We Study Billionaires - The Investor’s Podcast Network - BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to this Wednesday's Bitcoin Fundamentals podcast. The guest on today's show is Alf Pecca. Alf is a former multi-billion dollar fixed income manager and executive with ING and now is a macro expert. On today's show, we cover a lot of emerging ideas in the marketplace like the ECB's fragmentation policy that was recently announced, what it means for actions in the EU and their subsequent responses, whether Italy is potentially turning into the next Cyprus situation, whether the yield inversion will get worse before it gets better, what his thoughts are on Bitcoin, numerous important charts, and much, much more. So without further delay, here's my interview with the thoughtful Alf Pecka. You're listening to Bitcoin Fundamentals by the Investors Podcast Network.

Starting point is 00:00:51 Now for your host, Preston Pish. Hey, everyone, welcome to the show. Like I said in the introduction, I'm here with Alf. Boy, I am a fan. You have some amazing content, especially your Twitter feed, your newsletter. Boy, it's such an honor to have you here on the show. And I know we're going to get into some really interesting topics. So, Alf, thanks for coming on the show. Well, Preston, I've listened to plenty of your interviews.

Starting point is 00:01:27 It's actually fun to be on this side, this time, to be the guy you'll be interviewing. I'm looking forward to this. Well, I'm looking at some of the charts you said over to me, and I can tell we're probably going to have more conversations like this in the future. So for people listening, Alf has provided a bunch of charts. So if you're listening to this in audio format, I would highly recommend that you go back, kind of listen to this, maybe or watch this on YouTube if you're interested in some of the charts that we're talking about because we're going to probably cover a bunch of them here.

Starting point is 00:01:57 But before we get to that, I want to start off the show talking about this new term that came out of the ECB called anti-fragmentation policy. What the heck is anti-fragmentation policy? And what have they concocted this time? It's a band aid to try and basically close a huge wound. And the wound is the structure of the Eurozone Preston. I mean, the Eurozone, and I'm European, I guess my accent is very clear. I'm Italian. Can't do anything about the accent, guys. The Eurozone is a very, fragmented structure. And that's why you need an anti-fragmentation tool. And the fragmentation comes from the fact that we have one monetary policy for 19 different jurisdictions. We have one currency, one monetary policy setting, but 19 different fiscal policies that in principle

Starting point is 00:02:50 you try to harmonize under certain restrictions that are never respected at the end of the day. And also you have 19 different economies that have different structural features from each other. We don't have a banking union as well in Europe. So each bank has its own pros and cons and its own structure. It is really a fragmented structure. And when you start applying pressure towards the cracks, you start to see some problems emerging. And that is where the firefighters normally need to come in.

Starting point is 00:03:20 And the firefighter tends to be the central bank at the end of the day. Yes. What are they going to do? So I got the terminology that you could just describe. And we understand the 19 different jurisdictions, but like, how would they put this into application? So like if they were going to, is this just like advanced yield curve control, QE? Like what is it that they're going to actually perform with this? So the new anti-fragmentation tool is effectively supposed to be a full backstop for country spreads to avoid that they widened to a level where the monetary policy can't be transmitted equally to all jurisdictions.

Starting point is 00:03:59 This sounds very complicated, but indeed what it really is is to make sure that Italy, Greece, Cyprus, Portugal and Spain to a certain extent, their government bond spreads measured against Germany, which is effectively the benchmark safety net in Europe. This government bond deals, the spread against those bonds and the German bonds don't widen to levels that signal the fact that investors have lost confidence in the Eurozone to remain a cohes project. So you need a backstop for weaker countries to make sure that the monetary policy is spread equally across all jurisdictions. And how they think of that precedent is they effectively say, all right, we have to make sure that if investors want to sell or short, all the Italian government bonds out there, for example, they know they're going to be facing the wall. And the wall is an authority with an infinite, potentially infinite balance sheet, which is the

Starting point is 00:04:54 European Central Bank, that can act as a backstop and can. and say, you can sell as much as you want, we're going to buy all of that. So the idea is to have an unlimited bond buying tool, but only to use it as a backstop if the situation gets worse and worse. Now, the problem is the conditionality that the European Central Bank had to attach to this tool. It's not like, hey, guys, if you sell Italian government bonds and the spread against Germany goes to this level, we're just going to buy them all. But they also had to put some conditions in there. And the conditions are that the country doesn't need to have macroeconomic imbalances, the country doesn't need to be in an excessive deficit procedure, the debt sustainability

Starting point is 00:05:32 pattern needs to look okay. So there are a bunch of conditions that basically have to be assessed by external bodies, the European Commission, the International Monetary Fund, and all other external bodies from the ECB. Effectively, the ECB is looking for political cover. He's looking for other institutions to tell them they have a green light to come in and backstop the widening of these spreads, but before these countries can effectively convince all the other bodies that they are implementing reforms, that they are on a good path, there is a time inconsistency issue here, because investors are not going to wait for all this bureaucratic body to sit and give a verdict, and then wait for the central bank to put things in action. If they feel that things are getting

Starting point is 00:06:14 worse, they lucked very fast and put even more pressure on countries like Italy or Greece than we are already seeing right now. So this sounds really unfair to, if I was a German, I would be hearing this and I'd be saying, well, this just doesn't work. So when we say anti-fragmentation, it's also an anti-fragmentation for those that are typically, and I'm saying typically, because I guess they're not net exporters as of present. But if I'm Germany, and I'm hearing this, I'm saying, we've got to get out of this situation. Is that correct? Or what do you think their thoughts are? So right now, the anti-fragmentation tool is effectively what Germany, Austria, Finland,

Starting point is 00:06:56 the Netherlands, and all Northern European countries had to give in to obtain something in return. And what they're obtaining in return is the European Central Bank hiking interest rates. You have to think about it, Preston, in a way that if this tool wouldn't exist and it wouldn't be effective at all, every time the European Central Bank would even try to hint that they're trying to raise interest rates, higher interest rates hurt weaker economies, weaker balance hit economies like Greece or Italy or Cyprus, in a disproportionate way. So while Germany, the Netherlands, Finland, or other countries could and would want to have higher interest rate right now to fight inflation, which is skyrocketing in Europe as well,

Starting point is 00:07:37 they actually could never get there because you would have other issues to face with, which is the fact that Italy is at risk of blowing up if interest rates are effectively brought higher and higher without a backstop facility. So it's nothing else than giving in something, which is this anti-fragmentation tool, to obtain something back, which is a tighter monetary policy for longer and a more sustainably tighter monetary policy to actually fight inflation, which is becoming a domestic policy issue as well for countries like Germany. So talk to us about Italy. So I've talked to a few macro folks. And, you know, Japan immediately comes up with their yield curve control. And then I always ask, where, where's the next place we're

Starting point is 00:08:19 going to see yield curve control? And almost everybody suggests that it's going to be in Europe. So talk to us a little bit about that idea and also what's happening in Italy right now and just your general thoughts. Yeah. So the idea behind yield curve control is that you as the monetary policy effectively have an infinite balance sheet that you can expand in your own currency. And as long as your currency is domestic is the one you can effectively have jurisdiction on, you can print bank reserves out of nowhere digitally. You can expand your balance sheet on the liability side by having more bank reserves. You just created out of thin air.

