We Study Billionaires - The Investor’s Podcast Network - BTC008: Bitcoin & Macro Mastermind Discussion w/ Lyn Alden & Luke Gromen (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to this Wednesday's release of the podcast where we're talking about Bitcoin and the macro economy. On today's show, I bring back two guests that need no introduction, Ms. Lynn Alden and Luke Groman. These are two of my favorite people to talk to because they have such superior critical thinking skills and knowledge of the global macro landscape. We cover a lot of various topics during this episode. One of the more interesting points in the show is when Lynn gets into our opinions on

Starting point is 00:00:28 Ethereum and Tether. But those are just a few of the many ideas that we discussed during the show. So without further delay, here's our chat. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. All right. So here I am with Lynn Alden, Luke Roman. Guys, thank you so much for making time to come on the show. You guys are always so giving with your time. and it's always so much fun to get both of you together.

Starting point is 00:01:10 So welcome back to the show. Thanks for having me on. It's always good to be here. Glenn, great to see you again. Yeah, you too. I'm glad to be back. So the real place I really want to start here with the questions is I'm looking at the landscape of what's taken place.

Starting point is 00:01:24 And we're seeing the indices go higher and higher and higher and higher. And we know it's being driven by a couple companies. But when you dig into the mid-sized small-cap companies, they're just getting annihilated right now. This COVID coming back at Christmas time, this is beyond destructive when you look at what the real economy is beyond those 10 companies that are driving the indexes. So where I want to start is really in the commercial real estate space because you just can't drive through any town in America without it just being completely boarded up. So when does this start to matter? What are some of your thoughts on the fallout of this

Starting point is 00:02:05 commercial real estate and just mid and small cap businesses in general. So I'm just going to throw it over to either one of you guys to just kind of hear some of your thoughts and where some of this might be going. I think actually you summarized it well because I think you've been saying that when everything is in a bubble, it's the currency that's in a bubble. And so I think that's one of the ways to look at it. It also depends on, you know, we're talking about small companies. It depends on what you're looking at exactly because we've seen, for example, a breakout in the Russell, right? So small cap, you know, indices are doing well. But of course, if you look at, at small businesses, restaurants, not the publicly traded areas, those are struggling.

Starting point is 00:02:40 And so I also looked at, for example, I've been talking about the backwards square root sign recovery and jobs all of last year, pretty much. And with the latest data point we got with the ADP jobs, we saw the first dip in private jobs estimate since the pandemic. And so commercial real estate, I think it's one of those things where you can put in your value investor hat. I think that there are interesting opportunities there. But the whole broad sector. I mean, there's so much change happening all at once. And it's just things that we're supposed to take kind of 10 years. We covered that a year or two. And so it's really challenging. That's why even as someone that really likes to go into unloved areas, I've been mostly avoiding the

Starting point is 00:03:18 commercial real estate sector just because I don't feel like I have an edge in there and there's just so much disruption. I tend to agree with Lynn on that. I mean, it's got two things. You've got the cyclical slash pandemic issues with commercial real estate. And It'll end it a great job documenting those. And I would say that those are almost living by the leave of the government. So you basically, it's an interesting thing for commercial real estate, for the banking system, because if the government doesn't do enough, commercial real estate books for banks are in trouble. The commercial real estate sector is in trouble.

Starting point is 00:03:54 What is enough? And that it's a political question ultimately. And to Lynn's point, it does, broadly speaking, for me, it's tough to have an edge on that. But then away from the pandemic and the cyclical stuff, you also have this secular trend that was present before of Amazon slash internet slash e-commerce DoorDash where you're, you know, I saw something a couple of weeks ago of Chipotle talking about just basically putting up kitchens, no dining areas. And just the way that these productivity enhancing tools typically around, you know, the internet or mobile devices are really. changing the needs and the sort of the layout of commercial real estate space heavily on the retail side. But between those two things, like I said, I agree with Lynn, where there's probably some interesting opportunities. I would never say no, but boy, it would have to be a nichey space

Starting point is 00:04:49 with a very attractive cap rate. One thing I'd add is that the company Brookfield Asset Management of Canada, and I don't know if either of you cover that one, but it's a company that I've covered for a number of years. And they're one of the biggest owners of some of the key kind of high-rise skyscrapers in major cities around the world, so New York, London, different cities around the world. And they've actually been scooping up some of these mall properties and kind of doubling down in some of these distressed industries. And I found that interesting because they actually have a really, really good track record. And the CEO, you know, ever since he's been in place, they've just done phenomenal work. And of course, real estate's arguably their core area,

Starting point is 00:05:24 but they also have a big renewable energy business and a big infrastructure business. I've always been more interested in their infrastructure business. That's where I've invested for like a decade with them. But I just found that the fact that they have kind of the guts to go into kind of double down on the real estate side. I just found that interesting because they're not generally dumb investors, but they, for whatever reason, have the confidence to keep pursuing that area and not really backing out of it. And I guess their advantage is that they're well capitalized. So the reason they do so well is because historically they go in when other

Starting point is 00:05:54 the people are fleeing and without capital. And they have a global mandate. So, for example, back in 2016 when Brazil was having a horrible time, they went in and bought Brazil assets and they can always refinance things easier. So they have this really kind of contrarian investing strategy. And so I'm really curious to see if works out for them just because, you know, those are the people with an edge and they still seem optimistic. I saw some article recently, And it was just so weird that there was like a computer software gaming company that was stepping in purchased a $90 million mall complex. And they were going to step in and use that space as like a software gaming company.

Starting point is 00:06:36 And I'm thinking, wow, that's just so weird to think that that much commercial real estate would be used for something like that. So I wonder if that company that you're referencing the Brookfield does kind of not necessarily that it's an arbitrage kind of deal where they already have the person they're going to offload it to in place. But it seems like they have a better understanding of how that type of property is going to be repurposed and what kind of buyer it's going to be and what price point they're going to come in. But even at $90 million for a mall, I just don't know how you could possibly utilize all that space and that price. Yeah. And Brookfield does cite, I mean, they do want to repurpose it, you know,

Starting point is 00:07:17 some of the stuff that they're doing. They basically, their view is kind of like, really kind of high-end ones they want to keep. And then other ones they want to, you know, that aren't economical in their current format. They want to transform into other types of property. But it's, you know, it's really interesting. I guess they have to go up against zoning laws and things like that. I mean, ideally, it's almost like you could make a mall into like a little mini town, right? You could have, imagine if you had like, say, a senior living community, you could have like people live there and they go out kind of into shopping. They never have to go outside. They never have to drive and we're brave the elements. Malls have kind of interesting things if they

Starting point is 00:07:47 kind of really think outside the box, but as currently structured, you really have to have an edge to go in that space. It's crazy. Now, on the earnings, you know, as we get into this, I don't know how the fourth quarter is really going to close out, whether the Christmas, have you guys heard whether the Christmas sales were on par of what they were expecting? I know everyone was pushed online. I mean, it was probably gangbusters compared to previous years, but I'm looking more to the close out of the first quarter of 21. And I just, I don't know what it is, but I just think that the first quarter is just going to be devastating relative to anything we saw in the previous year. And do those earnings start to matter? Or is this just, they're adding so many units and the

Starting point is 00:08:33 expectation that they're going to continue to add so many Fiat units that we're just going to see the indices continue to go up? Where do you guys stand on some of that? You know, I think it's as intellectually offensive as it is on some level, I think it really is about the government and fiscal versus monetary. And now that it looks like maybe we've got a blue across all three both houses and in the White House, you got Schumer coming out today, saying first order of business is another two grand. I'm, you know, it got pinged about an hour ago that rumblings is that sort of everything that Democrats wanted is what's going to get, you know, put together. when they were put out when they were doing the stimulus debate whenever it was two, three months ago.

Starting point is 00:09:21 All of that stuff the Democrats wanted is going to go in. And so I really think it's almost a case where because, again, it's sovereign solvency that's being threatened here. And we're in the midst of this great power competition where if they let economics work, the very least it doesn't show well. At the very worst, it's a matter of national security. I just think that there's sort of this overriding national security need to basically make sure the economy is growing. So it seems like it's less what our earnings doing and more U.S. economy with Chinese characteristics. Lynn, what are your thoughts? Analyst consensus expectations are actually for decent earnings in 2021.

