The Wolf Of All Streets - This Economist Doubts We Will Have A Recession, But Crypto Has More To Lose | Frances Coppola

Episode Date: March 5, 2023

Frances Coppola is a financial economist, author, blogger, and former banker. You might have seen Frances in our weekly Macro Monday live shows. In this episode of the Wolf Of All Streets podcast, Frances explains why the housing market won’t collapse as it did in 2008, why she believes we will not see a recession, and what will happen to Bitcoin and crypto.  https://twitter.com/Frances_Coppola https://www.coppolacomment.com/ ►►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. 👉 https://nordvpn.com/WolfOfAllStreets  ►►CoinRoutes Trade spot & derivatives across CeFi and DeFi using your own accounts with our advanced algorithmic platform. Save tons of money on trading fees like the pros! 👉 http://bit.ly/3ZXeYKd  ►► JOIN THE FREE WOLF DEN NEWSLETTER 👉 https://thewolfden.substack.com/  Follow Scott Melker: Twitter: https://twitter.com/scottmelker  Facebook: https://www.facebook.com/wolfofallstreets   Web: https://www.thewolfofallstreets.io  Spotify: https://spoti.fi/30N5FDe  Apple podcast: https://apple.co/3FASB2c  #Bitcoin #Crypto #trading  Timestamps: 0:00 Intro 0:45 Bitcoin vs physical cash 3:36 Control over money 6:40 CBDCs 14:35 Safe assets 17:15 We are much richer than before 20:50 Yield curve control 26:45 Housing market, interest rates & inflation 31:25 Fed always overshoots 34:35 Real estate collapse 38:10 Labor market 44:50 Bigger recession? 49:20 Easy money 51:35 Crypto to lose more 56:20 Wrap up 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.

Goldman Sachs recently released a statement that there is a 100% price of a recession. Now, a lot of people are expecting this to be one of the worst recessions in history, if not a Great Depression or a Great Reset. But there are economists who have a more pragmatic, realistic view and think that maybe, just maybe, we will come out of this relatively unscathed. One of my favorite guests, Francis Coppola, joined me today to discuss this and a wide ranging of topics about the economy, Bitcoin and the crypto market. Is there anything that I can say to you or that anyone can say to you to convince you to become a Bitcoiner? I'm not totally opposed to Bitcoin. I've been on record as saying I do think we need

what we might call private monies, monies that governments can't control. Because not all governments are benign. Governments can be very authoritarian. And if governments had total control of all money money then they'd have the ability to deny people the means to live and i don't think that any government should have that capability and it's one of the things that worries me very much about the move to cbdc's for example that that's an extension of the power of the state the the beauty about physical cash now who is a crypto podcast and here i am talking about physical cash, right? We talk about physical cash here. It's no problem.

And I think just to be clear, and I've had you on before, I believe that we're very rational, pragmatic here and appreciate both sides of the argument, know that this isn't for everyone. So you don't have to be particularly skewed in one direction to have a good conversation about it. Yeah, I mean, the beauty of physical cash was that even though it was created by governments, governments couldn't control where it went. So it could be used by people who otherwise the government wouldn't want in their country or wouldn't want to have the means to live. They had no ability to deny those

people the right to transact. And that includes people like criminals. It's one of the big issues with physical cash is that physical cash is still the number one transaction medium for criminals because it's so difficult to find, it's so difficult to trace, it's so difficult to find, it's so difficult to trace, it's so difficult to collect. So some of the arguments about CBDCs have been around whether a central bank should create an equivalent to physical cash that was basically just a bare instrument, which could go anywhere and couldn't be traced. And I think the reaction from governments and central banks everywhere has been, no way are we doing that.

And so, in a way, the move to the digital economy and the fact that it is becoming increasingly difficult to transact only in fiscal cash is leading us towards increased control of the state over money, over the money that everyday people use for transactions. And maybe there's a role there for a Bitcoin or even something even more privacy oriented than that to act as a counterbalance, as something that people can use to transact in the digital economy without governments being able to control it, know about it, seize it from them, stop them doing it. Interesting. A lot of people would probably point to private stablecoins as the happy medium between those two. The original argument for Bitcoin obviously was peer-to-peer cash, but I think the volatility sort of eliminated that as people viewed it as digital gold and storing it and actually didn't want to spend it. For various reasons, you don't see that much transacting in it. But a dollarized asset that's on a blockchain and still gives you some of the privacy of cash without it being a

central bank digital currency, that might actually be that happy medium, as I said. What do you think of that? Well, I mean, that's kind of where the direction the crypto world has gone in, really. The problem with that is that if you are linking your stablecoin to a fiat currency, then you've provided a means for the government to control it. As indeed, we are beginning to see, you know, because of the insistence, you must have reserves or you must have this and that and the other. And the only thing you can do then is drive it offshore, break its link to the fiat currency underlying, then you've got the possibility that the whole thing could simply collapse. And the other problem you've got is that a private cryptocurrency is issued by a company, right? The company could control who gets access to it or who uses it or

so forth. It's not just governments that are not necessarily benign it's also private companies so if you want to have something that can't be controlled by anybody then that takes you towards things like bitcoin that makes perfect sense this is me becoming the bitcoin maximalist that you never thought I would ever be. That's right. Well, I think that there is always a difference maybe between what something should be in theory and what it is in practice. And I think that that's where a lot of the disagreement comes around the asset class. But it's good to hear. And I think most reasonable people understand the importance of whether it is Bitcoin or

