We Study Billionaires - The Investor’s Podcast Network - BTC021: Bitcoin and Bonds w/ Greg Foss (Bitcoin Podcast)

Episode Date: April 14, 2021

IN THIS EPISODE, YOU'LL LEARN: What were some early lessons that Greg learned that shaped the way he sees the investing world How does he think about the long-term debt cycle How can Bitcoin potentially impact the fixed income market How can convertible bonds become a catalyst for further Bitcoin adoption What are his thoughts on the contango trade His thoughts on the current sell-off in bonds and what it means for yield curve control How to think about sovereign default swaps and how it can be used as a model for valuing Bitcoin How governments will start to view Bitcoin if the trend continues BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Greg Foss's article: Valuing Bitcoin w/ Credit Default Swaps Greg Foss Twitter Browse through all our episodes (complete with transcripts) here. SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hey, everyone. Welcome to our Wednesday release of the podcast where we're talking about Bitcoin. As most people know, I love mixing Bitcoin with macro and specifically I like talking about not only how it's going to impact the gold market, but more importantly, how it might impact the fixed income market. So what better guests to have on than our guest today, Greg Foss, who has more than three decades of experience as a fixed income investor to talk about the potential implications of this current market setup. We talk about the long-term trend. We talk about UBI, yield curve control, forward guidance, more QE, credit default swaps, and most importantly,

how traditional investors will interpret these signals as an ever-expanding Bitcoin price just seems to keep on coming. Get ready because Greg brings some serious fire during this discussion. And without further delay, here's my chat with Greg Foss. You're listening to Bitcoin Fundamentals. You're listening to Bitcoin Fundamentals. by the Investors Podcast Network. Now for your host, Preston Pish. All right. Hey, everybody, welcome to the show. And like I said in the introduction, I'm here with Greg Foss. And from what I hear, Greg, everyone keeps telling me you two need to talk.

So here we are. We're going to do this. I'm flattered. Thank you for having me. So, Greg, I want to start off just kind of with your foundation. Early on, were you always in fixed income since the start? or is it something that you worked in the past decade? It's over 30 years, and with a focus on credit and fixed income,

and I did trade most other instruments, including equities. There were times when I would take equity short positions against bond positions. We could talk about that. But yes, I'm a trader focused on credit markets, and I've traded all sorts of derivatives, including credit default swaps, bank loans, etc. So when you first came into the market, give us an idea of where the tenure treasury was at just so we can kind of talk about this big

credit cycle and kind of where you fit at that point in time and some of the narratives and that kind of stuff. Excellent question. So, yeah, I started my career in 1988 and the U.S. tenure was at about 14 percent. Let's not argue over subtleties. The crash of 1987 was my middle year at business school. And 1988 when I started working, so the crash caused yields to come in. But then they rebounded a little bit.

So let's call it 14% on the U.S. Treasury. It did, as you know, hit about a 19% top in 1982-ish. So they had come down somewhat from 19% to 14%, but in 1988, that's when I got my start. So, Greg, back then, I would imagine that the narrative of rates could still go back up and hit new highs. Was that something that was still being talked about when you were coming into the fold? Yeah, you know, it's really a bit of a different dynamic. I mean, there was Paul Volcker. He was a fair chairman in the early 80s. And he was determined to snuff out in inflation. And so he just went hard on short-term rates, jacked them all the way up to stop the inflationary spiral.

And rates peaked out. It wasn't at the time, there were a lot of different things happening. For example, the crash in 1987, the stock market crash October, 1987. That sent a ton of people for a loop because, you know, they were new things on the block, Preston, like portfolio insurance. They called this thing using futures portfolio insurance. It was, when you look back on it, it was so infantile, but oh, no, no, this was the latest and greatest. So, yeah, bond math was interesting. It wasn't a certainty that rates would come down, but the general feeling was that they

would normalize from those continuous high levels in the late 80s. And then there was this, my inauguration, though, and I've said this on other podcasts. was I started working for the Royal Bank of Canada in 1988, and it was insolvent. This is a crazy but true scenario because it had way too many lesser developed country loans, LDC. Most of those loans were in Latin America, but in 1988, Treasury Secretary Nicholas Brady came out with a plan to solve the Mexican debt crisis, and it was based on zero coupon treasuries as collateral against the obligation. And they changed a five-year loan, these five-year

loans that were non-performing, they changed them into 30-year instruments. Okay, the way the banks did not have to write down the loans to market. They were backed by zero coupon treasury strip bonds, which at 14 percent, you can appreciate over a 30-year term how low the dollar price is. It's a brilliant strategy, but it allowed all money-centered banks in the world to skate themselves back on side after making these horrible loans to countries. And this was my first inauguration. And I'm like, hold on a second. You don't learn this in business school.

You come and you work in the financial system. And I'm working for the largest bank in Canada. And it's insolvent. The value of its liabilities exceeded the value of its assets, which were loans. And therefore, the book value of equity would have been written down due. zero if they had to write those loans to market. And it's just, I looked at this and I go, then how is it possible this whole system functions? And it functions because there's a too big to fail implied put back to the central banks. And this is no different. Manufacturers Hanover,

Chase Manhattan, all these banks in New York City, which have been combined and there's been some mergers and acquisitions. But these banks were in the same position. So Treasury Secretary Nicholas Brady came up with this brilliant solution. And it was, was my first welcome to the fire, Foss. You know, you're working for a bank. And if I ran out and told the newspapers this, I'd be fired in a second. And not only that, everyone would run me out of town because, oh, the banks are the safest things around. Well, guys, they're not. Okay. You just don't understand mathematics. And I said, yes, the banks can be bailed out by the governments. And the only way they can do that is by printing money. And that's when I started

looking for a solution to fee it. Yeah, it's amazing to see how the restructuring is effectively the debt jubilee, but it's just the, it's being structured. It's all just being completely restructured and being assumed at a collective level by undertaking that reorganization. Transfers of risk, as you're implying, you know, it eventually ends up on the government's balance sheets, and that's where it is now. It can't go any further. This is why we're at a particularly perilous time in the debt cycle, because it got transferred. It 2008, 2009 from the financial system full on to the government balance sheets. And they did nothing to solve that. They did not raise tax revenues when they had a chance to pay down their debt.

And so it's a mathematical certainty now that Fiat's will debase. I want to say what's really fascinating about the example you just provided is the two pieces that are vital to what you're describing is a reduction in the yield and extending the duration. You said we went from a short duration to out to a 30, and the yields went from whatever they were down to zero. And when we look at what's happened from when you first came into fixed income to today, not just in Canada, not just in the U.S., but literally, globally, we've seen the yields trickle down from those levels that you described at 16% plus. You know this, though. The world trades off the U.S., right? every single other yield curve in the world trades off the U.S. Treasury.

Okay, you can say, oh, that's not the case. I'm a proud German and that's not the case. And I'll look you right in the eyes and say, you're wrong. Okay. Everything in the world trades off the U.S. treasury. And everyone will say, well, then how come there's negative rates in ECB land, but not in North America? And you can say, because that's in a different currency.

But if you put everything into U.S. dollars, you will see that everything in the world trades off the U.S. Treasury as it should because it's the de facto reserve asset slash currency of the world. I think an important way to look at currencies and fixed income because they're very closely related is just the reflexivity between them. And when you look at the amount of dollars that are in the system from a fiat currency compared to the euro or the yen or whatever, and you're just looking at that size, the sheer size of it is what's driving the impact that you're describing there. Not just domestically, but the Eurodollar market itself. I think we know the answer to this, but I'm going to ask you because I'm kind of curious if there's any other things that you would

describe. In those early days, what were some of the really key and important lessons that you took away as a brand new person into the fixed income space that you'll take with you forever? Thanks for that question. It causes me to reflect. So when I was at the Royal Bank in 1988, to put it in perspective, the debt of Brazil and Mexico, we're both trading in about 25 cents on the dollar. Now, there wasn't a lot of trading that took place, but there were trades. And not only that, when it was restructured into these Brady bonds, which was a much more attractive and formalized structure, I actually went to my CFO and I said, you know, Emil, I know we've, you know, totally crap the bed on the, on the initial investment in these, in these countries, but would you consider buying some more?

I really think they're cheap. And the typical answer, not just in Canada, but this is typically a Canadian answer. Oh, no, thank you very much. I've spent all my money at 100 cents on the dollar. Why would I want to buy more of them at 25 cents on the dollar? So I guess what I would say to you is what I learned from the U.S. market, and this is the market that is best at doing this, their cost is not where they actually purchased the debt to begin with, their cost is last night's close. They tend to come to work within a mindset that's,

hey, okay, everything's marked to market. And today I got to make some money back where I'm going to make more money versus last night's close. Whereas Canadians are like, you know, five years ago, I lent this money at 100 cents on the dollar. And I know it's only 25 cents on the dollar right now, but I'm just praying and pleading that it goes back to 100 cents on the dollar. And I'll never try and correct that mistake. So it's a combination of you need to admit your mistakes and then you need to capitalize on the opportunities that the markets give you regardless of your cost base. If your cost base was 100 cents on the dollar, but you do have the market 25 cents on the dollar, then you try and make that 25 cents worth 28 cents. And this is a neat thing because

it is the basis of capitalism. It is an open market determining. of risk and return at all times. My impression of what you just described is just sunk cost bias. So do you think that that's a cultural thing? Because you were saying that it's more Canadian. A little bit. A little bit because so I moved from being a working at the bank and determining what the best Brady plan option was for the bank, I moved into high yield bonds.

Now, high yield bonds were absolutely a hated asset class in Canada. Now, the U.S. had a beautiful market developed by Michael Milken and established as a return that pays you for the risk that you're taking. In the U.S., they really believe there's always a price. Whereas in Canada, and I've had these conversations, or I did in the early 90s with Canadian accounts, how much would you buy at what yield? In other words, would you buy the debt of company XYZ? And they go, no price. Never. And I'm like, wait a minute.

