We Study Billionaires - The Investor’s Podcast Network - BTC085: Sven Henrich on the Central Banker's Dilemma (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. Today's guest needs a little introduction because I'm interviewing the one and only Northman trader, Mr. Sven Henrich. Sven is a major contributor to the financial space as a global macro analyst and investor. He has a substantial following for many of his thoughtful charts in identifying major shifts in the macro environment. As a fan of Sven's for numerous years, I was always frustrated that he was not a Bitcoiner,

Starting point is 00:00:28 But as of recently, he's actually come around on the idea, and we talk about this amongst many other macro topics throughout the show. So without further delay, it brings me great pleasure to bring on one of my personal favorites, Mr. Sven Henrich. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. All right. So like I said in the introduction, I'm here with Sven. Sven, I've been following you for years. I've been following you for years. And the two of us have had a few dustups here and there, you know, arguing over certain things. But I think the, really? Honestly, I think it's all in, I think it's all in good. You know, both of us are trying to seek the truth. I think at the end of the day. And I think that's where you, when you see those collisions, you know there's something there. Maybe you're missing something. Maybe you got something right. And that's the great thing about being online. But here's where I want to start with that. this. Welcome to the show. We're in a raging inflationary environment all around the world. And it seems

Starting point is 00:01:42 like we should or there could be a deflationary bust brewing. But then I'm looking at oil prices and I'm looking at these expectations over in Europe for what they're thinking oil prices are going to be. I don't know what to think. Right. So what are your thoughts on some of this? Hey, Preston. First of all, I'm glad to be with you. Did we have dustups? I'm not sure. I think we just tease each other a little bit here and there, but it's part of the journey, absolutely. But that's a good thing, by the way. It is. I mean, just maybe starting off with social media in general.

Starting point is 00:02:17 You can disagree on some things. And I think everybody got to be humble enough to let their views evolve over time. Amen. You don't never need to be personal or anything like that. Yeah. Good nature's jive is fair enough, but it's go wild. Amen to that. Yes.

Starting point is 00:02:37 Matt, Preston, the background. Where do I start? I mean, maybe just a quick background because I've been known to be kind of a central bank critic for more than a week or two. It's painful for all of us to recognize that the macro environment has devolved in a painful way for a lot of people over the years. I've been a critic on the sense that all the interventions that we've seen over the past 15 years have widened the wealth gap. And central banks, Powell himself, rating up front how central bank policies do not, absolutely, do not contribute to inequality when all the actual evidence is exactly there on the tables, creating rifts in society. And then, of course, the goal now to come, say, comes, he comes out last week and says, well, now that we're producing QE and bringing out or we're actually starting QT, we're taking the liquidity out, it's going to be bad for asset prices. So while you're not admitting that you're boosting asset prices on the way up, you know, you're certainly now using it as an excuse why asset prices may be going down. So there's an inherent dishonesty in the entire construct. And all of us, you know, we have to listen to all this. And these, these people, tend to put themselves on pedestal or being put on pedestal by the media as the great wise men

Starting point is 00:04:05 of women in the global monetary system. Well, they just revealed themselves to not be that at all. They're not wise. They can be horrifically wrong and they ignored all the precautions in terms of continuing to print into an environment where we did have supply chain issues, where we had fiscal stimulus to like we've never seen before. And they just kept adding liquidity into what I last year obviously kept screaming about was this massive asset bubble and everything exacerbating housing prices by buying mortgage-backed securities when there was no housing prices. So everything got literally exacerbated to historic degrees. And then of course, what happens while they ignore all this,

Starting point is 00:04:58 even in December. I mean, I'll just need to make this point. In December, CPI was already 7%. And the Fed, in their wisdom, put out this Fed Fund's forecast of less than 1% for 2023. So this broad disconnect was already there. They were still living in La Land. Now, to be fair,

Starting point is 00:05:23 they're not controlling a Russia invasion of Ukraine, which certainly exacerbated things. And so on this inflation question, you have really multiple factors that are coming at play and it's nasty. You had the monetary fiscal excess, you had the supply chain issues, you had the Russia-Ukraine war, which is ongoing, which is fueled energy and food prices globally, which the Fed does not have any control over. And then the other part is psychology.

Starting point is 00:05:56 And, you know, we saw this in the 20s in Germany. It was just one psychology kind of feeds on itself. You risk that you have that visual cycle, right? And then, you know, wage growth. People demand more of it wages. And it just feeds on itself in terms of expectations. So it's a really dangerous time in this sense because we are already seeing the economy slowing down rapidly.

Starting point is 00:06:19 Asset prices have dropped significant. In fact, this first half of the year is one of the worst first halfs. in all of history, and it got exacerbated also by the fact that not only stocks dropped, which was the standard kind of curved in the last 40 years, because bonds also dropped, so that in terms of finding a place to hide, that it really wasn't any, the terms of the large investment groups. And then, of course, you have a new asset class, crypto, Bitcoin, and everything got smacked, right? So the cumulative impact on the wealth effect is dramatic. And they had, But since the financial crisis, they've used, and they will never admit it, but I'll just say it, they used the stock market to manage the economy.

