We Study Billionaires - The Investor’s Podcast Network - BTC061: Global Macro Investing 1Q 2022 w/ Luke Gromen (Bitcoin Podcast)

Episode Date: January 19, 2022

 IN THIS EPISODE, YOU’LL LEARN: 01:25 - Luke's overview of the Macro landscape. 11:53 - Luke's thoughts on the dollar for the first half of 2022. 18:08 - China's shift in monetary policy. 18:08 - How Preston and Luke are estimating how high interest rates might go. 26:55 - How currency exchange rates can offset interest rates (or make them twice as bad). 31:51 - How China's water problem could turn into a major energy crisis. 39:40 - How the reverse REPO system works. 59:27 - What if the Saudis break the petrodollar system? 1:08:42 - Luke's thoughts on Bill Miller's large Bitcoin position. *Disclaimer: Slight timestamp discrepancies may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Luke Gromen's twitter Account. Luke's Website and newsletter. Luke's books on Amazon. Chinese Water Articles Luke talked about on the show. New to the show? Check out our We Study Billionaires Starter Packs. 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 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 this Wednesday's release of the podcast where we're talking about Bitcoin. On today's show, I have a good friend, an expert and macroeconomics back on the show, and that's Mr. Luke Groman. And so I have to warn folks in advance. We cover a ton of different macro themes throughout this episode, and we really didn't cover Bitcoin too much, but there's a little bit of discussion there at the end. Much of our conversation revolved around the rising interest rate environment, the Fed Forward Guidance for Raising Rating Rates, in 2022, how the reverse repo system works, and much, much more. And so if you're like me and you're always trying to learn more about how the complex Fiat system works, there's absolutely no one

better to help explain things. So with that said, here's my episode with the one and only, Luke Roman. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. Like we said in the intro, we're here with Luke Roman. Luke, the Alec Baldwin of the Investors podcast. And when I say that, I'm saying the S&L, you know, how Alec Baldwin hosted SNL so many times. It's you, man. It's you. I'm not going to shoot you. We're recording this on 12 January 2022. What's your overview of how you're seeing the market? And just for context, we just found out that the CPI,

I came in at 7% today and your treasuries at what, 1.7%. Boy, oh, boy. Let's hear it. What's your overview? A couple of different minds, I guess, a little bit. And first off, thanks for having me on. And happy birthday to you. I don't know what you're doing on with me on your birthday, but happy birthday, McBrend.

But I'm of a couple minds. I came out of last year and into early this year with the view that I disagreed. It seems to be a lot of people think this is just. just another rate hiking cycle. I think there are a lot of things that are very, very different. And so, for example, something I wrote a couple of weeks ago or a week and a half ago or so, I highlighted like the tightening cycle is occurring in the context of a bunch of things that no one alive has ever invested through. So, for example, obviously we're in our first pandemic recovery in 50 to 100 years. Something we've been talking about for ad nauseum is I think we're

living through the first bursting global sovereign debt bubble in 100 years. we think you're going to need negative real rates, sustained basis, increasingly negative, to make global sovereign debt and fiscal positions and entitlement obligations in the West in particular, sustainable. Third thing is you've got what we've been writing a lot about over the last year, something that we call peak cheap energy and metals. And you're seeing, not that we're running out of energy and metals, but the org raids needed to address the levels of demand are going to likely require significant upticks in

price. You're going to have a real sort of sustained inflationary impulse from, from, from, you know, commodity and metals markets in a way that we probably haven't seen in some time. Something we started writing about late last year, it's long been known that the Chinese have water issues, water constraints. They've been talking about it for 10, 15 years. There's been a number of U.S. policymakers talking about it for 10, 15 years. There's a lot of signs that have begun emerging in the second half of 2021 that those water constraints in China are becoming acute. And to be blunt, if China has a water problem, China has a power problem. And if China has a power

problem, the world has a power problem, and the world has an inflation problem since China's a world's factory. And that's something sort of these inflation is transitory crowd, I think are missing, is it both peak cheap energy and metal and these Chinese water constraints? I think this sort of new Cold War, if you will, that some people are calling it. I think a lot of people are still looking at that through this lens of, I think a lot of the economists are completely discounting it, like it doesn't exist, a Cold War with the biggest commodity consumer in the world, the biggest factory in the world, the biggest trading partner of everybody in the world. And it's just like, well, hey, we're sort of, you know, snapping our fingers and tapping our heels and the supply

chain problems are going to go away. And meanwhile, we're in this new Cold War, pseudo-Cold War, if you will, with that trading partner. And it's a Cold War that most people I read are still evaluating based on the lens of the USSR. A lot of times I find, hey, well, that was a Cold War. We won that. Well, there was a reason why the Baby Boom generation didn't offshore our manufacturing to the USSR. And we never fought that Cold War once in a position where the USSR had a quorum of our manufacturing. And there's a great book I was reading over the holiday break by Rush Doshi, or at least excerpts out of but I started it, I think it's called The Long Game.

At any rate, he highlights that in the last 100 plus years, all of America's adversaries, World War I, Nazi Germany, Imperial Japan, the USSR at the height of their power, none of them, in singularly or in aggregate, ever had an economic clout such that their GDP he was 60% or more of the United States as GDP. And China hit that level in 2014. So we're eight years past. So we're dealing with a different animal. And so the way that manifests, I think these trade issues, supply chain issues, I think probably going to be much stickier than people think. They're just not factoring in sort of the geopolitical angle of that. And then I think within all this as well, something that our friend Jeff Booth talks about a lot. Obviously, he made this

concept famous in his book, The Price of Tomorrow, which is, if you haven't read it out there, brilliant, short, easy read. You have to read it. But it's into all of this, we have a technology that is moving faster and faster enforcing deflation on the system, which is a problem because the system is debt-backed and needs exponential inflation. And so you've got sort of this cocktail of things that nobody's ever seen, really singularly, let alone in aggregate, all coming together. You still have a U.S. balance of payments problem. You're going to have that because it's the way the system works. We run these massive current account deficits. Foreigners are not buying enough treasuries relative to what we're emitting. And so the Fed's going to try to tighten

into this. And so when I came into this year and even finishing last year was really kind of looking at these things and just thinking the Fed's making a policy mistake that they should not be tightening. They need to let inflation run hot. The politics are getting in the way. Democrats are worried about midterms and the inflated. And I get it. But the Fed's doing the wrong thing by tightening. That's super contrarian to everything you'll hear out in the markets, that there's a massive policy air being made with them saying they're going to Titan. You're saying they're making the right decision by doing nothing. I think they should do nothing.

I think they should absolutely let inflation run hot. And the reason I say that is we know the World War II playbook, right? We saw last time debt debt to GDP got this high. They let inflation run hot. They capped yields from 46 to 51 U.S. debt to GDP went from 110% to 55%. U.S. Rio rates went as low as negative 14% and were negative pretty much that whole time or certainly the vast majority of the time. And by taking the debt to GDP from 110% to 55%, what it did is it de-levered the system where the Fed could then normalize policy without blowing things up. And that's

what needs to happen. Again, even more so now because there's more debt, the dollars, it's not a gold-back system, it's a debt-back system. You've got the Euro-dollar system. There's all these reasons why it's way more important now for the Fed to let inflation run hot, to de-lever it before because if they, if they tighten before they de-lever enough, they'll blow up markets, they'll blow up the system. This is where it gets really interesting, is because if you look, you know, you and I talked about this probably a year ago at this time, real rates have to get much more negative. They did. Debt to GDP went from a high of 135% in late 2020, down to 122%. So we've actually gone from 135 to 122.