What do you mean? No price. And here's the kicker press, and this is even more weird. They would own the equity of that same company. Okay. So there was a company in Canada, and you may know about it. It's a beautiful worldwide renowned company. It's called Rogers Communications.

Ted Rogers was at one point the largest high-yield bond borrower in the world, not in Canada, in the world. And Merrill Lynch successfully took all of his business from Canada and issued. somewhere around $4 billion into the U.S. high yield market. Now, $4 billion doesn't sound like a lot of money in today's dollars, but trust me, in 1990, that's a huge amount of money. So Ted Rogers was the largest high yield bond borrower in the world. And he has no U.S. dollar revenues, but these were issued in U.S. dollars. So the banks had to swap the debt back into Canadian dollars and tie up swap lines and everything like that. But most importantly, the U.S. guys looked at him.

and said, okay, your cable is world class, your wireless system is world class, and I'm getting you at a rate that is at least 200 basis points or 2% higher than an equivalently rated U.S. company. So yes, that's the price at which I will lend to a Canadian non-domestic, borrower. So we're trying to break into this business at my job. I'm working at TD Bank, and we want to bring a high yield deal for Ted Rogers, denominated in Canadian dollars. So I said, hey, here's a good place to start. You can't get in here. It can. Yeah. Oh, no, well, just listen. Here's a good place to start. Show me the holders of the equity of Rogers Communications, right? Present, show me the list of holders. There was one account that owned

$900 million worth of Rogers' equity, 900 million. And I plead with a salesman. His name was Andy, I go, Andy, I need to hit, I'm not going to name the account. I need to hit the key on your account. I need to talk to them about this bond issue we're bringing. He's like, fast, stay away from my account. Because you know the way bond salesmen treat their accounts. It's like their life, their bread. And I'm an idiot trader and anything I say will destroy his relationship. But I say, Andy, please, please, I got to speak to these guys. So I hit the key.

Hey, Mr. Account, XYZ, we're bringing a deal for Rogers Communications. I want you to consider buying some. They go, well, we can't. It's a junk bond. I go, well, okay, pejoratives aside, you own $900 million of super junk equity. How about if you sell some of the equity, right? You go on $900 million of it. If the equity's worth, if the bonds aren't worth,

hundred cents on the dollar, the equities were zero. You understand that, right? Account ABC or XYZ. Yes, we understand. Well, then how much can I put you in for? Zero. Okay, what's the problem? Well, it's a junk bond again. And if I had to report to my investment committee, I owned a junk bond, I'm not allowed. And I said, well, how about this? You sell some of the equity. You buy the debt at a 12% coupon. You treat the income on the debt like the dividend end you are not getting on the common stock. You trade up in the capital structure. Like you're not getting. Is that what you just said? Yeah, you're not because there was no dividend on the common stock, right? So you're actually, okay, you can pick up yield, reduce risk. How much can I put you in for? None. And then I asked a,

at this end, this is the kicker. I said, how much can I put you in for? They said, none. Okay, obviously the problem is price. You don't like the yield. What yield would you buy it? They said, there is none. And I go, what? I said, what if I gave you these bonds for free? Just gave them to you. They go, I wouldn't take them. I would not take them because I'd have to report. And I actually at that point, I couldn't bite my tongue any longer. I said, you're the ridiculous money manager. And then the salesman jumps out.

Okay, fast, fast, fast, you're off the key. He runs over to me. He looks at me and he goes, if you ever, ever talked on my accounts like that again, he'll take me out and kick me, you know, carve me a new one. But it's true. Isn't that the most ridiculous thing you've ever heard? Greg, this is such a perfect story for what we're seeing today because I think it's that times 100.

I'm living at this is the same thing with Bitcoin. I'm telling you, this is why I always bring it back to my credit days. Now there's a fully developed high yield market in Canada. I'm quite proud of it. I was the first high yield trader in Canada. I did all my trading on Wall Street with U.S. counterparties, but I was the first guy to actually set up shop in Canada. and try and develop a domestic high yield market.

I've been through it all. And guess what? Rogers Communications is no longer a high-yield borrower. It's actually investment-grade. It traded up. It improved its capital structure. But one of the days that was a really bad day for Greg Foss, there was a,

and I own hundreds of millions of Rogers Communications bonds, okay? Like literally, this was a massive position for me. And I wake up one morning, and the headline is, Rogers Communications has more debt than the province of Prince Edward Island. That's true. But he drew the parallel that a company with more debt than the province of Prince Edward Island had to be a worse credit than the province of Prince Edward. And the fact is not even true. They had way more cash flow in the province of Prince Edward Island. This is lost on so many

reporters and so many guys that do flippant remarks like Joe Wisenfall commenting on Hertz equity, having value when the bonds are trading at 40 cents on the dollar, Joe, please do some research. do not run out and draw these asinine conclusions without looking at the whole capital structure of a company. Or now, this is a funny one, the capital structure of a country. And this is where Bitcoin really comes in. I think whenever you just look at how the media runs with the various headlines anymore, when you look at what's driving that from an incentive standpoint, A salacious headline gets clicks. A click then runs the immediate ad.

It doesn't even matter if the person dwells on the page because the ad was run and the revenues were collected. And so from that vantage point, you can see why there's such salacious headlines. You can see why the articles are a pittance of any type of reporting. Some of them are like three paragraphs long. There's nothing to it other than the ad was serviced. Excellent way to describe it. This is the new social media. I'm 57 years old.

You need to understand that I grew up without having ever used a personal computer from my first engineering days because they didn't exist. I did everything on a mainframe. And incidentally, I wanted to mention to you, I'm pretty impressed by your background and your West Point aerospace. Seriously, I mean, that's a huge accomplishment. And I tend to find that people that are comfortable with math really tend to get it before a lot of other people.

Now, the problem is most people are not comfortable with math, right? It's probably the subject that most people decided not to take when they had the chance to choose between whether they would take mathematics or not. And you're seeing it. Some of the statements that people make are just, you know, wait a minute. You should have learned to this in grade four. But it must have skipped that class. Let's take a quick break and hear from today's sponsors. All right.

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So what's effectively taking place and correct me if you see it differently, Greg, is as these prices keep getting pushed higher and higher over this long period of time, it's forcing every one to make riskier and riskier decisions. Yes, I agreed with everything until you said riskier and riskier decisions. So let's just talk really quickly about bond math. You nailed it, okay? For people that are mathematically inclined, I always love to talk about bond math as being the equivalent of, and bond math involves duration and convexity.

first and second derivatives. And then that's the equivalent of velocity and acceleration. Okay, if you guys go back to your physics 101 class and you remember the distance formula where distance equals velocity times time plus one half acceleration times times squared, the bond formula is exactly the same thing except it's duration times change in interest rates plus one half convexity times the change in interest rate squared. It's exactly the same Taylor series. The neat thing about it is you should get comfort then that bond math is not outrageous. It's exactly like physics. And so, yes, you mentioned duration. Well, if you ignore small changes in interest rates, the bond pricing formula basically says the duration of a bond times a change in interest rate

will give you its change in price. And the change in price, when interest rates are as low as they are right now is very meaningful for duration. So very simply, the duration of a 30-year bond right now is about 22. It's just a mathematical formula, 22. And if you said, what does that mean? Well, it means for every 100 basis points change in the 30-year yield, the bond price will drop by 22%. Now, bond guys aren't used to losing 22% in bond pricing terms, especially since rates, is you. you said, over the last 40 years have come down. They've been used to these things called capital gains. It was a one-way railway for capital gains. Well, now, and we talked about Ray Dalio's risk parity, now it's capital losses. It's the same math, except that rates are going up, not coming down.

So the long bond that was issued one year ago has a one and a quarter percent coupon on it in the U.S. It's a one in a quarter of 2050 and it has lost 26% of its value in one year. That's a tough mark to market, right? That's 26 points. That's 18 years or more. It's 20 something years of coupons of the one and a quarter coupon to make your price loss back. This is tough to report to your bond unit holders, isn't it? Hey, thanks for coming out. You just lost 26% in one year. Now, That's only a 100 basis points change in rates. What if rates went up 400 basis points? Convexity starts to come in and the price won't go down.

It can't go down 80%, right? Because it just doesn't. The convexity is the shape of the bond pricing curve. But I'll tell you, these are big, big, big price movements for insurance companies and pension plans that have matched their liabilities against these assets. But all of a sudden, they're off 26%. That's tough to take to your unit holders. So yes, you're 100% correct on that price.

The difference, though, is I'm not certain that it meant they had to reach out the yield curve or you reach out the risk spectrum. That risk spectrum is always there. It's always relative generally to the U.S. Treasury curve. The incentive, perhaps you could say, were high yield bonds at a 300 basis point spread over treasuries, starting with a 14% yield, which meant U.S. treasuries were at 14%, you add 300 basis points on top of that, you get 17%. Is that 17% more attractive in 1988 versus this year when the 10 year is 1 and 170? You add those same 300 basis

points on top of it. It may look more attractive, but then you think about it. You have the rates that could be going in the other direction. And you may say, I don't like bonds of any duration, let alone the fact that you have that spread of 300 basis points over. So it's harder for me to make that to say that it was pushing people out now. Does it? It makes things like the discount rates on all assets lower, which means the price appreciation of all assets definitely goes up. But was it really pushing people out?

