We Study Billionaires - The Investor’s Podcast Network - BTC110: Japanese Credit Markets, Bitcoin, and Nostr w/ James Lavish (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. Back by popular demand is veteran bond and macro investor James Lavish. As many are aware, Japan's update to their yield curve control and unexpected bond buying programs are demonstrating enormous pressures in the global macro setup. James and I cover all of these emerging results. We cover the increasing systemic risk growing in the markets, whether deflation is starting to take hold in the U.S. economy, and whether that's,

Starting point is 00:00:30 will have any kind of impact on Europe getting its inflation under control. All of this, among many other topics, and this is a conversation you guys are not going to want to miss. So here's my chat with James Lavish. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. I'm here again with James Lavish. James, welcome back to the show. I'm happy to be here, Preston. Always a good night to talk to you. I'm thrilled to have you here because there's a lot of stuff I want to ask you.

Starting point is 00:01:16 First and foremost, how is your Christmas going? It's busy, but it's good, you know. It's always good to see family. Everybody's coming in. Now that I live out in the West, people are coming here more. It's fun to come to Vegas, right? But now with adult kids, you just don't celebrate Christmas on Christmas Day. So we celebrated one Christmas last night with part of the family.

Starting point is 00:01:38 We're going to have another one, Christmas Eve, Christmas Day. And then another one with my kids, it's just keeps rolling. It's like Christmas month. But it's good. That's good. We're blessed. I'm thankful. Super thankful and fortunate.

Starting point is 00:01:52 That's fantastic. How about you? How's yours? Good. Yeah. We're doing good. Just laying low. Those are the best ones, you know, when there's not too much planned.

Starting point is 00:02:02 We're staying busy. I've been having fun with this Noster. Have you heard of this Nost? this Noster thing. Like I said, I've been pretty busy with, and we can talk about the other stuff and been working on later,

Starting point is 00:02:13 but I've seen you guys riffing on this. Posting on, yeah. Yeah, and posting it out in Twitter. And I pulled it up. I actually have a window on it open that one of you guys posted,

Starting point is 00:02:25 and I just haven't gotten to it yet. Dude, it's crazy. Yeah. What is it? Like, Noster. Is that how you pronounce it? Yeah,

Starting point is 00:02:34 like Nostradamus. Oh, Noster. Yeah. No sir. Yeah, that makes sense. Yeah. So no surpil me.

Starting point is 00:02:41 No. Sir. So, I mean, the simplest way I could describe it is they're decentralizeding Twitter right now. Just a bunch of like Bitcoin, you know, you got a rogue group of shadowy psychopaths. Super coders that are out there just decentralizing money. Now they're doing it with free speech in Twitter. And I'm no expert on the intricacies of it. but I opened up an account.

Starting point is 00:03:07 I created private keys, just like with Bitcoin, you got private keys, and then you have a public address associated with those private keys, and basically created an account. And you just wouldn't believe how Twitter-like the experience is so far. Really? Yeah. All right. And so then, so, yeah, so it's, I mean, it's a protocol.

Starting point is 00:03:26 Anybody can just build basically an app on their phone or their desktop, and they just basically tap into this protocol, this messaging protocol. and Jack Dorsey's there, which is insane. Really? Yeah. Jack Dorsey is basically, yeah. So I'm like, I'm there having conversations with Jack Dorsey on this new messaging app that's completely decentralized. People are running their own relays.

Starting point is 00:03:51 I think there's like 130 relays of basically people decentralizing the servers. And the guy who stood it up, this is what's so fascinating about it. The guy who stood up. When did it? I think they did it launch months ago. But I think they're just now, like, getting enough built that people are, like, starting to sign up in the droves. And the guy just, I saw him tweet. I don't know if we, would we call it a tweet?

Starting point is 00:04:16 I don't even know what you'd call it. But he just, he just said that none of it would be possible without Bitcoin and Lightning in particular because, like, lightning immediately settles. and you can do these micro payments, that's going to be the thing that's going to be the incentive for these people running like their own local relay servers. There's people talking about running apps on like Umbrol. It's insane. Wow. I'll put a link in the show. I'll sign up tomorrow.