Starting point is 00:08:57 And you can use these bank reserves to extract bonds from the private sector and effectively exchanging these bonds for bank reserves. So you take these bonds away from the system and you say, guys, don't worry about those bonds. You don't have to buy them. I'll buy them. and you give in exchange to the private sector, these newly created bank reserves that you've just basically created out of thinner.

Starting point is 00:09:17 These bank reserves go into the banking system. They remain stuck there. They can't get out. But effectively, the private sector doesn't need to worry about absorbing these issuance anymore, Preston, because there is somebody else who's doing that, who's the central bank. Now, in yield proof control, the interesting thing is that, as we have seen in Japan, you don't necessarily need to buy all the bonds out there. But you can effectively signal to the private sector that if they want to sell bonds and make yields higher, because as you sell bonds, prices go down

Starting point is 00:09:50 and yields go higher. If yields are going higher than a certain level, they would then, basically, conditionally to that level being hit, buy as much bonds as possible to that level to make sure you can never cross that. Because the private sector is a limited balance sheet. Capacity. We cannot expand it, however we want. We need to get credit to expand it. To get credit, you need to have certain features and you need to pay back and to service this newly created credit with cash flow, with salaries, with earnings. For the central bank, it's completely different. They can just expand it however they want. An yield curve control is a smart way to make sure that on a quantitative side, it looks like you're not expanding it to a very large extent because you have this

Starting point is 00:10:31 conditionality you just sent as a message to the private sector that as they try to hit that level, you will ultimately expand your balance sheet. And it's a messaging tool, it's a, it's a some sort of a forward guidance tool as well, to a certain extent, that is more qualitative than quantitative necessarily. Now, in Europe, the problem with that is, again, a bureaucratic legislative problem because the German constitutional court has somehow green lighted quantitative easing programs that they always opposed from a domestic perspective in Germany because of the history with the Weimar Republic and inflation getting out of control.

Starting point is 00:11:08 They are really not happy with quantitative easing programs. They sort of bring light at them. And one of the main conditions the German Constitutional Court put was that quantitative easing programs need to be defined in size. They need to be of a certain defined size. You cannot just say, I will indefinitely print as much as possible if you try and hit this threshold. Generally speaking, German regulators and let's say the law in German.

Starting point is 00:11:33 and it doesn't really allow that. So when you try Il-to-Kirf control in Europe, it becomes very complicated. Because as a central bank, how are you going to defend Italian government bonds saying that you have only a certain amount you can buy Preston? How big does that amount need to be? Hedge funds can use leverage. They can also become very, very large in selling these Italian government bonds if they think that you will have to give in at some point as a central bank.

Starting point is 00:12:00 They can try to break the ECB if the ECB commitment is not very strong. So while Europe might be the best candidate from a macro perspective, and I tend to agree, if you understand the legislative issues and fragmentation within Europe, you also understand that a very extended and effective yield curve control or spread control in Europe is also very difficult to apply. I've never heard that side of it. And I think that you're, you know, it makes total sense that Germany would have policies like that in place based on the history and what they had dealt with not long ago, right? Like this 1920s for us seems like it was a long time ago, but culturally I think that it's so near and dear to, I mean, you're only a couple generations removed from that that hyperinflation event happening that it's still fresh in that population's mom.

Starting point is 00:12:57 And I didn't realize that you have that still kind of posing a threat to them implementing yield curve control. Now, do you think that that's going to prevent it from happening or do you think at the end of the day they're going to have to do it in the German population is going to have to deal with it in some sort of way? Slowly but surely we're going to get there, Preston, in some form of another. It's going to be a very rocky road ahead and it's not going to be simple. But you're seeing that the Germans would have never dreamt of allowing QE in the first place

Starting point is 00:13:32 10 years ago. If you would have asked any German, we are going to get the European Central Bank, just print bank reserves and lift all the bonds out there, all of them. For reference in 2020, the European Central Bank I calculated has bought more bonds than all governments across Europe have issued. Try to think of that, Preston, for a second. If you're a private sector entity in Europe and you're a private sector, and you're a You are a pension fund, you are a bank, you are an asset manager.

Starting point is 00:14:01 The central bank is telling you, dude, you want to buy some bonds? I'm sorry, you'll have to compete with me. I'm going to crowd you out. I'm going to take all the newly issued government bonds this year by all the governments in the Eurozone. I central bank, I'm going to buy them all. And if you want to buy some more, you basically have to compete with other owners of government bonds around there.

Starting point is 00:14:20 So you have to bid up the prices to make sure they can sell them to you. So you're crowding out the private sector completely. If a German would have heard this 10 years ago, it would be like, what? We'll never going to allow that. And in reality, we went to that point. We went to that point because Europe is a place where fragmentation is very high and cohesion is very low until problems reach a certain degree where the geopolitical importance of the Eurozone and the Euro in general needs to be preserved.

Starting point is 00:14:51 And therefore, if the heat in the kitchen is becoming really, really unbearable at some point, are going to close themselves in the room and try to find a compromise solution. It's always a temporary band-aid, but if you keep adding temporary band-aids one across another, then at the end of it, maybe in 20 years, you can imagine, will have some sort of ill curve control in Europe. It's going to be pretty complicated to engineer, though, because of these legislative issues and inherent differences in DNA as well. Really, a Spanish guy is just a different guy as a different DNA, as a different interpretation, interpretation of social policies, of economic policies than a German guy has. And those differences

Starting point is 00:15:32 will always be there and will be difficult to be bridged. Hey, so we talked a little bit about CDS, and you had sent me a chart, and I'm going to pull it up for folks to see here. And if you can just describe this chart that I'm showing that you had sent, talk to us about the CDS markets, what it is, and then talk to us about this chart that I'm displaying right now. so people can kind of understand what you're talking about. Okay. So Preston, this is a chart I shared on the MacroCompass. It's the free newsletter that I post once a week.