I think that always existed, Preston. I think there were always the people that would take that incremental 300 basis points. And there's still people right now that won't take that incremental 300 basis points at 170. And I think they're actually being very smart right now, not taking that incremental 300 basis points. But then you talk about equities and the price mechanism for pricing growth equities and everything. And yeah, there is a cascade, no question. I guess where I would push back on it, Greg, and I'm curious to hear your thoughts on this. So when we look at back in the late 80s and you look at the debasement that was occurring,

it was showing up in the CPI gauge. It was showing up. up as our debasement rate back then was call it 15%, and you had that actually showing up in the CPI gauge is 15%. And I would argue today that that gauge is completely utterly broken and that the way that the debasement is kind of getting inserted into the system is through the bond market mostly. It's a little bit of it being UBI here recently. And because it's not showing up in the CPI gauge, you have people in equities, you have people in fixed things. income alike that are stepping into those trades thinking that CPI is real when, in fact, it's actually being manipulated lower.

And so they're actually getting into these really risky positions, but they only become risky if there's a new alternative that shows up to the currencies that everybody is using alike around the world. Like that all unravels itself, but it has to have some type of catalyst that provides a relief value. What a great explanation. So now I understand what you're saying. you know what's neat. So I never traded bonds for inflation expectations. I was a credit guy. And

this will help explain it. And I believe this sincerely. I believe that credit concerns will overwhelm inflation concerns. Whether those inflation concerns are actually being properly measured or not, I believe that it's credit that's going to be the defining characteristic of setting the base rate. So every base rate is a combination of an inflation. expectations, as you point out, and historically that's been the overriding factor and a credit component. And my argument is that the 10-year U.S. Treasury has an inflation expectation in it, but it also has a credit component. It is not, even though it's termed the risk-free asset in the world, and there's no one that's better, it's still not risk-free because if it was

risk-free, the credit default swap market wouldn't be charging you a premium to ensure against the default of the U.S. Treasury. So my argument is, yes, inflation expectations are there. They're a concern for all fixed income investors, but that's a backward-looking concern. The forward-looking concern is credit. Now, will credit be impacted by increased interest rates due to inflation? 100%. It's, you know, cause and effect. But I see now what you were saying about how the gauge did the CPI. I agree is not a realistic chap. Would it. index, the money supply growth, as Michael Saylor would say, are all much better reflection of the true inflation.

It's a fascinating topic that I think really kind of gets to the root of why there's so much misconception in just the financial markets in general, because you know, as well as anybody, Greg, that if you went and talked to 100 people in finance and said, is CPI your inflation gauge? I think 99 out of 100 of them would say, yeah, what else would it be? Correct. Well, that's a dumb question. Unless, though, and this is what's a head scratcher for a lot of people right now,

why are house prices going crazy in most countries, for sure, North America? You know, I just saw Wall Street Journal article about what's happening with house prices in the United States. And Canada, let me tell you, is going off the charts as well. And if that's not an indication of inflation concerns, I don't know what is. And why is that? Well, people say, is your house price really going up? Or I ask the question, is it just that your unit of account is going down that quickly, right? So your house doesn't really change in value. It's always been valuable. And there's arguments, yeah, that people will pay more over time for that value, but certainly not anything like the growth in the house prices right now. And it's just that the unit of account, the fee of currency, is going down so quickly. And at least my experience with saying things like that to people, even though I agree with you 100%. When I say this to people, they just kind of look at me like, is this guy talking about unicorns?

You need to understand how blessed you guys are in the United States because there's over 150 fiat currencies in the world, right? And a lot of these countries have been serial defaulters. I wouldn't say serial, but they've defaulted more than once. They experienced this. I mean, Wences is ours in Patagonia. The reason he loves Bitcoin so much is because his family went through three episodes where they lost everything. And so I experienced one of them in 1988. Argentina was bankrupt. And it looks like Argentina may go bankrupt again. And this is really sad, but it's a fact. Now, the United States, is there a chance it'll default? Yes, there is, because there's a credit default swap market on the United States that is not zero, but it's extremely low.

The chance of it is extremely low. It's not zero, but it's extremely low. When people start doing the math as to the true obligations that the United States has in terms of its funded and unfunded Medicare and Medicaid, it's off the charts, guys. It's just, the math is just undeatable. You cannot tell me that the Fiat currency will not debase at an accelerating pace for the next. Now, I hope it's a long time, but it may not be where people call out the fraud or the Ponzi. Hey, this has got to stop. And does the U.S. very quickly go to Lakewood Venezuela? I hope. Hope it doesn't, but is the chance zero? No, it's not because they're both based on the same principles of fiat and printing money.

So, Greg, talk about what that was like when you were dealing with this in this Argentina crisis back when you first started. What does that mean for the various securities that are domestic to that country that are denominated specifically in the fixed income way that are denominated in that local currency? What does that mean for the equity market? Talk us through some of those things so that people can kind of understand what happens in these types of scenarios. Great question. So it always starts with the plumbing of the financial system.

And I won't go quite to Argentina because I don't know Argentina. I know they've defaulted a number of times. Their capital markets are nowhere near as developed as any G7 or G7. They are a G20 nation, but they're not a G7. Let's talk about G7 experiences. and it starts in the plumbing of the G7 nations and it will extend to the emerging markets. So like Argentina, so they're so far down the scale of risk, true developed risk markets that they catch a cold every time the United States sneezes, right?

And emerging markets change direction because of either the currency, the strength of the currency or outlooks for commodities, et cetera, et cetera. But what happens always is the plumbing of the financial markets, which include things like bank swap spreads, Ted the TED spread. That's the Eurodollar versus T-bill spread. It's the overnight funding. It's repos. It's all these things that occur in a financial system that's levered 25 times to its equity cushion. And when these things start raising concerns, there's flags raised. It's like, oh, all of a sudden, I don't trust this counterparty. ABC as much as I did. So we're not going to be doing business with them anymore. And the funding rates start increasing. So do you remember in 2007? This was before the credit crisis actually happened. It was the summer of 2007. Bear Stearns was in trouble. Jim Kramer on a very slow afternoon in the middle of August, saw it on TV at his rent. You remember? And he said, they don't understand the Fed is asleep at the wheel. And they have no idea how bad it is. Do you

remember and the poor girl, she's no longer on CEMB. She's looking, Jim, and he lost his mind. Well, he did. He was part of the community that convinced the Fed to respond to the gurgling that was in the financial system that the credit markets because of Bear Stearns, because of subprime pre-warnings, because of Lehman Brothers. Bear Stearn stock was still at $100 something dollars at that time. And they cut rates. They encouraged the Fed to cut rates. And equity markets went to a new all-time high and credit markets did not budge. They're like, this doesn't solve anything. And it still started gurgling. And even though equity markets went to an all time high, three months later in October, it really started to unravel again. And Bear Stern stock went from 120 bucks to in 2008.

I think it was 2008, maybe early 2009 when J.P. Morgan bought it for two bucks a share. And that's the danger. It's always the plumbing of the financial system. Now, I would extend that to Argentina. And I would say, yes, of course, it happens in Argentina. But if it happens in the biggest, most developed U.S.-centric financial markets, then, yeah, it happens so much more quickly in the, in the tertiary markets like the low G20 and the other currencies that are supported by the IMF, right? It's so dangerous.

You see it coming. Preston, the equity markets, they frequently don't see it. They just say, oh, well, the Fed cut rates, so everything must be good. Must go up. And that's the scary part because there is a real disconnect between equity risk taking and credit market understanding. Equity risk guys, they are just like so bold up. They're emotional. Their trees grow to the moon.

You know, you got to own equities, growth, this. And sometimes they're not wrong, but sometimes they're so wrong. And it always generally starts with their lack of understanding of the credit markets. I say this often. And I say credit markets are a dog and the equity markets are its tail. And that tail gets whipped around. And they sometimes have no idea. There's poor guys.

They're out there buying common stock when the CDS, the credit default swap guys are buying puts on the common stock because they need to buy insurance. And the equity market is going, why is this getting beaten up? I have no idea. And guess what? It's being driven by the credit markets, you knuckleheads. And you have no idea. and you're just being used as a whipping boy. Well, and when you just look at the sheer size of your fixed income compared to equities,

what's the numbers? You're over $100 trillion in fixed income, and I think equities is half as much, right? I use a number of $300 trillion. $300 trillion. Yeah, $300 trillion. And equity markets, you could argue it's $90-ish trillion. I think that's a bit of a stretch. But it's, yeah, it's at least three to four times.

Yeah, three to four times. but most importantly, most importantly, don't forget the leverage in the system. The system is leveraged 25 times. Wow. 25 times. That's your common bank, is levered 25 times to its loans. You have $4 of equity capital for every $100 of loans. Well, it's the way banking has worked.

And Ford pointed this out. Henry Ford pointed this out in the early 1900s. I believe he said something like, if American citizens understood the way the banking systems work, they wouldn't put any money in the banks. Which is so true. Yeah. What just, well, it's, but it's the way it works, right? And confidence. And when you lose that confidence, contagion is such a, it happens so quickly. So I often say, look, you need to buy your insurance before the calamity hits, right? You don't try and buy insurance when your houses are, or fire insurance when your house is already burning. You need to buy that fire insurance before it's

burning. And this leads to my belief that Bitcoin is that perfect. I call it an anti-fia. And I can give tremendous comfort in the fact that Bitcoin is equivalent to a basket. It's equivalent to default insurance on a basket of Fiat credit. And it's that simple. And you need to own Bitcoin as a hedge to the regular calamities of the Fiat system. Because what we're really talking about is we've talked about the 40 years of yields going down. Correct. Yes.

But if that starts to unwind itself, which you and I both have the same opinion that that's a very real possibility, that's going to wreck havoc on this market. It can go up for two reasons. And we mentioned them. One, it could be inflation expectations. And the other one is just like a high yield market. Hey, you're more risky. I need to be paid more to lend you money. And people will say, oh, the U.S.