Starting point is 00:10:04 And so whether that will come to pass or not, I think is up for grabs. And I think the Luke's point, a lot of that is a political question, right? So for some companies, their earnings are not going to be dependent on stimulus or lack thereof, but for some of the more cyclical ones there is. And we started to see a dip in retail sales in November. That's the latest data point that's out St. Louis Fed, for example. I think we're going to see what happens in December, because that was really kind of before some of this latest round of stimulus kicked in.

Starting point is 00:10:32 And so I do think it really kind of comes down to what sort of fiscal injections are being put out directly into the economy versus if there's some sort of gridlock that prevents that. And what we saw from the Georgia Senate race, it seems like some of the roadblocks are reduced a little bit. And so I think basically currency is being debased enough. The broad money supply is being increased enough that you can see decent earnings in fee-terms. So we saw 20% on the M2 last year. Do we see 20% in 21 or is it going to be even higher than that? So it was like something like my latest checkup was 25% year-over-a-year-a-year. M2 increase. So a lot of that happened in April and May. That was when the CARES Act,

Starting point is 00:11:16 the bulk of that came into the economy a little bit in June. But we've been running at a 13% annualized rate since the end of May. And that was kind of even without kind of another round of stimulus stimulus. It's partially going to depend on that the Fed increases their purchases. But overall, it also is going to depend on, for example, they get this extra $2,000 stimulus checks to go out. So it's partially going to depend on that. My base case would be somewhere and close to the 15%, maybe 12 to 15%, but then if you throw like a big infrastructure bill on it or you throw an extra couple rounds of stimulus checks, that number goes up. So I'd be shocked if it was below 10%, but then up from there, it's mostly again a political

Starting point is 00:11:55 decision. Luke, what do you think? That makes sense to me. I mean, I've not dug into the numbers as deeply as she has, so I would defer to her on that, but just conceptually, that makes a lot of sense of me. I think it's really very much a political question at this point. You know, Lynn, I like that you're, I think you're providing a conservative number there at 15%. When I'm looking at the chart over the last 10 years, it's accelerating. It's, it's going parabolic.

Starting point is 00:12:23 And maybe it's because COVID was kind of an outlier in 20 and maybe it is going to come back down into a more conservative number of 15%. But when I'm looking at it, I'm thinking, hey, this is probably going to be in excess of, of 20 or 25% based on just the trend of the chart. But, I mean, as we all know, it's just a crapshoot. It's just crazy to look at the rate at which it's accelerating here in the last couple years. It's just mind-blowing. I like to break it down because it helps also people follow along because they, you know,

Starting point is 00:13:01 if you kind of lay out the flow chart, right? So instead of saying this is going to be the number, it's like, here's the flow chart to get to your number and you can bake in your own assumptions. And so if you just take out kind of stimulus and you just focus on what is kind of the structural deficit, what is the structural situation to assume policymakers just sit on their hands all year and do nothing? That is somewhere in the ballpark of 10%. And then anything on top of that is additive.

Starting point is 00:13:26 And so that's why I get to that kind of like, you know, 12 to 15 baseline number. But then yeah, if you get, hey, we're going to a $3, $3.20 stimulus again, right? Then suddenly that number starts going up more towards your like 25% number. Now, with the current kind of composition, we do now have, it looks like a narrow blue sweep, but there still are some centrist Democrats, conservative-leaning Democrats. And so those really kind of sweeping MMT-like things, you know, I think unless you were to get another kind of contraction that kind of forces policymakers's hands, I don't see some of those really giant things happening in 2021.

Starting point is 00:14:01 But I think just the current trajectory can easily get you to 12 to 15 percent. And then it kind of like how I'd be shocked if it was below 10%. I wouldn't really be surprised to see another over 20% year based on certain stimulus outcomes. So I love this question. This comes from a really smart account on Twitter. He goes by Eddie. He says, do long-term U.S. Treasury holders really just look at CPI to calculate their

Starting point is 00:14:25 real rates? How do you guys respond to that? I think at least a quorum, if not a majority of treasury buying is being done for collateral needs for liability matching for regulatory capital purposes. They have to. For reasons, yeah. Nobody on Wall Street gets paid on a real basis as far as I know. In other words, it's everyone gets paid based on nominal returns. And so then it's okay, what's your nominal liability if you're a insurance company or what's your regulatory cost to capital if you're a bank? So with SLRs, it's effectively zeros, and sort of all the stuff that goes up is left out or is, you know,

Starting point is 00:15:07 there's always some reason explained away. And some of it, to be clear, there are reasons for why certain things are rising in price more and maybe they should be hedonically adjusted or smooth or whatever you want to do. At the end of the day, I think it's really about doing what you're getting paid to do. So I agree with that. And basically, some of the investors like banks that buy treasuries, they can do a lot more with that treasury and basically make more money from it than, the Ma and Paa investor that just buys a treasury and holds it or, you know, a trader that's trying to squeeze a capital gain out of it based on like a deflationary thesis or something. Now, to that person's question about how they look at inflation, a lot of times real yields,

Starting point is 00:15:44 people refer to the inflation break-even rate, which is actually dictated by the treasury market. That's the tips market pricing in what their inflation premium is. And so that currently for the 10-year just broke over 2%. And so that has a pretty good track record of forecast. official CPI. And so, for example, if you look at earlier this year, that, you know, had that big dip during the pandemic, the March kind of liquidity event, but that shot up before we started to get kind of official monthly CPI going up. And so that's been an accurate predictor of CPI, pretty much, at least officially reported CPI. Now, it's somewhat, they're looking out kind of,

Starting point is 00:16:21 depending on the maturity, looking at five, 10 years or more. Now, I think those are probably undershooting what's going to happen, but that's currently what they're pricing in. And so literally according to the treasure market themselves, they're pricing themselves with negative yields. Because if you look at just what the treasure market is saying, they're saying you get roughly 1% for the 10 year, but they're pricing in 2% inflation. So that's the treasure market. If you look at it in a vacuum, it's kind of schizophrenic. But to Luke's point, there's all sorts of regulatory reasons. There's all sorts of recilateralization. There's multiple purposes for those treasuries other than people just buying them, holding them and collecting that 1% coupon.

Starting point is 00:16:54 And I think to Luke's point, the fact that you have all these regulatory requirements that force entities into buying the government debt, it's going to continue down this path. It's going to continue to push further and further lower, right? It's all going to continue to stay in place. The thing that I think is going to be the really interesting dynamic as the rest of this year plays out is what Michael Saylor did with his convertible debt issuance. And this is more for corporal debt. That scenario that played out, and I mean, he's already doubled, I think he's already doubled the amount, maybe even more than that, of that issuance, of that $600 million issuance that he stepped into the market. And, you know, from my conversation with him,

Starting point is 00:17:42 I mean, it was oversubscribed because there's a lot of people that are in the corporate debt market and they like Bitcoin. And they're saying, I want access to Bitcoin, but because of all these other regulatory reasons, I can't get access to it in these debt markets, in these corporate debt markets that I have to employ all this pool of money that I'm sitting on. So what are your thoughts on that particular example that was done in such a dramatic and obvious way for the whole world to see? Are other companies going to start doing something like this? Is this kind of a textbook template for what we're going to see in the rest of 2021? In short, I mean, I would defer to comments that Jeff Booth has made tweet when we were all on together, whenever that was in October or whatever, where he said he was having those conversations back then.

Starting point is 00:18:34 At a board level, he had a tweet recently suggesting the same thing where he is talking to private companies. I think the adoption will probably be like a lot of things, slow but steady. And it probably will center around those companies that are either private or have ownership structures that are. are public companies that have ownership structures that are highly controlled by a few people that sort of get the joke as it relates to Bitcoin, as is the case I would argue with micro strategy. But ultimately, to the extent it keeps gaining momentum, I don't see why you wouldn't do that. And that raises bigger questions about the debt markets as a whole, inflation rates, reserve asset questions, et cetera. But that's a separate question.