So it's not the 110 to 55 that we did after World War II and five years, but we've made progress. Now, the challenge, the scary thing on some level is going from 135 to 122 to 7% CPI, it broke supply chains. Letting inflation and demand run this hot to try to de-lever the U.S. government's balance sheet, completely broke supply chains in part because they're all so stretched now, right? You say that the supply chains broke and caused the 7% CPI print. I see it kind of a little bit in reverse where I think a lot of the COVID policies and things like that were actually causing a breakdown in supply chains and then that caused prices to go up, which then gave you the CPI prints. I think that's fair. But I think the key takeaway, it almost doesn't matter chicken or egg, which came first, is that running the economy that hot as we did with,

with the COVID stimulus and all this stuff, the supply chains can't handle it. The system breaks down. True. Yeah, it's both of those things. On one level, they need to let this inflation run hot, but the supply chains aren't working with it running this hot. Now, the flip side to all of this that has really started to evolve in my way of thinking just in the last, more recently, the last couple of weeks is I've been watching the dollar

trade down with real rates rising in the last week, week and a half. I've been watching gold rise with real rates rising sharply in the U.S. off the lows. And neither of these things should be happening. And I was kind of scratching my head a little bit about why that could be the case. And all of a sudden, it hit me. I had an epiphany. I went back to something that I watched at the time. I wrote about at the time.

But last May, Stan Drucken Miller, obviously a legendary investor. And I think maybe even a more legendary FX trader. I mean, the man is unbelievable at FX, right? He gave this incredible interview on CNBC in May of last year, May of 2021. And in it, he lays out the case that once we get on the other side of the pandemic, once you start to have this recovery, he actually, even to back up, he lays out the whole case, look, foreigners aren't buying enough of our treasuries. Instead, they've been buying U.S. tech stocks, right?

So we run these massive deficits. And instead of sterilizing U.S. deficits via treasury buying, they've been sterilizing deficits by buying U.S. stocks and in particular U.S. tech stocks. And his point was that whenever we get on the other side of the recovery of the pandemic and Fed starts to tighten, you're going to get sort of this traditional recovery, cyclical, you know, sector rotation, out of tech into commodities, cyclicals, banks, value, right? Why pay up for growth when the underlying economy is going to recover and grow? Classic sector rotation. What Drucken Miller's point was is that's going to be terrible for the dollar because the U.S. is still going to run the deficits. So much of it is structural. And

they're not buying enough treasuries. They almost can't, certainly not with the dollar valued where it is, but they're not. And so they have been sterilizing it with buying tech. But if they start moving money out of tech, that means capital flows that are helping finance these deficits, sterilize these deficits, start flowing elsewhere on the margin. And the release valve turns into the dollar. And so it's interesting in just the last week, week and a half, I've been watching the dollar trade down when the dollar should absolutely be trading up. Everyone in the world is like. And I would have been right there with them as of a week and a half of it. The dollar should be going up.

Everybody's long the dollar. Everybody's selling yields. And yet the dollar's falling aggressively in the last several days. And so I think I'm really to answer your question coming to this year, we're out, I'm of these two minds. One is it is absolutely unlike any other cycle we've ever seen. And so you can sort of throw out a lot of the playbooks. But you've also got sort of this view of the tech or the rotation of the tech could be really bad for the dollar and feed on inflation. If the dollar gets weaker, that's only going to put more upward pressure on inflation and force the Fed to tighten more, which is going to sort of, you know, it's a very interesting dynamic.

If Brent was here, Brent would be throwing something at the screen and saying, but Luke, the dollar's been up for the last year. this is just a standard volatility move since the start of 2022. What would you say back to that? You might be right. It's too quick to tell. But with all due respect to Brent, if I had to listen to Brenner, I had to listen to Stan Druckenmiller on currencies, I'd be listening to Standrucken Miller on currencies. And when you look at the flows, and I've looked at the flows, like it makes sense of you can see the treasuries aren't being bought, right? You know we're running the deficits.

You know how much of the deficits are structural because so much of it is entitlements, defense, interest, not these things you can't cut. And so those are just going to keep growing at one clip or another. Then you can see not enough treasuries being bought. And then it's just a question of, okay, if we're running deficits, we have to balance that in the capital account. The way the Americans balance it in the capital account is via either tech stocks. We sell tech stocks to the world, which is what we've been doing really since 2010. You can see there's a chart in the Fed Fred database that foreign holdings of equities has gone from like $2 trillion in 2009 to $12 trillion. in 2020, right? So, I mean, we're buying stuff from China and China's buying tech stocks from America.

It's probably not a great trade in the long run, but that's what we've been doing. And so if you then take away tech stocks or you start even the internet can take them away, of course, but on the margin, if the flow start moving away from tech stocks and capital globally starts moving towards oil and it starts moving towards industrials and cyclicals, look, the price of oil and cyclicals and gold and all this other stuff is going to have to rise a whole lot. to sort of balance those current account deficits. And so it's very possible we're just seeing sort of a small move, you know, countercyclical move and that sort of the Fed is tightening and real rates are rising and the dollar is going to go up. That might very well be the case.

And that's why I say I'm of two minds. It's still early. I think it's too early to tell. And quite frankly, a lot of it is dependent on what the Fed does, right? I mean, the Fed comes out and, you know, let's say a real aggressive, say the Fed says, all right, we have a $9 trillion dollar balance sheet, and it's going to be back to 800 billion like it was in 08 pre-lemen by the 4th of July. Well, dollar's probably going to go up a shitload, right? I mean, rates are going to go up, dollars are going to go up, markets are going to go down. And so if that's the extreme case, if extreme informs the means, form the means, then it's too

early to tell. But I'm watching these two dynamics very closely. This isn't just a normal cycle. And then this other dynamic of, hey, if there's a sector rotation away from tech, the dollar could have a bad year when everybody thinks it's going to have a good. year. So with all that said, the most popular question out of the 100 plus questions people posted on Twitter for this discussion, this is what people really want to know. How much can the market handle in the fixed income, the sovereign fixed income, U.S. sovereign fixed income, what percent can

these yields get up to before we're going to see another deflationary fit thrown by the economy? So the 30 year today is at 2.09. The 10 year is at 1.75. Throughout one more here. The one year is at 0.48. What do those go to before we start to see things really get wonky? And you start to see equity starting to sell off. And clearly we are in a deflationary bust at that point. What do you think they're able to get these things up to? It's going to sound like a wishy-wash answer, but it's not. The answer is that it depends on where the dollar is. So if the dollar is here or higher, you're probably getting close to the levels where, and I think you saw that to a certain degree, right? Last week, last week was an ugly week, you know, two weeks ago or three weeks ago, whenever it was, we had it, we had a round to sell off. Some of it, it was weird, because you had some days where it was just sector rotation, you know, oil was up, but tech was getting killed. But there were a lot of days where everything was getting killed. oil was down, tech was down, yields were up, industrials were down, everything was down. And so, I think with the dollar at 96, at 97, the dollar certainly at 100, we're probably there. Maybe not quite there, but close. I think that's what the wobbles we saw the last two, three weeks are telling you that we're probably getting close. I think the yield curve where it's flattened out is probably telling you that we're getting close. If you take the dollar

down to, I don't know, 70 on the DXY, let's say, for a big number that's not completely non-credible. If you take it down to 70 over the next 12 months, then I think you probably can hit some of these numbers that Jamie Diamond and some of these other banks are talking about, right? We're going to start normalizing the balance sheet, and we're going to raise rates four times. And just for context for people to get down into break 80, we haven't been below 80 since 2014 on the DXY. So today we're at 94. At the start of 2021, a year ago, the DXY was at 89, and today we're sitting at 94, kind of got up to what was the high here, 97.