It's a quintessential risk-free borrower. And I'll say it was until they lost control of their borrowing house. And if I may, there's some really good questions that came up, okay, that you said, hey, I'm interviewing Foss. Do you guys have any questions? And at this point, I want to, there was a really good question by somebody who asked me to explain, why is it a certainty that debt, that Fiatts are going to debase? And it's this simple, okay, guys, ladies and gentlemen, the total debt in the world to total

global GDP is over four times. But let's just use four as the total debt in the numerator, okay? for multiple of the GDP, which is essentially your tax base. Okay. Now, it's total debt. It includes corporate debt and everything, but interest expense is tax deductible. So you need to include total debt in your numerator against your tax base in the denominator. If this is four times as big, if your numerator is four times as big as your denominator,

and the average coupon on that debt, you pick a number. I'm going to say, let's say it's three percent. I think that number is low, but debt has a coupon. on it needs to be paid. That means that your numerator, right, Preston, is growing at 12%, just organically. That doesn't even include any of the deficit funding that is going on right now. If your numerator is growing at 12%, your denominator, which is global GDP, needs to grow at 12% over time forever to keep up with your numerator, not including any of this deficit funding. It's impossible. Global GDP will not grow at 12%. Therefore, the,

The currency needs to solve the error term it, the error term. It needs to solve that equation where you can continue to grow your debt by printing more money. Simple mathematics, you guys, you need to understand that that's called a debt spiral. And we are in one and you cannot get out of it. You are 100% certain to be debased because they need to continue to print money to solve this debt spiral. Let's take a quick break and hear from today's sponsors.

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funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. So Ray Dahlia, who we're going to talk about is risk parity. He says that there's for main things that eventually get you out of these situations, all of which are not convenient for portions of the population depending on where they sit. And I would argue in this situation, people that are heavily exposed to fixed income in their portfolio are going to be huge bill payers for that, at least the ones that continue to hold. What are some of your thoughts on who the parties are that are going to be impacted the most by this? So I have enormous respect for Mr. Dallio.

It's funny. He's 99% of the way there. I just think he thinks that he's missed the Bitcoin train and that. So that's an aside, okay? Agree. You haven't missed it, okay? You're so bright. You're just overthinking it by a half.

You're too smart by a half, Mr. Dallio. That's a bond term. He knows it's worth 85. The market right now is 40 to 42, and he's bidding 41 and a half, and he misses the trade at 42, even though he knows it's worth 85. It's called being too smart by a half. So don't be too smart by a half, Mr. Dahlio. Bitcoin is friggin cheap right now. Frigin cheap. So what is he saying? Well, he's absolutely correct. There are going to be a lot of pain. And who is going to bear the brunt of this pain? In your traditional 6040 portfolio, if you're CalPERS, you have 40% of your portfolio,

at least 40%, but we use the 60, 40, 60% equity's 40% bonds. 40% bonds yielding right now, let's say their average yield, if you include high yield and all the fixed income instruments they have, let's be generous and say it's a 3% because US 10 years 170, high yield for coming up with a number of 3%. So on 40% of their portfolio, they're earning 3% without defaults. That's not even including any defaults. That's assuming that that 3% is certainty. They have a prescribed rate of return of 8%, right?

That's for their defined benefit pension plans. Well, if you're only earning 3% on 40% of your portfolio, that's 1.2% coming from there. That means that your 60%, which is equities, needs to make, help me with the math, 6.8%. So 6.8% on 60% means you. You need equity markets to grow at something like 12% a year for the rest of time just for you to make your prescribed bogey of 8%. That's why these pension plans are absolutely cornered. They have these prescribed defined benefit pension plans that will never meet their obligations. They say it's a funded rate of 8%. Well, they're trying to come down to 7% or 6%. As soon as they do

that, you know they become, oh, we're fully funded at an 8% as a prescribed rate of retirement. turn, but at 6% were way underfunded. And that's what happens. So you're saying, okay, so who bears the brunt of this? It's even going to be worse. If people who are used to earning capital gains in bonds, now get capital losses because interest rates start rising. And they need alternative asset classes. So all of this blends very nicely with the conclusion that we all know we're going to come up with is they need to hedge with Bitcoin. Okay. Only math, let's not get over things. And Mr. Dahlio, once again, you understand it. And I know you're a, let's just say he's $1 trillion. Okay. Because Fidelity and those guys are $1 trillion dollars guys. So their whole fund is

about the size of the entire Bitcoin market cap. I say to Canadians, they're having trouble getting involved in Bitcoin at a trillion dollar market cap. That Bitcoin is worth more than the entire Canadian banking system, the market cap of the entire Canadian banking system combined. And the flip side of that is, it's almost worth as much as the U.S. market cap of U.S. banks, are you telling me that market's not big enough for you to get involved in? I think you're mistaken. And I think the number of people that think they've missed the train right now, I argue that it's still in the early innings and it's actually less risky to get involved now than it was when people were getting involved three and four years ago. On a risk return

basis, Bitcoin is less risky now than it was three or four years ago. So there's a lot of people say in that narrative right now where because now that it's at a trillion that it's become way more investable to a lot of different institutions. What are some of your thoughts on that? I agree with that. It's like you're let's make the math easy. Let's say you have $100 billion. You're managing $100 billion of assets all across the spectrum, equities and bonds. And that $100 billion asset manager probably has it most, let's make the math really easy, 25 analysts, right? So each analyst needs to cover essentially 4% of the portfolio, all right? Which means each analyst can effectively cover really well. They can effectively cover 10 companies, okay? But let's say that 20 companies. The point is,

in order for a hundred billion asset manager to get a weighting in their portfolio that justifies the time that the analyst will spend on it, as well as meaningfully impact the performance on their portfolio, assets have to be a certain size to invest in them. Markets have to be a certain size. And as the market for Bitcoin grows, it increases the universe of potential buyers because it's big enough for them to get a line, a weighting in that line that can meaningfully impact their performance of their overall portfolio. It's that simple. It's about allocating people's time as well as being able to get the performance out of that line. Because if you say, hey, I can't own more than 10% of an asset, imagine you're dealing with it or a company, imagine if

you're dealing with a company that's only got a market cap of $10 billion. Well, if you can only own 10% of that company, that's a $1 billion allocation. And what if you're a $100 billion dollar company. Well, that restricts you to owning one percent of that company. Well, there's a lot of companies. They're way smaller than $10 billion. So, you know, there again is how the system just differentiates and it doesn't allow big funds to get into perhaps more efficient parts of the market. Do you have any thoughts on the insurance industry and some of those key players starting to take small Bitcoin positions? Because they've historically invested their float and a lot a fixed income through the years. And like we saw with Berkshire Hathaway and their treatment of

GEICO, they've just been starting to take a lot of cash equivalence on their balance sheet in this past decade, mostly because of where interest rates have been at down near zero. I think it's kind of interesting to see some of them entering the Bitcoin space. I agree with that again. Justin, it's all about a risk return calculation. An asset is an asset is an asset. It doesn't matter, whether it's digital or physical. It's, uh, you know, I purely believe that the mass mutual is a very important leader in the space right now. You know, they've made two investments. One, they own Bitcoin, but the more important investment they've made, I think is within N-Y-D-I-G, and they're, uh, they're funding for round two fund financing. You know, they were involved with

Soros Morgan Stanley, New York life, mass mutual. And I'm missing one of them. But the point is, These are really, really important players. So, yeah, all of these players, insurance, pension funds, CalPERS, CalPERS is the largest, if not the largest pension plan in North America. It's certainly close. We have some massive pension plans in Canada that should be involved in Bitcoin. Why? You know, you can talk about the non-correlated returns, but in my opinion, it's way more

about the asymmetric trade opportunity, you know? I believe that Bitcoin at $50,000 or $60,000 is still a rounding error based on where it can go. I mentioned to you, I calculated the value. I think that Bitcoin has intrinsic value based on the credit default swap market. That number is, in my opinion, at least $100,000 a coin right now based on credit default swap spreads. It's between $110,000 and $160,000 US dollar per coin right now, depending on CDS spreads. And as those spreads widen, the intrinsic value of Bitcoin will just increase, okay? Not to mention the fact that it can increase on a whole bunch of other metrics as well, supply and demand and network value, et cetera.

Simplify for us how you kind of came up with that valuation? CDS, so again, credit default swaps are a brilliant invention in the credit markets. They're not that old. I'm going to say they're 10 years old. Hold on, no, they've got to be more than that because they caused, you know, they were the crux of a lot of the 2008, 2008, 2009, unraveling. But let's say they're 15 years old. They were invented at a JP Morgan early 2000s in the U.S. as a way of creating credit curves for companies that didn't have outstanding obligations at each term in front end of the structure. So a typical CDS insurance contract is just like a credit spread is issued in a five-year term. And each 90 days, there's a new issue. So the

five-year term goes to four and three quarters, four and a half, four-and-a-quarter. all the way down. And there's a very efficient credit curve for the top credits in the U.S. in both corporate and sovereigns as well as municipal states. These are very well-defined insurance products. And they call it insurance, but just think of it as a quasi-bond. It's a derivative. It's a bond-like derivative. This CDS also trades on sovereigns. Now, I mentioned to you that the 2008, 2009 financial crisis only transferred risk from the financial system onto the risk of the governments. Therefore, I believe that you need to look at the credit default swap rates of governments and evaluate their relative potential for default. And there's,

you know, what's the biggest one right now? Well, Turkey. Turkey is a G20 nation that is trading at about 450 basis points in the five-year term. That means it costs you $450,000 a year to ensure $10 million of Turkish debt against default. There's all very efficient pricing. These are traded by sophisticated global players. And Turkey's in the lowest rung. And then in the top rungs are all the G7 nations, including the U.S., which trades at 10 basis points.