not an asset like that, when it fulfills its promise to give people that privacy and protection hedge against those authoritarian governments. And frankly, it seems like we're on a trend where all governments are becoming a little harder to trust, right? Even the ones that perhaps 10 or 20 years ago or 30 years ago, we viewed as impeccable and you know protecting the people now i think there's a general fear of government that's pervasive across all citizens everywhere and i think with reason i mean we shouldn't forget and we're short-lived creatures so you know 70 years is a is a quite a long time if a human but it's a short time in human history and you

don't have to go very far back to find a time when governments of supposedly developed countries supposedly advanced countries were extremely authoritarian i mean to to appalling extents and we shouldn't forget that um we can go there again. And I would say all the signs are we're beginning to head down that road now. So I think we should be taking some steps to protect ourselves from that. You brought up the obvious, the central bank digital currency, which was going to be my next question when you were already speaking about Bitcoin in the first place. Is there a positive case for central bank digital currencies? If a government built in privacy protections that were equivalent to cash, there are legislators in

the United States who have discussed that. Or is this just generally a path to violations of privacy and human rights? And obviously, to complete control by the central bank, right? If they want your taxes, take them out of your wallet. They want to airdrop you some stimulus, throw it into your wallet. They want to define what you can spend your money on, how much you have to spend in a month. There's a lot of scary things there, but in theory, if structured correctly, it just could be a better version of cash. Yeah. These arguments have actually been around forever because the CBDC, I mean, I can remember in the aftermath of the financial crisis in 2008, having lots of discussions with people

who wanted what we call sovereign money, where the government produces all the money in the economy and banks are simply tasked with distributing it, but not with creating it as they do at the moment. We should remember that actually most money in our economy is actually digital already. It's just it's not it's not decentralized, but it's digital. And actually, most of it's not created by the central bank. Most of it's created by commercial banks. The amount of actual central bank money that people use in their daily

transaction is actually limited to physical cash. Banks use central bank money between themselves to settle payments, but the money that we ordinary people use in their everyday transactions is created by commercial banks. So a central bank digital currency that was used in the retail space would partially replace the money that's created by central banks so and in a way it complicates things and it creates a competition to commercial banks and for that reason all the thinking on this around from central banks i've seen has all been about oh my goodness we mustn't disintermediate disintermediate the existing banking system because it could all go horribly wrong and people could rush to pile all their money into the CBDCs and the banks would lose all their deposits and they'd all fail. And yeah, it's a nightmare scenario.

So all these central banks are coming up with limits on the way in which people can use CBDCs. Ideas about limiting the amount people can have, about what they can use them for. And I look at this and think, you know, if you're having to start putting limits on the amount of money somebody can hold and the things they can use it for, why would anybody use it? And just practical things like in most countries that have advanced banking systems, one of the things that people do, they do this at the end of the month, is the month is longer than their money. So they temporarily slip into an overdraft and they maybe pay a bit of interest on that and then they clear it again.

This is quite common. Lots and lots of people do it. They can't do that with the central bank because the central bank won't offer them an overdraft. It's credit risk. They won't take it. So again, it just makes it less useful. So the moment you want to have more money in your account than the CBDC limit or have an overdraft facility or use your money in your account for something that isn't on the list of permitted activities for a CBDC, you're back to commercial banks again. And I'm simple-soul. I just think, given that

commercial banks are supported and insured by central banks, I am not at all sure why, what benefit a CBDC adds to this at all. I'm not getting it. Well, I do think central bank digital currency has some value and we're seeing some movements in that direction already. It is actually in wholesale markets where I don't know if you remember, but after the financial crisis again, there was lots and lots of discussion about safe assets. This terrible shortage of safe assets, which was all caused by governments basically not producing enough debt because government debt. So prior to the financial crisis in the US, MBS were treated as safe assets and private label MBS all disappeared. And so

everybody substituted treasuries and then there weren't enough of them. And so the price of treasuries rose and it didn't help that the Fed was doing QE as well, which kind of removed even more of them from circulation. And in Europe, this constant fiscal consolidation that governments were embarked on the whole time and Germany's famous parsimoniousness meant that there was a chronic shortage of safe assets there as well. And so we had this financial system that had really too much cash kicking around because of QE, not enough short-term securities, and a shortage of collateral. Now, it seems to me that a CBDC actually could solve some of the problems of the need to use government debt as a safe asset in financial markets. It could substitute for it, and that might be quite a good thing.

We'd have to think about exactly how that would work, but it might solve a problem. Now, what you've described is why I don't believe we're going to get a central bank digital currency anytime soon in the United States, which I've said countless times and seems to be very controversial. But I don't believe that they're going to disintermediate the banks when we all know that it's a revolving door from the banks to the government. Yeah. Anyways, I can't see Goldman Sachs being replaced by a central bank digital currency anytime in the near future. It does seem quite unlikely, Scott, I must admit. I mean, I think we might end up with one in Europe, but I think it's going to have limited usefulness.