97, yeah. And it was, you know, a lot of it, and really since May June the last year, it sort of did nothing. If I remember right from memory, it sort of was range bound from January through May June of last year. And then the Fed came out and said, hey, we're going to tighten more. And the dollar had a good second half. So for the dollar to sell off that much relative to all these other currencies, let's say the dollar goes to 80. I mean, you're going to have to see extreme tightening for all these other currencies. So over in Europe, over in China, all these other places are going to have to have extreme

tightening in their currencies in order to allow the dollar to become that much weaker, correct? You would think so. It's a zero-sum game. It could be the capital flow issue we just identified, right? We're in a recovery. The pandemic becomes endemic. Who needs tech at 40 times sales? When you can buy, you know, Parker Hannafin at, you know, whatever it's trading at right now,

10 times EBIT dot, I don't even know. I've not looked at all I know is it's a heck of a lot cheaper than sort of pretty much anything on sort of the NASDAQ. And you've seen, obviously, I think, some capital flows out already. The average NASDAQ stock has had a really rough four or five months. The only reason I kind of push back on that even being a potential is like Lynn just had a post today where she was talking about however in China, they're really kind of creating a much more accommodative policy over there than what we were seeing last year, which was probably

the tightest ship being run from a monetary policy standpoint for 2021. So if they're easing and they're expecting the dollar, we're having this conversation about the dollar falling down to an 80 on the DXY, I don't know. I just don't know that these international markets could possibly allow for the dollar of the fall that far without them stepping in and saying, oh, we're racing you and we're just going to try to debate just as fast and make our currency just as weak. So it's interesting, right? If it's a capital flow issue like we just talked about, right, where suddenly money starts flowing out of tech into industrial's commodities, et cetera, it's going to be flowing out of the U.S. elsewhere. The dollar starts to fall.

And what's really interesting in all this is everyone could be loosening in terms of their policy, It's a capital flow issue that is cyclical, right, based on the cycle of where we are and the price investors, global capital is willing to pay for growth. They don't need to pay up for growth so they can switch to value. And what's interesting in all that is because I agree with your point that these countries aren't going to necessarily want their currencies to strengthen per se against the dollar, but what will they be doing to try to fight it? They'll be buying treasuries, right? They'll be buying and what does the Fed desperately need to have happened if they want to taper? They're selling treasuries. Fed needs a buyer. Fed absolutely needs a buyer. So it fits

where if you had this cyclical capital flow, if the pandemic is becoming endemic, you sell growth, you buy value, you buy commodities, you buy emerging markets, you sell the United States. And the dollar falls based on the capital flow issue, then foreigners are going to start buying a lot of treasuries as the dollar falls. And you can see very clearly there's an adverse relationship between the level of a dollar and how many treasuries they buy. And once it gets too high, they sell a whole lot. And once it gets low enough, they start buying again. And so I think something that could work away from, I think it could be driven by capital flows rather than relative interest rates. You know, it's a balance of payments equation. But to me, it's still very early

to tell. But I could see clear to something like that happening. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year,

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All right. Back to the show. So your analysis involves a lot more variables and a lot more thinking than how I think about the answer to this problem. And I want to put a chart up here on the screen. If people are watching this on YouTube, I think they might be able to see the chart. If not, all I'm doing is just pulling up a bond yield curve. showing Luke the trend, the long-term trend of the bond yield curve.

So here comes, Luke. I'm printing it up on the screen. So here's the bond yield curve. You'll see this line up top is really kind of the long-term trend, the 30-year trend, right? And it's obviously sloping down. And I'm just showing it off of the 30-year. All the other, you know, durations underneath of that would be slightly lower

for where they were kind of peeking out on previous mini-cycles or whatever you wanted to refer them to. So all I'm doing is I just keep this running trend line of kind of where we're at across each of the durations. And I'm looking at where they're intersecting. And I'm saying, okay, well, it looks like you could maybe have an inversion on the bond yield curve out here in July of 22 because that's where a lot of the lines start to cross over.

And then as far as just kind of like, where would it peek out? Well, I guess it could stick with this 40-year trend line that's up here above. Like, I would see that as a worst-case scenario where, like, the 30-year maybe get up into this range, like a 2.7 maybe where it would maybe throw a fit. But I'm with you. I follow this analyst from Fidelity, and he puts up incredible charts. And he's saying something very similar to what you're saying, which is you're already seeing the market really struggle to handle the yields we're at even right now, and that you're

starting to see the credit markets really kind of sputter and stall out. And maybe, which is really interesting, but if you go back to that chart, you can see we are deeply under that 40-year trend of how high those yields would sell off to. And for people that might not aren't familiar with bonds, as the yields go higher, they're selling off, people might not realize like there's a whole lot more to go on that trend line compared to where we're at right now. But yet the markets are already acting like they're going to throw a deflationary fit. Right, which is the last thing they can afford to have happen. I mean, it's... Which is why you're saying they shouldn't raise rates. They shouldn't raise rates.

They said let inflation run hot. And it's becoming a political issue, which is, I struggle to remember the last time our politicians were right about anything. So I don't see it necessarily as a political issue. Help me understand why you think it's a political issue. I think the Democrats are seeing their midterm numbers, and I think they're scared to death. They wanted to stay low. Yeah, they're still there.