10 basis points for five years, again, is only $10,000 a year to insure $10 million of U.S. debt against default. But I'll remind you, in 2006, Lehman Brothers was trading for six basis points. Six basis points are $6,000 a year to insure $10 million of debt. Three years later, that insurance was worth $6 million. Hey, that's a pretty good insurance policy to own. The problem is if you own that insurance policy from someone like Bear Stearns, you're worried that, oh, my God, this insurance company that I bought it from called Bear Stearns may itself default. Okay. So you have to run out and buy insurance on Bear Stearns. And this is called counterparty risk. And this is why the contagion in the world

tends to erupt really quickly. Long story, I took the current CDS rates. I adjusted them from five years to what I believe to be an appropriate duration for the unfunded and funded obligations of the countries. And I came up with a simple mathematical cumulative basket. of what Bitcoin, as I describe it, as the anti-fay it would be worth. So let's walk. So someone asked us to do this. I'll walk through it really quickly with the United States. The United States government owes $30 trillion worth of debt right now. And they have $160 trillion in unfunded Medicare and Medicaid obligations. Okay, so that's $190 trillion. Their swap CDS, five-year, is 10 basis points. you adjust it to a term which I viewed to be between 10 and 15 years as the appropriate duration

of those unfunded obligations. You get a number and you can just draw a credit curve and you can argue with me that my credit curve is too steep or too flat. At the end of the day, you take that number, you get a number for the United States, you add all the other G20 countries onto it. You divide it by 21 million coins and that's what each coin is worth. Very simple. And it's based on a fluid functioning market in risk that changes daily.

And again, I'll tell you, as those rates widened to reflect increased credit risk, which is a function of inflation expectations as well, the intrinsic value of Bitcoin will increase in lockstep. And where can it go to? I'll just say a lot higher. And are my numbers similar to what Michael Saylor's numbers are? In all due respect, his numbers are very good targets that I believe in as well. I really like that because to date, we've heard a lot of different opinions on what we think

the market cap could be. You know, people are comparing it to gold. People are comparing it to whatever. But I've never heard it approach from, I've heard people call it chump insurance. Chimath. Yeah. That's okay. But this is real insurance, guys.

This is insurance that trades in the market, right? That's what I like what you did is you've taken something that's just kind of a catchy phrase, and you've actually put some math to it. And I think that you've done it in a thoughtful kind of way. And what I find really fascinating is it's kind of a similar price point to what a lot of people are seeing this current bull run that we're in kind of achieving. So I find that kind of fascinating. Let's not stop there. I need to stress to you, imagine if the United States goes to 50 basis points.

The rest of the world is unraveling everywhere. Because the U.S. at 50 means Canada. I don't even want to know where Canada is. I'm going to point Canada out because I'm so concerned about my home country here. Canada actually has a higher credit rating than the United States, according to S&P. We are still AAA and the United States is AA plus. Yet the United States trades at 10 basis points in five-year CDS and Canada trades at close to 40. Yeah, I'm looking at this right now because I pulled up this chart that you shared with people.

Okay. I see it. It's a 30. We'll call it 38. That's crazy. Please mail my prime minister. I know he failed math. Okay.

Justin Trudeau is not good at math. He said budgets will balance themselves. Hey what? They don't budget themselves. And the market is telling you we are much closer to a single A credit rating. Notice where Portugal, notice where Italy trades. Canada is not backed by this ECB. Canada only has that.

the Bank of Canada. We're in big trouble. Hold on. Hold me understand this because this makes no sense because it's a market. It's a market. It's a market. It absolutely makes sense. So keep going. Are you telling me efficient market is real? Okay. So I'm seeing S&P 500 rating, United States, AA plus Canada, AAA. Would you wrap fish in an S&P report? I wouldn't, okay? It's an opinion by a credit rating analyst that wants to work on Wall Street. And the best way he can work on Wall Street is give ratings to Goldman Sachs underwritings, help Goldman Sachs trade their or sell their product. Okay, all this mortgage back security structures and all these alchemy that these guys came up with, they were being rated by credit rating analysts that wanted to work for the people that were coming to them for credit ratings. Okay. It's so conflicted. It is just so wrong. And yet, these are what sets the investment guideline. of some of the biggest pension funds in the world. So you're correctly viewing this.

You're calling out that the rating makes no sense relative to what the market is charging them. And guess what? In CDS land in 2006 and 2007, neither did those. And the market was telling you, hey, guys, there's smoke, okay? The markets are truth. Rating agencies are so, so, there's conflicts everywhere. The issuer pays for the rating.

I mean, it's just, guys, it's so antiquated. You've got to get off of this. But again, they set the rules. It's nearly a 400% higher insurance policy. That's crazy. Isn't it crazy? That's crazy. And yet, we have a higher rating.

So the S&P gives us a AAA rating and the prime minister of Canada can run around and say, guys, we're still AAA. And guess what? The insurance markets are saying, no, no, you're way closer than single A. But he doesn't understand that. Because you guys are so nice. Yeah, or until we're not, right? Because this is so dangerous. This is so dangerous. Like, I'm so, I'm so concerned for my kids. I'm so concerned for people that don't understand the real

workings of the credit markets. And that's just about every politician in Canada, except for, you know, there's a famous guy, Pierre Pallineuve, or anyway, him and Pierre Rochard need to talk as they speak the same language and they're finally getting it. But people turn him off because he's like, oh, he's anti-social programs. And hey, I support social programs as long as we can pay for them. And if we can't, it's going to bring everybody down. Okay, so talk to us what's going on with gold right now. When I say right now, I really kind of mean like the last six to nine months.

Respectfully, I'm going to have to say, I'm not sure. I'm not a gold expert by any means. And do you have any ideas? I believe that Bitcoin will absolutely overtake the market cap of gold. I believe in the hard asset value of gold. But I also know that gold is not a fixed supply. I know that it is not divisible. It's not transferable.

It's not portable. It's not everything that Bitcoin is. And therefore, I think it's just a matter of time before Bitcoin overtakes the market cap of gold. It's a better form of a store of value. Is gold a horrible store of value? No, I don't think it is. But that being said, and I always point this out and people are like,

okay, stop talking. there's 20 million pounds of gold in seawater. I think that technology someday will be able to remove gold efficiently from seawater. If that happens, all of a sudden, this 2% growth rate in gold is no, 2% annual growth rate in gold is no longer 2% annualized. Is it going to happen? I don't know. Technology is pretty darn smart, but there is nothing about gold that is better that

makes gold better than Bitcoin. Nothing. You cannot tell me one characteristic of gold, a part. from filling your teeth and a little bit of electronics, okay? And even then, it's a bit of a stretch. Do you find that the rest of the financial community is starting to come around to that same narrative that you just said? You know, the expression, right, slowly then suddenly, one of the things I want to do, Canada, Northern Ontario and Canada have some really important gold mines and some towns are built up on the gold industry. I firmly believe that some of these gold miners with

excess electricity power to start mining Bitcoin to hedge their gold position. And if you believe in a store of value, and yes, for 5,000 years, gold was, you know, is and was the go-to store of value, well, it's going to be subsumed by Bitcoin because $10 trillion for Bitcoin is barely a stopping point, okay? Bitcoin is going to many times higher than $10 trillion in market cap. It's just a easy calculation as a function of total global financial assets and what level Bitcoin will hold of those total global financial assets. And it's interesting thing, I know I'm rambling a bit, but I believe that Bitcoin becomes the de facto global reserve asset when energy is priced in Bitcoin, which is totally natural since Bitcoin is digital energy. It makes tons of

sense to me that oil and natural gas should be priced in Bitcoin. I think that Russia would much prefer to have Bitcoin than U.S. dollars. And you're seeing that they're doing some deals with the Chinese and in yuan and all these things. Note on that chart, Preston, where Russia trades of CDS. Russia is a triple B minus rated credit. Very important. Very, very important. This is not a drill, you guys. These are real live insurance rates for sovereign default. It's more than double that of Canada. If you look at that, so go a little bit to the right more, you'll see the probability of default. Okay, that's a pretty neat line. I don't want to get too granular with everybody. Yeah. But it shows actually the probability of default based

on a 40% recovery rate. Okay, 40% just happens to be a number that credit traders gravitate to as a recovery value of, there's nothing scientific about it, but using 40% recovery rate, it gives the different levels or the different probabilities of default. And if you look all the way down even to Turkey, it's still under a 10% if I'm not mistaken, a 10% probability of default. What if you start getting up around 25%? That's when things really start getting exciting. By the way, when I say exciting, it means, you know, or contagion and, hey, I own Turkey.

I've written default insurance on Turkey, so I better hedge somehow. And I'm going to do it at Texas hedge. So I'm going to run out and start buying because I've sold insurance. I need to buy insurance on and then I'll buy it on Russia. And then I'll run around and tell everybody since I own Russian default insurance as Warren Buffett says, well, you buy insurance on someone else's house and then you go and try and light his house on fire. There's a little bit truth to that. But really, it's nothing more than contagion.

