt that needs to be repaid. And you can repay it in three different ways. Number one, you can increase taxes, and we know that that would kill growth. Number two, you could, and this is kind of a variant of number one, you could print money to pay it off. And that's bad. That's inflationary and again, kills the economy. Number three, you can grow. So when you grow, the tax revenue increases. So we need to have a focus on economic growth. This new technology in terms of decentralized finance is ideally suited

to reduce the frictions induced by the middle people. And I think that most in the U.S. just don't realize how much is taken away by these oligopolies. And if we put that back into the hands of businesses and individuals, we have a real shot of increasing growth, not to, oh, well, maybe go from 2% to 3% or 1.5% to 2.5%. No, no, no. We have a shot of going from where we are today

to 5% or 6% real GDP growth. But all of these interests in the middle, these thick middle layers, making it very difficult. Plus, you've got the bureaucracy of these different regulatory agencies acting on their own behalf. So it's a fight between the SEC and the CFTC and the FTC and the OCC and the IRS and other departments. We need to rationalize this regulation or we're going to be left behind. And no, it's not too late. There is time to do it. And I was very energized. So I was co-running a conference in Washington, D.C. last week. And one of the panels we put together had Senators Gillibrand and Loomis. And they talked and I was impressed. They had a very good grip of the big picture. And the big picture was that the U.S. was losing their competitive

advantage to other countries, given the chaos that's going on right now, and there needs to be some guidance. This was bipartisan, and these issues are bipartisan. So the idea of efficient allocation of capital, the idea that if you've got an innovative proposal, it doesn't matter who you are, that it should have a fair shot. Reducing the power of the oligopoly. These are all bipartisan issues. And crypto provides a rare opportunity in our government for both sides of the aisle to get together to do something so actually um again i was encouraged uh by that uh but i'm certainly discouraged by the current actions uh of the sec and they were strongly criticized uh at this conference yeah spares no spares no words i agree i was i mean dave and i have been speaking for a long time so you know

last summer when the gillibrand lummis lummis gillibrand bill was proposed i think everybody was encouraged i would say i've been discouraged by the lack of talk about it since last summer and how it's sort of fallen by the wayside clearly not as a priority and as for the sec you know we're looking at 2026 for gensler's to end. So either he needs to pass on from his job or pass on from this world for us to see anything, I think, in the next three years, unfortunately. So the news is it was announced at the conference that the bill, the Lummis-Gillibrand bill, will be reintroduced in April. And it will be leaner. And I like lean. But also, some of the weak parts were fortified. So they say it's leaner, but stronger. I'm not sure what the strong actually means. We'll have to wait and see. But this is not dead.

So this is a bipartisan effort. And let's see. It's weird to me that Europe is so far ahead of the U.S. on a regulatory framework with their MICA framework. And I think it's purely a result of Europe and the U.K. seeing an opportunity. They've been dominated by the dollar for so long. This is a great opportunity for them to be in the game early and to have a friendly environment. And they also want to jumpstart their growth. Yeah. The fact is, is it should be bipartisan. It makes no sense. We already talked about it before, why an inclusive financial technology would be, you know, the province of the Republicans. I mean, you know, it doesn't even make sense. I mean, yeah, anti-regulation and deregulation, that tends to be more Republican, I guess. But the fact is that it is unconscionable what's being done out of the SEC. And the reason why

we're so screwed is because we're the only country that actually has two regulators with two totally different political bases. Let me explain. The Agriculture Committee is where the CFTC sits, and the Finance Committee is where the SEC sits. They are huge sources of donations for both, and no congressman or senator is going to support combining them if that if they're in the wrong side so the fact is is you know you compare that to the FCA in in the UK well the FCA does it's it's it's monolithic it's very simple so this food fight over jurisdiction is a big problem and every single action the SEC has taken has been about jurisdiction you know like the suing Do Kwon.

Why did they sue Do Kwon? They're not going to find him. He's going to end up, if we could get him, we'd have to extradite him to South Korea, who I think has precedence over him in terms of what they're looking for. So why did they spend untold tens of thousands, hundreds of thousands of dollars of lawyers and staff time to sue Do Kwon? Easy, because it got them to be able to put in print that Luna and UST were securities. Creating legal precedent, that's it.

That's their sole goal for it. So you talk about CFTC and SEC. In the payment space, it's worse because it's a state responsibility right now. So if you want to do payments in the U.S., you need to get approval of 50 regulatory agencies. Five zero. And who can do that? So it's only the very largest firms, you know, PayPal, Facebook, Meta. It's just enormously expensive. That should definitely be something that is a federal responsibility. I think we all agree there.

And unfortunately, we're up against time because I could listen to the two of you gentlemen chat for the next seven to nine hours. But yeah, Dave, of course, you know, I see you every week. So I'm sure I'm assuming other than vacation, we'll be seeing you back. But Cam, you are absolutely welcome back anytime. It's truly an honor and a pleasure always to listen to you. And nice to hear sort of the pragmatic approach to what is likely to happen and also the importance of crypto, because usually we're all just sort of the pragmatic approach to what is likely to happen and also the importance of crypto, because usually we're all just sort of screaming obnoxiously and the message doesn't get across. I'm glad that we have people that can actually go to Washington and

speak about this in a rational manner and understand it. I think it's wildly important. And Dave, I included your video about the market manipulation in my newsletter this morning, by the way, just so you know, I liked it so much. So everybody can see that there. So for both of you, just a little housekeeping for everybody. Tomorrow, we will not be here. We're doing Twitter spaces at 11 a.m. Eastern Standard Time instead of YouTube. But the rest of the week will still be intact on YouTube.

So, guys, tune in tomorrow. Spaces, we're going to be talking about exactly these topics. I believe it's called the crypto empire strikes back because we're seeing Grayscale's court case opens tomorrow. I have John Deaton, who is the lawyer suing the SEC on behalf of Ripple, who will also be joining. We're going to talk about how the industry is finally standing up and pushing back against this regulatory nightmare. So everyone, please join tomorrow on Twitter Space at 11. Cam, Dave, thank you once again.

Truly, truly enlightening. Thanks, Brock. Let's go.