And I think the Republicans are being opportunistic and saying, we have something we can hammer on them about. Look at, you know, I mean, you're starting to see, you know, the Joe Biden. I did that sticker show up on gas pumps all over. And so I think that it's very cynical on the part of the Republicans. And it's politically dumb on the part of the Democrats because you actually have working class wages rising above inflation for the first time in like 20 years. And it's been happening for like three months. And so I completely agree with. every point you're making. How in EPP does this show you the central bank is that we just had a

7% CPI print. Everything on the yield curve is selling off like crazy, and your federal funds is pegged at zero. I think they're doing what they have to do. But we've never seen that before, Luke. We've never seen them not move when this blowout. Not since after World War II, no. And it's, the U.S. is facing a very similar problem that Germany was facing in 1931, which was okay, you know, without the baggage of having hyperinflated eight years before, they had these very onerous war debts. They had these high debts period. They had spent a bunch of money domestically on things like stadiums and stuff that couldn't possibly earn the foreign exchange to pay back the notes that was owed in foreign exchange. And they had these war reparations that were in an

inflation adjusting currency that they couldn't print. And in the same way, the U.S. has all the debt, and it's got the war reparations in which are entitlements. And a lot of them are, they don't owe dollars. They owe health care goods and services, right, the Fed can't print. And so there's a lot of similar, you know, we just lost a war, the global war on terror. You know, we saw us pulling out of Afghanistan and et cetera. You're in sort of this great power competition with China. The Germans were de-industrialized by war and by war reparations. You know, the Rur Valley was seized by the French. And we voluntarily shipped a quorum of our industrial base to China, based on a short-sighted mistake in trade policy, ill-advised trade policy, shall we say, in the long

run. And the punchline is that in 1931, the Germans faced a choice. They could either inflate and basically keep the domestic voters happy, or they could run austerity on the domestic populace to try to keep the external creditors happy, but they couldn't do both. And the U.S. and the feds in the same position where they should be letting inflation run hot. They should be screwing bondholders. They should on a real basis and capping yields. You know, somebody has to pay. Either the bondholders pay in real terms or the bondholders pay in nominal terms via austerity.

We write the debts down. And ultimately, the Germans did it be austerity. And the political fallout from that, you know, the world paid for for the next 15 years with the rise of the Nazis and Hitler, etc. Anyway, that's not to say we're going to sit, but it's the same dynamic. that we're seeing here. And I had this thought, as I was getting ready for the interview, when you talk about, you know, what's the Fed doing? If I really think the measure for people at the Fed, people in Washington should be, do they want the job? And if they want the job, they shouldn't be allowed to have it because they're either don't understand what they're walking into.

I mean, it's going to be like a disaster or they're a sociopath. And they want the job. And the fact that they want the job, show proves they're a sociopath. What you want are qualified people want to be like, I don't want anything to do with this show. I mean, they're literally like, here, here's a stick of dynamite. You know, you'll make 180 grand and then you can get rich on lobbying after your service is done. It makes no sense. So the Fed, the Fed is doing what they can. I don't blame the Fed. The Fed is managing an unmanageable situation. I mean, they have to do the same thing that Germans in 1930. I mean, there's literally a section of the book 1931 where they, where the chancellor of Germany, Bruting says the plan is we're going to tell the domestic audience that we're

not going to pay the war reparations. And then we're going to tell the foreign audience that we're going to pay the war reparations and implement austerity. And the problem, of course, is the internet didn't exist back then. So you could get away with that for a while. Now, you can't tell the bondholder, like, it's in the markets instantly. So it's, it's this fundamental disagreement that's unresolvable. You have to make a choice. It's this riding two horses with one ass analog I keep referring to. There's multiple questions about that, by the way. And then you overlay the resource stuff, the China water stuff, the Cold War stuff. I mean, it's who would want to manage through this? You either had no clue what's going on

or you're nuts. You mentioned something earlier that I really want to go back to because this is something I just don't know that much about. And I'm really curious, the China water problem that you brought up. And then you said it turns into an energy problem. Start really take us down the path on this to help us understand, like what's inherently driving this, this water issue. And if you do have any good resources for people to read up on, because I know I'm curious, if you have any recommendations on that, but explain to us in layman's terms here what's going on. So there's a gentleman named Gopal Reddy, who really has furthered my thinking on it. A brilliant guy. We've talked a bit, R-E-D-D-Y is how you spell his last name. And he wrote a

piece. You can find it online. It's public. It's an issue near and dear to his heart. And he is standing on the shoulders of a gentleman whose name escapes me. He's a British gentleman. I think he's a former member of Parliament. And he wrote a piece as well about China's water issues in 2018. And my understanding is the British member of parliament. The British gentleman was for his troubles asked not to come back to China for publishing that. Now, Chinese have written and talked about this. You can find it. I want to read it now. It's incredible. It's eye-opening. And so the issue ultimately is really, it's structural. The The Chinese, a lot of the populations in the north, they don't have a lot of water. The rivers have

been drying up. It's sort of a fundamental mismatch. They don't have enough water to start with. Climate change or whatever. The water supplies that they do have are shrinking. The aquifers they've been drawing on, they have been drawing on way in excess of replenishment rate. When you talk about replenishment of aquifers, you're talking in terms of tens of thousands of years. So it's not like, you know, you can just sort of stop drawing on it for six months and it fills back up. It's not how this works. And the issue is that if when you've got a power grid set up, and I'm going to mess this up, so take this with a block of salt. But when you have a power grid, you've got baseload and you've got swing power, usually your hydro stuff is really good sort of baseload power. It's as long as

the waterfall's going, the turbine's going. And so when you start having rivers get too low, you start knocking off hydro-based loads, then you have to make up over here. You know, everyone hears, God, look at all the nukes China's putting on. Nukes use a lot of water. Cole uses a lot of water. And so this water issue had been identified by the Chinese, by this British gentleman, Reddy wrote a lot. Go-Paul wrote a lot about it as well. And I think that the brilliance of what Gopal-Ready has done has been,

tying it into recent events where he's pointing out, look, in 3Q21, we started seeing the Chinese shut down power plants ostensibly for environmental reasons. They have always been about when it comes to economy and environment, the economy wins full stop because they're worried about political issues if the economy slows. And yet here we have in 3Q21, these oddities that they're shutting down power plants for the environment. Here in 4Q21, we have Apple being asked to shut down factories for the first time in decades in China for lack of power. They're having power outages. He had the Bitcoin mining migration. And Gopal made the connection where he, gopaw said, look, he goes, I don't know this,

but it's very possible that this wasn't about, hey, we don't want competition for the, for the central bank digital currency. I'm sure that's at least part of it. It's probably at least partly like if you don't have enough electricity, the first thing that gets thrown out are the mining rigs because, you know, you can't shut off Apple. You can't shut off your factories. You need water for your people. Desalination is extremely energy intensive and may be slightly positive, and it's going to be long lead time. You're having this, water is endemic to electric power, and electric power is endemic to China's economic growth, and China's a factory of everything. I know a lot of people maybe that aren't Bitcoiners that are outside that space

would hear the comment that I made about the power being the issue and not necessarily the competition in the monetary space and roll their eyes and think, yeah, right. But everybody that I talked to that are hardcore miners and people that are really connected to what was happening over there from a mining standpoint said it was all about energy. The whole thing for them to move over here was because of the demand that they were putting on the energy grid. And that makes sense. So then, you know, more recently in December, it was Shenzhen and Guangzhou, right? So you're the number one tech manufacturing region in the world. And one of biggest manufactured goods regions of the world. There were articles you can find them online.