There seems to be an element of jumping on the bandwagon here, and everybody seems to be terrified of China. And I just think China's a very different country. Yes, they'll probably have a CBDC in China, but it's a command economy. Of course they'll have one, and they'll force everybody to use it because that's what they do I don't think that needs to affect us because that realistically nobody's going to use a Chinese CBDC as a substitute for the US dollar they're just not

I I agree and it's I mean that's China's playbook on everything technological or with any even inkling of freedom right they create a internet, create their own version of every social media platform. It's a very insular, you know, protected walled garden of an economy in the first place. But that is where we're going to see traction for central bank digital currencies is in authoritarian countries, which again, then maybe is even more of a reason

for a country like the United States not to adopt what's happening in China, right? We tend to just go the opposite way. Totally this. I mean, actually, in a way, the fact that banking, that the creation of money in economies like the United States and in Europe and in the UK is to a degree decentralized. It's not done by one central authority. Most money is created by this network of private banks. And it responds to demand for lending rather than to, we need this much money, let's create it. So there's a degree of decentralisation there. It's perhaps not as decentralised as a crypto-based solution would be, but there's

some degree of decentralization and that creates resilience in the system I know we had 2008 when all the banks blew up and everything else and no there are vulnerabilities in this system it is prone to booms and busts it is prone to concentration and it does need regulation but you know, there are advantages in the way our current system works. You mentioned before safe assets. In 2023, what do we view as safe assets? Because I think that that list is rapidly diminishing. Well, actually, believe it or not, we still regard US debt as the world's premier safe asset. Despite the shenanigans over the debt ceiling and the possibility that the US might default, which would be ridiculous,

it's still the world's number one safe asset simply because there isn't really a substitute. You know, people keep talking about things like gold. Every now and then you read something where somebody says, oh, the nations like China and India and Russia will produce, they're talking about creating their own currency, settlement currency, which would replace a substitute for the US dollar and might be backed by commodities. Well, good luck with that because these are all companies trying to do that with a ruble. I mean, really, is that going to work? I can't imagine China wanting to do that, actually. So when you start looking at this, you think, no, actually, the world's premier safe asset is still US Treasury bills

and will be for a long time to come. And to a lesser extent also, the government debt of other countries in good standing, you know, like Germany and Japan. Japan's looking a little wobbly, but I am not convinced that it's going to change it much. Simply because, you know, if somebody's going to dump JGBs or USTs or German bunds or whatever, you've got to think about where they're going to go. Where are they going to dump um jgbs or usts or German buns or whatever you've got to think about where

they're going to go where are they going to go because where they're not going to go right now isn't crypto it does not I think that I think that's uh clear at the moment yeah I certainly wasn't making the case for crypto there any volatile asset is not necessarily safe at least in the meantime so it's more of what it could be in the future. You bring up Japan, obviously, and there's sort of this financial meme that we're all becoming Japanese now, right? Is that good? Thank you. Japan is an interesting country because it is a little bit like the canary. I mean, when you look at the demographics, for example,

this aging population was aging long before anyone else. And this kind of constantly stagnant economy and it can't get inflation off the floor and things like that. And every now and then people's inflation kind of looks as if it's going to rise. And everybody says, oh, we need to dump JGBs. And then it collapses again and they lose their shirts. It's not known as the widow make a trade for nothing, you know. And I keep looking at Japan and thinking, yeah's also quite a closed economy. In other areas, it's also caused by the move to the services economy.

We talk a great deal about producing lots of stuff, but actually the amount of stuff the Western countries produce as a share of their GDP is declining. And that does make for a more stagnant economy because it's just so hard to raise productivity in service industries. So, you know, in that respect, yes, we are ageing societies. We are becoming services economy.

We're actually a lot more prosperous than we were after World War II. For example, the big, big, big growth period after World War II, we're a lot more prosperous now. People are richer now than they were then. I know it doesn't feel like it, but we actually are richer than the people who lived then. It feels like it when you zoom out and not when you zoom in. Everybody's hyper-focused on the past few years.

Obviously, we had the black swan of COVID, and we love to point at this immediate trend, obviously, of credit card debt increasing and savings decreasing, but that could be a very short-term thing. And we've seen those spikes and troughs many times in the past. And I think it's right to say that for countries like the US and Europe, arguably, the very poor prospects for young people are potentially more of an issue than people are giving credit for. There's just much too much imbalance at the minute between the old and the young. Well, millennials were born into a terrible time. I mean, they've basically suffered every single financial disaster at the most key times in their development.

You know, when you're graduating college and something collapses and when it's time to enter the job market and something collapses, it really is pretty astounding when you look at the timing for that generation. It's been dreadful for them. And as part of that, you've had the QE period, you've had this massive rise in property prices, you've had stagnation of wages. So they look at what people of my generation had and think, we're not going to get close to what you had at our age or even at your age. It just all seems very unfair to them. And I think there potentially could be a reckoning for that at some stage. But it has, to some extent that that sense

of unfairness that sense of the old have got it all and there's nothing for us is I think part of what has driven the crypto phenomenon in the last few years I think it has some sympathy for it yeah I think it's also uh driven some of that uh sort of move towards authoritarianism and the political environment that we sort of discussed earlier and lack of trust for government. Yeah, I think that's fair. I mean, I can't really blame young people for saying we aren't having a proper share in this economy that the old have created and is run by the governments of the old. So we need to create our own money our own ecosystems our own economy um and i and i have some sympathy for that i can quite understand why they want to do it i'm not convinced that the way

they're going about it is necessarily all that healthy well the good news is that there's no uh draft or world war at the moment so i guess that there we can at younger generations for now the other point, I guess, about Japan, I think you make a great point about the demographics, but is the way that they have managed to effectively just squash the bond market, treasury market, right, with yield curve controls. We've seen sort of this trend of QE in other nations, but I think that yield curve control may become the future trend on how the banks manage the economy moving forward. Do you see that as a trend, or do you see that as a bit of a meme about all turning Japanese? I think it's where we're going. And actually, I mean, we talked about that in relation to