It's like the domino effects. It's about hedging your own risk. And the guys that are selling right now, the guys that are selling protection on the United states at 10 basis points. Trust me when I tell you, they're not using one to one leverage, okay? They're using probably 10 to one leverage. They're using that leverage and that is a way of turning it into a hundred basis points annualized return. And then you realize, oh, I'm picking up Nichols in front of a steam roller because that contagion, hey, I'm a seller, I'm a seller. And then your boss taps you on the shoulder and goes, Foss, you know, you've way oversold your

position. Go out and buy some. And you know in your heart of heart, you're like, but boss, I've been the only seller. There's no other sellers. I'm trying to protect my own market. And then it starts to really gap because the market says, hey, the only guy that was selling insurance to us all, like long-term capital management, they're now a buyer. That's the scary part. It's when the seller turns into the buyer and the market realizes, holy moly. And that's called contagion. And it happened with long-term capital management. The whole street ran to long-term capital for vol. Long-term capital. Long-term capital was selling volatility, based on six years of historical data, by the way, and these guys are Nobel prize winners? My lord. That should have been enough to let everybody know. Well, you know,

until Wall Street runs to their best client, hey, I'm purchasing VAL from you. I'm purchasing VAL, meaning I need protection. VAL is a, when you buy VAL, you're buying insurance, you're buying protection. I'm buying VAL and long term, sell, sell, sell. And whoever the guy was was, the Nobel guy was, well, this is crazy. We're at 99% confidence intervals. And yeah, you are. If you're based it on six years of data, come on. You can't run a whole long-term capital management on six years of data. But that's what they did. And then who bailed them out? Okay. So then another example of socializing losses, because if they had failed, then so would have some of the big investment banks failed. And if the investment banks failed, then some of the cronies would have failed.

and hey, I lived it, man. I'm not telling you this is, there's anything right about it. It's just the way the system works. That's how I found Bitcoin on how to buy it. I just looked for some Nobel Prize winners. I saw Paul Krugman and I was like, hey, I need to be on the buy side of this. Okay. That's a good way of doing things too. Someone who's wrong, 100% of the time is just as valuable as someone who's right 100% of the time, right? So it's very important. I'm obviously joking. We have to be, but look, look, this. This is the biggest problem is that these people have a podium without actually doing any research and people believe that they've done the research.

Yeah. Right? And they get up there and they spew this fud and people take it at face value because, well, this guy must know something when in fact he's just regurgitating stuff that he's read and hasn't peeled back the layer of the onion. I would always say if you have not actually seen the blockchain in action at tradeblock.com Or if you have never experienced the beauty of transferring value from a Bitcoin wallet, iPhone to other mobile phone, you have not even done the research at what makes this system so

beautiful, right? And having grown up without a personal computer because they didn't exist in 1986, I'll tell you it takes a lot for an old guy like me to come to grips with things like Twitter, to come to grips with things like an iPhone that's so powerful, it's more powerful than what was required to put two men on the moon, right? It's just an unbelievable technology and what I believe to be the most beautiful asymmetric trade I've ever seen in my career. Greg, help me understand what you said something earlier about the 40% recovery. Is this the currency got devalued by 40%?

It's typically in bonds. Okay. What tends to happen, it's sort of needed. When a bond defaults corporate or we say governments, but generally it's around core. it always tends to be at the lowest levels of subordination, there tends to be about a 40% recovery rate. I don't know why. It just is a number that the market again has gravitated to. There's nothing scientific about it. There's a bond trading expression that bonds do not spend much time in the 60s.

They either go from 60 back to the 70s or they go from 60 and gap down to 40. Okay, because people then realize, oh my God, it's gone from being a bond to a quasi. the equity because what is the bond trading at 40 cents on the dollar? It's not the bond of the company anymore or the credit. It's actually the equity of the company. And all the equity has just been crammed down. The equity gets crammed down and it becomes an option. And when there's a restructuring, 40 cents on the dollar. So they picked this number, Preston. It's nothing scientific. And if you lowered that recovery rate, the probability of default would actually go up because it's just backing out the probability of default in a mathematical formula.

So when we're talking about sovereigns, what does that get you? Because it's not like you're being dropped down into equity. Excellent question. And this is why we can't go too far on this path. I mean, if you put a recovery rate of 5% in there, which probably is more likely the right number for a sovereign versus a corporate, then you'll get a much higher chances of probability. You back out a higher de facto chance or probability of default. And then people might really start getting scared. And I'm not here to scare anybody as much as just tell people, look at these markets. These are true risk markets. You get so many people who say, oh, you must have had so much fun.

You had a negative view on these sovereigns. You must have had so much fun shorting their treasuries. And I'd say, that's how little you really understand about credit. You don't short a treasury bond. You buy default insurance. It's a floating rate obligation that changes as a function of the credit, not as a function of administered yield rates or yield curve control or all this other garbage that the central banks can do. And I wanted to hit on that. Yeah, let's talk that. Yeah. Yield curve control.

What's going to happen if the United States invokes yield curve control? Typically, they'll peg the 10-year rate at some number. So right now it's 170. Let's say they decide to peg the 10-year rate at 175. My opinion is that's going to get so many more people looking to the credit default swap market for truth. It's going to push people into this somewhat esoteric part of the credit markets called credit default swaps and people will focus more on it. What happens to the price? Does it double? Instead of it being at 10, does it go to 20? Preston, I've seen it see when it started with Lehman Brothers.

It didn't go from 6 to 12. It went from 6 to 60. And then it went from 60 to 150. And then it went from 150 to 7% up front. And this is when the contract changes from a annual premium to, hey, you want me to insure $10 million of your debt? Give me $4 million up front because that's what happens. That's how the contract actually starts changing.

And these gaps are painful and they tend to be driven again. by people who were selling and leveraging a low basis point return, picking up nickels in front of a steamroller. They went from being a seller. They had to reduce their position, i.e. become a buyer. And there was just a wall of buyers. And the spread just lifts really quickly.

All right. So, Greg, I have a 10-year treasury chart pulled up here on my screen. And I really like what you just said, because to me, it's a very tradable idea that we're about to talk about here because I find yield curve control to be right around the horizon. Now, whether it happens in the next six months or year to year and a half, I have no clue. But I would suspect that the trigger for such a thing would be kind of based on the yield curve or the yield on the 10-year treasury getting outside of a comfort zone that, in my opinion, has been clearly defined based off of a trend that's been running like we had earlier

discussed from the 1980s. So when I'm looking at specifically the chart that I have right now, which is showing that trend from 1980 up until right now, this sell-off that we've seen since the start of the year has been of epic proportions. Just by looking at it from a yield to you. Okay, fair enough. Yeah, yeah. Right. So, I mean, this this yield has just sold off in a cataclysmic way. And we're approaching 2%. Based on the trend, it looks like it's going to make a strong run at 2%. Rick Santelli, Rick Santelli, who traded in the pits for many years, would agree with that. It's about, you know, it's about returning to reversions to the mean. And, you know, what happened in the last year was just a total manipulation and whatnot. And it's like a spring,

a coiled spring. It's, it's bouncing back. So yes. Now, when I, if I was going to draw a line out on this trend, it really kind of takes me to probably around the 3% mark because this on the chart here, I don't know if you can see it or not. That's 2 to 4. Yeah, yeah, I do. I see you there. So for me, that would probably be the pain threshold. Just looking at it in a super simplistic let's assume you're right. You know that that means that the 10 year bond, which has a duration of about an 8, if it goes from 170 out to 3%, another 1.3, 8 times 1.3 means that 10 year bond, bond will lose another 10 points in value. Yeah.

Just to get to where you think it's going to cause maximum pain. And I'm going to tell you what, that's wicked more than maximum pain. And then you take the 30-year bond that's already lost 25 points. So I actually think you're 3%. I think that's high. I actually think it's 2% and maybe even right around 175. Because don't forget, if it goes out to 2, they can't just stop it at 2. They need to bring it back and actually make the bond perform.

So they need to get that extra 25 basis points as making it appear that the bond is performing. This yield curve control, whether it's 175 or 250 or 3%, again, will cause people to look to the credit default swap markets. Okay, because people will start saying, oh, my God, this is not a true reflection of risk. I need to look to true reflections of risk. And the U.S. Treasury is not going to be able to sell default protection on themselves. It's like you don't go to an arsonist and purchase fire protection or fire insurance, right? The U.S. Treasury will never be able to control the credit default swap markets.

And that is why you need to look at those for absolute indications of stresses and risks in the system, not manipulated like yield curve control. But I want you to expand on that. So let's say it is somewhere between 2 and 3%. So I'll go with you. For me, I think what you're saying there is they've got to get ahead of, I was calling it, you know, the trend line at 3%, but really that's the point where they have to have it fixed by. Yeah, you got to have it fixed by then. So yeah, you're probably right. The 1.75 to 2% is where they're going to have to start doing some action.

And since we're at 1.7 whatever, 1.71 or whatever right now. Still basis points. It's like, you know, basis points are for kids, right? I mean, at the end of the day, it's all about price, right? Bonds trade for price. They do not trade for basis points. And each one of those basis points, when durations and rates are as low as they are and duration impact is as high as it is, those bond prices are very meaningfully changed by changes

in yields or rates. And again, for folks that aren't intimately familiar with bonds, when we're talking about the rates going from 1.7 to 1.8 or 1.9, those bonds are selling off, and they're selling off in a very meaningful way for a market that is, if you talk about all the bonds together, like Greg said earlier, maybe $30 trillion across the whole global market. Oh, no, $300 trillion. I'm sorry. $300 trillion. That's just so massive, guys. And it's just, what happens when $300 trillion loses 10% of its value. Oh, that just happens to be the equivalent to the entire USA deficit. Now we're talking real money. Who is this born by? This is born by people that have matched long-term assets,

being their purchase of long-term bonds with their long-term liability. So insurance companies, pension plans, all of that. So I really like this chart. And I just want to show it to you. I don't know that this does a lot of favors for our audience. But I think this is a really interesting chart here where it takes the 10 year minus the two year spread. And then when you compare that, when you see it start rising like this, it had a really meaningful indicator for the 2008, 2009 crisis. And you can see it. It's the steepness of the curve. It reflects the steepness of the curve. And right now, the only thing that the U.S. Treasury actually focuses on or not, you know, they're purchasing $120 billion of bonds each month, but they're focused on manipulating,

the short-term yield or the overnight, the Fed funds rate, but they have not specifically said that they're going to jump into the yield curve control. I mean, based on just looking at the numbers and looking at the trend, to me, it seems like yield curve control is coming by mid-year to the third quarter of this year, just kind of I have no experience in that. And I honestly hope it's not the case because as a credit trader again, it's like, oh, well, Isn't that interesting? The first, the sweat is starting to appear on the brow of the borrower being the U.S. Treasury. They're starting to sweat. That's not what you want to see as a lender,

right? You actually just want to see confidence. You want to see. Even though they're out in the market purchasing $120 billion of debt each month, they're doing it in a fashion that isn't implying pegging the yield curve per se. I need to stress that the U.S. Treasury deciding to buy high yield bonds was in and of itself such a monumental event. And it was only because they needed to protect against the downgrade of four potential candidates being downgraded from investment grade or the triple B credit rating level to the double B credit rating level or high yield. Those four credits were general electric, general motors, Ford, and AT&T. Those four credits themselves are bigger than the entire high yield bond market.