They were asking their citizens to start rationing water. And so there's this sort of monster in the background, right, that's sort of like, you know, jaws at the beginning of the movie that is sort of like mauled a couple of people and we haven't seen the shark, but you can sort of see the outcomes of it or hints of the outcome of it. And to me, I mean, the implication of this, we could take this wherever you want to go. They're enormous. I think the big question everybody would have is what's ready think the timeline is before this really starts to cause major issues, not just kind of shark sightings? The short answer is within a couple years. The fact that we saw what we saw in the third

quarter, these fundamental inconsistencies, the Bitcoin, the shutting down a factories, Apple, if you're going to tell Apple to stop running stuff, there's a problem. There's a big problem. You're going to tell a lot of people to stop running stuff before you tell Apple. And so, you know, again, it's one of these situations where it depends on how things go. If they get a whole bunch of rain, then this thing could get pushed off for years. If the weather goes against them, like this could be a problem in 2022, later 2022. And importantly, and that's why it's, you can take this a lot of different ways. You can take it to the most extreme, which is interesting and I think important think about. But for me, I've tried to boil it down to something that's more investable in the short run, which is overwhelming consensus. is that we've seen peak supply chain disruption. And if China's got water problems, there's like zero chance we've seen peak supply chain disruptions because supply chains are stretched thousands of miles all the way back to China. We've seen how complex they are.

You miss one part and everything shuts down and China doesn't have enough water. China doesn't have enough water. These supply chain shortages are going to continue. They're going to become endemic. And when they become endemic, you're going to get an inflationary mindset. Companies are going to go from running JIT to doing what they did in the sector. 70s, I'm told, which is you order as much as you can. And actually carrying inventory starts to be an asset on your books. Every quarter, you write your inventory up because it goes up more. So there's,

it's a very dangerous situation. Which causes more of the same. More of the same inflation, about which the Fed can do absolutely nothing, unless they want to crash the economy, in which case, they still aren't going to produce more water in China. It's not going to friggin matter. All they're going to do is cause political disruption. So it's, that's why I say if someone wants to be in charge of this parade, they either don't know what they're wishing for or they're a sociopath. It's, it's, it's really an interesting time, you know, because the Fed can't tighten enough to fight this without blown up the bond market with the dollar where it is. I mean, it's, they're stuck. They don't realize how stuck they are. While we're talking about China, Evergrand, is there anything

new that you've seen pop out of that or any other comments that you think of kind of come to light now? I've not seen anything particularly, and there's probably about 100 guys you could have in the hot seat that would be more value out of than me, honey. Hey, so today, Zero Hedge had a comment that they posted. They said, some are terrified about balance sheet drawdowns, yet forget that banks have literally handed $1.5 trillion in excess liquidity back to the Fed via daily reverse repo ops. And then they said, Fed can drain $1.5 trillion with zero impact on net flows. I sent this over to you. I said, Luke, help explain this to me in an easy and understandable way. I think everybody who listens to this show knows there's reverse repo going on.

And I know there's other very smart macro thinkers out there that are talking about this reverse repo being able to net out the flows. What the hell does it mean? Explain it in a way that anybody listening to this show right now can understand what in the world all of this means. There are a bunch of plumbing guys who will be able to know the ins and outs of this way better than me. I've been focused on it very much from just a general flows so I understand sort of it from a T account basis. So here goes. Here's what we were talking about earlier. So Fed creates reserves when they do QE. The Fed gets the treasuries, the bank gets

reserves. Once reserves get too high according to Basel three banking regulations, the banks can actually have too high a reserve. So banks then have to basically cut back on their balance sheet. It basically, once the Fed does too much QE, it actually reduces banks' abilities to grow loan. So let's just think through the logic. So as the Fed is taking a bunch of money and buying bonds off the market, they're pushing all that liquidity into the hands of the banks. They're creating reserves. It's a swap. I think that's where people say it's an asset swap. I think that's right. They're giving the banks, you know, reserves, which are basically bonds of very, they're not zero percent yield, but they're, you know, it's reserves and, you know, very low yielding, zero duration asset. And the banks and the Fed are putting the treasuries on their balance sheet. But what they're doing is they're capping the amount that they can allow the banks. So if I'm a bank and I'm engaging with you as the Fed in this swap, let's say you give me a thousand units. We're just going to keep this really generic. You give me a a thousand units, and you've capped me at a thousand units relative to how many loans I've lent

out? What's the ratio, this Basel ratio that you're talking about? I don't know the number that that is, but it's basically the biggest banks in particular have, based on the size of their balance sheet, have to have so much capital and reserves count a certain way. And the gist of it, the important gist of it is, is once banks have too many reserves, and I don't know what that is, it's defined per Basel 3 relative to the size of the bank and the balance sheet, once they have too many reserves, they have to stop growing their balance sheet elsewhere. So basically, once QE gets beyond some maximum point of marginal utility, there's actually declining marginal utility for the economy in total, because at first, it's taking bonds

off the bank balance sheets and freeing up reserves so the banks can make more loans. Taken too far, they end up with too many reserves and they actually have to constrict the amount of loans they make because they have too many reserves. And I don't know the logic beyond that other than the Basel 3 is trying to make the banking system more stable post-08. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why Vansansansans. VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk,

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All right. Back to the show. It almost seems like it's a flag or a valve that kind of pops or like a circuit breaker that pops to back to the Fed to demonstrate to. them that they're providing too much liquidity into the market. Like the market can't handle the amount of liquidity that's there because they're blowing over these thresholds and they have to keep them within a certain amount. Would you think that that's the rationale for having that cap or that limit there?

I mean, it's almost like a dual corridor system, right, where you can have two little reserves, you can have too many reserves. And I think this is my view, I think that what Basel has been trying to do, the Basel three rules has been basically trying to prevent central banks and the domestic banking system from being used to finance deficits. I think it's basically sort of, it's a gold standard of sorts, you know, a hard currency of sorts where basically I think they've been trying to prevent the central banks and central banks forcing the domestic banking system or cajoling, regulating the domestic banking system into financing deficits at infinitum. It's, it's, it,

It hasn't really worked per se, but it sort of has, right? Because we've seen repeatedly, right, the repo rates by people say, well, that was just a plumbing issue. No, that was, that was them bumping up against this constraint. And in the same way, this would be bumping up against a constraint. So I guess, you know, when you look at it that way, yeah, it would be saying, hey, Fed, you can only QE so much. And if you want you QE a certain amount, we're going to start penalizing your banks, ability to lend. It's going to hurt your economy. And then, in In theory, you have two options. You can go back to the Congress and say, listen, you're spending too much damn money. You either raise rates to get more people to finance it, or you start cutting

spending. And the reality is, is what the Fed did is they did this reverse repo program to basically circumvent the whole thing. And so what reverse repo does, right? So again, Fed QE is Fed gets a treasury, bank gets a reserves, reserves get too high. Banks have to cut back a balance sheet. Reverse repo temporarily swaps reverse repos, the treasuries that the Fed just bought back to the banks, and then the banks temporarily give the reserves back to the Fed. So literally just reverses the transaction they just did. But they're getting fees on this. I don't know. I'm sure there's a, yeah, I'm sure there's a commission on it. Sure. Yeah, there's a small, when I say fees, I'm saying yield. They're getting a small yield from the Fed as they put them on deposit, correct? But here's the bigger deal is my

understanding on very good account from people that know the plumbing issue back and forth is that these reverse repos are not on balance sheet for the banks. So it basically, it gets rid of the balance sheet constraint. And so this reverse repo balance, you're seeing, you know, it's interesting. You back when did the reverse repo start to blow up? The reverse repo balance started really to blow out last April when the SLR, the supplementary leverage ratio exemption for treasuries that was put in place April of 2020, and that came out and said, hey, banks, you can buy as many treasures as you want, it won't count against this Basel 3 capital constraint, right? So that temporary exemption ended in April of 2021. And basically, if you look at when that ended and when the reverse

repo balances, when that thing ended, that SLR exemption, reverse repo balance was like zero. And it went from zero to two trillion in eight months because there was a two trillion. And so this is basically just an Enron like accounting creation, right? If you go back to Enron right when they At the end of every quarter, they would like move the barges off their balance sheet, right? They'd like repo the barge to Morgan Stanley. And so at the end of the quarter, it was on Morgan Stanley's books. And then it would switch back to Enron's books. So it looked like Enron had more cash and liquidity than they actually did.