Starting point is 00:04:51 I'll get in there and figure it out. Check it out, man. I get my keys. Do you have like a username and everything, just like Twitter? It's like, yeah. So your public key is your, your, you know, username and some of the software clients like the local or the software clients that you can run on your smartphone or whatever are getting to the point now where it's going to be like the at

Starting point is 00:05:11 symbol like on Twitter like at Preston or at James or whatever that it will auto do like the same stuff that you have with with Twitter right now but right now everyone's using because it's so early people are using their public addresses that are associated with their private keys as like their username effectively to tweet at. But dude, it's wild. It's just like the Wild Wild West. Looks like I have a lot of problems. I'll definitely check it out.

Starting point is 00:05:38 Definitely. I'll send you a link and then I'll put a link in the show notes for people if they want to check it out. Anyway, let's hop right into this. So the big news, we covered Japan early on. Man. We were talking about this. Break it down for people that maybe didn't listen to earlier episodes.

Starting point is 00:05:57 Yeah, you and I talked about this. We've been talking about this for months, right? Yeah. And even offline, we've been talking about it quite a bit. But for those who haven't been watching Japan, the Bank of Japan, a number of months ago, had declared that they were going to hold their 10-year rates at a certain level, which was 0.25%. Now, everybody else in the world, the Bank of England, the ECB, the U.S., everybody's raising

Starting point is 00:06:25 rates, and Japan is holding theirs, like, just, barely over water, right? And so the 10 year was being held at 0.25%. It's called yield curve control. They're controlling the yield curve of the different maturities of their government debt. And so doing that, though, as you and I discuss, and you know all this, but doing that, when people can get a better return on a sovereign bond, on a government bond elsewhere outside of that country, that's doing that, they're going to sell those bonds and buy the ones that yield better, right? In essence, what happens is it's people who are investors in Japanese government bonds were selling those 10 years. They would get yen for those 10-year bonds that really sold. Then they would sell the yen,

Starting point is 00:07:18 buy U.S. dollars, and buy the U.S. Treasury 10-year because it makes sense that they could get a better yield. And that's just interest rate arbitrage right there. It's called interest rate parity. And it just, that's kind of what happens. So there's tremendous pressure that builds up as people are selling all of these treasuries and there's nobody to buy them. So the market eventually becomes pretty ill liquid. And the Bank of Japan has to step in and buy just about every single bond that's being sold in the market, in the open market. Then we would see outside the window, the bond trading at crazy levels. And that was hedge funds taking the opposite side of the trade, thinking that eventually

Starting point is 00:08:06 that the way they were pegging it at 0.25%, it would break. That's what they were doing. And they were right. And eventually they were right. And because the Bank of Japan ended up, over the last number of months, they jumped over the halfway mark that I'm pretty sure no other sovereign has jumped over this is a new one, at least in the modern era, that the Bank of Japan owns more JGBs, more Japanese government bonds than anybody else in the world.

Starting point is 00:08:36 They own over 50% of their own debt. So what do you think that means? I mean, it's comical, right? I mean, they're just, they're basically printing money, printing yen, and buying their own bonds. But they were doing this and doing this and doing this and there's and the market eventually and I sent you that that chart. The market eventually pretty much dried up. It just wouldn't even trade for days at a time, two or three days at a time.

Starting point is 00:09:04 It wouldn't trade the 10 year. For people that are listening and not viewing the video on this discussion, you might want to go back and pull up the YouTube version of this discussion because we're going to throw up some charts here that James sent me. For the people that are just listening to. In the United States, we have something that's called the move index, and it just, it shows the, you know, it's a volatility index and shows the volatility of our bonds. And as that number gets higher, it's worse. The more volatile it is, it's worse, right? And in this chart, you can see that that orange line, it kind of ticks around. Typically, it's tipping ticking around one to one and a half, which is a, it's just a 15 or 20% move from where, I'm sorry, that on the index level, You can see where it's moving around. And as it goes up, you can see it just spike up to two and a half times, almost three times, what it normally is.