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Starting point is 00:23:20 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Well, this is the thing that struck me with the whole thing is when you looked at the terms and conditions of the deal, he did it for 75 bibs, right? And then the convertibility piece was really kind of the other piece to it. And I think it was $395 where if the stock price got through that price point, then the debt owners are in an

Starting point is 00:23:53 advantageous convertibility position, right? Well, the stock is already through the $395. And it was oversubs by, I think, $150 million. So you have to ask yourself, was 75 bips way too high of an interest rate for the demand that came out of the deal. Would he still have been over-subscribed at zero percent? And so the deal for me was just kind of like, my God, he could have, maybe instead of the strike being at $395, maybe the strike should have been $600 or something like that, and then still at 75 bips. He might have still had have been oversubs. Lynn, what are your thoughts on some of that? Have you seen that? There's like that Twitter account of like this is like restaurant chain in Canada, and they think they do Middle Eastern food.

Starting point is 00:24:41 Yes. And they also have like their balance sheet on Bitcoin. And their food looks awesome, by the way. It's a literally like, you know, it's a restaurant account, but they have their tweets about Bitcoin because like that's where they put their reserve acid. And so I think I agree with what Luke said. So one thing I've been saying over the past year, because I've been asked that in a couple different podcasts is will more companies go that route?

Starting point is 00:25:00 And I've been saying that, you know, in some cases, Microsatrogen Square in the public realm are somewhat unique, right? Because Micro Strategy, I mean, Michael Saylor is unique. and he has unique control over the company. He has unique personality. He gets it. And so he can move more decisively than the average publicly traded company, including the average like tech stock, for example.

Starting point is 00:25:21 And Square, of course, you know, Jack Dorsey's had a long bullish view of Bitcoin. But even then, that was a small move for them. And so you'd actually expect almost more out of Square. So they're kind of a trivial kind of, you know, 50 million Bitcoin allocation was what I'd expect kind of as the base case, whereas micro strategies was rather kind of surprising in a lot of ways. And so I think that some of those, you know, tightly held companies or privately held companies are the ones that can kind of make that move because it comes down to a small number of individuals that have a high conviction and they can say, you know, well, like where we are in the

Starting point is 00:25:52 halving cycle, or whatever reason they want to go with, and they can just go in on Bitcoin. Whereas if you get it, most of these other larger companies, you know, it's kind of like career risk, right? You don't really get rewarded. The person you suggest doing that is not going to get massive rewards, but if it were to go wrong, they're fired next year. And so, you know, unless like the CEO is just kind of gung-ho about it, they can get away with it. But I think, you know, some of those companies where there's just not like a really kind of central leadership structure, they're slower to move on there. But we'll see what happens when more quarterly reports come out and we see kind of a micro strategy, their stock storing and see what some of,

Starting point is 00:26:28 you know, what some other companies do in the space. Yeah. I just think it's such a huge example because he did it in such a large way that it's demonstrative of what even a much smaller percent. If you didn't do it with 100 percent of your reserves, right, and you just did it with 5 percent or 10 percent, it's such an example. It's just kind of mind-blowing what he's doing over there. And I kind of suspect that it's going to be a much bigger talking point, maybe mid-year of 2021 as the price, you know, our expectations, I think all three of us have pretty high expectations of Bitcoin going higher. And by the time we get into mid-year, it's going to be interesting to see how some of these other companies are treating it at that point.

Starting point is 00:27:10 Yeah, I remember, you know, with our previous chat when we had Jeff here, too, one of the thing we all kind of shared in common is kind of like, it'd be weird not to have at least like a 1% Bitcoin position. Like it'd be, it's one of those things like, you know, if someone goes really kind of all in on Bitcoin, they're taking a certain degree of risk. But it's also, we're basically saying it's arguably risky to have no Bitcoin at all. People were basically making the case where why not have non-zero? And of course, as people have different levels of conviction, they can dial it up from there. And as an example, I mean, one of my model portfolios this past year had a 5% Bitcoin allocation because the purpose of that portfolio is something that a lot

Starting point is 00:27:45 of investors can look at. It's got kind of your classic kind of mix of equities and all these different asset classes. There's some gold in there and basically a 5% Bitcoin position. And that 5% Bitcoin position has been absolutely silly for the returns of that portfolio without taking much risk. And so the same goes true for corporate balance sheets or things like that. It's really easy to justify a tiny position. We saw that, I mean, a really good example was mass mutual, right? The, you know, the 150-year-old insurance company, they came out and bought $100 million of Bitcoin. And that sounds like a lot, but for them, that's absolutely tiny. And so that is basically their way of saying we want a non-zero Bitcoin position. We want to have

Starting point is 00:28:23 this little hedge. We're going to stick it there. They're probably never going to sell it in the near term. And so I think that sort of kind of trivial position is likely to keep coming up in various places. Because just the risk reward for having a really tiny Bitcoin position, it's great. So I want to talk about the big announcement on Monday. And I'm just going to read this from the acting comptroller of the currency, Brian Brooks. Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stable coin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low

Starting point is 00:29:01 costs associated with these products. The announcement is basically puts blockchain networks on an equal level of global financial networks such as Swift, ACH, FedWire. I mean, this is massive, right? What are some of your thoughts on this big announcement? One thing I'd point out is, you know, I've been monitoring because I analyze a lot of foreign banks. And so if you looked at, you know, some of the major commodity companies, like the really big ones like Rio Tinto, Vail, you know, some of these really big BHP, some of the big commodity companies, they all tested some blockchain transactions with Chinese firms. They sold iron or basically, you know, over a blockchain. And they did so. They used Singapore banks as Singapore fintech companies as intermedias, I believe.

Starting point is 00:29:53 We also saw similar things like Spurbank of Russia tested with Singapore, a blockchain-based ledger settlement. And then also last month, Singapore's largest bank, DBS Group Holdings, they announced that they're going to have their own kind of exchange for a handful of the largest digital assets and that they were going to partner with the Singapore stock exchange. This exchange would be only for accredited investors and institutional investors. They're also going to provide costly solutions similar to what Fidelity is doing, like institutional great. custody, and they're also going to do tokenized offerings. And so basically, you know, from a U.S. perspective, if you see all these other banks around the world that are kind of testing these technologies out and just seeing what works, you don't want your own banking system to just be locked out of that innovation. And so quickly you're going to be like, you know, the horse

Starting point is 00:30:39 buggy against all these other cars. And so I think it's, you know, Bitcoiners have been talking about game theory over the past year, right? So that if it starts to get adoption in one place, it kind of catches on. And so even places that try to ban it then kind of went back and soften their bands and like, well, you know, you can still innovate. So they want to provide certain regulations for it, but they don't want to outright ban it. And so I think that's kind of a similar thing at play here is that, you know, to their credit, they were trying to make sure that their banks don't get kind of regulated out of the competition. The global competition. Yeah. Now, what are your thoughts on the KYC limitations? I know Jack Dorsey has been very vocal.

Starting point is 00:31:18 Brian Armstrong was obviously very vocal from Coinbase. Do you see them rolling? that back because it almost seems like if you do come out too aggressive, you're just going to have some type of global competitor, just like we saw in Singapore, is that going to be a driving or a common theme where over-regulation is just rolled back six months or a year later? So I think it depends on the type regulation. I don't see that many governments rolling back KYC regulations just because they're really kind of, like they really like to be tight-gripped about that. And people often joke that if cash was invented today, it'd be illegal.

Starting point is 00:31:55 Like, it would never be allowed to exist. And so, you know, we somehow went, you know, centuries with, it's pretty hard to track payments. But in the past, you know, 50 years or so, it's almost like they don't know how we can imagine a world where you don't track every payment. And so I'm, of course, in favor of payments, privacy. But I think that's the area where that's kind of the hill that I think a lot of governments are going to try to die on, which is that, you know, you can have it, you can trade it, you can do stuff with it. but we want to be able to track it. If they were to pick kind of one thing to regulate, I think that's certainly in their top one or two.