This is the same kind of transaction. It's just when the Fed does QE, they get treasuries, bank gets reserves. Reserves get too high and start to weigh on bank ability to make loans. There can be a capital charge if you get too high, right, increased capital charge. once you get too high above capital thresholds or reserve asset thresholds in terms of the size of your balance sheet. And so then the Fed does the reverse repo, which temporarily reverse repos of treasuries, back to the banks.

Banks temporarily give the reserves back to the Fed. But it's quote unquote temporary. Yeah, it's just quote unquote temporary. Meaning it can come back to the bank again. And it should, right? It's a repo. It's a reversing transaction, but you just kind of keep doing it. Well, I guess, okay, so the terminology they say is the zero impact on net.

net flows in the short term. It's net zero for that time interval, that very short duration time interval that you're looking at because it went over there and it's sitting back at the Fed. But the bank can still plow those back if they fall within the balance sheet constraint. So it's actually still there, right? Like it hasn't, it's not like it just disappeared into oblivion. The Zero Hedges comment too was in regards to QE taper, right? Where the Fed can taper a trillion and a half before anything bad's going to have.

happen. And that was my underreading. Yeah, I think that's totally wrong. Because if you look at, you know, just by reversing the T accounts of it, right, is if you, is it if you reverse the reverse repo, then the reserves go back to the banks, treasuries go back to the Fed. So then the banks have reserves with which they can buy treasuries. But in theory, there is a constraint under Basel 3 that is still there, right? So in theory, yes, they're right. They have the reserves. I will come out of the reverse repo back to the banks, and then there's all this money in these reserves. And in theory, the banks can buy treasuries. However, there's a constraint for too much reserves. There's also a constraint for too many treasuries because that SLR exemption expired. And you're assuming

supply chains aren't going to continue to do what they've been doing and you're going to have all these constraints in physical reality outside of, you know, number entries into ledgers. Right. And even just setting that aside, right, if the Fed came out and said, we're going to we're going to suspend the SLR rules again as it relates to U.S. Treasuries, banks, you can use all those reserves and buy up treasuries. Then the zero hedge comment that there's a trillion and a half in liquidity to buy treasuries as the Fed sells them, yes, that makes sense to me. I can't say it's absolutely the case because I would defer to the plumbing experts on that. But from a T-account perspective, that would make sense.

If the SLR rules for treasuries are not suspended again like they were from April 20 through April 21, or through March 21, then what Zero Hedge said is, I don't think, correct in terms of no net flow implication, because whether the banks have the reserves or not is they're not going to buy the treasuries because the constraints on the balance sheet will exist with the reserve levels where they are, even if they're out of reverse repo and bank on bank balance sheets, if that makes sense. All right. Let's move on to something else.

This stuff. You just want to gouge your eyes out because it's just there's a loophole that's created for a loophole that's created for a loophole. And meanwhile, you've got so many zombie companies that are being created because of these policies. I think it's the easiest way to think about it is the U.S. has a balance of payments problem, which is we're running deficits. They're structural.

We really can't shrink them. And foreigners aren't buying enough anymore. And they are basically doing everything they can to sort of keep the ball. in the air of changing bank regulations and liquidity regulations and B. And so if you start from this point of balance of payments problem and they're going to do anything they can to make sure those balls stay in the air, that's what's happening. It's a classic emerging markets move. You've seen it in Argentina.

You've seen it. Any country in history that's had a balance of payments problem, that's what we're watching. It's just very, you know, it's a lot of sexy language and it's, that's what's happening. Okay. So more sexy language. yield curve control. So when I'm looking at yield curve control, for the most part, it's not being implemented. We're watching all the durations sell off in fixed income except for the federal funds rate, which is being kept at 0%. So you could make the argument that the bond market is

as I free and open, even though they're doing all these swoopy things that we were just talking about. But I think if we go through another big deflation, I've been calling them deflationary fits because what happened there in March of 2020, I think is going to be kind of the norm moving forward is we're going to have these big deflationary fits. They're going to step in with just arm loads of quantitative easing. I think on the next deflationary fit, you're going to see UBI used a whole lot more than what was used in this last round. And I think that when you get into the next round, you're really going to see yield curve

control being used. For people, for the fancy name here, yield curve control is you're pegging a yield, Let's say we wanted the 10-year treasury pegged at 1%. If anybody steps into the market and tries to sell it off and raise that yield above 1%, the central bank's going to step in and be a buyer for every single one of those sell orders in order to continue to keep the yield pegged at 1% or lower. So I think on the next deflationary fit, that is going to become a very real policy. That's being – I was going to use the word implemented, but I think maybe abused is probably a better word to throw out there. And maybe across multiple durations, if not all durations,

are you going to see them really kind of finangling these yields? Do you agree with that, Luke, or are we way far off from something like that happening? Are we multiple deflationary fits away from that happening? I think we are, and I'm sure I've said it before to you in prior conversation, is yield curve control is the Hotel California, right? Once they check in, they can never leave. And so I think they will do everything they can to avoid yield curve control. I would argue we're in, we've been in a soft form of yield curve control, yield curve management, shall we say. They're happy to let it move around as long as it stays in between, you know, it's like bumper bowling, right? It's, you know, yield curve bumper bowling is what they're doing. And we know that because we can

see how quickly they hop to it when the repo rates spiked, right? That took them 24 to 48 hours. There's that, you know, it was the ball rolled into a couple lanes over and they quickly ran down the lane, grab the ball, put it back in the lane. And how do they do that? They did that by growing the balance sheet, right? They did not QE. In the same way, we're not in yield curve control. You know, this argument that, hey, there's plenty of demand for treasuries to me is disingenuous when the Fed's balance sheet's sitting at $9 trillion. You know, the release valve has been the Fed's balance sheet. And so I think your point is on in terms of as we get these inflationary down drafts, whatever caused them, whether it's overt tightening or it's some sort of external factor or whether it's, you know, a bond market selloff where it gets trickier,

right, is the inflationary side of things, where if it's cyclical in terms of sort of this recovery, if the pandemic becomes endemic and things normalize, okay, that's one issue. If it's cheap energy and metals and Chinese water and power constraints and so ongoing supply chain issues, which I think are very likely to continue, that's a different animal because now you're going to be talking about CPI, this is probably going to run 7 to 10 for the next two, three, four years. And that's assuming we don't try to resure stuff. There's no inflation associated with ESG and climate change initiatives, which is a joke. There's going to be a ton of inflation with all those things, right? So it's they've got to do something to keep. We know the bond

market can't withstand levels, interest rate levels at a certain level at a certain price of the dollar. Will they ever do it? I think ultimately they'll be forced to. I think it will be the last thing they want to do, I think if I'm in their shoes, I would much rather continue this yield curve management, this yield curve bumper bowling because it's, the bumpers just keep getting tighter and tighter, right? They keep getting tighter and tighter and eventually they're going to intersect, right? They're actually going to intersect. Yeah, it's going to be paid.