Starting point is 00:16:08 And we do some deep dives into certain topics. And in this case, we're talking about Europe. And the CDS is a credit default swap. And those contracts became very famous during the great financial crisis for a bunch of reasons. Well, what they do really, they allow owners of search. risks to have a product that hedges them against the default risk, especially the credit risk. So a risk of the issuer of a certain bond, for example, to default. If you buy a CDS, you're going to be protected against this event. Now, the CDS product became very, very much

Starting point is 00:16:44 famous after the great financial crisis. They're still pretty traded in pretty decent size, actually, to the point that if you look at the CDS market in Europe, there are two different CDS. One CDS has a regulation that going top of my head goes back to 2005 before the great financial crisis. And if you buy the CDS on Italian government bonds under the law of 2005, you will be protected against the risk of default, but these CDS will not protect you against the technical default that Italy can actually incur to if they would choose to redenominate their debt from Euro, back to lira. And now you can understand that if you bought some bonds denominated in euro, you might not want to have some bonds denominated in lira because if Italy goes out of the eurozone,

Starting point is 00:17:35 lira will obviously devalue big times against the residuals in the eurozone, which will be mostly northern European countries at that point. So you might actually want to be protected against that event too, right? You want to be protected against Italy defaulting, and you also want to be protected against Italy redenominating their debt into their own previous domestic currency, called the lira. Now, if you want that double protection, you need to buy another CDS, which is a 2013 or 14 law, one of the two. And this new CDS protects you against debt risk as well. Now, why am I mentioning these two CDS, is this chart for people who are listening shows the spread between the two CDSs. So if one protects you against the redenomination,

Starting point is 00:18:19 the other doesn't, you can understand the spread or the difference between the two effectively encapsulates the risk of redenomination or a proxy that investors are assigning for the risk of redenomination or how much are they willing to pay more for the other CDS that also protects them against this risk marginally. And the chart shows that the proxy for this redenomination risk or what I also call the Ital exit risk, so the risk that Italy basically exits the Eurozone, has actually spiked up very quickly in 2022. This is the result of a couple of things. It's the result of the ECB attempting a tightening monetary policy. And every time they do, which means press and they stop quantitative easing, they even suggest

Starting point is 00:19:01 they're going to hike. They did a hike of 50 basis point, the largest since at least a decade in the Eurozone, all at once. They obviously apply pressure on countries like Italy. And the more pressure they apply, the more probabilities there are that theoretically Italy could choose at some point to just release the pressure by exiting the Eurozone. It's a very residual small probability, but it goes up in terms of pricing. The second is that Draghi's government just fell in Italy.

Starting point is 00:19:29 So we don't have a government anymore. Literally, we don't. We have a situation where we have an energy crisis. The economy is weakening. The European Central Bank is tightening monetary policy, and we do not have a government anymore. Which means we're going to run for elections at the end of September. And the polls are showing that we are at best going to get a very fragmented government. At worst, we are going to get an outright.

Starting point is 00:19:50 European critic slash skeptic coalition. And obviously that coalition increases the probability that Italy might decide to apply some pressure and try to get out of the Eurozone. Now, you have seen now this proxy for redenomination, which is a different between the two CDS's pricing to levels, which are basically amongst the highest you have seen over the last 10 years. Close to 2018, where we had a government crisis and we really had a government coalition, which was outright Euro-sceptic back then. So, investors are becoming pretty nervous about Italy, and I have to say pretty rightly so.

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Starting point is 00:24:38 Do you think that it's just a matter of time of when that plays out where they revert back to the lira or is it something that you think is recoverable, that they're going to continue to use the euro? Or is all the math, right, of all this debt leading us down this inevitable path, it's just a matter of what? I have to say that it's a chicken and egg game or actually it's a game. or actually it's a game theory problem here, because the Eurozone is roundabout convenient enough for all the members to still be part of the Eurozone. And why? Because the Northern European countries

Starting point is 00:25:16 have benefited from a much weaker currency that in reality they would have had, if it wasn't for the Euro, they would have had a Deutsche Mark or another Northern European domestic currency, which would have been much stronger than the Euro was. So by design of the Eurozone, they effectively had this competitive advantage of being able to, being export-driven nation for most cases, and being very productive and relying on a weaker currency than their structural domestic currency should have been, they effectively have ripped quite some benefits out of the Eurozone. And on top of it, do not forget the geopolitical benefits that the Eurozone brings, which is you can negotiate if you do it smart enough.

Starting point is 00:25:53 You can negotiate contracts when it comes to energy security that should be much better than your bilateral negotiations. Italy doesn't, sorry, the Eurozone hasn't done a great job at the energy security at all, but in principle being a block rather than a single country delivers these advantages. It also delivers advantages for weaker countries because, you know, you can argue that also being part of this bigger block to a certain extent allows you to have closer connections to neighboring countries, allows you to have a different way to when it comes to geopolitical negotiations. So the sort of the incentive scheme is just good enough for everybody to,

Starting point is 00:26:29 wanted to stick into it, a press, and while people do not like uncertainty. And getting out of a project which has last for 20 years and has brought peace and a certain amount of wealth increase over the last 20 years, the uncertainty that getting out would provoke is actually pretty, pretty big. So I think at the end, Europe will try to do whatever it's necessary to try and stick together. It's becoming every time more and more and more. And so it's becoming every time more and more difficult to achieve. Interesting. Let's transition to a chart that I think is really easy to kind of wrap your head around

Starting point is 00:27:06 and just kind of is useful for kind of understanding the longer, well, not longer, but you know, your eight-year cycles. And so I've just displayed a chart that on the top line is just your unemployment numbers and then the line underneath of that is the difference between your 10-year yield and your two-year yield, which is a really popular chart that you see being shared online. Because what that chart is displaying to people is a negative yield curve, at least between the 10-year and the two-year on that bottom line. So, Al, take us through your thoughts in general on this chart, the 10-year minus the two-year in particular, and whether you kind of see that

Starting point is 00:27:50 as a leading indicator to a recession and just really kind of all your thoughts around it. Is it reliable? It was a great place to start. Yes, it is. The ill curve is a super good economist, actually, I have to say. It has a almost immaculate track record in predicting sharp economic slowdowns. Now, why do I say that instead of recessions? Because there have been maybe a couple of cases in the past where an inverted yield curve

Starting point is 00:28:19 between 10 year and 2 year has failed to predict the recession, but nevertheless has predicted quite a sharp economic slowdown. And when it comes to investing Preston and protecting our purchasing power, all that matters is that we are able to understand the change in cycles. Is growth accelerating? Is growth sharply decelerating? That's all we need to understand. If it turns into a recession, okay, but if growth is moving from 4 to 0 percent, that's