Starting point is 00:32:27 Luke, there was a question. Evidently, you said somewhere on Twitter that if Bitcoin becomes global currency, it's hunger games in real life. They wanted you to expound on that idea, and then they wanted to hear Lynn's response to your description of this. So by way of background, I was having a conversation with, I can't remember who it was, but the gist of it was, my point was that you need to separate, you need to have that my view is that Bitcoin's your store of

Starting point is 00:32:56 value, your wealth reserve asset, and that Fiat currencies would still have a place. You spend your Fiat, you save in your wealth reserve asset. In my view, it's Bitcoin gold. Silver, I guess you could throw in there too. Their point then was, well, Bitcoin will become the currency and wealth reserve asset. And my point was that what I said was if that was the case, if you, you, you, you use Bitcoin as currency, then yeah, you would trigger basically a global hunger games. And my point was that effectively, in short, you can either have, this is sort of delicate, but if you use your wealth reserve asset and you hard cap it, even if the price moves, then you're taking the release valve from being the fiat currency to being human population. Because effectively,

Starting point is 00:33:44 their case is, well, if you make Bitcoin the currency, then everybody's going to be a lot. And got to add value and to earn currency. Otherwise, you're not going to, and if you don't add value, then, and it's a very libertarian view on their part. I understand where they're coming from. But my point is, if you did that too quickly, if you went particularly from a timing standpoint, if you moved quickly from a world where you had fiat currency and Bitcoin and gold as a wealth reserve asset to simply your wealth reserve asset as your also as your medium of exchange, then you're basically shifting the release valve from fiat currency to the population. And you're relying on people to be charitable.

Starting point is 00:34:31 You're relying on family connections. In some cases, those would come through. In some cases, they wouldn't. And that's just at an individual level. Now, if you take it up to a country level, there are countries that are, our natural current account surpluses, there are countries that are big current account deficits. So from a country standpoint, the way the global currency system has worked over the last 50 years is basically do you think about it as a giant banquet and everybody around the table

Starting point is 00:35:01 brings something to the banquet and the United States is the guy at the head of the table is what he brings to the table is eating everybody's cooking and that's it. And so in a world where Bitcoin become currency, where there's no separation between medium exchange and store of value, living standards in the United States would collapse pretty quickly. And so without that buffer there of fiat currency to sort of take the buffer. And so that was my point, is that effectively, in extremists, it would be a case of either you add value or you starve.

Starting point is 00:35:35 And so that's the background of the conversation. and why I said what I said. So I separate that kind of into two phases. And so I kind of take the Michael Siler Camp of viewing Bitcoin as really good savings technology. And so I'm not at the point where I'm kind of looking at it as a direct kind of, you know, I think payment rails are great. For example, strike is really kind of doing good work using Bitcoin and Lightning as payment

Starting point is 00:35:59 rails and things like that. But I primarily think there's a ton of value in Bitcoin for its store value properties. because that total addressable market on its own, the market cap is several trillions, right? So it's far larger than the current market cap. And therefore, there's a lot of appreciation there. And so my view is let's get there first and then start to see what comes out from there. Rather than try to think 10 steps ahead, I'd rather say, okay, here's a roadmap for the next, like three steps, and then we'll reassess when we get to that roadmap, right?

Starting point is 00:36:26 And so that's how I'm approaching it. Now, I've answered some questions before, for example, on podcasts where they say, for example, if you were on the Bitcoin standard, how would you stimulate? Like if you wanted to stimulate against a pandemic, how would you do it because you can't print the money? And in short, the answer is basically you have to build a tax it out of some other group. You have to just rearrange the stats that you have within the economy. And so in some ways, it's a more honest stimulus, but it's also harder to do. And so how that would work in practice, I think is that's kind of a whole can of worms in and of itself.

Starting point is 00:36:57 And as far as international trade, so one of the ways it works now is that, you know, if a country starts to run a persistent trade with the United States, is an exception, which is something I keep pointing out, and I know that Luke's pointed out, but for most countries, if you start running a persistent trade deficit, generally what happens is you encounter some sort of currency issue during your next recession, you know, investors kind of pull out their money, and, you know, some sort of catalyst happens, and then your currency devalue significantly, and it really does reduce your standard of living, and makes everything hard. You go through a really kind of serious recession, but then the outcome of that is that your exports get more competitive, and it's hard if you to import, and it's

Starting point is 00:37:33 it kind of forces you back to an equilibrium and is somewhat self-correcting. Now, theoretically, if everyone is kind of operating on a hard currency, then instead of their currency devaluing, the deflationary forces, they basically would start pricing things super low to be competitive again, at least getting some, you know, stats back to that country. So it's a similar dynamic. There's a whole kind of philosophy of looking at that. And so my view is, you know, I'm taking steps back into saying I'm focusing on Bitcoin

Starting point is 00:38:03 is solving, you know, one of the stores of value problem. And I think, you know, I'm looking at less currently as the payments thing other than, for example, things like strike and things like that that can basically make Fiat move a lot quicker. I think another important point to what you were saying there on how would you stimulate in a crisis. If you're in this type of environment, your incentive structure has completely changed. You now have an incentive structure to have a rainy day fund. You have an incentive structure to pack away a bunch of savings because it's continuing to go up in value. It's not depreciating in value. And so, I mean, you just look at this situation we just went through with COVID. Everyone has been incentivized through all these inflationary monetary

Starting point is 00:38:46 policies to have literally nothing on the books for a rainy day fund. And you're levered and maxed. and you have 15 days of rainy day funds sitting there to be used. And I guess that whole dynamic, that entire incentive structure would kind of start moving and spinning in the opposite direction from what we've seen and where we're at right now. So maybe you don't need to stimulate as much because people are actually having rainy day funds that aren't being devalued at a breakneck pace. Yeah, I agree at that point. And due to my work on the long-term debt cycle that Ray Dalio popularized, I've been

Starting point is 00:39:23 emphasizing that view as well that, you know, part of the reason we got these crazy multi-trillion dollar stimulus packages against this pandemic was in some ways less about the pandemic and more about the amount of debt and solvency of the buildup in the system over the three to four decades, really since like the 70s and 80s, essentially. And so if you were to realign the whole system and towards a more equity-based system and less of a debt-based system, it is true that in general you'd need far less stimulus and things would be able to be much more targeted for kind of edge cases rather than kind of these big sweeping things because that is currently how it's structured. And it would, you know, the equity based system too, it does tie into that pro cyclicality

Starting point is 00:40:02 to somewhat or there were, you know, hunger games to use my perhaps a bit history on it, but directionally accurate, I think, view of if the value of the economy is driving the value of the currency to expand and it's a hard currency with a hard cap, what happens when a pandemic hits and the value of GDP drops 40 percent? You know, you're ranking. day fund, you might have saved 40% of your money, but your economy drops 40%. Now your rainy day funds nothing. Now what do you do? And it's very much a, you know, deflate to compete, deflate to compete. It's hungry. It's who can, you know, who can take the most pain. I really like this question here. What signals are you looking at to warn of another potential

Starting point is 00:40:46 wave of credit stress and equity sell off like we saw back in March? What are the canaries and the coal mine that you're looking for that would tell you, hey, this is looking like this might get a little nasty. For me, it's the dollar, it's treasury yields, it's relative performance of treasury auctions in terms of the bid to covers and participation and the size of the tails on them. Those have been sort of the big ones. And then from markets, and then politically, it's really around the fiscal side and the monetary side.

Starting point is 00:41:18 Are they going to do enough? At any point in time, we can have a crisis and a crisis. a dollar super spike via the Fed or the fiscal side not doing enough, basically. And so then it really comes down to having to pay attention to what they're doing subjectively or qualitatively relative to some of those other quantitative measures. Yeah, I agree. There's a couple kind of domestic versus international indicators. So internationally, I look at the Treasury Euro dollar spread, just to get an idea

Starting point is 00:41:45 of how tight that is because that's kind of an indication of dollar shortage. So we saw that back in March, for example. we haven't really seen it since. And of course, we've had a weaker dollar environment because there has been more of that liquidity available. In the United States, I'm looking at all sorts of things. I mean, I have like a heat map that I make every couple months and kind of look at it more regularly, which is I monitor year-of-year changes and a bunch of different economic

Starting point is 00:42:07 indicators. And so I just kind of watch the health of that map and I look for kind of areas of weakness or areas of strength. And so, for example, we saw over this past several months, we've seen pretty strong retail sales because that's where a lot of the stimulus is keeping consumers solvent, but you're seeing kind of weakness and jobs, for example, that's really been the weak area. And I view them, it goes back to that control systems analysis that I do as pertain to the economy, that basically, you know, if you start to get some of the breaking points, that's when you start to get

Starting point is 00:42:37 the higher likelihood of policy response, because something will break in a similar way. It depends how extreme you want to get. If you, you know, kind of a mild case that I think a lot of people can relate to because, of course, March 2020 was kind of extreme. But if you just look back in the end of 2018, just when the Fed said, hey, we're on autopilot and we're going to keep tightening the balance sheet, we're going to let yields do what they're going to do. And the 10-year yield got over 3%. And just, you know, the market had suddenly had to freak out. S&P 500 dropped 20% in a couple months.