Japan where they're doing it explicitly, but a good many central banks have been doing it implicitly, controlling bond yields to stop the spiking I mean the Bank of England did quite a bit of that last autumn in the case of the Fed there's a specific reason why I think that yield curve control is what Fed's going to have to do because otherwise it's going to lose control of interest rates and the reason for, or perhaps more accurately liquidity control, is what it's going to have to do with lose control of interest rates. And that's actually because of the move from LIBOR to SOFA. So from the interbank rates to the repo market rates

as the principal market benchmark rate. Because whereas the interbank markets where the Fed funds rate operated was just between the banks, so they were just borrowing and lending reserves, like central bank money, lending it to each other, borrowing it from each other. That's all they were doing. Now, almost all of that has now moved into the repo market, which is a much bigger market and full of other participants who don't have access to reserves.

So they have to do that. Yeah. So it's not just reserves being lent and market participants involved are not banks or lots of them are not banks. Banks are major, major providers of liquidity, major market makers in repo markets, but the whole market is much bigger. And into this comes the Fed saying, right, we're going to use the repo rates as our principal policy rate.

Well, to do that, Fed's going to have to control it in much the same ways that it has controlled the Fed fund rates in the past. And for me, that means that Fed is going to have to intervene in the repo market, perhaps more than it really should. I'm actually quite disturbed by the move to repo rate because I just don't think they've thought about the implications of having this as a principal benchmark rate. A rate that is not simply an interbank rate. I mean, okay, LIBOR was hugely problematic, you know, rigged and all the rest of it, but it was just banks. Whereas this is a much, much wider market now. And that implies that the Fed has got intervened directly in a much, much bigger market full of participants that are not banks. And that does imply, I guess, a degree of Fed control of financial markets that goes beyond what we had in the past, if that makes sense.

Yeah. And you mentioned that they might not be considering the implications. Is there a more pessimistic view where they don't see any other option and increased intervention is really the only path of the future for there not to be a great reset or all of these ideas that people have about another depression? Well, I can quite see why they did that. I mean, I have a bit of an issue with the FED, you know, before September 2019 really saying that providing liquidity to the repo market isn't our job. It's the job of the banks. And then the banks said, well, actually, it's more important that we have enough reserves

to settle all these payments that we suddenly have to make because we've got quarterly tax payments and we've got the lifting of the debt ceiling and this massive increase in treasury issuance and we've got one or two other things as well and so we're going to hang on to the reserves we're not going to provide liquidity to the markets and then the fed had to do it um you know and you can see how this kind of tussle played out but there's no reason to suppose that wouldn't happen again i mean and while you rely on commercial banks to provide liquidity to the market, which is where the principal rate is the policy rate, it all seems a bit weird. You know, the Fed actually needs to kind of see what it's done and think through the implications of how much support is it really reasonable to give to the

repo market? And is there another rate that could be used which isn't so wholly dependent upon conditions in the repo market um and kind of related to that you can see where i'm going with this if your policy rate is a market rate that you're having to manage through the repo market and then your policy rate is really is that setting your yield curve because you know longer term bond rates um relate to shorter term ones yeah then in a way um the fed is is kind of doing yield curve kind of controlling the yield curve um through kind of through the bond market which is a bit through the um bond market which is a bit weird anyway i mean it retained, the Fed has moved towards explicit yield curve control at times, operation twist. What's yield curve control, arguably? Anything which changes

the duration in the markets is arguably controlling yields. And it's certainly a question of just what you call it. You call it operation twists and you pretend you're not controlling the yield curve, but of course you are because you're flattening it, aren't you? I think most people don't understand, so they can call it whatever they want and it'll go right over most people's heads regardless. But we talked about safe assets, obviously, for governments, US debt being the number one. But we talked about how hard life is for millennials, younger people to survive. What are safe assets for your average person who's just looking to save,

looking to get a bit ahead? I mean, we don't even need to talk about the lack of salaries or the job situation, but what can you put your money in and reliably grow it moving into the future? Of course, there's treasuries, right? I mean, I think that right now the obvious place is to earn your 4% to 5% on short-term treasuries, but that's not outpacing inflation. No, and neither are insured bank accounts and CDs and things like that. I mean, it's actually very hard to find places to put your money in liquid or safe savings that isn't going to get eroded by inflation. It's kind of a form of financial repression, really, which is kind of, as you say, a little bit unfair

to those people who are trying to build up savings because it's getting eroded. So, I mean, property, if you can get on the ladder, is still a long-term safe investment. I know that we had the crash in 2008, but it's worth remembering that that was the first property crash in the United States for 70 years. We have them a little more frequently here in the UK. But even here, we had a major property crash in 1990. And house prices have more than recovered since. They're like two or three times the amount they were then now. They've really rocketed. And that's good for people who own property.