Starting point is 00:07:05 Hernanke actually, as a former Fed Chair, when he was Fed Chair, he said in 2012, you know, when the stock market goes up, consumers feel more confident. They want to spend more. That's what it really is all about. And they constructed this over those last 15 years, intervening at every single step of the way, believing apparently that this all could be consequence free. Well, now we see the consequences unfolding, but now they're in a position where they can't rescue the stock market because of inflation still being a dramatic problem. So the question is, how do you then ultimately solve this and how can we wiggle through it? Because, and I'll finish on this point, the Fed funds rate that I mentioned earlier, the projected Fed funds rate, that they had at less than 1% in December for 23.

Starting point is 00:07:58 They now have over 3% going to 3.8% in 2023. Let me tell you something. When you build an empire of debt totally financed by cheap money, you cannot raise rates to certain levels without, without you're facing a major, major, bear market, depression, what have you. So to me, this is just another Fed put. that's been placed in the market

Starting point is 00:08:26 because while they're saying 3.8% Fed funds rate for 2023, they're also at the same time projecting positive GDP growth. I'll just say it straight out. That's a lie. It's just not going to happen.

Starting point is 00:08:40 And the reason that's not going to happen is because we've seen for the last 30, 40 years, the Federal Reserve being able to raise rates to a lower high, to a lower high, in each cycle, they can tighten policy less and less and less. Why? Because the debt construct has completely blown up in everybody's face. Notice the crisis get larger, the indimensions get larger, and the debt requirements get larger. I mean, think about it. Back in just 20 years ago, that debt was $5.5 trillion.

Starting point is 00:09:12 Now it's over $30 trillion. We just added $9 trillion in debt in four years. In 2018, they couldn't even They got barely to 2.25% on the fit funds rate. And they stopped. They stopped because the market collapse. The recession was kind of a risk factor for them. So they pivoted because they can't handle these more big market drawdowns. So now we've had an even larger bear market. Actually, it's the most extensive bear market since 2009, which was length.

Starting point is 00:09:42 Yes, COVID crash was deep and it was fast because they intervened. But this is dragging on. And as you see consumer confidence, the lowest. consumer sentiment, rather, it's the lowest ever. That's recessionary. So you're already risking very much a recession. And my premise in general is to say that there's no way they can get to 3.8% without a major recession. They can't raise rates into a major recession.

Starting point is 00:10:09 So ultimately, I expect there will be a pivot. We can discuss what that may look like. But they can't do it. So everybody's saying that they're not going to do anything until something break. Do you share that sentiment? Well, first of all, they have to have, if you look at from now from the Fed's perspective, let's say they are in the box, like I say they are. And they got the policy completely wrong.

Starting point is 00:10:35 They got themselves trapped. They are in a position where they've lost a lot of credibility, maybe all credibility at this point, because not only because they got it wrong, but because obviously over the years, they've trained the investor mindset to always expect an intervention. And I would say they were genuinely scared of something ever breaking again like during the financial crisis. So that's why we saw after QE1, we saw QE2, QE3 and all the other central banks starting to apply this in this deflationary environment that we were in. But if you build an entire construct of growth dependent on the market, meaning market, market levels. Last year, everybody ignored this, but I kept pointing this out. Market cap to GDP

Starting point is 00:11:24 in the 70s, 80s, it was around 40 to 60%. That's kind of, and it went on for decades like this, right? Then we had this big tech bubble building and we saw something we never seen before. I went to about 150% market cap to GDP. So the market was valued a lot more than the economy itself in terms of annual GDP generation. Then we had the tech bubble very. And we had the tech bubble Then we dropped to about 75%. We went back to the normal range, if you will. That was the bottom. Then they came up with the housing bubble, right?

Starting point is 00:11:57 Because they kept interest rates low, and then that fueled a new fire speculation. It got to about 137% market capital GDP. Then we had the global financial crisis. Went down to 50% market capital GDP. So these were kind of these excesses that right size themselves after things broke. Well, in December, you know, they actually hadn't lifted the whole thing up to over 200% market cap the GDP. And everybody ignored it. It's like, this is madness, right?

Starting point is 00:12:30 You cannot expect to have a long-term, you know, disconnected financial system that is not backed up by actual productive growth in the economy. So the fact that the bubble now burst is maybe a positive in a sense that, okay, we're getting back to a right sizing type process. The problem is it's so big. We're still high. We're still in a 165, 170% range. So we're just kind of sitting on top of the tech bubble at this point, right? So how do you, from a policy perspective, convince the market that you're actually serious without then actually breaking something? So this is the art of jawboning, as it's called, right?

Starting point is 00:13:15 At the beginning of the year, I said, at this article, I talked about, okay, maybe this year is all about gaming the Fed. And if I were the Fed, what I would do is I would jawbone and get the market to tighten for me as much as possible. So that actually I don't have to raise rates to the point where I break things, but everything, you know, let stocks fall for one. right, take the excess demand part of the equation, demand destruction, create, you know, slow it down. And then when the time comes and do all this without actually causing a crash, right?

Starting point is 00:13:55 And interesting enough on that point, this is so strange about how this market's been acting this year is because we made low highs and lower lows, lower highs, lower lows on the S&P. But so did the VIX. you know, that the peak spike was in January. I was baffled. I got to tell you, and I think a lot of people probably baffled, that in at the June lows, when we went into the 3,600 area, the VIX was, again, making a lower high. You know, you would have expected in standard market functioning,

Starting point is 00:14:25 you would have some sort of capitulation in Vick spike now. And we can discuss that separately. It's kind of an oddity because it almost makes it feel like this whole thing is a bit controlled. It's like it's managed in some way. I'm not saying we can't have a massive expike still because I actually long term still see that coming. But I just in terms of market behavior, I find that very, very odd.