Starting point is 00:43:05 But then under the surface, it was bigger. And so a lot of people thought that Powell freaked out and kind of reverse course because of the equity market. But it's also the fact that if you look at the credit market, there were no high-yield bonds issued for like six weeks. it just froze. And so the market just stopped pricing that. That is, of course, it's a shorter timeline for a disaster than a 20% equity decline. And so basically, if you get one of those events, there's a very, very high probability of a policy response in a similar way that we saw back in late 2018. And again, in a similar way that we saw back in March. And so, and I think Luke's been really accurate at predicting those along the way, basically saying that if you get kind of these pullbacks,

Starting point is 00:43:42 that's what their policy response are pretty much going to have to be. And I've been using a similar analysis that shows basically that they don't really have a ton of choice. I think the equity market can have pretty big declines potentially before there's an issue, but some of those other things that generally go along with an equity decline, like the credit market freezing up. Those are the things that are really kind of breaking points. And of course, the treasure market going illiquid like it did March is the shortest breaking point of all. That's the one where they have an emergency meeting on a weekend and respond to Monday morning. All right. So these next two questions are crypto-specific. So these are more oriented towards you, Lynn. Luke, if you have

Starting point is 00:44:18 an opinion on these ones, please chime in. But I want to talk about tether, specifically people suggesting that tether is what's pumping the Bitcoin price. And I want to capture Lynn's opinion on that. And then I also want to capture your opinion on Ethereum because I saw, Lynn, you recently had a post on that. So let's tackle the tether fud first. What is your opinion on Teth Lynn? I could ask a couple times. I usually refer people to Nick Carter on that subject because he's done a lot of analysis. As an example, people often cite that Griffin and Cham's study that argued that Tether

Starting point is 00:44:53 was correlated with Bitcoin and could be driving it. But people often don't reference the fact that there were two more studies soon after it. They show the opposite conclusion. And so I have one of them here. One of them is Visvonov, Natraj, and Lyons, and another one from Wang Tun Wei. And so these were comparable studies. The third one, I believe, had a larger sample period,

Starting point is 00:45:16 and they basically just found no correlation. There's all sorts of things. Like basically, you know, a lot of people argue that tether's just no fiat's going in and they're just printing units and that's jacking up the Bitcoin price. And one thing that, for example, Nick Carr did on his podcast is he interviewed people that actually converted fiat to tether. And they were saying, yeah, I was there. I was one of the whales kind of putting fiat in and getting tether out and using it.

Starting point is 00:45:38 And so, you know, a lot of people just look at that tether creation is driving Bitcoin, but there are Bitcoin exchanges or, you know, crypto exchanges that use Tether as their unit of account. So when people want to buy Bitcoin, they convert Fiat to Tether and then they go and buy Bitcoin. And so that kind of correlation is questionable best. I don't really, you know, concern myself too much with that FUD, but I do think that I wouldn't be surprised one day to wake up and see that one of these stable coins is, you know, kind of under attack at some point or, you know, some sort of revelation came out.

Starting point is 00:46:08 And then that becomes insolvent. And it certainly result in high volatility for a variety of assets that day. I'd be more worried about the altcoins when that happens than I would be about Bitcoin. And Nick Carter's argued, for example, that Bitcoin could see a spike in a similar way that, you know, the dollar sees a spike. If you get a liquidity shock, that that's basically the go-to asset in that space. But I don't really have a strong view on that. I don't really view Tether as driving Bitcoin in the long term. But I wouldn't be surprised if something were to blow up.

Starting point is 00:46:35 I wouldn't be surprised the upside or downside Bitcoin volatility that week. One of the things that back in 2017, this was a huge talking point. Everyone was, and let me tell you, that bull run where we were at in late 2017 was percentage-wise, way higher of a run than what we've seen to date on this bull run. And I'm telling you, on Twitter, everyone was going berserk saying, tether is the reason that this is getting pumped. It's tether, it's tether, it's tether. and then the price contracted 80% from that high.

Starting point is 00:47:08 You know, it went up at Kiss 20,000, and then there was an 80% contraction. And having lived through that entire experience, tethered didn't blow up after it contracted 80%. And you would think that if there really was some shenanigans happening there with whether they're actually taking Fiat and holding it into some type of treasury for how much tether's on the market, in those types of scenarios, in my experience is when you, you're running some type of scheme like that, when the price contracts 80%, it blows up. And we didn't see anything of the sort. So just like you, Lynn, I don't know what the ground truth is because it doesn't appear that there is an auditable treasury of fiat that's back behind these tokens. But from what

Starting point is 00:47:51 I've seen since 2017 and all these articles that you're also referencing, to me, it seems like it's more of a talking point and somebody just throwing up a risk without fully being vetted or being validated as being a truth, just more of a rumor. Yeah, I agree. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI powered platform. So whether you're prepping for a SOC2 or running an interoperative Enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing

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Starting point is 00:51:32 How about your thoughts on Ethereum? Because I'm not going to lie, I was a fan of your post the other day. So it's complicated because if you look at Bitcoin, Bitcoin is a finished product, right? So they're still doing updates and security updates and things over time. But essentially, you know, what Bitcoin is at its heart has not changed, you know, in a decade. And so, you know, it continues to ossify around what it is. Whereas Ethereum, it kind of infinitely malleable. It's changing at a far more rapid pace than Bitcoin.

Starting point is 00:51:58 Some people consider that a good thing. Other people consider that the bad thing. But for example, they're going to change their entire protocol from proof of work to proof of stake. And so, you know, in doing that, for example, to back up for a second, basically they're running all these decentralized applications. But there's a lot of issues with that. So, for example, they rely on kind of these node infrastructure providers that almost act like the Amazon Web Services. And so these quote unquote decentralized applications are often just referring to these, you know, these big third party. enterprise that are actually doing a lot of the back end up being a far more expensive

Starting point is 00:52:34 version of, say, Amazon Web Services. And of course, they're still getting some aspects of decentralization. They're not really hardened against, say, a state actor coming in and saying, you can't do any of this. We're going to stop all this. We don't really have that kind of infrastructure to build a kind of go down into survival mode and keep operating the way they are. Now, they are trying to address that, but then that radically changes the protocol. And so, for example, with Ethereum, they've had issues with throughput, right? So you need other tokens to run all those smart contracts, and they're actually having issues with transaction fees because there's only so much scaling. And they've kind of like Bitcoin, they've been trying to look into off-chain solution to try to increase that throughput.

Starting point is 00:53:10 But their ultimate solution is to move towards Ethereum 2.0, which is actually delayed, because if you look at how complicated it is, it's extraordinarily complicated. And so it involves, you know, they're rolling out the beacon chain, which is it going to be like another chain running in parallel, they did that in December. And then they're going to, you know, they're basically going to split Ethereum into like 64 shards, they call it. So it's like these kind of like 64 parallel chains. Then they're going to start moving from proof of work to proof of stake. So if you have 32 others, you can become a validator and you can start validating transactions on one of the charts. And so unlike Bitcoin, where every node can see the entire system. With that new system,

Starting point is 00:53:49 each validator only focuses on the shard that it's on. And the beacon chain kind of coordinates how that works across the board. And so the idea is to make those nodes would be smaller and, you know, people could run them, but they're only kind of partial nodes. And so it's just basically an extraordinarily complex system. And at some point, you know, they want to build that whole thing in parallel. And then they want to take the existing Ethereum blockchain and kind of merge it into one of the shards and becomes one of the shards on the, so that's, that's Ethereum 2.0.

Starting point is 00:54:15 And so therefore, any sort of pricing model you had over the past five years is out the window because now you're looking at a total different system. And then the way that the issuance is going to work is that instead of a fixed issuance schedule, they're going to have, you know, you get certain kind of rewards as a validator for validating the network. But then also, you know, anyone doing smart contracts, they burn ether by basically, you know, to fuel smart contracts. You have an inflation mechanism and you have a deflation mechanism and, you know, depending which one wins out any given year will depend on, in part, based on how many validators there are, how much throughput's happening, things like that. And so there's not a

Starting point is 00:54:51 a clear connection between, even, let's say, first, you have to have an idea of how well the Ethereum network's going to do for any sort of applications they want to do. Then there's not a clear signal that would translate that into a specific token price, right? Because the fees can adjust based on throughput and all sorts of stuff. And the whole point of Ethereum 2.0 is to have a ton of throughput, meaning you shouldn't need a lot of Ethereum to run these smart contracts. And then the question is, so what does Ethereum become worth? And of course, you know, people that like Ethereum, they want to become validators. So they have an incentive to gather Ethereum. That's kind of a, And they're actually going to lock it up for like two years while they do this whole kind of rollout.