Starting point is 00:28:45 not a recession because it's not negative, but it's damned if it is a strong economic slowdown, right? And so from that perspective, a flattening yield curve between 10 year and 2 year is a fantastic predictor. So first, let's explain why, I think. And then this very nice chart you brought with unemployment rate, which also helps us bring everything into one picture. The reason why a sharply flattening and inverting yield curve between 10-year and two-year and two-year predicts economic slowdowns is the following. Let's take the example of now. The two-year government bond deals in the U.S. have actually spiked up very aggressively over the last six to seven bonds. And why? Because two-year government bond deals have to reflect by design the very

Starting point is 00:29:26 shorter monetary policy the Federal Reserve will try to force upon markets. A two-year yield is nothing else than the sum of all Fed funds rates over the next two years. You can say so the discounted value of all the Fed funds future prevailing we will see over the next two years. Well, you can think the Federal Reserve is quite a weight when it comes to imposing what the monetary policy and therefore the Fed funds will be over the next two years and therefore markets are somehow forced to adapt their price into what the Fed tells them the pricing has to be. This is the short end of the curve, the two-year treasury yields. The 10-year treasury yields, they're completely different beast. A long and bond deal tends to reflect the perspective for structural growth and inflation over the next

Starting point is 00:30:11 10 years, right? So if the Federal Reserve is forcing upon us a cycle of tightening, which is going to bring in their head Fed funds rate all the way up to 3.5, 3.8, 4%. But the bond market is smelling, present that these very tight monetary policy stands right now over the next two years is actually way too tight for what the economy can handle. Because of weak demographics, because of productivity rates which are not exploding, because excessive debt in the public and in the private sector, is very hard to be sustained in refinance if interest rates and borrowing costs are all of a sudden and much higher than they were before,

Starting point is 00:30:48 what the bond market is going to do at the long end, so 10 years, third years, it's going to price that future growth and future inflation will be very weak. So the 10 year tends to price what comes after the two years. So from year three to year 10, what's going to be the contingent result in terms of growth and inflation? We're going to achieve when the Federal Reserve is going to put upon such higher borrowing costs in the short term.

Starting point is 00:31:15 Well, the result isn't going to be great. They're probably going to be forced to cut interest rate back all over again to try to stimulate the economy. And that gets priced in in lower 10-year interest rates. And as you see this happening, the shape of the yield curve between two-year and 10-year tends to flatten very aggressively all the way to actually inversion. And the unemployment rate chart to show there also tracks this very, very good. And you can see that as unemployment rate drops. So let's say, let's go from 2012 all the way down to 2020. After the great financial prices, we did quite some damage, structural damage to the economy.

Starting point is 00:31:51 And then we tried to actually fix it, right? So we kept economic policy and monetary policy pretty loose for a long time. And as we did that, unemployment rate actually kept grinding lower and lower and lower and lower, all the way to 3.6%. But look at that. That is also, tends to be a point where the yield curve has flattened all the way to and why? Because every time unemployment rate goes under 4%, which is where the Federal Reserve thinks the structural unemployment rate in the US should be, roughly 4%. Every time you cross this level below, the central bank gets worried that we are overeating. And if we are overeating, guess what they're

Starting point is 00:32:28 going to do? They're going to try and impose upon us a cycle of tight monetary policy right here, right now. As they do that, guess what happens? All over again, the front end yields go up to reprise this tighter monetary policy. The private sector is like, what are you talking about? I cannot handle these rates. It's too high. I cannot borrow at these rates. I cannot buy a house at these rates. I can't do anything at these rates. At the bond market is like, oh, you can't? Okay. So if you can't, I'm going to price that future growth and future inflation are going to come down. And the ill curve tends to flatten all over again. Back to 2022, unemployment rate 3.6%. And the Federal Reserve is telling us they need to tighten like there's no tomorrow. On top of it, we have an

Starting point is 00:33:07 inflation problem right now that we didn't have for the last 10 years. So their commitment to tighten increases even more, which I guess all over again, flattens the yield curve even more aggressively so. When we see the unemployment numbers start getting worse, and we see the spreads go from this 10 to 2 year number that we're showing here, which is a negative number, 0.27 when I captured this chart. And we start to see those spreads become positive again between the 10 in the two-year. Is this just a function of fractional reserve banking that this has to unwind? Is it just inherently how fractional reserve banking works? Because a person would look at this and say, well, maybe it can just stay down there. Why can it not just stay down there, Al, when you're

Starting point is 00:33:55 looking at it? Well, the reason why this can't stay down there is that if it would stay down there, it would mean the Federal Reserve wouldn't give up on their titling plans at all Preston. So it would mean that they would keep the front-end policy very, very, very tight, even in the phase of the economy slowing down. If they do that, what happens is that as our system is based on continuous credit creation, continuous leverage, we need to feed the leverage beast and the money printing beast every single time. if the Federal Reserve doesn't accommodate this process, if they keep interest rates too tight

Starting point is 00:34:37 for too long, the system doesn't work anymore. Because if mortgage rates, let's make an example. With mortgage rates, I think it's very, very clear. Mortgage rates in America have moved from 3% to 6% in the span of only 3 to 6 months. That's the fastest ever increase in mortgage rates that has ever been recorded in the US. Preston, how are you simply are not able to borrow the same funds and to phase. a monthly mortgage installment rate at the new mortgage rates to buy the same as of before, because borrowing rates have doubled.

Starting point is 00:35:10 And so before the median house in the US, after mortgage would cost you, whatever, $1,500 a month. Now it's going to cost you $2,500 a month. Are you making a thousand more per month in salary? No, you probably are not. Actually, in inflation-adjusted terms, you're making less. So what happens is that if the Federal Reserve wouldn't ease and they would keep monetary policy very, very tight, these borrowing rates wouldn't be coming down. And as they don't come

Starting point is 00:35:35 down, Preston, we simply can't afford borrowing anymore. And if we do not borrow, what happens is that we are not creating new credit. We are not oiling the credit-driven monetary policy mechanism that we have put in place since the 70s. After abolishing the gold standard, what we have basically done is we have made money supply completely elastic. There is nothing that pegs, pins hard money supply to anything. We can extend credit every time we want. And there is nothing that is pegging this credit creation to anything. The only thing that is pegging it to anything is the ability to afford new credit creation, which is nothing else than borrowing rates need to be low. And if the Federal Reserve wouldn't ease back all the way again, this borrowing rates

Starting point is 00:36:25 wouldn't be coming down again and nobody would be able to continue to borrow, which would de-leverage the system and actually cause a 2008-plus sort of outcome that nobody wants. No elected politicians actually wants to have that happen under their watch. I'm going to pull up a chart just of the 10-year treasury, and I'm kind of curious whether you, I think I'm sharing it right now. Can you see it off the 10-year treasury? Yeah, I can see that. Okay. So this is the 10-year treasury since the 80s. I think a lot of people are familiar with what this looks like. the yield, obviously, on the 10-year treasury. And as we look at this, and it's important for people that are looking at this on YouTube, you can see on the Y-axis, I have that in log terms, and you can

Starting point is 00:37:09 see how the volatility on the yield is just totally blowing out as we move right on the timeline. When you look at this, and we see that the 10-year treasury got down to, it looks like, 0.32%, which is practically nothing for a 10-year treasury here in the U.S. Do you see that, potentially achieving a lower yield moving forward, or is that the bottom of this cycle for the 10-year treasury? No, I don't think that is the bottom. So, of course, with these predictions, you have to think about what is the time horizon for this to happen.