Starting point is 00:14:47 So if that was my theory that they're going to let this happen with jawboning, then this was all going according to plan. Again, Russia, Ukraine, I think, made things a lot more difficult for them because of the energy price and food price inflation component. And this is where the actual narrative doesn't make sense. And you actually heard Powell admit to that last week because he was challenged on this. What we do in terms of rate hikes is not going to impact energy or food prices at all. Yeah.

Starting point is 00:15:21 And so this is the perversity of this all right now. So if it's not impacting and no benefit to the consumer, then why are you now smacking everyone on housing and everything else? Because let's face it, it's going back to this wealth inequality piece. The bottom 50% did not benefit from all that money printing in the run-up of asset price. If you don't own assets, you don't see asset price appreciation. You don't. And so there's Druckenmiller talked about this last year as well in terms of how they're really just benefiting the upper tier of society, especially the top 10%. And we had it with data.

Starting point is 00:16:01 You can say it, you know, 89% stocks or 89% of stocks. by the top 10% is it's a no-brainer. So they really benefited from this. And the bottom 50% also got hurt because they were increasingly priced out of the housing market. And then thanks. Now they got inflation. You know, if you're in the bottom 50%, inflation, food and energy is hurting you more than someone that's in the top tier income.

Starting point is 00:16:30 Yeah. Higher gas prices. Okay, I've paid more in my tank. I don't care. Right. It's really, it's just a minute part of my monthly expenditure flow, right? That's, that's unfortunately the reality of what's been happening. And then now with housing, rent prices have been, obviously, screaming up as well.

Starting point is 00:16:47 So you just get beaten down more and more if you're in the bottom 50%. And those two stimulus checks, they didn't help you in the sense that, okay, they helped you while the crisis was going on. So I kept you afloat. worst case, maybe you got caught up in the bubble and put it in, you know, some coin somewhere. You know, that's just reality, right? So now inflation is going to continue on the food and energy front until we see some sort of solution with Russia, Ukraine.

Starting point is 00:17:20 And if the Fed is not really careful here by wanting to continue to raise rates, and then they're going to break something. Yes, they're going to put us in a major recession because they're making. making everything else more expensive, right? They're making no, though. 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.

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Starting point is 00:21:38 That's Shopify.com slash WSB. All right. Back to the show. Does the next response, does it come in at the same size of COVID? Or are they going to try to do a much smaller response? because they know that if they do something substantial, that the inflation prints are coming right back and maybe with even more magnitude.

Starting point is 00:22:04 Well, this is the interesting part because I think we all need to be just humble understanding that this is all a really unique set of circumstance and I don't think anybody has a clue how this can play out. I mean, the standard script is, yeah, we're on a recession, now going to go back to printing because they have to, as I mentioned, over $30 trillion in debt.

Starting point is 00:22:23 Actually, you lost a journal, had a piece out this weekend, I think that the cost of servicing the U.S. debt has already increased by 30% in the last year. And that's with, that doesn't even account for the latest rate hike. It's just the minuteness of the rate hikes and the financing conditions is, again, if you go to 3.8%, what are we talking about? You know, on the one hand, they say, you know, the debt is not sustainable, both Yellen and Powell have been saying this for the, for years. On the other hand, they put in the conditions where that continues. And so now this, by the way, you know, somewhat like they're saying critically of me,

Starting point is 00:23:01 says, well, you were ranting about them not raising rates for years, so why are you not critical of them raising rates? I'm not critical of them raising rates. I'm just trying to be realistic about what this implies to the debt construct in the economy that has been made so dependent on asset price inflation when it doesn't have asset price deflation. So the short answer is, I guess, it depends on how inflation evolves. I think we're all looking at the negative side. Maybe we can also look at what a potential positive could be. If energy and food price inflation are so tied to Russia, Ukraine, and not be an geopolitical event,

Starting point is 00:23:39 what if that actually solves itself? I know that seems completely unrealistic at the moment. But let's say they do come to a political situation. And I can come up with a scenario where there might happen, then all of a sudden, inflation is going to collapse on that front. On a commodity side, look at copper, massive bear market already, aluminum, lumber, all these kind of commodities, they're already dropping hard big time. So if we're looking at data this summer, I think we need to keep an open mind in terms of how this can involve, because there's obviously the consumer part of inflation, but then there's also a core inflation, what the fit looks at. And so, So you get one headline or Russia, Ukraine, and then it's over.

Starting point is 00:24:24 And then given how positioning is at the moment, which is some of the most negative I've ever seen, because people are, I mean, Jesus. I mean, it happens to every problem, but, you know, people get really bearish. In fact, the AIA-I-I bull bear ratio right now is some of the worst since the 90s. It's worse than the global financial crisis. It's close worse than it was during the 2000 tech bubble burst. So I think people are not prepared if there's any good news coming in a sense of positioning and how vicious actually a comeback rally may be. And then all of a sudden, all of a sudden it just disappears, right?

Starting point is 00:25:01 Because then you're looking next year at massive retrace numbers in terms of the inflationary component. And that gives them a room to basically stop. And then then basically if you have some goodness with COVID, you know, In terms of, like today, China announced they're easing restrictions. Again, supply chain easing, and then you can go back to some sort of normal. And keep in mind, the market is already pricing and rate cuts for next year. So while the Fed is talking about 3.8% of the market is always saying this is a short-term thing.