Starting point is 00:55:24 So I wouldn't be surprised to see Ethereum price do pretty well. But just unlike Bitcoin that I think you can have pretty firm price targets on, I think you can do some good on-chain analysis and kind of come up with the fundamental view. And it's really kind of a finished product. Ethereum's, it's far more of a speculation. There's just so many moving parts there. And I don't view it as kind of hardened against kind of, you know, as decentralized as Bitcoin is, against, for example, state attacks or things like that. And so I don't personally invest in

Starting point is 00:55:54 Ethereum. You know, at the end of the day, from an engineering standpoint, and I know that's how you're looking at things because that's your first love as engineering, as is mine. I mean, it looks like an open heart surgery from an engineering standpoint. And it looks extremely complex what they're trying to do. The one piece that I got a lot of concerns with, and this is the thing that you were addressing, which is the nodes, the size of the size of the, of the full nodes that need to be run and the fact that a state actor could step in depending on where those are hosted. And I'm not necessarily concerned about the size today. I'm worried about the size in 15 or 20 years from now because the size of all these smart contracts all being run on a

Starting point is 00:56:36 base layer like this, you have to keep it decentralized, but you have to keep it decentralized into perpetuity. And that's where it comes off the rails for me is in 15, 20 years from now. What is the size of a node, a full node, and they're going to get into a terminology thing I found online that they like to change the terminology of quote unquote full node to fit their narrative and their interest. And I'm just not buying it. The other thing that I think is really important is there's no, and a lot of people in the Bitcoin community call it number go up technology, which is the four-year having event, right, combined with the two-week difficulty adjustment to keep the supply schedule intact so that the stock the flow just keeps ramping up

Starting point is 00:57:18 every four years. That's the number go-up technology. In Ethereum, you don't have anything of the sort. And so effectively, I look at it as an Amora fish that's just effectively sucking off of the movement of the stock to flow in Bitcoin, and you're seeing a portfolio allocation percentage-wise that's coming off of that Bitcoin number-go-up technology being dropped into Ethereum. At least that's how I view it. And it seems like you're not in your head and you agree. Yeah, I mean, from an engineering perspective, I prefer Bitcoin's design. I really like modular components, right? So things that are kind of just inbuilt to be hardened. And so the fact that Bitcoin has a really simple base layer and then you can scale it with things like lightning and liquid and some custodial things like that. It's a variety of kind of, it depends on how much kind of trust you want to have in your particular layer. But there's trustless second layers and then there's trusted second layers. I think that design just makes a lot more sense. And I think it's really well designed from the beginning. Whereas Ethereum, I think is their proponents, it like how ambitious it is because they're trying to put so much right on the base layer, but I'm also concerned with how that turns out. And so I've kind of used the analogy of the

Starting point is 00:58:26 Concord, right? So 50 years ago, we invented this commercial jet that can go like Mach 2 and you can get to London to New York in three hours, but it never really was used very much because it's just it was so complex because once you get your pilot, I mean, basically once you go above Mach 1, everything changes. It's all different now. And so to get that to work in a kind of an economical way was extraordinarily difficult. And so basically, you know, from like a cool factor, if I look into some of the details of what they're doing with the 302.0,

Starting point is 00:58:53 I'm like, okay, it's really neat. It's cool, but I don't know how to price that. I don't know how to kind of, I don't really know how to view that as money. I'm concerned about the decentralization aspects of it. And so it's kind of like I'll see it when I believe it. Get to the 3M2.0. Let's see what happens.

Starting point is 00:59:07 But, you know, I think the risk reward is, is really strong in Bitcoin's favor at the current time. It's a solution looking for a problem. Yeah. Hey, Luke, this question, I like this one because this isn't something I've really talked about too much, but I know Kyle Bass has been very vocal about this. And the simple question is, is China's economy a mirage? I remember asking a friend of mine that question who was in Hong Kong for 20 years, fluent speaker. Said, is it a bubble? This is probably 10 years ago. He said, yeah, it's a bubble. The question is, when's it going to burst? What is it? It all gets into a relative question, right? I mean, it's like if he has to fish to describe his environment, the very last thing it would list would be the water, right?

Starting point is 00:59:54 So if we've got a bubble currency, bubble sovereign debt markets, I mean, the way I've always looked at China's economy is when you look at some of the things that Kyle describes in terms of the loan growth, the banking system loans relative to GDP, yeah, they look precarious. With that said, I just get the sense they look at things differently, which is to say in the world in which we live and have lived for the last 10 years, 20 years, 50 years, if I'm China, would I rather have 20,000 kilometers of high-speed rail or whatever they've got, some of which currently goes to lightly populated city centers, shall we say?

Starting point is 01:00:36 Or would I rather have the equivalent amount in treasury bonds that the U.S. has to price at a negative real rate in order to keep the wheels on the car. And I think if you take a look at what China has done, I think a lot of what they have done has been based on this view that basically an understanding of money at a very fundamental level that here in the West, here in the U.S., we're almost like the Roman Catholic Church with a geocentric model of the solar system saying, well, the dollar is the center of the world and everything's revolving around it. And the Chinese are looking at it going, we've been to this movie before. We've seen this movie several times in our history. You know what? Send us the commodities. We'll build a whole bunch of cities because the cities are going to create employment as we build

Starting point is 01:01:25 them. It's going to be a better store of value. It's going to create jobs as we maintain them. There's a whole just, they're coming at it from a completely different angle. What's interesting to me is when I read the book, The Raven of Zurich, memoirs of Felix Somery, there's this chapter, and I've actually put the highlighted the quote on Twitter before. This is 1913. Felix Somery said that the Europeans, the height of their economic power, four different major empires, they all looked at the Chinese with curiosity with their infatuation with gold and silver. They weighed it. They weighed their current.

Starting point is 01:01:56 That's how they got that when they did a transaction, they would weigh the currency relative to what they were selling. And the Europeans look at that, at the height of their power with great curiosity. And Somery said, we thought they were two generations behind us. And it turns out they were a generation ahead of us. And so it's been interesting to me as my view all along has been the Chinese is it a bubble? I guess, but I think it's a differentiated view of money and that we would rather have the stuff because if you look at the obligations of the issuer of the currency, they're going to have to create a lot more currency units.

Starting point is 01:02:31 And so we fast forward a generation. And what do we find? We find the U.S. talking about things like MMT. We find the U.S. running an economic model that is starting to look very much. much like a Chinese economic model, centrally planned. And so I hear what Kyle's saying, but I just think it's all a relative game. And I think they've been coming at it differently. And I would argue that our economic model is shifting more towards theirs rather than out of necessity, more than theirs toward ours. Yeah, I think that's really well said. Lynn, did you have any other

Starting point is 01:03:04 comments on that one? Not particularly. I mean, I think it depends on what aspect you're looking at. And so, for example, China's had a very large corporate debt bubble. You know, and if you just measured as corporate debt to GDP, for example. Now, because a lot of that debt is to nominate their own currency and because they have a lot of kind of top level control, they have a lot of levers to pull to kind of smooth that over over time. And then the fact that their sovereign entity is rather unlevered, you know, so they have a lot of assets around the world.

Starting point is 01:03:33 They have foreign exchange reserves. You know, so they have a lot of leeway to kind of manage those issues. And so it has been a sight to behold because they've been kind of an expert at deflating bubbles gradually. Like they say you can't deflate a Ponzi, but they have a decent track record of deflating these Ponzi's and then building up the next one. And so, for example, people refer to the ghost cities. And then a couple years later, they're not ghost cities anymore. It's like, no, they were just five years in advance and they kind of overbuilt.

Starting point is 01:03:58 Then, you know, those kind of got populated. And so it really comes down to political philosophy. So, for example, if we look at China in India, you know, China has managed to industrialize faster in India. in part because they're able to use some of their central planning to do things. But of course, that brings up all sorts of privacy issues, human rights issues. And so I think for Luke's point, it's all a relative game. And so, for example, I think one of the biggest bubbles is persistent U.S. trade deficit.