Starting point is 00:37:46 But what we're doing here is we are taking a system that is basically built on its core, let's say, and we are leveraging up more and more at each iteration. That's what we are doing. We are financializing the system as much as we can. We're adding leverage on the government balance sheet and on the private sector balance sheet. We are adding complexity and financialization into the system.

Starting point is 00:38:12 So every time you have an unwind, for some reason, last time you had it for a pandemic. Next time can be for a credit crisis, or it can be because of a recession, or it can be because of a default. But every time you have to de-leverge a system that has become big, and bigger and more leverage than more leverage each and every time. It's very simple. The reaction

Starting point is 00:38:34 is going to be worse and worse every single time. Actually, you can even see that in this chart. You can see that every time you had a crisis of some sort, the rally in the dollar or in 10-year treasury yields actually tends to be sharper and sharper and sharper. So you are now seeing also the dollar, for instance, Preston, going all the way to highs reached only a decade ago. and the dollar is sucking away liquidity from everything, everything else. So you will be seeing the next time that you have a systematic crisis somewhere in the world, you will be seeing the Rellington and your treasury yields that is at least as big as it was last time.

Starting point is 00:39:12 That's by the design of the system that has probably added more leverage, more complexity and more financialization in the meantime. It sucked everybody in and every time you need to de-leverage, the problem becomes bigger and bigger. So I would expect on a long-term basis that every time you see a new problem, the reaction would be even sharper than it was the time before. So with enough time, you're thinking this goes negative. Yes, pretty much. The only negative thing, the only thing about the negative interest rates that can be politically complicated in the US is that, don't forget, the dollar is the

Starting point is 00:39:50 reserve currency of the world, which means it acts as the denominator. for about 70 to 80% of transactions and commodities and instruments, about anything is priced in dollars. Basically, that's what I'm saying, right? Trades, invoices, commodities, instruments, anything is priced in dollars. So if you then, what this does is it also effectively forces or brings foreign reserve managers, so people who accumulated surpluses in dollars everywhere in the world, to have, again, a large pool of liquid instruments in dollars to be able to actually get

Starting point is 00:40:27 their hand on them or sell them or buy more when they need to manage their domestic currency, right? So it's an FX stability mechanism. Preston, if you would go to the Arabs or anybody else who has sold commodities and get dollar in exchange for the last 10 years, and you will tell them, okay, guys, so now you're going to be charged for the luxury to own these dollars, because that's what negative interest rates are, right? You're going to be saying to a oil exporting country, you export oil, you get dollars back, and now you have to do something with these dollars. And if you want to buy treasuries, I'll give you a negative nominal return. From a political standpoint, that might be a bit complicated to accept, I would say. Actually,

Starting point is 00:41:08 there are many central banks around the world that have somehow limited their euro composition of the FX reserve basket exactly for this reason, because euro yields on German government bonds were negative for so long, and they do not want to be charged for the luxury to own reserves that are resulting from their exporting ability. So they're exporting goods and services. They're receiving dollars back. You want to charge them negative interest rates that can be complicated. Still, you could be headed towards 0%. And I think the path of list resistance for long-term bond deals, because of weak demographics, because of productivity trends which are stagnant, because of a system that keeps relying on unproductive debt, keeps relying on more leverage

Starting point is 00:41:50 to make the whole machine oiled, the long-term perspective for long-term interest rates, especially real interest rates keeps being lower, lower and lower. So for people that are hearing that, and maybe they're looking to buy a house in the coming five years or whatever, I mean, they should hold out. If you think that the rates could potentially go negative, I mean, they're going to get completely different pricing, But at the same time, the prices on the houses will continue to blow out if we keep pushing these yields down to nothing, correct? Correct.

Starting point is 00:42:21 What does a person do who's 30 years old and wanting to buy their first house? Because right now, interest rates are really high. The prices on the houses are also really high after this past year. What do you tell a person like this? They're in a no-win situation, it seems. Yes. Right now, it's really a tight spot. You can't afford anything decent because prices have gone to the moon.

Starting point is 00:42:42 and mortgage rates have gone to the moon, which make, again, as we said in the, previously, your installment, your mortgage installment completely unaffordable against what you are buying right now. So to make housing more affordable, basically Preston is to say you want to make a leveraged, inherently leveraged assets because a house is a very leveraged asset because of mortgages. How common is to get a very high leverage on a mortgage to buy a house, it's incredible. So you're talking about a highly leveraged product, highly dependent on interest rates. You want to make that cheaper in a world where we're talking about interest rate being structurally low. And credit creation to be the engine that oils the system such that this wealth effect can be reverberated.

Starting point is 00:43:32 Unfortunately, that's not likely to happen. And if it happens at those prices are going down, they are going down in a deleveraging process. So if the Federal Reserve keeps monetary policy too tight for too long, there is a moment at which unemployment rate picks up. People don't have a job anymore. House prices are unaffordable because they're too high and mortgage rates are too high on top of it. So the only release ball is for house prices to drop simply because there's not going to be enough demand to meet these higher prices and high mortgage rates. But at that point, prices are dropping and you probably can't afford the house anyway. Because you are one of the guys that is facing high interest rate, high borrowing. cost and probably you lost your job. So housing prices dropping as the economy slows down, as the side effect of a recession, basically, it's nothing to be particularly happy about. The situation is honestly not easy on housing and it is the poster child for wealth inequality. It is really the poster child of the side effects of this wealth effect monetary policies we are running where by oil in the credit machine, we make credit taxes cheaper and cheaper

Starting point is 00:44:36 via lower borrowing rates. So the people who can get their hands on these leverage and on these assets, they will become inherently richer by a wealth effect. And people who are late to the game, simply because of demographic change and demographic cohort they find themselves in, they'll have a very hard time getting their foot through the door. The only thing that can change all of this Preston is actually politics and voters. So if you look at 2028, 2032 elections in the US, the composition of books.