Starting point is 00:25:36 So you've got to be mindful of that as well. How that plays in terms of timing, nobody knows. How are you looking at real estate right now? because with these rates in the speed at which the rates have occurred. So we've gone, you know, here in the U.S., just call it generically 3% to 6% in real estate rates. I'm not sure what it is over there in the UK, but it almost seems like that the economic reality of that has not hit the market yet or that it's just about to. So what are your thoughts on that and like the timing of like how some of that might play out?

Starting point is 00:26:12 Yeah, so first of all, let me say since the global financial crisis, we've all come to, we've been trained to expect bear markets the only last, you know, at the most six to eight weeks before the next round of intervention comes in, right? This one's been dragging on. Actually, started in November. That's when everything peaked. The S&P peaked in January, but small caps, everything else peaked in November, and it's just been going on. So we're already in the most extensive bear market that we've seen since the global financial price. But bear markets can also last for years, right? We've not been there. And I think the question here for us now is, okay, going into the second half of the year, if we do see improvement in inflation, can we actually get

Starting point is 00:27:01 out of this phase here now? Or is there the big second shoe to drop, to your point, real estate? And that's the problem when you build an everything bubble, right? Not only a bubble in stocks, crypto you can argue, but in bonds, we clearly had a bond bubble, but also in real estate. This is why often it's so critical to fit because they bought like $1.7, $1.9 trillion in mortgage-backed securities into a red hot housing markets, a policy that was designed to bail the housing market out, you know, in a low supply type of environment. The housing market clearly can't handle higher rates either. It just can't.

Starting point is 00:27:42 I mean, if you got a 30-year mortgage at 2.5%, great, you know. But now you're looking at 5.5, what, 6, it's just going to kill demand. And it's going to kill the construction side of it. Because if you don't have demand, then you're not going to invest. And if you're all of a sudden, you're paying a lot more, you know, to finance your projects. You're not going to take that. So they're looking and staring and a completely collapse there as well. How is that helping to consumer?

Starting point is 00:28:12 The upside to this, it could make things, again, more affordable and they get some sort of balance. The big issue is what you raised, which is to speed, the velocity of what has happened with yields. So I want to raise that issue real quick because I think that's really important. Ten-year yield to me is one of the most important charts out there, along with the dollar and the junk yields, if you will, junk, J&K, it's a interesting chart. That chart actually is on a point where you would intervene typically. In fact, maybe the whole system right now is we're in a situation where typically they would intervene to save everything, but now they can't.

Starting point is 00:28:50 But the 10-year yield, and that flew higher this year like we've never seen before in terms of velocity at all. Last year I had this chart out. You may recall this, this inverse pattern. It was like in October was one point. 5%. I had an inverse, had a technical target, and it got to 3.2% hit it on the nose, then retreated. That was the point when we saw the market rally in May, right? It had made a new low. Then we saw the 10-year retreat market rally. Then what happened in June is the CPI numbers came out,

Starting point is 00:29:27 10-year freaked out, made new highs, 1 to 3.5% market structure lows. See, when you have a, just making a technical comment here is when you have a technical pattern play out, like we had that inverse going from 1.5 to 3.2%. The pattern has played, and then you wait and you look, okay, let's see if we can get a new pattern. Now we have a new pattern because we're building this really tight rising wedge on the 10 year. And the 3.5 that it hit in June hit the top of the trend line. Now we're reversed. And guess what?

Starting point is 00:29:58 We're seeing a rally in equity market. So that chart is super important conceptually. because it goes to what I said at the beginning. This debt-laden system cannot handle higher rates. 3.2% by the way was where it stopped in December of 2018. Excuse me, in the fall of 2018, 10-year hit 3.2%. Market fell apart, Fed Flip Lobb. That was the end of it.

Starting point is 00:30:24 That was with $8,9 trillion of less debt. So we cannot be in a situation where 10-year continues to hover. of 3.2% for an extended period of time. So if they want to really avoid a severe recession and a soft landing, the 10-year must come down and must come below 3%. And then this was going back to my early January concept. If they wanted to just job on the market, let the market tight, let the market overtight as it now has.

Starting point is 00:30:58 And then they come, then see the 10-year reverse and have to fit. meet it somewhere in the middle. So instead of a 3.8% fit funds, right? Maybe they'll stop at two and a half, 2.6, 2.7. And that's the end of the tightening cycle. So I'm wondering, as I'm watching this now, and the genie having a reverse again, it has the tightening cycle from a market perspective already peaked as the market is starting to price in a recession risk coming, right? And then that That's the pivot, but we won't realize it until after the fact.

Starting point is 00:31:37 Yeah. It's just in the here and now you can make observations. All I said is, you know, if they can't get that done and the tenure keeps flying higher, we're going to keep making new lows of markets. If the tightening cycle has peaked and the tenure is now going to break its uptrent pattern, you're going to have a massive risk on asset rally because, again, positioning, negativity, and relief, frankly, because that, that's, you're going to have a massive risk on asset rally. that then says the worst is over.

Starting point is 00:32:06 And I think we're just going to need to be cognizant that things can get a lot more violent, not only to the downside, but also to the upside. That's why we're kind of making the spare market rally case. Yeah, it's fascinating when you're looking at especially a lot of these treasury yield curves. The one that's got my attention right now is over in Japan, they're trying to do yield curve control. And you're seeing... They always...