And that doesn't just mean people who own their own house. It also means people who own rental properties. And so we're seeing increases. But, you know, if they're paying, if rental properties are mortgaged, then landlords are paying higher interest rates. So we're seeing increases in rentals because of rental costs because of that, which again hits the young. But of course, the higher your house prices are,

the more difficult it is for somebody who is young and not on a particularly good wage because you know wages have stagnated haven't they it's just incredibly difficult and more and more difficult for them even to buy property um literally exponentially more difficult because not only our price is going up and wages stagnant interest rates are double. I mean, a year ago, your monthly mortgage payment has practically doubled. If you have a 30-year mortgage, even more,

just depending on how long it's amortized over. I mean, that's an impossible situation. It's really hard. I mean, we don't have 30-year mortgages here. And we've had an interesting discussion about whether the short-term fixes we have here are worse or better than the actual floating rates that we also have here. And at the moment, the view seems to be that most people would be better off with the floating rate because we think that interest rates will come down.

And if you are locked into – because in the United States, your 30 year mortgage, you can refinance at a lower rate. But our short term fixes here, the average is two to five years. We do have some slightly longer ones, 10 years or 15, but they're expensive. Not many people have them. The common fixes are two to five years. And you can't refinance at a lower rate. You have to wait for your term to expire. So, if you've got a five-year fix at current interest rates and interest rates go down, you're going to lose. Interestingly, and this is a little bit of an indicator of where we think interest rates are going. And remember, the UK does kind of follow the US, which is relevant to the US as well. HSBC recently offered a five-year fixed term deal for a mortgage deal in the UK at below the Bank of England's current policy rate. Really?

Yes. Okay, so people do believe that rates are coming down. Yes, that's what that's the indication is. HSBC thinks that rates are coming down, which, you know, for the people we're talking about, it's potentially a good thing. And in terms of inflation, that's quite kind of good thing as well, because it does imply that they think the inflation is going to come down. Interest rates do very much relate to inflation. I mean, policy rates are all about inflation. I remain unconvinced that raising policy rates to deal with an oil price and gas price shock is quite the right thing to do.

And a war is quite the right approach. But it's what central banks are doing. And, you know, inflation will come down because eventually inflation does. Right. Doesn't that imply that they've probably overshot already with the tightening cycle? I think they have yes i do because it's such a lagging i mean you don't you know you're still waiting for the reason for the to see what happened from the tightening six months ago now yep and you continue to tightening you know as we see sort of this uh pretty dramatic decrease in inflation i mean there's some some

indications it's been sticky but I think it's coming down yeah all the things I've been looking at um suggests that inflation is going to come down and um there is no reason to continue raising rates now so and they arguably should have started kind of tapering off the interest rate rises a little while ago but um that is actually consistent with what the Fed has done in the past by the the way, it has always overshot. And so when you actually... In both directions every time. Yeah, every time. I think they have 100% hit rate of overreacting in both directions.

Totally. And so you get, when you look at kind of historical charts of inflation versus interest rates and recessions, you kind of see this kind of saw-aged effect where they've overshot and then there's been a recession, then they've overshot in the other direction and it caused a boom. So yes, we could do with maybe something a little more reliable by way of sort of trying, it's very hard for policy makers

because they're dealing with long and variable lags, famously, it's hard to see what the path of inflation is going to be, It's very hard for policymakers because they're dealing with long and variable lags, famously. It's hard to see what the path of inflation is going to be. Hard to see what the path of economic growth is going to be. And therefore, quite hard to judge when it's the right time to kind of take your foot off the gas pedal. It is their one job, though. You think that they could, after time, they could listen to what everybody else seems to see as obvious. And I mean, if you look at any, it's always the yield curve inversion first, which we have massively, then the Fed pivot, then the market bottom. And people seem to forget that and think that a Fed pivot means liquidity, means everything goes up, but that's not what's happened

really ever in the past. It happens eventually, but that Fed pivot, because they're so poor at timing, usually then causes because they've overshot that recession and bear market. And that's when we see everything bottom. So anyone who's really excited about the Fed pivot hasn't really studied history. Yeah, exactly. Exactly. And the way I see this is that yet again, the Fed is overshot. And yeah. I mean, all the signs are there. And we have, as usual, the, well, not just policymakers, but pundits saying, oh, yield curve's inverted.

Oh, yes, but that doesn't mean what it has in the past. And I go, why doesn't it? This time it's different, right? This time it's different. The most dangerous four words in investing, says Jesse Livermore, right? This time it's different. It seemingly is never different.

But one of the sort of predictions of, I think, since really 2020, since the COVID black swan, was that we were going to see this major collapse in the real estate market. Yeah. That hasn't come to fruition. I know that real estate is hyperlocal, so it really depends on where you're looking and what metrics. I would argue that it's just frozen. Nothing's happening. We thought that there would be a collapse, but it's just there's really no buyers and sellers. If you were selling, you don't want to give up that 3% rate to go buy a new house at 7%. And if you're buying, you just can't afford it and you're going to just lock in the same thing.

You're going to stay where you are until rates come down. So why do you think we haven't seen this real estate collapse? Or am I just looking at the wrong data and the wrong market? No, you're right. And I keep saying this. When we see real estate collapses, it's always, always, always and everywhere associated with banking collapse every time.

It doesn't matter where you are in the world. There is always, if you have a real estate collapse associated with it, it's a banking collapse. Now we haven't had a banking collapse. So in my book, there was no reason to assume there was going to be a real estate collapse because the two are so intimately interlinked. And then you're right that when people talk about, oh, people are going to stop buying property, they would ignore the other side and say, yeah, I know, but people also stop selling and people stop building. Builders, I keep saying this, you know, in the UK where we have, you know, supply problems. And you say, well, we could, if we built lots of houses, we could bring the prices down.