Can you imagine if those four credits got downgraded into the high yield bond market, the calamity that would have caused in the equity markets and in the subordinate markets of the capital structure? It would have been crazy. So the Fed went in and said, yes, we can buy high yield bonds. Now, they didn't just buy those five names or four names. They decided they would buy the entire market. Well, now you've seen that high yield bonds are at the lowest yield they've ever been in history.

And I will guarantee you. Again, I'll make another guarantee. It's 100% certain that if you own high yield bonds right now, you will lose money on a real basis over the next five years, on a real basis. And you probably will on a nominal basis as well, after you subtract. out true defaults, okay? It's only math. You need to pay your high yield bond manager a fee. After you've paid all your fees and you've paid for defaults, anyone who owns high yield bonds right now, I don't know. They must be just getting into the game. Okay, because if you showed me this 30 years ago,

I honestly would have told you, well, no, it's impossible. It would not exist. But yet here is where we are. You know, you said something to me that I had not thought about that I think is a really important point when we're talking about this yield curve control. They have no incentive to announce that they're doing it. They have no incentive to actually come out in a messaging kind of way. If I was advising them on that, 100%. If I was the Wall Street guys advising them on that, I would tell them, do not do that. Yeah. You can do it in practice. You can do it with the numbers, but don't stand up there on the stage and say, we're officially starting yield curve control. I think you're right. We're a buyer at any price as long as it keeps the yields right here.

I think you're right. I think it would be, again, showing a sign of weakness rather than a sign of strength. I think that Chairman Powell is doing everything he can to provide the confidence to the system. I need to be clear. I do not want our system to fail. It will over time, okay? It's again, a mathematical certainty, but how long is that time? I will give you probabilities that it's most likely within the lifetime of my children, which really makes me upset. Okay. And it's maybe not as likely, well, certainly not as likely as it'll fail before my lifetime. But it doesn't matter whether G7 country fails. And if it's a G7 country, the likelihood, the market's telling you this is it'll be Canada before anyone else. And that pains me as well. But there will be other

countries that continue to fail. And this is just a fact of life. And the IMF and the special drawing rights that they've come up with and all this political back and forth between who will be the global reserve currency of the world. No one's saying Bitcoin, but that's what it's going to be. Bitcoin will be the global reserve asset, in my opinion. It's the most likely outcome. It's the safest outcome. But it doesn't mean the other system doesn't continue to function. We hope that Fiat will continue to function to allow for commerce rather than barter to allow for free market setting of across currency rates across the world. And we hope that because why? Well, because you can't just overnight go to a Bitcoin standard. It just,

it would be absolute calamity. You don't want that as the interim step. You want an orderly, you want an orderly transformation of the understanding of what a reserve asset really is. Greg, what are your thoughts on the contango that's currently existing in the Bitcoin market? Boy, there's a lot of people that wanted me to get, wanted us to get into that. And I'll just say, look, it exists. One of the most interesting things that I've seen about the contango is not that it will give you an annualized return in the double digits. And sometimes you need to be careful by turning short term, short term returns and

multiplying it by four, turning it into an annualized return. But let's just look at the returns that are available now on the non-regulated exchange, just like OKX and what are some of the other ones, Binance, I guess, Derribut. Those returns are actually meaningfully higher than the contango that exists in the Chicago Mercantile Exchange. That's pretty interesting. And what did that?

Why does that now exist? It's because your prime broker is not giving you leverage on the CME because of the blowups in things in the most recent fund universe like the family office, Archegos, or however you pronounce it, your prime broker has just lost a ton of money. And he's not giving you leverage on these things. So it's interesting that the contango that exists in the CME is meaningfully lower than the contango that exists on the non-regulated exchanges. So I'll say yes, it exists. Is it a true cash and carry trade? Absolutely. They tend to exist in futures markets. Is it a trade that I ever focused a lot on? I did not. So I'm by no means an expert. I will tell you this, though. I would,

I own Bitcoin not to earn a yield. I own Bitcoin as a hedge, and I wouldn't want to give away that hedge by locking in a cash and carry trade, by owning the spot and selling the future and playing the upward sloping yield curve or contango. And it's so funny, a contango. People say contango, and nine out of ten people, even in finance, have nowhere, no idea what it means. And then you would just say, well, upward sloping.

And you go, well, guard darn it, why didn't you call it upward sloping? Because you don't call a yield curve in contango. You only call a futures curve in contango, yet they're both drawn the same way generally, right? And then you say something like normal backwardation, and that's it. People's eyes glaze over. And you just think you're smart, right? It's all these derivatives guys always think they're so smart. You can't sound smart if you don't say it, Greg.

Let's call a spade a spade. Things trade for price, okay? That's at the end of the day. Things always trade for a price. You never settle anything in basis points. You always settle something in price. And anytime someone starts talking to you in these fancy damn things like you earn 20% annualized and you say, well, how do you get to that annual? Well, you earn it for five days, but you multiply it by 60, right, or 50.

And you're like, what? This is some sort of convertible arbitrage. That's the funniest thing that they always do. They annualize the returns when there's a merger or I said convertible arb. I mean merger. are when a target company is getting taken over and it's going to be done in 60 days. So they decide to annualize it by multiplying by six and say, yeah, well, I'm earning 15% over 60 days. So that means over an entire year, I'm earning close to 90%. Guys, it's not that. That's buggering up

the mathematics of it. Okay. It's about a price. And the thing that you're investing in and you're going to earn something that goes from 97 to 100, but it could also go from 97 down to 77, you're not even reflecting the risk. You're just saying, well, I'm doing merger Arb and I'm earning this annualized. It's the same thing in the futures markets. These curves change all the time. There's counterparty risk. There's so many things that people just overlook. And I would just say, I'm in Bitcoin not to create a fixed income or an income instrument. I'm in it because I think it's going to go from $50,000 or $60,000 a coin to at least a million a coin.

And I'm not sure how it's going to get there. And I don't want to be not long it if it gaps up by a couple hundred thousand dollars because some country comes out and says, we've successfully acquired this many Bitcoin for our treasury. And the rest of the country's the real risk. What you just said was the real risk. Of not being long, right? that's the real risk of not being long.

You cannot, these tape bombs, okay, these bombs that come across your tape are real. And they typically go on an asymmetric trade like Bitcoin. They'll go against you. So not only if you're not long Bitcoin, you are so, you are so short. If you're long it, but you're not, it's a core position, but you've been fancy and you've been trading it. And you're not at your core holding. You're somewhat below it.

And one of these tape bombs comes out where a central bank. has purchased it for their reserves, well, you just missed your whole opportunity. He blew it. Especially if it done all the homework, sort of like Ray Dalio. Like he's done it. Ray Dalio's done the homework. And yet he just won't say the word. And he's still relying on risk parity, which Ray, you're also smart enough to know that that only

worked when rates went from 14% down to zero or 60 basis points. It doesn't work going the other direction. He has to know that. Well, he does. And the hedge fund that I worked at for five years, we tried to mimic. like the Bridgewater portfolio. Because why? Because it's brilliant portfolio provided interest rates truly are non-correlated with equities. But when they're correlated, which they are right now, meaning if yields go up, bond prices go down and equities go down as well, then in your risk parity

needs to be rewritten. You need another asset in there. That asset is called Bitcoin. You know it. Don't be scared. No, you're so right. I mean, Ray, obviously, understood the long-term trend of interest rates, the direction they were going. Brilliant, brilliant. Yeah, I mean, it was such a brilliant strategy, but like all things, it kind of comes to a head based on what's playing out right now. And if anybody understands it, it's him. But it's just surprising to see, now whether he's doing it privately and just not talking about it, who knows, but it's like everything, the theory of agents, right? It gets harder and

harder to resist it when Morgan Stanley says that they're doing it, when goal. Goldman Sachs says they're doing it. TD Bank in Canada has just come out with a really, really good research report where their head of research says it's still a Ponzi scheme. And that's good because, you know, if TD Bank actually embraced it, they didn't ever embrace high yield bonds until after 30 years until, you know, the U.S. guys were doing it so successfully. So all I'll say is there's always a continuum of people that are early movers and early adopters,

but it gets harder and harder for people to ignore it if big, funds like Morgan Stanley, New York Life, Mass Mutual, come out and endorse it. You know, one of the things I wanted to comment on where you were talking about the spreads being much larger on the newer exchanges like Binance versus the CME. What I find interesting is, so the CME obviously has scar tissue from past experience based on this fractional reserve banking system that exists. And when you look at how everything in the this new crypto economy settles, it's an immediate kind of settlement kind of way. I mean, that's the whole reason you have these U.S. dollar coins that have been stood up so that you can