Starting point is 00:32:30 And I guess I'm just trying to understand. understand how that all plays into the broader, the broader markets, because if they're, if they're doing the opposite of Fed policy with their yield curve control, and it seems like they're, they're working very hard to keep the peg, the yield peg in place, how does that play into the calculus, the global calculus of, of everything that's playing out? Because they're adding units. Others are aggressively tightening units, you know, monetary. units in the system. So how do you think through that and like, you know, how do you add that into the overall scheme of how you're how you're optically viewing where this goes next?

Starting point is 00:33:12 Well, first of all, we've seen over the last few years several times where central banks were pulled opposite in terms of policy. And we had that in 2017, 18, what the Fed was raising rates and reducing their balance sheet while the ECP kept printing. And Japan kept printing. And they kept rates, negative, right? So that's not unusual. What then obviously changed the equation was, you saw that with overnight repo, overnight rates also jumped into the US,

Starting point is 00:33:44 and also they brought this whole repo program in to keep things under control. Maybe Japan is kind of in that situation now, in the sense that the entire globe is moving towards tightening. Obviously, their policy is completely out of sync with that. and now obviously requires more and more interventioner question is how long they can keep this up. And that's the problem with permanent intervention. You're creating a financial system that's disconnected from fundamentals in a big, big, big way. Japan, Corrota, you know, they've done nothing but for years and years.

Starting point is 00:34:22 So I think right now they're very desperate. What you don't want to see actually is them losing control because I think that could break something globally. That's clearly a risk factor, right? Because that would push yields higher all over the place if Japan lost control. So I think this timing now between the summer and into the fall is very critical. Because if I'm correct in saying that the 10-year may have peaked, which I don't know if I'm correct, and we're dropping lower on yields and we're getting support from inflation data in terms of new CPI reports coming in July and August. then that actually takes pressure off the Bank of Japan.

Starting point is 00:35:03 You heard the term widow maker, right? Oh, yeah, yeah. People betting against the power of central banks, Bank of Japan in a specific way. They do have the ability to create money out of nothing, right? They have an unlimited supply. So, you know, I think there are a lot of people scared that if they're going to try this again,

Starting point is 00:35:24 betting against the Bank of Japan, they're going to get railroaded again, right? That's, yes. So basically what I'm saying is, there's risk in the system and everything. We have central banks fighting for control, trying to get a hold of the narrative in an inflation. Part of it may just simply be public posturing.

Starting point is 00:35:42 The concern is that indeed, they are going to break something. And maybe on that note, I should say, just a personal observation here, given the amount of carnage that we've seen in not only indexes, but specifically in stocks, where we've seen stocks dropping 40, 50, 60, 70,

Starting point is 00:36:00 80%. I'm actually surprised we haven't seen a major blow up yet by anyone. Yeah, I know. That brings me back to my earlier comment about this all seeming very controlled. Yeah. You know, traditionally, you know, I've been known sometimes to be a bear. Traditionally, I would say, you know, this is the, if this is the perfect environment for something to blow up and get really ugly. But it's so calm. It's so. You know, steady. In traditional markets, for sure. And traditional, yeah, it's a thing. Yeah, the digital asset space is a disaster. Yeah.

Starting point is 00:36:39 Yeah, well, yeah, you know, growing pain. Major disaster. Major disaster, yeah. So now, what I'm saying is, okay, well, you know, look at the arcs of the world. I mean, you know, there's Facebook. I forgot art or these are major fang stalwarts of the bull market. Netflix, completely destroyed. right Facebook. And you know that so many funds were highly exposed to this.

Starting point is 00:37:05 Get, where's, where's the drama? Where's my, where's my, where's my, where's my, where's my big VIX spike? What I have been saying this year is the SMP makes lower lows and the VIX makes lower highs. Sven, do you think that some of it has to do with, there were just monumental gains made in the preceding years since COVID? I mean, there was, there was, there was a year and a half. that, I mean, you had a raging bull market where, I mean, people just crushed. I mean, people made what they would typically make in a decade in that short one and a half year time frame in financial markets. Is this the reason why we aren't seeing the, because I'm with you, it doesn't make any sense

Starting point is 00:37:48 to me that we haven't seen something really kind of explode in traditional markets, but do you think that that's why? It comes back to leverage. I mean, look at margin debt last year. I mean, it just blew higher far beyond what we saw in 2000 or during the housing bubble. I mean, it's absolutely massive leveraging on the side of retail, for example. The one stat that just blew my mind last year was that last year alone, more money flowed into stocks from retail than in the previous two decades combined.

Starting point is 00:38:26 That's an insane amount of money, right? And so did they all sell the top and living at the beach? I don't think so. No, no. Right. There is pain out there. And that's what I was saying. I think maybe the, and this is the worry I have, is the Fed, again, making a policy mistake

Starting point is 00:38:46 by underestimating how much pain that actually is out there. And we see that kind of with the savings rate as well. You know, this is one of the things that always irk me with central bankers, you know, this sheer leading right up until the bitter end member Ben Antke 2008. There is no sign of a recession. Subprime is contained, you know, before blew up in everybody's face. And then he got redominated as the hero, right? Because he intervened.

Starting point is 00:39:14 And then we saw this last year again with every one of these guys bombarding markets all year long saying inflation is transitory. I mean, they literally promoted this risk on. environment, you know, and the S&P was just the tracker of the Fed balance sheet. Now we've dropped over 30% on small caps, NASDAQ, and you know if it wasn't for some of the specific stocks, and especially energy holding things up, because that's where you've seen gains, that actually underneath the damage is a lot more pervasive. So to me, the notion that all this is consequence free and we can have kind of a soft landing here with rates staying as high as they are.