Starting point is 00:45:06 boomers, let's say, voting and the share of boomers amongst the voting population will start shrinking. And if you sum all the older generation, they will drop below 50% in terms of voting counts, voting shares across the voting population for the first time between 2028 and 2032. So as a new cohort of people with different incentive schemes will be voting, perhaps we can shape the politics and the policy making towards something that is a bit more sustainable, these infinite credit creation wealth-effect machine that basically feeds wealth inequality to extreme levels.

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Starting point is 00:49:13 I'm going to share a chart that you provided me. I don't know if this is the right one that you want displayed for this portion of the conversation, but feel free to share your thoughts on what's happening over in China right now from a real estate standpoint. Oh, man. So Preston, before we talk about China, we should talk about this chart for a second at least. And for people who are not watching but listening, this is a chart that shows the market cap of all biggest asset classes in the world. So it's total market cap of the global equity market, the global bond market, the gold market and the real estate market. And now, don't cheat, guys, but especially if you're not watching, the question you should try to answer in your head is, what is the biggest, market in the world. And then the answer you'll give me is obviously is the stock market. It

Starting point is 00:50:03 must be the stock market. It's so big. And the reality is that the stock market is huge. It's $110 trillion, globally speaking. That was at the end of 2020. Now it's probably a bit higher even. But it's $110 trillion. The bond market is bigger. So if you thought it was a stock market, you're wrong. The bond market is $124 trillion worldwide. So it's a lot. So it's a lot of it's bigger than the equity market. Gold is roughly at $12 trillion. That's a figure that most people are familiar with. What about the real estate market? Would you guess it's 100, $290, 30? Well, summing up the residential real estate, commercial real estate, and agricultural land, we're talking over $300 trillion. It is bigger than the bond market, the equity market, and the gold market,

Starting point is 00:50:54 all together. I mean, when I first saw the chart, I'm like, wow, I know it's leveraged. I know it's a big market. And obviously, it also has an inherent utility to humanity. I mean, we need to live somewhere in the first place, right? So it has a utility scale to, at least a utility which is much more tangible than buying a stock, let's say, or buying a bond. But the fact that it is bigger than the equity and the bond market combined and the gold market on top of it combined, it's pretty mind-blowing. Now, the wide is so big is because, as we explained before, Preston, you can actually lever up your purchasing power on houses via mortgages.

Starting point is 00:51:32 And as people tell me off, it's not true. People in the US buy houses cash all the time. Again, I invite people to look at the big picture. 87% of house transactions in the US, 87% in 2021 were backed by a mortgage. So the mortgage market is underlying the housing market, and it's pretty big and it's what allows this very large leverage. 300 trillion. Okay, that's incredible.

Starting point is 00:51:57 Now, what is the biggest geographical single asset class in the world? Must be the US stock market, the US bond market, not really. So, the US bond market is around about $20 trillion. And the Chinese real estate market, Preston, it's $55 trillion, $2.5 times larger than the entire Treasury market in this. US and it ranks as number one geographical single asset class as the biggest in the world, $55 trillion. It's gigantic. What's happening over there, it's also pretty large. China's going through an unexpectedly big, the leveraging process when it comes to residential real estate. People

Starting point is 00:52:40 in China have a problem when it comes to allocating their resources. It's very difficult as a Chinese guy to invest abroad because of capital controls, regulation, restrictions, And the Chinese stock market can be pretty volatile and not representative of the Chinese economy overall. So people have invested and basically supported the Chinese real estate market big times. And regulators in China have allowed a buildup of leverage, which is incredible. So China has basically expanded their leverage in the real estate market in an incredible way, all the way up to $55 trillion.

Starting point is 00:53:17 Most of these projects, infrastructure, real estate. projects were actually not very productive Preston. So we are talking about credit creation for unproductive purposes to a reasonable extent. All of a sudden, China decided that that had gone too much uncontrolled and decided between the end of 2020 and beginning of 2021 to apply some tighter regulation when it comes to financing real estate projects. And as they did, many developers started to have a problem. Because when you were, are very leveraged, it's exactly the same mechanism as we discussed before. When you are very leveraged, you are relying on more credit and cheaper credit and laxer regulation. That's what you want,

Starting point is 00:53:59 the old time to oil the mechanism. And as you stop and reverse that, you go through de-leveraging. And now the de-leveraging, the size and the magnitude of this de-leveraging has caught Chinese policymakers by surprise. And we're having Chinese people refusing to pay their mortgage installments on new houses projects, basically, they have been promised they've been delivered by a certain time, they'd invested in them. And obviously, the developer went belly up, and they're refusing to pay mortgage installment. And we're witnessing a very large delveraging processing, the largest market in the world, which is not covered enough, I think, from a macroeconomic standpoint. So when we look at the Chinese market, and we saw what happened last year with

Starting point is 00:54:42 the ever-grand situation, is there a lot more that's happening behind the scenes that we're not necessarily seeing in the public purview that's just not coming to light? Well, Preston, together with Evergrand, which is a very famous story, if you look at all the indexes which are trying to track real estate developers across the board and other sectors that highly depend on real estate developers in China, you see that the weakness is not only Evergrand. Actually, most of these sectors have been decimated when it comes to market cap. So you have to think that the weakness is very widespread and the fact that Chinese people are even stepping up and saying to the CCP, to the Chinese Communist Party, I'm sorry guys,

Starting point is 00:55:27 but you made sure that this leverage machine and this wealth creation machine basically could work and we rely on that to increase our purchasing power. You can't just stop it and reverse it all of a sudden. Because don't forget as well, Preston, that the Chinese population has received an extremely small percentage of the wealth and basically of the wealth that China as a country has been able to create since they joined WTO in 2000, in the early 2000. If you look at the share of consumption that comes from the private sector in China as percentage of GDP, it is amongst the lowest of every developed and emerging markets out there. So the Chinese people aren't getting

Starting point is 00:56:09 are basically getting rewarded for the effort and for being the engine that has been basically behind the Chinese growth miracle over the last 20 years. And on top of it, now they're getting damage when it comes to one of the few ways they had to somehow create wealth. It was, of course, fueled by unproductive credit creation, laxer regulation, the Chinese policy making actually supporting this machine, but they're not going to stand. behind this, and we're seeing weakness that spreads actually beyond everground and to the entire developer sector and also to other sectors which are, let's say, adjacent to the real estate