Starting point is 01:04:23 That's a bubble that's been building for 50 years, essentially, without being allowed to normalize in a way that many other countries are able to normalize their trade balances. And so I think that there are a number of bubbles around the world. And China's corporate sector debt is one of them. So it's among the many that I think are a problem rather than kind of if I don't really view it as like the single worst bubble. I think there are a lot of really big bubbles. Yeah, I would actually say it's a great point on the trade deficit where I would actually argue that that's exactly what the Chinese have been doing is saying, okay, well, that's the bubble and sort of the mirror image or the other side of the T account is, okay, well then here's how we hedge that. Because whenever that bubble bursts, if we store our wealth in paper, it will be a flaming pile of paper.

Starting point is 01:05:08 And so we're going to take the dollars and put them into things that hurt when we drop it on our foot. All right. So this is the last one. We're going to go around the horn. What is a question that you're chewing on right now that you just are struggling the answer for yourself or something that you've just been thinking a lot about and you don't necessarily know the outcome? but you want to propose the question to the group. And we'll start with you, Luke. The question I've been thinking about is would U.S. policymakers be willing to burn down the system to try to defend the dollar?

Starting point is 01:05:48 So you're seeing basically a jail break. I mean, it started six, seven years. Central bank stopped buying treasuries on a net basis. And then you saw Russia and China in particular moving. to gold instead of treasuries and basically putting their money into anything but treasuries. And now you're seeing, I would argue, a jail break of, and maybe a jail breaks a bit of a strong term.

Starting point is 01:06:11 Price performance is influencing maybe that term. But U.S. citizens, global citizens, global corporations starting to move into Bitcoin away from dollars. It's an indictment. You know, Luke, when you look at policymakers right now, something that was just an insane headline to me this week. you had Nancy Pelosi and you also had Mitch McConnell. Both of their houses were vandalized. And I think what was written, I don't know which house had this written on it, but one of the two of their houses had, give me my money spray painted on their front door.

Starting point is 01:06:49 And the picture of that for me was just such a mind-blowing moment of even if policymakers want to defend, the dollar at this point because they know that that's what's best from a national standpoint. Is the population in a position where they're going to allow their elected officials to act in that manner? I don't think they will. And I think today in particular, as we got into what was happening this afternoon and tonight, where you have members of Congress cowering in the Capitol, I don't think that they would try.

Starting point is 01:07:25 But when I see Hank Paulson's op-ed in the Wall Street Journal a month ago, when I see Kevin Warsh's op-ed in the Wall Street Journal yesterday, when I see Larry Summers talk about that people shouldn't get their $2,000. To me, it just raises this question of, are they actually starting to think about that this is something that they could try or that they should try or that it might actually work? Because the answer is, no, they shouldn't try it. No, it's not going to work.

Starting point is 01:07:50 It's going to be like trying to give themselves a root canal with a shotgun is how it's going to go. But that doesn't mean they can't try. And I don't think it would last for very long, but that's something I've been thinking about is basically the story of 1971 up until just recently was about subjugating the U.S. middle and working classes in order to support the dollar and the dollar system. And my view is post-COVID, we moved to a shift to subjugating the dollar to support the U.S. middle and working classes.

Starting point is 01:08:22 And there seems to be noises amongst certain influential policy makers. or former policymakers that maybe we need to go back to supporting the dollar and subjugating the middle working classes. I don't think it's a good idea. But if they tried to do it, everybody's off sides, myself included personally. Lynn, any thoughts on Luke's question? No, I have a similar outlook. And so I think that there will be attempts where they try, but then the feedback loop of either the votes or some of these populist uprisings, kind of answers that question in a similar way that the Fed tried to keep normalizing things into late

Starting point is 01:09:03 2018 and they got punched in the face. And they were like, oh, we're just kidding. We're going to reverse now. And so I think we saw it kind of this summer where, you know, some politicians was like, I don't think we need any checks. And then like, you know, we actually saw the interesting dynamic that wasn't cleanly across party lines because, you know, the Democrats were like, okay, we passed this $3, $20 thing in the summer, you know, that the Heroes Act, I believe it was called. And then Republicans are like, our starting position is nothing, or maybe we'll give like, like, you know, $600 billion and maybe some small business aid and tax cuts and things like that. And so you had these really kind of really wide kind of starting points.

Starting point is 01:09:35 And then they narrowed more and more. They kind of started coalescing around $1.9 trillion, which, you know, trillion here, trillion there starts to add up to something big. But that never really took off. Then, of course, we had the elections. And then during this past thing, they were literally kind of, you know, coming to an agreement. And then Trump comes out and says, I want $2,000 checks. And so the Republicans were in an interesting position where the Democrats wanted the bigger checks, their own president and their own party wanted the bigger checks, but they didn't want the bigger

Starting point is 01:10:00 checks. And so you almost had like that three-way battle going on because it's no longer cleanly among party lines. Instead of left or right, you have establishment left, establishment right, and you have populist left, populist right. You have like a bunch of different quadrants here that are kind of competing. And so I think my question along similar lines is what does the Fed's pain point for treasury yields. And so, you know, what we're seeing lately, for example, is that inflation expectations are rising. They just got above 2%. We just had the 10-year go above 1%. And so actually real yields are staying pretty static. They're hovering around negative 1%. And that's also put some downward pressure on gold over the past several months. And so what I'm kind of watching is

Starting point is 01:10:43 what are the Fed statements and meeting minutes talking about in regards to yield curve control or increasing purchase on the long end of the curve, which they actually did talk about in the latest FOMC minutes as a potential option, because I don't know exactly where their pain point is. I think that's pretty important for certain asset classes. And so that's something I'm watching closely. You know, if used as a reference point in the 1940s, they had 2.5% as their pain point. And so in the 1940s, you had three major spikes of inflation, two of which went well into the double digits, and they held the short end of the curve at near zero and the long end of

Starting point is 01:11:17 the curve at 2.5%. So I've been using roughly 2% as my estimated pain point because, you know, if their inflation targets 2% or above, I don't think they want 10 years going above 2%, maybe less, but I don't have a strong conviction within, you know, 100 or 150 basis point range of where their pain point is. And I think, you know, there are different Fed officials that have different pain points. So some of them wanted to yield curve control yesterday and other ones are talking about tapering purchases. So I don't know exactly where that pain point is, but that's kind of the big questions. I'm watching is, you know, kind of language from the Fed around shaping the long end of the curve.

Starting point is 01:11:54 And I don't think that within new administration, if, and I think the expectation is that UBI is going to become the new insertion point for liquidity, or at least it's going to be used more aggressively than it has historically, if that's true, I think it only adds more pressure to that yield curve control that you're talking about, right? I'm curious, do you agree with that, Lynn? Yeah, generally, the more stimulus there is, especially stimulus that targets the working middle class. Yeah.

Starting point is 01:12:25 The more kind of velocity you can potentially get, especially when you're talking about like a post-lockdown scenario. So then that could push up official inflation expectations. And basically, if left unchecked, the Fed says, no, we're only going to buy this amount, but yields are going to do what they're going to do. So they said, okay, we're taking this excess supply off the market. But if they're remaining supply, the market's going to price it. that I think you could move into an event that looks a lot like late 2018,

Starting point is 01:12:49 where suddenly the market says, wait, the Fed's really not going to buy more. And then there's a big sell-off and probably growth stocks take the bigger hit. Because you look at late 2018, it was the NASDAQ stocks that were getting killed. I mean, Apple's down like 30-some percent, whereas like value stocks are actually holding up. And so I do think that if they were to just let that run, you know, the Fed might just test what the pain point is. They might say, okay, we're going to keep adjusting things gradually. and they're going to let the pain point kind of sort itself out. So rather than say, we're going to say ahead of time what the pain point is,

Starting point is 01:13:19 they might just watch what happens. And when they find the pain point, they'll say, okay, we're just kidding. We're going to go ahead and, you know, up our purchases at some extent or increased duration of average duration of purchases, whatever the case may be. Okay. So here's my question for you guys that I'm chewing on. Right now you see everybody coming out all these big banks that are saying that their price expectation or what they think the value of Bitcoin is, is basically Plan B's stock

Starting point is 01:13:47 to flow valuation of, call it $200,000 to $300,000. Everyone in their kid sister is coming in and saying, yeah, I think Bitcoin's worth this amount, right? Well, it appears that the stock to flow valuation has a lot of validity and a lot of correlation. When we look at just the chart that was published well in advance of the halving, we look how it's playing out to date. It really appears that that's kind of what's taking place. If we continue to see that play out in 2021, and the price does go to $100,000 or $200,000, is everyone just going to lose their calculator and not be able to do a discount model for the stock to flow price of 2025?