And that's where it's, yeah. And so how quickly will that happen? It depends on what happens with inflation. It depends on what happens with growth. It depends on a number of factors. That's how I'd answer that. Okay, I had a person ask, what if Saudis break Petro dollar fully or partially, and then the person online wrote, they already sold their treasuries? What are your thoughts on that one?

I think we are already well along that route. I mean, I've heard very credible rumblings. I heard very credible rumblings 18 months ago that the Chinese and Saudi signed a deal, that the Saudis would sell some oil volumes to China in yuan or dollars, China's choice. I don't know that that came to fruition. I don't know that it's done in any volumes. I mean, there's a big meeting where all the foreign ministers of the GCC nations are flying over to China like next week or something. Right. Now, what do you think is? They're not talking about the Kardashians and, you know, who should be a quarterback for the jets, right? So the Saudis are ultimately going to have to do what they must to keep their biggest client happy. And their biggest client by far is

China. And so I think it's inevitability and inevitability that you get some sort of concession in terms of China being able, the Saudis selling oil to China in Yuan, then the question becomes, do we ever hear about it? And if there's, and if we do hear about it, what are the implications? Because will it show up in, you know, in theory, I would expect the Saudi real would probably fall pretty sharply against the dollar, maybe. And if the Saudi real fell against the dollar, then you would expect to see the price of oil. Saudi oil would actually, their cost base would fall, right? Their costs are in Urales. They're selling in dollars. Those are pegs. But they would see, you know, they would have, they would be able to even

further lower their cost basis relative to the world's oil. So in theory, it would be a deflationary impact for global oil in dollars on one hand. On the other hand, it's hard to know what the market implications would be for dollars. I mean, it would make concrete the multilateral system where suddenly, going forward, the world would no longer need to hold dollars for oil, certainly not the Chinese, certainly not, you know, others, other big players, they would be able to pay in their own currency. And going forward, that means that as the U.S. emits these deficits, which can't really be cut, again, because their entitlements, defense, and interest primarily, there'd be a lot of dollars being admitted, and there would be a significant step down in foreign demand because everyone

could pay for oil in their own currency. They wouldn't need to stockpile dollars as much. And then the Fed would have to pick up the slack, right? And so as the Fed buys those bonds, we've seen, look, we know for, we know empirically when the Fed buys 60 to 100 percent of issuance, the dollar goes down. We know that because we saw it last year. We saw it from March of 2020 through April of 2021. So structurally it'd be really bad for the dollar. It might actually be good for the dollar in the short run.

It might be bad for oil in the short run. But I think it's an inevitability. I think it's probably, you know, underway, it probably has been underway for close to five years. So back to the Fed, how many hikes do you think they can actually get through? If any, they're going to hike, right? I think they're going to hike, yeah. I think they're going to hike, too. How many can they get in in 2022? The forecast right now is what, four? I think the forecast is three, but you've got people saying four. You're starting to say four. I know Goldman was out saying four. I think J.P. Morgan was out saying that there's going to be four. And then Howell testified and

said, we got to keep rates low, all on the same week. I think they could do the three or four. And if you would have asked me this two weeks ago, I would have said there's no way. Really? So I agree with you. I think they can. Why'd you change your mind? Just watching what this dollar's doing, right?

Watching this capital flow angle of if we're going to go from. That's myopic. You know, it's increasingly looking like we're going from pandemic to endemic. And you can see it in the day. you can see it in the political responses. Everyone is backpedaling in Washington on this thing now. And I'm not going to get into it more than that because it's a political hot button. Neither you nor I need that kind of a heat. That's so true. If we go pandemic to endemic, we continue that the capital flow movements, I think, are going to weigh on the dollar, maybe in a very pronounced

way. And if they do that, if we continue to see the dollar fall, then the more the dollar falls, the more ability they will have to actually raise rates. And so it's interesting is it's possible that what we're watching is the Fed not, you know, the way to think about it is is not how much is the dollar going to rise on the Fed tightens. It might be the right way to think about it is is what we're watching with Fed tightening is them slowing the rate at which the dollar falls. It's basically their foam in the runway for how fast the dollar is going to fall.

As we go from pandemic to endemic because of the capital flow out of the United States into areas and assets that are not big tech. So I'm just pulling up the chart, the DXY chart, so people can see what we're talking about when we're talking about the dollar. So I have it in a monthly bar, Luke. I think it's better to look at these things in longer timeframes when you're talking currencies. And then I have the MACD here on the chart.

And you can see that you're actually getting, it's looking like a little bit of a roll over here on the MACD. Now, this bar hasn't closed out. you got another 18 days for that to close outs. But you might be right, Luke. You might be right on the momentum there. I just wanted to kind of pull that up so people could see it. Yeah. So I mean, to answer your question, I, that's, to me, it really is a function of the dollar. It's really the lower the dollar goes, the more room they have. And I think they, I think they know that, right? And so it's been very interesting to me to see what gold is done, right? Because if I was the Fed and I wanted the dollar

down. If I was the Bank of International Settlements and I wanted the dollar down, because it's in everybody's interest for the dollar to go down. If the dollar goes up, this whole thing's going to implode, right? We are going to get a lot more than an inflation error or a deflationary, you know, tantrum. We're going to get, you know, an implosion. So everybody needs a dollar down. Now, if I wanted the dollar down, one way I would consider doing that, I would, you know, get someone like the BIS bid and gold every day, right? Which sounds conspiratorial except it does. You know, except they have a trading desk. And if you read on the New York Fed website, you can see, and the Exchange Stabilization Fund,

as a, you know, the ESFs has a mandate to maintain orderly markets in FX by buying foreign currencies and gold. Their word's not mine, right? So if you get gold just marching up, that can sort of create a framework to sort of try to get the dollar moving in a direction that everybody, everybody needs it to go. So when you think about the BIS, do you think that that's one of their main things that they're, instead of framing it that way, tell us your point of view of the BIS? I just think of it as a central bank or central bank. There's a great article in the Wall Street Journal from 2012. I think it's December 2012. And I remember the article, the name of it's inside the risky bets of central bank. You can look it up. And it's a fascinating, fascinating article to me, because I, frequently here, oh, there's not some small committee that gets together and it's not the way the world works and it's a conspiracy theory. Okay. The article in the Wall Street Journal says that every six weeks, central bankers accounting for 55 to 65% of the world's gross domestic product

get together in a room in Basel, Switzerland, with no notes, with no meeting minutes and talk about in plain language what they want to do. And so I look at that and I go, okay, do you think they're talking about the Kardashians and who should be starting a quarterback for the Jets. Absolutely. Or, right? And so, so again, I think it's cynical and continuous. That's the pregame. So it's like, okay, there's six guys in a room who are made, you know, I think they are acting in the best interest of the system.