remove that risk of the fractional reserve system. When I find fascinating, although you can go way more levered in these positions on these new exchanges like Binance than you can on the CME, I would argue that the risk might not be there. It could be. Maybe there's something technically, technically happening that I don't fully understand. But I do know that they immediately settle, which if the risk is reaching the parity of whatever's on escrow, it's immediately settled. And all parties are settled out of the positions without any type of impairment happening on either end. I will plead ignorance. I have not traded on any of that. I do not have an operations department behind me to go into depth in that. And again, I'll just,

stress, that's not what I am in Bitcoin for. Oh, yeah. Now I'm with you. So, yeah. You know, I think that you can create, I'll go on the positive side. Any developed market needs a derivative market, okay? Everybody says, oh my God, something like credit default swap was an evil thing if you believe Charlie Munger and Warren Buffett on that fact and about purchasing fire insurance on somebody else's home and then going out and trying to set their home on fire. That was an interpretation that was wholly misinformed. The derivative market and the credit default swap market was such a brilliant invention because it allowed the creation of credit indices, much like equity indices. Equities don't have a maturity, whereas all credit does have a maturity, and therefore,

your index could theoretically mature. And that's not what an index is, but what the CDS allowed is the continuous creation of a five-year contract that was placed in, in an index and allowed guys like Bill Ackman to go out and purchase huge insurance on the credit markets and thereby hedge his equity positions. It was what's called an upside down trade. He was using the top part of the capital structure to hedge the bottom part, but he did it. And what did he take out of that trade? It was some crazy amount. And it allowed Bill lackment to put up numbers during the, during the COVID crisis that he otherwise would not have been able to put up because his positions in Hilton hotels and all these other things were

getting carved. He just went up and bought enough protection on the credit markets that he offset his losses and equities. And people will say, that was luck. No, man, that's not luck. That is skill in managing risk. And you need these instruments, instruments to allow you to manage risk. And that's all Bitcoin is.

It's a risk management tool. And despite Peter Schiff and all his venting over how it has no intrinsic value, all that Peter Schiff has successfully done is showing you what a poor risk manager he is. Okay. Because he has been for so long, so wrong, and he has not reversed the position. Yeah. Okay. So you know what?

Do you need to always admit your mistakes? You need to understand when you're wrong and make adjustments accordingly. And that's the key. And so I will just say this is why we need it for Canada. We need people to understand this. We need to understand the politicians to understand the fact that Canada's trading at 40 basis points is so much more important than the fact that it has this AAA credit rating, which is wrong. And this is the danger. The only thing I wish that this website that you shared for the CDS has was a just a timeline line that kind of showed.

Oh, you can get them. Oh, you can drill down and you can get the spreads over time and you can do it. It's there. I don't have it in front of me and I'm not smart enough to show you on the computer. Is it on the same site? Yes, it is. Yeah. Oh, there I go.

Okay. You can get a history of the different spreads. You'll notice in the in the, in the COVID risk for USA. You'll see. And again, everything will trade relative to the U.S. including all the banks. Okay, so all the banks, if you pulled up a JP Morgan five-year CDS, it trades in lockstep with the USA.

It will not. So there was a question that came up on your ask Foss questions. Somebody said, will high yield ever flip in the U.S. Treasury? And the answer there is no, okay? The U.S. Treasury will always trade at a lower yield than the high yield market. It doesn't mean that a particular corporate credit, and there are very few AAA corporate credits left, but there could be a time, and this has happened in the past, where corporate credits have traded at tighter spreads than the U.S. Treasury. It's sort of hard to imagine,

but it has happened. I'm sorry? Look at Michael. Saylor. Well, no, you can't. You can't, okay, because he's a convertible bond. He has optionality in there. He has equity vol priced in there. So there's a big difference between a convertible bond, which Michael Saylor is, and a true senior credit that has no equity vol inside. Michael Saylor, he's so smart, he already knows if he did a straight senior issue, he'd probably have to pay about 250 basis points more than treasuries. But the reason he went to the convertible bond market is because the convertible bond arb guys, they want to buy equity vol.

They want to own his equity vol. And by doing that, they effectively compress his yield spread to zero. Okay. And it's not, though, a true credit spread. It's equity vol impacting that yield spread. Do you see a world where you could actually do negative yield or a negative coupon for some type of equity that's promising to buy Bitcoin if this continues to go in the direction? This is really interesting. How about credit default swaps that are settled in Bitcoin rather than settled in Fiat? I mean, these are some wicked, wicked cool ideas. But yes. So one thing I'll take out today is so, I saw a tweet by Anthony Pompliano, which was quite smart, except he said that they should take. So GameStop today announced that they were going to do a shelf filing for a billion dollars of debt and equity. I think they just probably said equity.

And he said, well, they should put it all in Bitcoin. And I said, I thought to myself, no, you know what? They don't need to put it all in Bitcoin. The first thing they need to do is pay down some of their high yield bonds because GameStop is a high yield borrower that high yield borrowers themselves. should are typically their high yield is because, you know, they're straining to meet their interest obligations, let alone their term repayment of debt. Yeah. And to own Bitcoin in that scenario is much different than a high grade credit that has very

low leverage or a higher yield credit, but has very low leverage. GameStop has enough debt. They have $200 million of debt that they should actually pay down. It's a two-year maturity. They need to pay that down. Get it off their balance sheet. Their credit rating, it'll change their default profile meaningfully because if you have no debt, you can't default.

And then they could start playing the Bitcoin game. But the first thing for them to do is solve their debt maturity profile before they jump right into Bitcoin, okay? And this is what Saylor understands so well. He used an instrument that's a quasi-equity instrument. It's not a debt instrument. A convertible bond is a large portion of it is equity. And that's what he did.

He used the equity, the convertible bond, which is an equity derivative market to fund his Bitcoin purchases. Brilliant guy. Like Sailor, you're a rocket scientist, man, you know it. These guys are just, I went to McGill and I took a couple of engineering courses with these walking mainframe computers. The beautiful thing about sailors, he can actually speak as well as understand the math, right? Like, you know, here's the thing.

Some of these guys you go to school with, they're just so smart. they can barely even speak. They speak the base layer of the base language of the world, which is called mathematics, but they don't speak any other language very well. They're just a walking computer mainframe, right? So at least Sailor can speak that. He can talk to talk as well. Love it.

So true. All right, Greg. I could literally talk to you for the rest of the night. This is really fun. We have to do this more often. Tell me what the score is in the NCAA game right now. Do you know? I have no idea.

So one guy said, why are you doing it on a Monday night? And the only thing I could think of is because Gunzaga is playing. And I'm like, okay, I haven't even looked at the score, but I'm hoping that there's still enough time in the game. And I wanted to thank you, A. Look, and I want to point out something that I'm really proud that I learned about you. So West Point grad, it looks like you flew an attack helicopter at one time in your career. I had a friend from my hometown in Montreal that actually went to West Point as well and flew a helicopter for the U.S. Army in Alabama. Yeah, Fort Rock.

Okay, so he was based out of there. He lives in California right now. He's not in that. But he's a great guy. And let me tell you, you know, it's the service that you guys give to your country that makes you guys so, so good. I did. One of my roommates from Cornell died in 9-11 in that horrible accident and or that horrible event. And so I, as a Canadian, I'm, you know, I've experienced some of the ebbs and flows of the U.S. culture at,

It's way different than Canada. We need you guys. I need Canada to get their arson gear, but we won't do it without the U.S. doing it because we never do. And this is why it's so important for our kids to embrace the alternative that I see as Bitcoin, that fix the money, fix the world, as Marty Bent says, this is so important. And it's important for people that put, like yourself, that put service into the country. You don't do that because you don't love your country. It's because you love your country.

And we're doing this for Bitcoin because we actually love the country. We're not trying to destroy the country. We're trying to help the countries, right? Absolutely. You couldn't say it any better, Greg. It's so important. This is a non-conscription army that you guys have, the highest technologies in the world. Bitcoin can help so many things.

It can bring A6 chip manufacturing back to North America, which itself is a source of a potential national defense issue. Canada needs that because we're a country. of basically the population of California. We don't have a big central bank behind us like the ECB or the Fed. And quite honestly, we're in trouble. And that does not make me happy because my granddad served the country in two world wars. And he didn't do it because he didn't love his country.

He did it because he wanted a better future for our children. And I just want the same. And I'm sure you do. So let's do this Bitcoin thing. I wanted to thank everybody listening. and to tell you guys that I take tremendous strength from the Bitcoin Twitter community. I've learned so much. And I wanted to thank you for the opportunity to share my experiences.

Greg, I'll have your Twitter handle in the show notes. Is there any other links or anything else that you want to point people to? I wrote a paper. I wrote a paper. It's actually, it may be published in Bitcoin magazine, but I'll send you the link to the paper. It's in PDF format. It's long enough. It's maybe more than 40 pages or something.

So I put my history there and I put my methodology for pricing Bitcoin as a function of credit default swaps and why I think it makes sense. And I'll just send you that link. Okay, I'll put it in our DM. And you can attach that and anyone who has any questions or most importantly, any criticism. Okay, I'm wide open. I want you guys to carve holes in this, okay? I believe I'm right, but I'm never 100% certain.

I will not go out and say I'm 100% certain about very few things because you just can't be. You need to hedge your risk and always learn and learn if you're wrong and adjust your position accordingly. Greg, thanks so much for making time to come on the show. I thoroughly enjoyed this conversation. I look forward to bringing you back on. Okay, my friend, it's so nice to talk to you guys. And I'm not sure who you guys want to win in the NCAA, but I hope it's a close game. I hope there's a buzzer reader to celebrate.

So thanks a lot for having me and I look forward to our next encounter. Hey, so thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you're using. We really appreciate that. And if you have time, leave us a review. So thanks for joining us this week. And we'll catch you next Wednesday. Thank you for listening to TIP.

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