Starting point is 00:39:58 To me, it's a fantasy construct. So something needs to give very shortly here. Otherwise, this fall is going to be, it's going to be a show to remember. Yeah. No, I'm with you. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a stock two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more

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Starting point is 00:43:31 Back to the show. I had a question come from the audience. This one's from Eddie. He wanted to know if he found technical analysis harder over the last few years, given the Fed's massive influence on the markets. And then, Sven, if you don't mind as a follow-up to that, just give us some of your thoughts in general about technical analysis and how you find it as a tool for maybe a beginner investor

Starting point is 00:43:56 or somebody who's just kind of new to the space. Okay. So first to Ed's question, I find technical analysis to this day to be incredibly helpful. I mean, look, maybe mixing the answer with the other question you had about technical analysis in general. Technical analysis is not a guarantee. It's not a tool that guarantees you anything. You can still be taken out positions.

Starting point is 00:44:27 And that's why people sometimes call it voodoo or squeakly lines and this, that, and the other. What technical analysis to me anyway is we're all in a position of great uncertainty. Anything can happen at any time. But it helps us identify a positive risk reward. For example, do I want to continue pressing long here in this technical setup? And this could be on the charts, on the signals, on the positioning. It's a whole heap of tools. And you can make this really complicated, which I don't like.

Starting point is 00:45:03 I'd like to actually keep it very simple. Kiss, keep it simple, stupid. That's one of my wife's lines. And she's been just marvelous. And I can go through all kinds of tools, which we don't need to go through. But I'm saying when the search is to find what the market deem is relevant, it keeps us honest in that sense because we may all have opinions and we may have biases and, you know, we want this to go to a million and this to drop 100%.

Starting point is 00:45:28 This is not realistic. But it helps us keep us honest in the sense that we can say, look, you know, this, we can debate all day long, why, but it is relevant to the market. And if it's relevant to the market, it has to be relevant to me as someone's trying to position for a profitable trade. It's going back to Ed's question specifically. I gave you one example. This is really recent. This was here in June 16th, I posted this chart on Twitter about the broader NICI-N-Y-S-E index. One of the most powerful tools to me in technical analysis is confluence where, okay, there's not one particular point that on a chart that's of interest. By the rather, it's multiple things happening at the same time, which I found fascinating.

Starting point is 00:46:22 And in AISC specifically, it was the weekly 200 MA. It was the February 2020 highs. and it was the 38-2-fib. And they were all in the same zone, which to me just screamed confluence support. So is that to say a guarantee that NIC does not drop lower? No, and I pointed this out on Twitter.

Starting point is 00:46:46 So there's a lower gap below. This area doesn't hold. But I also said, this is an area of confluence that would be of interest for bulls to take a major stand at because it has all these areas together And guess what?

Starting point is 00:47:00 It did. I keep tracking that chart. It just bounced right off there like a rocket. So technical analysis absolutely matters. Now, to be fair, what we see when all these interventions over the years, I've come to realize that the extremes become ever more extreme to the upside as well as to the downside. When you have too much fluff in the system, the down moves can be absolutely all-inspiring.

Starting point is 00:47:27 And there will be times when, you know, technical analysis also gets blown out. It's not a, as I said, it's not a guarantee. You just got to be aware where the control pivots are and then figure out if that is a trade worth taking from a risk or work perspective, you know, stop management and all that. Not financial advice. It's a tool. And we got to learn how to use the tool. And keep in mind, banks use technical analysis.

Starting point is 00:47:55 They have whole teams of technical analysis. They're basing on all this as well. Some may call it a self-fulfilling prophecy, but it's not. I mean, yes, a lot of people are looking at different things, but it makes sense because the market is sensitive to it and is reactive to it. And our job is to find out where those points are and then use those points to develop a positive risk reward entry point. And the final point on this, and I freely admit this, when you are in a heavy, heavy

Starting point is 00:48:26 printing environment like we were last year, the cell signals often get washed away. It's very tricky. But it comes back down to the simplest things. And trend lines, for example, are very powerful. Yeah, you can get a spike over. You can get a drop below or whatever, temporarily. But markets really respect us as well. And as we got into November, December, the S&P was screaming against a long-term trend. The NICE did it as well. And it just, kept stopping there. Like every time it dinged it, while the Fed kept printing,

Starting point is 00:49:01 that correlation was there. So every time it dinged, it was definitely worth an effort to get a sell out. And we got these occasional drops. You know, they weren't very dramatic. But then once the trend broke, all hell broke loose, right? That's why it's an arch form,

Starting point is 00:49:16 I would say, to mix technical analysis with what's understanding, what's going on on the macro front and what the trends are. And then present a comprehensive picture of how you want to approach this from a trading perspective. You know, as a guy who started off as a value guy exclusively, I was very suspect of anything

Starting point is 00:49:38 technical analysis related, but through time, I found that things that have a larger market cap, or if I can kind of look at a sector by combining equity indices or whatever to to manufacture a larger market cap collectively. I find that there's a lot of signal, like you're saying, probability-wise, in using technical analysis when I'm dealing with a larger market cap. When you're looking at smaller market caps, I think it's just so volatile, dependent on much smaller factors that are hard to predict or forecast based on looking at price exclusively. So, yeah, no, those are some interesting comments. And I really like your comment about the comment. influence. I think that's an important factor for people to think about. Sven, so you seem to be

Starting point is 00:50:28 more amenable, is the word I'm going to use, to Bitcoin playing a role in potentially the resolution of a lot of this craziness that we're talking about with respect to central banking policy. In general, what are your thoughts around it? What kind of played a role in some of that change your heart or maybe just looking at a little bit differently? Well, as you said at the outset, we had a couple of little dust-ups, you know, at the beginning. Now, look, for me, it was an evolution as well. Part of it, part of my capitulation process was my wife kept beating me up over. She's been a long-term bull on Bitcoin.