Starting point is 01:14:29 And where I'm going with this is, so I obviously have a large Bitcoin position in my portfolio. So everyone's talking about how they're basically going to use the stock the flow model in order to miss the next big 80% drop. And then they're going to somehow step back in and capture the next big stock the flow move to a million in 2025. I just don't buy it. At least that's my position of like how I'm chewing on this problem. Does it just keep going? Do people start pricing in the 2025 valuation of a million dollars and start discounting it into today's value because if you do, you don't sell. You just continue to hold because any price under 200,000 is a

Starting point is 01:15:12 great price, right? So I don't know how to answer that, but I'm curious how you guys see whether you even think the stock the flow is valid, whether you think this is the quote unquote final cycle for Bitcoin or whatnot. I'll be quick. I think the stock to flow model has been demonstrably valid. And so I would watch it until it's proven otherwise. The thing I have found that I've not, I've seen much of the Bitcoin discussion on Fintwit in particular, but some of the price targets as well, centers on the technological thought or coming at it from a technologist. And the thing I've not seen as many people coming at it from is the other side, which has never been true before, which is the U.S. is insolvent. You look at the U.S.'s big three expenditures, entitlements, defense, and treasury slash interest, it's 140% of tax receipts. COVID basically blew a gaping hole in the U.S. fiscal position.

Starting point is 01:16:13 And what I bring this up, because if you overlay that with your view of, hey, does it just take off and run? The thing I don't see anybody talking about as it relates to this, you know, the typical stock to flow where you have the run up and then it pulls back 60, 80%, and then it off for another is, is in none of these prior cycles has it literally been the case where the U.S. can't make ends meet unless the food is filling in the gap. And my gut tells me that at the very least, that suggests that the stock to flow model dictated pullback will be much less severe than it has been in prior cycles. And at best case, just skips over them entirely. but I'm coming at this from a complete non-technologist standpoint. So I'll stop there. But personally, that's how I'm thinking about it, that basically you won't get as big a one

Starting point is 01:17:07 or you might not get one at all because of what has happened to the fiscal situation. Yeah, the backdrop is just that ugly. It's gotten so bad, so fast. Lynn, help me. And if I was going to rephrase it, is like, what in the world do I say on this show after the price goes through 100,000 when people are saying, do I buy? Like, how in the world can you possibly answer that question? I know it's going to be a huge, huge issue for me later in the year, if this keeps going

Starting point is 01:17:35 in the direction that I suspect it's going. Like, what do you say to somebody? Yeah, I have similar issues. I have clients asking, like, let us know when you think it's a good time to sell. The way I'm approaching it to back up is, so I went long in April 2020. I wrote that big public article in July 2020. And so my view at the time was that I had a very high conviction that Bitcoin would do very well through that year into 2021 based on the 18 months or so after the having event.

Starting point is 01:18:02 Now, the part that I had low conviction on is what price target it would reach. Basically, it was like north of here by a lot. I looked at percent gains of previous cycles. In general, each cycle had a smaller percent gain, even though it was still outrageous. So with the stock-to-flow ratio, what I found was that I really like Plan B's charts, the ones that they're all color-coded, they show how it relates to the halving cycle. I thought those were extraordinarily valuable. I didn't put a lot of emphasis on the specific price targets because that is a supply-only

Starting point is 01:18:32 model, whereas demand is what dictates how far it overshoots, how far it comes down. It's ultimately going to be dictated by supply and demand, but that kind of has an implicit, kind of a static demand assumption, and then the fact that it overshoots and undershue that is because demand is somewhat flexible. And so my base case was that it would be a parabolic increase, but that it would be probably smaller than the previous one. And so far, it's above the previous one in terms of the post-having, where we were kind of, what is it, eight months since the having, we're actually above schedule.

Starting point is 01:19:03 And so I don't know if that means we're due for a correction, then more up from here and it kind of slows down, or if that kind of trend is broken and that this cycle will be, you know, bigger percent-wise than the previous ones. I don't really have a good answer for that. I am monitoring things like the market cap to realize cap ratio, basically monitoring a bunch of different kind of on-chain indicators, sentiment indicators. And basically, my view would be to let people know when some of those indicators look a lot like previous tops. And then people from there can judge what to do with their own situation. That doesn't mean, you know, it's going to crash.

Starting point is 01:19:35 It just means historically, we're in the danger zone now. That can mean different things, depending on what happens. And so my view is that basically you can have a blow off top. And then if you were to get enough of a correction that kind of shakes people's confidence in it, that's when the narrative shifts because I think we're in kind of a bubble in a sense. Basically, with any sort of investment, there's a really kind of big spectrum of information, right? So whether it's a stock that people know the fundamentals of and they can tell you everything about it versus someone who thinks just, you know, that they did a share split, so the number's going to go up kind of like just low information investor versus

Starting point is 01:20:08 high information investor. Same thing with Bitcoin, right? You know, there's people saying that it's only going up because of reasons XYZ and they're not talking about the supply. They're just kind of having a narrative. Whereas other people have, you know, have been showing like a ahead of time what the rally would do and it's done almost that exactly. And so I think there's a spectrum of information there. And I think that there are some people that when you get that kind of blow off top, they can say, oh, it's been a bubble, the narrative. And you could get a lot of that kind of that doubt, right?

Starting point is 01:20:32 So people say maybe it was a bubble. Crazy I want to sell. And you get the momentum to the downside. My base case would be that that would be smaller than the previous percent wise. I do think there would be probably some correction, but I don't know. I think that the best way to answer for people is that they can make sure that their position size is one that it doesn't keeps them up at night. I think that's the way to handle it. I don't think that there's, you know, they're trying to time it perfectly is probably not the

Starting point is 01:20:57 right approach. And instead it's saying, what is the position size right for you? Right. There are some hardcore bitcoins that are just never going to sell. They don't care if 95% of their net worth is in Bitcoin. And so that's their answer. Whereas if you're someone else and they put say 5% of their portfolio and now it's 50% of their portfolio and they're checking Bitcoin five times a day, maybe for that person, the answer is, okay, rebalance. Go back to your target allocation. I wouldn't really recommend having zero Bitcoin, but I think that there are ways that they can dial back risk, especially when you've had a 5x or a 10x gain at some point, and you want to kind of just rebalance some of those into their assets. I think it really is going to come down to the

Starting point is 01:21:35 individual sentiment and individual circumstances of that person. Really well said, both of you. Guys, that's all I have. I just want to thank you. I mean, I really enjoy these conversations. I forgot we had Jeff here last time. The next time that we do this, I promise, I'm having Jeff Booth with us. It's going to be the four of us. Again, we're going to make this a theme every quarter or whatever if you guys are willing to sit down and have that chat because I really enjoy talking with you too and Jeff as well. Sure. It's almost like there's so many subjects. There's so many subjects. But yeah, real fast, give people a handoff. Luke, I know you have a book there that's outstanding. And then Lynn, give a handoff. to folks to your site as well. Yeah, sure. If people want to learn more about what we're up to, check us out at FFTT-LC.com and check out different products we have there. I'm at Linnaulden.com.

Starting point is 01:22:30 I'm also on Twitter at Lin-Alden Contact. I have a lot of free articles and newsletters. And I also have a low-cost premium research service that covers a variety of different asset classes based on where kind of good opportunities are, from equities to commodities to Bitcoin, whatever the case may be. Guys, we'll have that in the show notes. I highly encourage you to check out both of those. Just incredible resources and incredible people.

Starting point is 01:22:53 Guys, thank you for your time today. This was really a lot of fun. Thank you. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcasts.

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We Study Billionaires - The Investor’s Podcast Network - BTC008: Bitcoin & Macro Mastermind Discussion w/ Lyn Alden & Luke Gromen (Bitcoin Podcast)

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