Starting point is 00:09:59 And that's just showing that the liquidity in the Japanese bond market is completely drying. It's drying up. And then the right hand side, you can see the percentage of ownership, bond ownership of the Japanese government. And you can see it that just rises from 2013 where they owned about 10% of their own bonds to today, where they own over 50%. Clearly, they're the marginal buyer. They're the main buyer. It's akin to FTX owning all their FTT tokens.

Starting point is 00:10:30 I mean, right? And so now, you know, Japan, and so this is what they're doing, right? Japan's got over 260% debt to GDP, right? Now, it's a different economy. I know it's a different demographic. They're a net exporter, and it's not like the United States. Totally agree. But this just shows the tremendous pressure, the manipulation of their monetary policy is having on their debt markets.

Starting point is 00:10:58 So then people are talking about, well, it must be that, of course, what happened was Japan is scared of inflation. So they're raising rates. I personally don't think that that's what they're doing. I think that they are kicking the can down the road to maintain this monetary manipulative. right? And there, yes. The next chart, you can see here is that in a normal yield curve, your yields are lower the short of the maturity and they're higher the longer the maturity. So this is kind of a, it's kind of a normal yield curve. It should have a little bit different belly to it. But the thing here is you can just see that the whole yield curve just moved up about 20 basis

Starting point is 00:11:40 points from the three, you know, four year the treasury on. But what's really interesting is you can see at that back end all the way down, the one month, six month, up to the one year, it's barely below zero. So that's it. This is the only negative yielding debt that's out there in the world. This is it. This is the last of it, you know, from any major country. This is the only, this is the only place that you can borrow pretty much for free. And so free money, the message here is free money is going away for the world. And so risk assets all sold off. immediately across the world. You could see all the futures just dive bomb everywhere because everybody knows that well, okay, so free money is going away. If Japan's not going to have free

Starting point is 00:12:29 money, well, who is going to have free money? And if you look at the next chart, you can see that the, this is how much negative yielding debt there was in the world after the 2008 crisis. So all the way to the left there, you can see it was just a little bit. And then it spikes up after the the 2008 financial crisis. And it was over $16 trillion of negative healing debt just last fall, year ago fall. And now you can see it's just a smidgen of that. And it's in Japan. This is it, the last of it.

Starting point is 00:13:03 That's where the markets are freaking out. And that's why everything is sold off. The risk assets all sold off. Of course, then, you know, the financial snap back in Japan because it kind of fixes a little bit of their short-term, long-term debt problem, but when their financials can actually make some money. But they're resetting. They're joining the debt problem party of the world. They're joining the inflation problem party of the world. And you saw the reaction. It's where we're at. And so, yeah, so this next one is you can see that people ask about the yen and what's going

Starting point is 00:13:38 out with the yen. And you and I talked about this. And you can see how that spread between the treasuries, the U.S. Treasury and the Japanese treasury, the 10 years, those are the, you know, the 10 years kind of like your benchmark treasury for your country. That's the benchmark that you look at for where your yields are. So in this one, you can see that as that difference between the two moves, so does the yen, almost lockstep. And you can see that as the U.S., the United States, the U.S. Fed was raising rates while Japan, the Bank of Japan was holding theirs at a certain level and that spread widened. Well, of course, that had a negative effect on the yen, just like we're talking about.

Starting point is 00:14:24 And the yen jumped over 150 or 155, right? And since that has happened, the U.S., you'd seen the U.S. 10 year kind of wane here in the yields because people are expecting us to go into a recession, which I would agree we are headed headlong into a recession. The 10 year and anything above the 10 years kind of backing off on those yields, right? So the spread has gotten better and hence the yen has gotten cheaper. So it's not, you know, the yen has gotten more expensive for the U.S., but the yen has gotten stronger. but you could see when they changed those rates overnight, we didn't even get to this. So what happened was the other night, the Bank of Japan surprised everybody and said,

Starting point is 00:15:18 all right, well, we're going to, we're going to move that window from holding the rates at 25 basis points. We move it up to 50 basis points. So basically doubling the yield on that 10-year treasury, right? And immediately all the risk assets sold off. The 10-year treasury in Japan went straight up to 46 basis points. I went right toward that level where the Bank of Japan would have to step in and start buying to hold it there. The yen took off against the dollar. So it became, there were fewer yen per dollar.