And no, you won't, unless the government builds the houses, because private developers won't build into a falling market. If they think house prices are going to come down, they'll stop building. They'll bank their land and sit on it until the market improves. Same with banks. Banks accept housing, real estate, as collateral against loans, right? What bank in the world is going to lend when house prices are falling?

Because the value of its collateral is going to fall. Why would it do that? Again, it makes no sense. And I wish people would think about this, about what are the incentives of the people in the housing market, because bringing house prices down is not an easy thing to do. You can only really do it, I think, with really very large-scale state intervention. Yeah. The developers also overshoot in both directions historically. I live in Florida and I remember the financial collapse, obviously, even though I was in New York at the time in 2008, 9, 10. And Miami was skeleton buildings of 75% to 100% finished condos with nobody living in them. So nobody at that point was going to build more. There was already way too much supply that nobody was willing to buy or live in.

Yeah, I remember going to, I think it was Portugal I went to in about 2009. And there were all these cranes everywhere with these unfinished buildings because everything had just stopped. Because there had been a building boom in Europe prior to the financial crisis in places, you know, like on the Mediterranean and so forth. And it all stopped. And it was so, you just had these kind of half-finished building projects. They finished them now, though, and people are living in every single one of them. Yeah, they've now finished them. But it took quite a while.

And of course, in Ireland, after the financial crisis, they actually demolished some of the houses they'd built. They had these ghost estates where they literally had- Cheaper than finishing them. Yeah, absolutely. It was cheaper to bulldoze them. Amazing. Yeah, it really is amazing.

And then we've also seen a lot of people arguing for a strong economy right now because of what they're seeing in the labor market, which maybe also hasn't collapsed in the way that people thought the real estate market would. United States, obviously, continuing to have record lows in unemployment, job numbers always seemingly outperforming to the upside. I mean, I think recently the expectation was 180,000 and we got an over 500,000 print. Are those the actual numbers that we should be looking at, I guess? So is the labor market actually that strong? Because a lot of people will dig in and say that's a lot of temporary workers and full-time jobs and it's people with three or four jobs.

Or is, once again, is this time different where we've had all of these things the the tightening but they've failed to crush the labor market I'm kind of a bit of both really I mean I think labor markets are tight but actually what I think is not being said you know we've been talking about wage stagnation actually if you want your wages to grow, you need to have a tight labor market because employers need to be paying more. You know, and so at the same time as we've got people saying we need wages to grow, they've been stagnant for 20 years or 30 years or whatever it is. And we particularly younger people need higher wages. At the same time, they're complaining about the tight labor market and saying, oh can't have wage rises because there's a fuel inflation and i i just think can't you is this not a case where actually some inflation is the price we need to pay to get wages to rise possibly as long as the wages are

outpacing inflation it's not the worst thing in the world the other thing we've got i mean i don't know the us u.s labor market as well as i know the uk one but in the uk one we have the great retirement i think you have that in the great you were in the u.s as well where you've got a lot yeah got a lot of older people people 55 plus retiring early and a lot of that is because during covid and indeed in the 10 years before that their um portfolios, their pensions, their savings and so forth, they've really done rather well. And so they feel rich, they've got money, they can retire and so they retired. And so we've got this idea here, the government seems to have this idea that it gives them tax breaks, they might return to the workforce. I'm going, if they're feeling rich, why would tax breaks encourage them to return?

It doesn't kind of make sense. I'm not seeing a great deal of sense here in the thinking around this about why it is that people are leaving the workforce. So, for example, if you've got women leaving the workforce, you need to do something about the cost of childcare. Or you might need to do something about the cost of child care or you might need to do something about elderly care as well because a lot of women leave the workforce or reduce their hours or drop down into less skilled jobs less productive jobs in their 40s and 50s to care for care for seniors

for you know for our relatives and so forth um and if you want to want those people to come back into the workforce to take on the kind of jobs that they're actually skilled and trained to do, then you need to do something about the services that they need, which would be childcare and elderly care and so forth. And if you've got people who've had to drop out of the workforce or reduce their hours because they've got long-term health problems, then you need to do something about your healthcare now in the us that might be saying actually we need to do something about making it less costly for some people or something in the u.s we have uk we have capacity issues you need to do something about that you know and it's all these

kind of infrastructure kind of issues underneath things that are actually making it difficult for people to stay in the workforce. And if you want to loosen your labor market and increase your workforce and so forth, then you need to help those people to get back to work. And giving them tax breaks kind of doesn't cut it, really. Yeah, I mean, it's interesting. We've seen that sort of the death of the 60-40 portfolio. It's been the worst years in history for that sort of conventional wisdom. But if you were even just automatically rebalancing as someone who's retiring, as you said, you benefited from that massive boom in stocks. And now you've actually probably ended up in bonds with a high yield. Why would you ever

go back to work if you can move to a 1090 portfolio and you're sitting there getting four or 5%? I'm really not seeing the incentive for any of these people to go back to work unless they can find a job that they really want to do. And the kind of jobs we have vacancies for tend to be the kind of delivery driver um healthcare assistance retirees don't want or exactly they're the ones that have traditionally been done by young people young young and poor people not not well-off retirees you know so again i'm not getting it i'm not seeing the incentives i'm not seeing it it's it's almost like a lump of labor fallacy that says oh we can just get the elderly,