Starting point is 00:56:52 sector in China. It is pretty big, and also it has ramifications when it comes to global macro. China with its credit creation has been the engine of cyclical growth all over the world with the big amount of aggregate demand that they were creating because they weren't growing structurally. top of it, they were also creating credit, adding leverage very, very quickly. They had such an amount of aggregate demand to export towards the world. And now if you de-leverage, you go towards the opposite trend. The Chinese population is becoming older. The workforce isn't growing anymore. And now you're going to de-leverage as well instead of adding further leverage. These has ramifications also for other jurisdictions that are very dependent on the demand that comes from China. So we should

Starting point is 00:57:39 We should watch this trend very carefully and it's not looking good because to stop the leveraging process is a very, very difficult effort. Once it's put in motion, it's very difficult to stop very quickly. Almost like a water wheel that starts spinning in the opposite direction. It just kind of reinforces itself as it starts going in that way. I'm going to throw up a chart here. Describe what this is and why you find this to be an important chart right now for the people listening. Yeah. So again, this is all about nuances and I think they are very important in macro analysis and most of the analysis out there tends to stop at headlines and I try to do my best to look at, you know, a little bit under the hood, especially on the macro compass. And this as well is one of

Starting point is 00:58:25 the charts I published on this free newsletter I write and it shows Preston that the, it's not only the pace of inflation, it's not only the absolute level, which is above 9% in the US, but it's the momentum and it's the composition of these inflationary pressures, which is freaking the Fed out. And this chart shows the basically the components of the CPI baskets which are running above 4% inflation year or year. So the CPI is a basket, as we know, many items. And with this chart, I tried to look at how many, in percentage terms, how many items of

Starting point is 00:59:01 this basket have an inflation rate above 4%. Both 4%, is way above the Fed target, which is 2%, right? And I found out that over 70% of the CPI components are running at over 4% year on year when it comes to the inflation rate. These scares the Federal Reserve big times because you can't say anymore that inflation is due to used cars or other very volatile goods. Everybody is stuck at home and has fiscal stimulus and is buying stuff on Alibaba and Amazon, and that's why we have inflation.

Starting point is 00:59:32 with over 70% of the CPI basket above 4%. You can't argue that anymore. So the composition of these inflationary pressures is as important as the absolute level and the pace. The other thing that is very relevant is that the momentum of inflation isn't slowing yet. So if you look at months-on-month inflation and you analyze that or you look at three months over three months, so measures of momentum rather than only the absolute levels, those are also accelerating and you see that inflation is broadening overall.

Starting point is 01:00:02 to especially to categories which are very sticky, Preston, like services inflation, rent of shelter, services ex-pros energy, very sticky late cycle baskets of inflation, components of the inflationary basket are becoming, are seeing inflationary trends that are becoming entrenched. And those you don't bring down very, very quickly. It's very hard to actually bring this down. And that's why the Fed is becoming more and more aggressive at it iteration. So when I see this and then I think about the 10 year minus the two year that we talked about earlier, we were at like negative.27% on that chart.

Starting point is 01:00:45 And I see this and I'm thinking it's going to even go more negative between that spread of the long end and the short end of the curve. How negative do you think that the 10 minus the two can get? Yeah. So this is one of the trades that I have on my book. That's also what I do, by the way. I just share everything I'm buying, both on a long term and on a tactical basis. I'm an open book.

Starting point is 01:01:08 I've managed money. I know it will be wrong. I have nothing to hide. It's full honesty from my side. This is a trade which is working. It's a very tactical, relatively sophisticated trade. But what I did is I bought a 10-year bond and I sold a two-year bond and I made sure that I waited that enough, well enough, that the only thing I care is the slope of the curve.

Starting point is 01:01:27 So I'm betting that this slope between 10-year and 2-year actually goes even more negative. And I'm targeting minus 50 basis point, 5-0 as my next target. I started it when it was positive, way positive. It's been going very well. And I keep on running it because you're perfectly right, Preston. If you're the Fed and you look at this, you don't care if you're going to worsen the recession. You don't care if unemployment rate is going to go up. At least in the early stages, you really don't care.

Starting point is 01:01:55 Later on, maybe you'll care a bit more if the damage you're doing becomes larger and larger and larger. But right now, let's recap, inflation at 9%. The momentum of inflation is accelerating. The composition of inflation is going towards a trend where you don't like it's broadening. Inflationary pressures are broadening towards the sticky components of the CPI basket. I'm sorry, but you got to do something about it and you won't stop rest until you see results. Now, the interesting thing is there are two things that are interesting is that inflation is one of the most lagging indicators. And in macroeconomic analysis, you have forward-looking indicators, coincident indicators,

Starting point is 01:02:33 lagging indicators. And so, for instance, forward-looking indicators would be some surveys that have a statistical significance in explaining how GDP will do in a year from now. And if you look at the service today, they are forward-looking because they anticipate changes in economic activity. A coincident indicator would be maybe the labor market. It's a coincidence to slightly lagging indicator, labor market worsens or impover. improves only after the forward-looking indicators have pointed towards a certain trend in the

Starting point is 01:03:04 economy. And then the lagging indicator, one of the most lagging of all is inflation. Because to develop or to slow down inflationary pressures, you need some time for all of these to feed into the economy and the elasticity of prices and consumption habits and all of that. The Fed will be looking at targeting the most lagging indicator of all, which is showing its worse behavior, not only in absolute level, but in composition and momentum over the last 40 years, Preston. So they'll be big and they'll be looking in the rear view mirror. They'll be looking

Starting point is 01:03:38 at the most lagging indicator and try to slow it down as much as possible. They'll be as hard for as long that I think the Ilker will invert further and further and further. So let me try to rephrase what I think I just heard you say. You're watching the unemployment numbers and as they start getting worse, then you're going to, you're going to, you're you're going to get out of that trade? Yeah, when they get worse enough that I smell the Fed is going to start looking at those at least. What do you think that? I'm sorry to interrupt you.

Starting point is 01:04:08 Finish your thought there and then I'll ask the question. No, sorry. I'm just saying that the labor market is a slightly lagging indicator too. So before it weakens to a point where the Federal Reserve gets worried enough to consider another item into their equation, it's going to take quite a while. So right now, they only have one item. It's an equation of one line. Bring inflation down, down, down, down, down.

Starting point is 01:04:33 It's the only thing they care about right now. Before something else becomes bad enough to enter that equation in the first place, it's going to take a bit longer. When it does enter, then I'm going to be looking for them to actually start cutting rate, accommodate so that two-year yield can actually finally come down and you don't need to flatten the curve anymore because you can just buy the front end of the bond market and it's going to be okay. But sorry, so you were saying.

Starting point is 01:04:56 The real simple question here, what level do you think the DXY gets to? Before all this, you know, change the wind shift the other way. So the DXY is basically about 57% euro against the dollar. Yeah. So let's say, euro against the dollar went through parity. It's now rough, a little bit above that. I think we bridge parity pretty easily and sustainably. that would be my basic scenario.