I'm not one of these, oh, God, they're trying to, you know, sort of take over mankind and want to rule the world. I think they are acting, trying to act in the best interests of the system from the standpoint of, look, the system imploding is in nobody's interest. I think they are trying to basically just manage what has gotten away from them in terms of global economic growth and the debt and all this stuff. So I don't think they're sort of like this evil committee of the world, but by the same token, like, again, read the Wall Street Journal. There is zero chance that 10 guys in a room, no meeting minutes that control, you know,

that are the central bankers controlling two thirds of global GDP are talking about the Kardashians, right? They are talking about, okay, what happens if the dollar rises? Well, this will happen and this will happen. And in our economy will tank, okay, then we can't have the dollar rise. Okay, how do we keep the dollar from rising? All right. Well, we will tighten policy this way.

That's going to make the dollar go up. What are you going to do? Those are the conversations that would have to be having. They'd have to be having those conversations. That's how I think about it. So global cooperation among central bankers is really. Yeah. And the article kind of says that.

It says, you know, basically then in a forum where they can bounce ideas off each other, right? Not an easy flight, right? I mean, you get on a plane and fly for eight hours to Switzerland. I mean, you're there for two days and fly back. Like, again, they're not going there. They would do the Kardashian stuff over Zoom. Luke's got Kardashians on his mind. Final question.

What do you think of Bill Miller's portfolio this week that came out? I saw a headline about that. Now, I'm going to say this. Bill's a friend. I consider him a friend. I don't know if he considers me a friend. I consider him a friend. And I would argue he probably has one of the best risk-adjusted returns over a lifetime

of a very long time in the market. I don't know what's he up to four decades or something in the market. He probably has one of the best risk-adjusted returns of anybody that I've ever talked to for people not tracking the announcement. He said he has two things in his portfolio. He has 50% Bitcoin and 50% Amazon. So, I mean, this is really bold. This was huge. And then we had Ray Dalio who made the announcement that was circulated on our show on the investors podcast network that 2%, he finds it appropriate to have 2% allocation in the Bitcoin. So it's kind of a Bitcoin question, Luke. Any thoughts on some of this stuff? Does it surprise you at all or that you have such massive names? I mean, Bill Miller, I mean, the CEO of Leg

Mason itself managing 80 billion, you know, two decades ago. And that's what's in his portfolio. I mean, to your point, the man's record speaks for itself. I mean, he's a legend. And he's brilliant. I think it speaks to, when I saw it, it speaks to, I think, a greater recognition amongst people sitting in senior seats that realize that the Fed is trapped, that realize basically, right, there's always two things in investing. There's the end game and how you manage your chips along the end game. And I think it's just a sign that people in senior seats are realizing, A, the end game. And when you see aggressive moves like that, either they don't have. have the mandate where they need to manage the chips in a more short-term nature, right, which is the best place to be for something like this because I think that's what we're

watching, right? If I understood it, right, it's mostly his money. And it's, and so he can do whatever he wants with it. And he doesn't need to write a letter to shareholders in a month and in two months and with the quarterly letter and saying, oops, you know, we just lost 1,500 basis points of your money over the last three weeks in Bitcoin because Bitcoin's down 30%. The fiscal stuff is the fiscal stuff. The balance of payments is the balance of payments, these other issues. So as I look at it, it's a little aggressive for my taste. It ain't that aggressive for my taste based on my analysis of how this is all laying out for the world. They don't have a choice. It was interesting. I had a great conversation with Jeff Booth last summer.

And we at a conference and we were talking. Was this the Bretton Woods? This is the Bretton Woods conference. Yeah. Yeah. Right? So we're talking. And the gist of it, someone asked him, it's like, okay, well, you know, if you've got

this fundamental disagreement between inflationary currency system, right, where it's a debt-backed currency system, so you need inflation to make the debt whole, while, Jeff, you're saying you've got this, you've got, the tech's got this deflationary impact, right? And Moore's Law is putting deflationary pressure. So you've got these, you know, it's the two horses, one ass problem. And this person asked Jeff, I said, this person said, how are they going to resolve it? And I interject that. I just said, they're going to have to fully reserve the debt. And Jeff goes, they're going to have to fully reserve the debt. And for the audience, what fully reserved the debt means that 70 to 100

trillion dollar system, no one knows how big it is. Everyone says it's huge. It's mostly going to have to go on the fully reserving the euro dollar system means fed balance sheet 70 to 100 trillion. And that's where this is going to have to go. And it's just the way it is. And so when you say, borrowing a productivity miracle, it's what's what's likely going to happen. And I think that's what people like Bill Miller, when they put 50% of their money in Bitcoin and the other 50% of Amazon, I think that's what that bet is saying. I think it's like, look, it's my money. They are going to have to fully reserve this thing. And this is how I want to play it. Yeah. I think that's what he's doing. And I mean, he's been in since 2015. So he can he can handle a little.

volatility in that. Oh, exactly. No, that's right. That's right. That's exactly right. And I think it's important, right? I mean, I think it goes back to that chart you and I've talked about before of, you know, what gold did in Myanmar Germany.

So as the currency is literally going to zero in gold terms, right? Or gold's going to infinity in currency terms. There were four or five instances as the currency was hyperinflating and one of the great hyperinflations of all time where people were selling gold and buying German Reichs marks. It was like, oh, it's different this time. They're going to tighten. The German rights bank's going to tighten rates. times this year and they're going to taper QE.

You know, they're going to stop. Oh, so gold. Oh, God. You know, give me, give me Reichsmarks. Well, the math was the math. But what it speaks to is that managing the chips properly. You're Bill Miller, you own it in a hole. You've got money. It didn't, you know, the path was the path. Yeah. Be careful with leverage.

Be careful with leverage. Yeah. Luke, I could chat with you all night. I love these conversations because I get to learn. I get to learn in these conversations and they're just so useful for to kind of just really kind of wrap my head around the complexity of all of this. If people want to tap into Luke's knowledge, I say this every time we talk, but you have your

two books there kind of in the back, Mr. X interviews, and both of these books are so insightful. If you really want to try to wrap your head around his sight picture and how he sees the world, both of those books have been extremely helpful for me personally. Thank you. I can't help promote those enough. Is there anything else you want to highlight or give people a handoff to? No, they can always just check us out at the website, FFTT-LC.com and see what we're up to there and, you know, our different product offerings, et cetera. But no, I just, you know, I've got an active Twitter feed. I think everyone that's listening or most people that are listening probably probably know that. Check us out there. But no, it's, I appreciate you having me on again. I always learn a lot talking to you. It helps my thought process a ton. I really appreciate it. Absolutely. And boy, I had fun. Thanks for coming on the show.

Absolutely. And happy birthday to you, my friend. Thank you. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm.

So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.