the older people back into the workforce. All these kind of jobs are labor shortages, and those kind of jobs will magically disappear. And I'm thinking, how? Yeah. I wish that I had it in front of me. There was an article I read either yesterday or two days ago that actually pointed to the fact that even though we have this stagnation in wages, obviously, we also did see sort of this huge wave of people leaving their jobs and being in high demand and moving to other jobs. And in those cases, which was a huge part of the workforce over the last few years, people did get massively increased salaries because there was so much competition for good employees. Yeah, totally. I mean, we saw a massive increase in the wages paid to haulage drivers, for example, because there was such a shortage of them. But now, I mean, here, again, I can't talk about the US so much, but here, one of the problems in the uk is that many of our of our short shortage

occupations are actually in the public sector and the government is determined not to pay higher wages in the public sector um and has doesn't seem to quite it basically doesn't want the labor market to work as a labor market should i mean this is just basic supply and demand, basic economics that says, you know, if you have a greater supply of jobs than there are people to fill them in this particular sector, then wages will rise. It's just pricing. And so you've got a government that's determined to stop the labor market acting as it should. It's weird. Yeah, and they've failed. So the question is,

does that mean that we're going to get a bigger recession and eventually see a spike in unemployment and people are going to lose their jobs, knowing that that's what the Fed effectively has stated as their implicit mandate, right? We need to break something before we all pivot. Or are they just wrong? I think they're just wrong.

But I thought they were just wrong for a while. I mean, the Fed does seem to be determined to continue tightening until unemployment rises. And I find myself thinking that's kind of human misery you're talking about you literally want to make human people's lives more difficult and more painful um because you don't know what to do about an oil price shock under war and supply chain disruption I am not getting it and oil prices are going down anyways yeah and. And supply chains are healing. I was looking at my favorite chart. It's the Baltic Dry Index. It's well worth a look. Just looking at shipping costs. You spoke with Mike McGlone, I think, and Dave Weisberger on a Monday. And Dave's favorite chart is the Baltic Dry Index. Yeah. Yeah. It's the best. It's the best chart. And if you look at that, it kind of went up like that. And now it coming down like that i am not seeing the inflation impression from you know shipping not getting it yeah we're even paulo said we've begun the

disinflationary process i think he has an aversion to saying deflationary well i think we have to be precise about our terms i mean disinflationary is where inflation reduces, but it's still positive. It's not deflation until inflation actually turns negative. But it is a deflationary pressure that's causing disinflation to some degree. I would call it a disinflationary pressure myself, because I actually, it's this kind of precision about terms. I mean, I fight these battles all the time. I write entire posts doing calculus. And listen, when they use the wrong term, we get a collapse in global markets if Jerome Powell says the wrong word. Well, exactly. So precision, we are not. I mean,

deflation. If you look at 1929, for example, this appalling collapse in prices. I mean, that is what deflation is, is a fall in the general price level. Now, we're nowhere near that. Even if inflation comes down from its current heights, even if it comes down to the Fed's target of 2%, it's still going to be positive. Prices will still be rising a bit. That's not deflation. Right. I think that we have Mike McGlone, as I talked about, he loves to point out the fact that things like gas, natural gas, are priced the same effectively as they were in the 90s or early 2000s

that we really haven't seen commodity price rises in that degree. So he talks about deflation sort of in that degree. But I agree with you that we're not going to see the price of groceries going down anytime soon. Maybe never, right? Maybe it's a slow in the increase, which is disinflationary, but not a decrease. Or at least not anytime soon. No, there is this sticky price problem, you know, that Keynesians talk about, you know, whereby prices go up, but they're not so willing to come down. So, yeah. whereby prices go up, but they're not so willing to come down. So even when inflation has come down, the price level stays what it was before.

Even if your inflation comes down to zero, your prices haven't fallen. So if they went up before, they didn't stay at that level. The sticky price thing is about actually prices aren't. It takes quite a big shock to make employers it make companies reduce their prices across the board and that's typically a shock to growth so it would be a recession really yeah do you think we're going to get this reason this recession and if so how bad i'm not 100 convinced i know the i know the um yield curve

is saying yeah big recession on the horizon and but you know it's always path dependent isn't it so if the fed actually stopped tightening and if the um the um government kind of did a bit of fiscal stimulus or something it probably wouldn't happen, they have a good habit of doing that when necessary. Do you think that we get back to a phase of easy money, QE? Or do you think that this Fed pivot looks more like just stop tightening and doing hard? I wouldn't want to rule out a return to easy money at some point for the reasons that I gave earlier, really, which is the Fed has to control yields, really. You know, it's committed itself to doing that, to maintain liquidity in markets because otherwise it can't keep control of interest rates because now it's not just the banks it's trying to control, it's the whole market.

So I wouldn't like to rule out a return to some form of easy money. And I think also there's a paradigm shift here whereby what we used to call easy money in the past, which is the Fed pumping out, doing QE, pumping out money. The counter to that is QT, quantitative tightening. The Fed's doing that. And as you recall, the Fed tried it before and had to stop after a while. And I think we're going to end up there again, simply because actually what it's actually way we've ended up is it's more like a pump.

It's about like saying we've got to maintain liquidity in the markets. We don't want too much or we get these ridiculous booms, which cause mayhem and silly bubbles and crypto and stuff like that. And we don't want too much or we get these ridiculous booms, which cause mayhem and silly bubbles and crypto and stuff like that. And we don't want too little. Otherwise, we get market freezes and bank failures and things like that. So, you know, somehow we're trying to find this Goldilocks level of liquidity. And so the Fed's come up. Responsible money printing.