Starting point is 01:05:26 As always, I can be wrong. I would expect 0.9.95 to be totally doable on a euro dollar, especially Preston, if we are right on them, keeping the pressure on and keeping the temperature in the kitchen very high, because they'll be looking not at the pan whose oil, frying oil is exploding, then only be stopping when the kitchen is half on fire. That's what we're talking about.

Starting point is 01:05:52 And if you're talking about that, then you cannot be positive about risk assets, you cannot be positive about other currencies. The only thing you can be positive about is preserving your purchasing power in such an environment is to own dollar, dollar cash, protection, very defensive assets. It doesn't sound fancy, but there are cycles every time. And my role is to make sure that I am looking at macro models that point towards what's coming next and what could be the best asset allocation in this cycle without having my ego attached to a certain asset class.

Starting point is 01:06:22 I mean, investing and protecting purchasing power, it's all about being nimble, intellectually honest, and trying to steer your asset allocation according to which cycle you're in. And right now, it's not the cycle to be offensive. It's the one to be defensive. Hey, so I'm a huge Bitcoin fan. In fact, this is a Bitcoin show, but I talk a ton of macro because I think it's super important to just impacting the price. What are your thoughts on Bitcoin and where do you see?

Starting point is 01:06:52 its role in the future? So Bitcoin, I'm a very top-down macro person, Preston. So Bitcoin for me serves as the main indicator for the digital asset space in general. And the digital asset space in general, I treat it as a macro asset class, which means that it has certain features, certain characteristics, certain implied and realized volatility, and a certain collocation, basically, in my quadrant and in my cycle analysis, right? And at the moment, effectively, it tends to behave in the cycles as a pretty leverage risk-intensive asset class. You can see that it tends to be very volatile across cycles, and its wings are very wild,

Starting point is 01:07:42 which tend to appreciate capital and depreciate capital very rapidly. Also, you see that its correlations are evolving in a very interesting way as more institutional come into the space. And you can see that they treat it somehow as a proxy for tech. You tend to see that Bitcoin tends to trade in certain part of the cycle as a leveraged version of a tech stock, right? So that is the result of institutional investors coming in, having to design and allocate the asset class in their models in a certain role.

Starting point is 01:08:11 And the role that Bitcoin tends to have right now, cyclically speaking, is that. that of a risk sentiment asset class, a tech-driven risk-sentiment asset class. Okay, so that is the cyclical analysis you can do in Bitcoin, and you can do it on Ethereum, and you can consider that as part of your asset allocation from a tactical perspective. From a structural perspective, that's a different story. So from a structural perspective, you are considering the digital asset space, and you have to ask yourself, what is the role it could play over the next 10 to 15 years. And there are two line of thoughts that I'm still investigating and I tend to be very much open-minded.

Starting point is 01:08:49 One is the role that the underlying technology has and will have likely over the next 10 to 20 years. The world isn't becoming an industrial world anymore. Whatever people say when they talk about onshoreing, when they're talking about the importance of energy and labor and capital being depreciated against labor being appreciated, that's the 70s. That's the 80s. Our business models are not likely to reflect that. Again, they're likely to reflect more technological advancement going forward. So from that perspective, this asset class tends to fit pretty well into that structural development we're looking ahead of us over the next 10 to 20 years.

Starting point is 01:09:29 So I have sympathy from that structural perspective. The other theory is a basket of digital assets, mostly the scarce one, let's say, Bitcoin or defined to be scarce in supply. for instance, Bitcoin, to serve as an anchor or a potential anchor when it comes to redesigning our monetary system. And that is the other big consideration that these asset class is in at the moment. And there, I think it is okay to consider it as a potential call option. So that's a theory that many people have come across with and they're like, okay, what is the

Starting point is 01:10:03 probability is going to play a role in re-anchoring a new monetary system? Is it 0%? while assigning a 0% probability to something generally in investments is not a smart idea. So if you think there are some good macro reasons why Bitcoin could be more than 0% part of this basket that anchors the next monetary system, then only for that very reason you should structurally own some. So I tend to be extremely open about that. I have some, maybe we should record another session only on this, because of how money works and how we are used to deal with money, it can be relatively complicated to imagine a deflationary system.

Starting point is 01:10:44 It can also just thinking about it and designing it in our head as we have been born and raised in an inflationary in a system where money supply can expand. Thinking of a system where it can't expand, it brings a lot of questions around. Can you create credit in Bitcoin? Can you lend Bitcoin? Can you expand its supply at least temporarily until you bring it back? But all these questions need to be addressed thinking that. that the world isn't becoming a less technological place, it's becoming a more technological place. And also that, to be honest, the monetary system we're living in, as we describe it for an hour,

Starting point is 01:11:18 tends to be very shaky. And the more time goes on, the more these de-leveraging episodes are stronger and stronger and stronger, and the more the wealth inequality tends to widen to a point that you can maybe foresee the possibility we need to redesign it. That's what you need to ask yourself, what is the role the digital assets can play in this reshaping? So maybe I didn't give a definite answer and it's very difficult to give one, but at least I hope I gave some frameworks that I'm using to consider the asset class, both cyclically and structurally. I loved it.

Starting point is 01:11:49 I loved it. And as you were describing that, the deflationary versus this inflationary thing that we just spent an hour kind of describing all the nuances of. I'm thinking of two galaxies literally kind of moving towards each other like this as time is progressing to the right. What a fascinating discussion. Thank you so much for making time, Alf. For people that are not subscribed to your free newsletter, we're going to have a link in

Starting point is 01:12:16 the show notes for them to sign up. And I mean, the charts, just a couple of the charts that we shared today, you have tons of these and you have analysis in your newsletter. I highly recommend people to check out that link in the show notes. And if there's anything else you want to highlight, Al, please highlight it right now. Well, Preston, I just want to thank you for the hour we spend together, your question are very good and that's not a surprise for me. I'm used to listen to your interviews. All I want to say is that if people enjoyed this, indeed, they can find much more at the macro compass. It's free.

Starting point is 01:12:47 There are, I think, 75,000 people reading it. It's quite a lot. So thank you for everybody who's reading that. If you want to find out, you can just Google it. It's free. And once a week I release a piece, which is my macro analysis and some investment ideas as well. Thank you so much, Al. Amazing discussion. And thank you for your time. Thanks, Preston. 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

Starting point is 01:13:23 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 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.

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We Study Billionaires - The Investor’s Podcast Network - BTC089: European Fragmentation Policy & Mounting Global Pressures w/ Alf Pecca (Bitcoin Podcast)

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