Starting point is 00:51:10 To me, analytically, at the beginning, I obviously, you know, I saw the run-up in 2017, 2008, and then a complete collapse. Looking at the technology, wasn't clear to me that central banks would actually ever allow it in terms of being, these guys all are monetary, the regional dictatorship, they have complete control over the monetary system.

Starting point is 00:51:37 So why would they actually allow this to happen? And maybe with regulation together, they would squash the whole thing. And then of course we drop, what, from 17,000, 20,000 to 3,500, And that was the first kind of a big pain wave. But then I also looked at it from the human component in terms of where you actually see development happening. It's actually working from a technical perspective.

Starting point is 00:52:05 It is very clearly defined. And you see people like Jack, from former CEO of Twitter, getting heavily involved. And they're smart people. And they're doing a lot of things around it. Then the regulatory pass started evolving a bit where I started realizing, you know what, they can't shut it down. They can't ban it. I mean, they can make it difficult, absolutely, but no, they can't shut it down. But then at the same time, I saw, as you know, it's talking about this massive acid bubble.

Starting point is 00:52:37 So I saw all this other stuff coming about that reminded me very much of the 2000 tech bubble, the fluff, you know, the overexcithement, the emotions, a long way. with the recklessness in some cases in terms of behavior. You know, as you know, we got spammed to hell with bots and everything else. These are kind of all the negative components. So in terms of an acid bubble, I was very concerned that everything could blow up in that sense. And I started talking to Michael Saylor last year. I had three discussions with him, the first one. Then I was kind of coming from the point of, okay, let me try to poke holes on the whole thing.

Starting point is 00:53:17 And during that discussion, this 2000 tech bubble aspect came back in my mind. And Michael and I talked about the components. You know, we had, obviously, stocks get completely obliterated in the wake of the tech bubble, including Amazon, including Apple. I mean, they dropped 80, 90%. But, and this is the hindsight equation, you know, are you looking at business models that are sustainable or that have the potential to have, a global dominance and footprint. And clearly, in hindsight, we know the apples and the Amazon's

Starting point is 00:53:53 of the world were exactly that, whereby, you know, Pets.com and all that stuff completely blew up. So then that became of interest to me because I said, okay, well, let's look at the space and what do I see

Starting point is 00:54:07 as a winning business model long term in that construct. And that's where when you are in an asset bubble, you want to see how this all falls out, right? And we just saw that. We just saw this year. In January, my second discussion with my phone was my first nipple at Bitcoin when it had dropped.

Starting point is 00:54:29 I think it was down the low 30,000. So just a little nibble because I was still in the full cognition that we're still in an asset. And I pointed out the charts. Going back to Ed's question earlier about the relevance of technical charts. One of the things I always liked about Bitcoin, And I've set this for the last year and a half of us. That I like that it acts very technically. He actually charted beautifully.

Starting point is 00:54:53 And I've been pointing out Bitcoin on the Northcast for months and months. When I see bullish signs, I pointed to bullish signs, when I see the negatives, the bearish aspect of it, bear flags or whatever. It plays it. It plays it really nicely. In fact, this last few weeks, when the markets dropped, Bitcoin, my third-discussion, Michael, sale, I talked about the 17,000 level. We dropped to 20,000.

Starting point is 00:55:17 I said 17,000. There's a major trend line there, major, major support trend line. And that's the immediate risk. But as long as it holds the trends intact, guess what? We hit literally that weekend, we had 17.5 tacked the trend line and a bounce from there. Not saying anything is clear, but, you know, it's all part of a process to mean. If we were to drop that trend line, boy, folks, things can get a lot uglier. I just be absolutely clear on that.

Starting point is 00:55:44 And I said that's in January. You know, you can make the case because there's a large, a larger, larger macro trend line that points down to six, seven thousand. And I'm not predicting anything. I'm just looking at the overall risk. That's why it's important whether we are now in a structural bear market that lasts for a couple of years in which the cases can happen. Or we're coming out of this and this will have been like a, you know,

Starting point is 00:56:07 first half of the year's scare because, and it's the other thing, I've been pointing out for last couple of years, is the asset correlation is massively high between the S&P and Bitcoin in terms of the directional flow. In fact, in the recent weeks, it got to like 95%. In my case in January was what's missing for Bitcoin is that regulatory framework. Because from a demand perspective, I think there's a lot of funds that are professional investors that want to get into Bitcoin, but they don't have to. regulatory clarity and they can't actually invest until they do have that regulatory clarity.