Yes. Yeah, it's absolutely that. And if you think about it, I mean, even the tools the fed has created, if you look at the standing repo facility and the overnight reverse repo facility, you know, the standing repo facility dishes out reserves. And the overnight reverse repo sucks them all back up again. It like like i said it's like a pump it does work it does indeed work with a little bit of interest rate uh malarkey um to actually make the pump work in the private sector because otherwise nobody would do it would they um

always need a little malarkey it's the government government after all. I know we're getting up against time, but I do want to ask you one more question. We talked about Bitcoin, of course, at the beginning. Do you think that there's any redemption or that it's redeemable? Or do you think that maybe it's about Bitcoin and the industry itself needs a further purge? I do think the industry has more to lose yet. I think there are still too many frauds and scams in there. You only have to look at the

amount of stuff being punted on Twitter to see that there's still lots more frauds and scams in there, actually. So I think a further purge is necessary. I'm not at all happy with some of the stuff that's going on. So yeah, there's more to come out. But I don't think it's going to be reduced to just Bitcoin. I agree. I think that, I mean, even as a, you know, listen, we've learned a lot of hard lessons over the years, even in our most diehard beliefs. And, you know, I certainly have been a huge proponent for the industry, but I can't see the contagion being completely over and I can't see 9,000 dog coins surviving. So. Oh, you think you've seen the end of dog coin? Oh, shame. Man, I would love love to i don't think it'll happen

now unfortunately i was there i was there at its birth and it when it was dog ecoin oh yeah i was saying dog coins in general the 9 000 knockoffs of dogecoin i think those will survive because it's a powerful meme it's a meme coin isn't it i mean the rest of it's the original meme coin yeah that's right that's utility being first and an original yeah and that's bitcoin as well isn't it no that that bitcoin has this kind of um meme um character as well um and first mover advantage first yeah but but also it's also kind of iconic as well um you know and it has this hardcore of believers who are actual maximalists who still believe it's going to take over the world.

And I know I kind of said, hey, maximalist me, but I don't. I do just see that it has some utility. Yeah, I have a pretty strong passion for Bitcoin, but I also don't think it's going to take over the world. And to be quite frank, I don't want to live in the world if it does take over. That's not the world I want to live in, because that has to be such a dystopian, horrid future that I don't want to be there and say, ha ha, I told you so, I've got Bitcoin. Yeah, well, actually, in a way, the fact that the crypto industry created stablecoins is kind of testament to how extremely illiquid bitcoin is if you think about

it that it was just the whole industry was just desperate for liquidity and bitcoin couldn't couldn't provide it i think it's also a testament to the asset that people who are actually in these countries with hyperinflation and massive problems to what asset they actually want. They want to do this. Because we can speak as much as we want about how they should buy Bitcoin, hedge against inflation, and we could all argue that to death. They want dollars. And they've always wanted dollars. And stablecoin actually gives them dollars when they couldn't have found them

even on the black market otherwise. And I don't see that as a negative. I know Bitcoin maximalists may, but I see that as perhaps the greatest killer app that's come out of the crypto industry in general is access to dollars for people who don't have it. Yeah. I mean, certainly, interestingly, the growth of stablecoins has made US dollar more liquid in places where it kind of enabled the US dollar to reach the parts that it otherwise wouldn't have reached, not least because of the restriction on banking, correspondent banking. Since the financial crisis, the banks are much more risk averse than they were.

And so we've seen correspondent banking networks shrinking and shortening, which has actually made it really much more difficult to get dollars to quite a lot of developing countries, even ones that are not affected by sanctions. It's just too risky for the banks. So stablecoins are in that respect and create a liquidity for those countries that they otherwise would be denied because of the difficulties with the banking system. The problem with that, of course, though, is, you know, with the best in the world, USDC and USDT are not dollars. And if you actually want to spend them, you've got to convert them to actual dollars. And then you're back into the US

banking system again, and they cut short correspondent, they restrict the correspondent banking and the short chains and yeah, banks don't want to deal with you. And at the moment, we don't have a solution to that because if anything the um us regulators are moving towards even tighter regulation of banks in relation to crypto absolutely and that can be the topic of our next conversation because i held you long enough that thank you so much i i absolutely love uh your insights and i like to think that maybe we won't get this uh recession of doom or Great Depression so it's nice to hear yeah I'm hopeful that we won't I mean you know if I just think that central banks really do need to think about stopping the interest rate rises

um and maybe governments need to be thinking about, I mean, it needs to be thinking about distribution issues, I think, and about the problems that they're storing up for the future if they don't do something about the inability of the young, really, to build up any significant assets. Let's hope for the best. Where can everybody follow you and your work after this conversation? Well, you can find me on Twitter at Francis underscore Coppola. I'm usually fighting with somebody. It's endlessly entertaining. Lots of my followers just want me to see who I'm fighting with today. And it's not necessarily about finance or crypto. It might be about anything. And you can also find me on my own blog, which is coppolacomment.com, where I do write about finance and crypto and stuff.

I read it all. So I hope that everybody else does the same. I'm a huge fan and it's really always a pleasure to have you. And I can occasionally be found on Coindesk and on the Financial Times. Awesome. Thank you so much. It has been a pleasure and we will speak very soon, I'm sure. Indeed, I look forward to it. Take care.