Starting point is 00:15:52 And so you can see the yen went all the way down to the 130s, all in an instant reaction. And so everybody freaked out. Nobody predicted this. Nobody predicted that Japan would finally blink. Because as we were talking about, we were saying Japan's going to try to hold out as long as they can, hope that the Fed blinks and starts lowering rates before Japan has to stop their control.

Starting point is 00:16:16 That's essentially what happened. They moved that benchmark. They moved that the peg from 25 basis points at 50 basis points. And everybody freaked out. Bloomberg had surveyed, 47 economists. Guess how many had guessed that this would happen? Zero.

Starting point is 00:16:35 Wow. Zero. Not one economist had guessed that this would happen. And so it was like a shock to everybody. And so people are scrambling to figure out, well, is it because they're scared of inflation? And like I said, I think it's because they're trying to continue this. They're just moving it to a level. And I think even Lynn was on your show a number of months ago, and she had said it.

Starting point is 00:16:58 She said, look, I think they should have pegged it a little bit higher now that we see where rates are going. But nobody expected the Fed to be raising this hard, this fast. And nobody expected the market to be able to handle it, I don't think. Exactly. For this long. Exactly. And so because nobody expected that, and certainly not the bank of Japan.

Starting point is 00:17:20 I mean, the Fed didn't even expect it. If you read my newsletter this last weekend, if you saw it, I showed that the Fed expected the rates to be not even half of what they were at the end of 2022 back in December of 2021. They had no clue that they were going to be the size. Of course, this is what the game of chicken that the Bank of Japan was playing. They lost at least this round. They're trying to stay on that game and hope that they can pull it through for the next three months before the Fed has to stop raising rates and the pressure,

Starting point is 00:17:57 And we'll see. I mean, it's a dangerous game. They're printing a massive amount of money to do this. They just announced they're going to buy another $9 trillion of JGBs monthly to control these yields. I just threw the first chart back up again, which shows the percentage. And you're showing how it's at 50% of them owning it. It seems like in 2022 that it looks like they've added about three percent. ownership, I would say, based on the chart there. But they've been holding it down for so long because they've been, they wanted inflation. They've been battling deflation for years there. Decades.

Starting point is 00:18:40 Right. And I mean, why? They need inflation. Why? Because they have someone's debt. Why? Because they need to inflate it away. I mean, but it's a problem for them.

Starting point is 00:18:53 It's an experiment. It only seemed like the rest of the world wasn't there yet. Like, that was the relief valve as they're trying to create it because they got there first and the rest of the world wasn't quite there yet as far as the speed at which they got themselves into this indebted quagmire or whatever word you want to use on a global scale. They just got there first. And now it almost seems like they're the final defender trying to hold the like cheap money down. Yeah. That's what it feels like. Exactly. That's exactly what it feels like. And so when I saw that announcement, I was like, I knew it. I was like, wow, I mean, that's it.

Starting point is 00:19:31 They're going to have to move it again. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:23:44 You think so. Unless we hit recession really quickly in the next, in the next, in the, like if we, unless unemployment shoots up and people are out of work and prices just crash and we really hit it hard fast, I think they're going to have to move again because, I mean, look at the, you saw the spread, right? So if you bring up that last chart again, sorry, we're going back and forth here, but that last chart, you can see the yen has gotten ahead of itself, right? What's it going to be? Is the spread going to widen?