Starting point is 00:56:50 So if I look at this, then I see a bear market, I mean, I see an asset bubble that's popping. I see business models getting crushed left, right, and center in the crypto space. I see the fluff coming out, which I think is a positive thing. Because once you have the creative destruction, then you can have that longer term view in terms of what will maintain, what will be sustained. You heard Gary Gensloff in the SEC yesterday saying, considering Bitcoin a commodity, it's kind of singling it out,

Starting point is 00:57:21 which is of interest as well. So you're looking, you know, the Twitter handles Northman trader, not Northman investor, but in, in terms of Bitcoin, I do see it as a longer term hold for me. So that's,

Starting point is 00:57:36 that's why I outlined in January, I want to kind of use this year with the VU that an acid bubble could be bursting. I'm going to use this year as kind of slow patience scaling in strategy over time. You know, 20,000 was a level I mentioned in early January as well. That was kind of a key support line as well. So now, here we are. So it's part of a process.

Starting point is 00:57:58 And I think long term, it's very positive for Bitcoin. Now, of course, if you, you know, bought it 50, 60,000, you're writing this down. This is no fun, right? That's why I kind of stayed away from that cycle. hype at the time. By the way, just a general comment, I think, for anyone, whether you're a short-term trader or a long-term trader or investor, the biggest skill I find that I continue to teach myself is patience.

Starting point is 00:58:29 That's why, for example, if I were really patient, I just maybe trade two or three times a year, wait for the big confidence points to come together. Yeah. But, you know, we're also creatures that want instant gratification, right? So we get trigger happy on the finger. But that's one thing I learned over the years to just be a lot more patient. But at the same time, when a setup hits, fight for it too, you know, because things will be volatile.

Starting point is 00:58:59 It's not like, you know, okay, thing, here you go. You know, you got to be willing to sweat it out because that also happens at key points. and be persistent but disciplined. All right. So here's my last question. So you spent a lot of time in nature. I do. You're out in nature and I love the pictures.

Starting point is 00:59:20 I love the memes also. But I love the pictures that you post. What is it that you have learned from nature that you apply to your stock investing in just kind of the way that you optically view markets? Well, it goes back to those patience thing. You know, nature, you know, I live here, I'll just put this out. I'll live here out in the countryside in England.

Starting point is 00:59:43 It's absolutely lovely. And there's, I love England, by the way. I mean, I just moved here a few years ago, eight, nine years ago. But it's an amazing place because everyone over time wanted to come here. The Romans did, the Anglo-Saxons, the Vikings, the Normans. And you get to see all these places that have been. around for a very long time. And that kind of, I don't want to get too philosophical here, but it helps really keep the macro

Starting point is 01:00:15 in perspective. You know, things change over the world, but they will sustain the same. And it helps me, actually, the beauty for me is I can just step outside and I'm in nature, you know. We're forced to stare at screens long enough as it is, right? So it's a nice, nice outlet here. I love it. So I wouldn't want to be anywhere else at this point.

Starting point is 01:00:40 Although the winters are rough. Yeah, but you know what? Do you snow ski at all? No, we don't get snow in England. We get rain. You get rain. We get either, we either get cold rain or freezing rain. That's where the wood shopping comes in.

Starting point is 01:00:56 Because, you know, we got a nice wood burner, got the axe out. I love it. Yeah, it's good stuff. That's amazing stuff. That's amazing stuff. Sven, I really appreciate you coming on. And I've been a fan for years. It might not have seemed like it at a few moments, but I'm serious. I've been a fan of yours for years and just, I love how succinctly you can get to the crux of what's important in the markets. And you can do

Starting point is 01:01:25 it in a single tweet or a single chart that I think everybody that follows you when they see it, they're like, yes, yes, that's the chart right there. That explains exactly how I feel. right now about these market conditions. And it takes a lot of skill and a lot of knowledge to be able to pinpoint things like that. So such an honor to talk to you. And I really appreciate you taking the time to come on the show and I have the conversation. And give people a handoff to your content and things that we can put in our show notes. Oh, yeah. And obviously the website is Northman trader.com. I also have the Northcast out what try to explain charts, what I see in terms of markets and of course the Twitter handle at a Northman trader and I sprinkle sarcasm into

Starting point is 01:02:09 ways sometimes that doesn't work because people don't get that it's sarcasm. I had some person attorney from Florida got upset with me yesterday about a little sarcastic tweet that that happens so sometimes it's lost in translation but yes I try to look at the end of day what I try to do is I try to keep it real. We are in a complex world. I try to add some humor in it, but sometimes the humor just writes itself because I just need to comment on what people actually say or do versus what's actually happening. So it's kind of, it's an ongoing comedy show. And I, you know, what comedy is good for us. I think humor is helpful getting through complex times. But it also helps make what is said being,

Starting point is 01:02:56 whether it's being done. And in general, I am a bit, I guess, woeful about how this is all been evolving over the years because people are getting hurt. This is, you know, this is, and we say it's made fun and giggles. It's not. Inflation right now is hurting a lot of people. And this wealth and quality issue is strenuous because we're seeing it in politics now. The tensions are high and society gets ever more divided. That's not a positive thing.

Starting point is 01:03:25 I don't think things would be as extreme if we didn't say the middle class shrinking decade after decade after decade. It's a challenge. So yeah, we keep it light but real and steel. Well, I really appreciate you taking the time. And we'll have links to all your stuff there in the show notes. And thanks for your time today. Preston, brilliant.

Starting point is 01:03:44 Thank you very much. Thank you, sir. Thank you, sir. Cheers. Cheers. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires.

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We Study Billionaires - The Investor’s Podcast Network - BTC085: Sven Henrich on the Central Banker's Dilemma (Bitcoin Podcast)

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