Starting point is 00:24:15 Is it going to close? or is the yen going to come back? And in that case, it's showing that there's additional pressure. Like all things being equal, it looks like the yen should be up around 137 for the percentage moves that it's made. When the correlating percentage moves,

Starting point is 00:24:34 it's made over the history of this, just eyeballing it. It looks at like a three or four percent off from here. And so that something's got to change there. This is going to tighten up. The yen's going to get weaker. or that spread's going to going to tighten either way. So what's it going to be?

Starting point is 00:24:51 That's it. And they're going to be standing there. So the indications, though, and this is what I was getting, sorry, pressing, the indication, though, is the last couple of days is that, man, there are not a lot of buyers, even at 50 basis points for that tenure. And that Japan's going to have to step in and hold the line. What it is, they keep it in a range, right? the fact that it was stuck at 25 basis points for so long.

Starting point is 00:25:18 It was just such a red flag. It was like a siren that, you know, like they're holding it there. Like the dam, they're holding it there. If it goes back to 50 basis points and they're doing the same thing, then you know. You can see. So when you pull the, when you're looking at this slide, the light pink, which is kind of in the middle, I think people can see my cursor. This is what James is referring to. the thing was just pegged out at a quarter or 25 basis points for a very long period of time.

Starting point is 00:25:45 If it was dipping down and showing like, hey, there were a few buyers there, well, then you know it's not being paid. Liquid market. Yeah. But I mean, it was pegged out for what? One, two, three, four. Everybody was a seller. Yeah. And the Bank of Japan was the buyer, period.

Starting point is 00:26:00 And so, I mean, there was literally nobody there. It didn't trade for days. Like, they would just would not open their market. Well, that'll probably be the indicator, whether your theory that, they're going to have to raise the yield even higher is if it just continues to be pegged out at 50 bips for, right? If it gets pegged at like 46, you know that they're staying there buying them. And if they just can't stand it and it gets pegged at 48, 48, 49.

Starting point is 00:26:27 You know that they're, if it's not moving between 25 and 40 and 50, that's okay. That's a clear indication. Number one, number two, if it doesn't trade for a day, that's a problem. Oh, yeah. That was another. And then watch the end. I think as we enter this, and so this raises, where's this, it's the dollar pop out of it? What's that?

Starting point is 00:26:46 So with all this, I'm sorry to interrupt you. So when I'm looking at all this and I'm saying, okay, so the yen, they did this for the yen to make it stronger, right? That means the dollar should be weakening, but I'm not seeing that in the DXY at all, at least these last two days. Well, what we're seeing what, hey, look, you know, everybody does their own thing. everybody everybody is like you have your own process please not everybody has the same portfolio portfolio you know makeup but I'm long the US dollar because I think as as the world goes into recession we're going to have a flight to safety and there's going to be a shortage of dollars and so you're going to have that same phenomenon where people need dollars so you

Starting point is 00:27:28 think it's just a correction here in the last like two months yeah yeah I do and look the cost of capital just went up everywhere, right? So now we're just waiting for the next credit event. Like, what's it going to be? What's going to be the credit event that, you know, who's it going to push it over the edge? We know that we know that there's, there are problems out there. We're watching the U.S. Treasuries. And even the U.S. Treasuries are not tremendously liquid lately. And if you look at the 10-year, it's been tailing out. What does that mean? I just assume, Preston, that everybody reads my newsletter, so they know all this stuff, right? I'm sorry.

Starting point is 00:28:06 Or they listen to you. If they don't, we'll have a link in the show notes. What a tail is is when the bond auction market opens, right, that we have an auction of U.S. treasuries. Well, it trades when issued before that. The dealers and buyers can, they can buy and sell beforehand and kind of guess where it's going to come out. And the last, like, I want to say the last eight out of 10 or seven out of nine auctions has

Starting point is 00:28:33 been tailing, which means that the demand was lower than they thought in the auction. So the dealers were, they guessed that the demand was going to be higher. And we just keep seeing that. And so as that keeps happening, you know that we're, people are getting, they're getting worried. And the balance sheets are for the private owners of these bonds, they're running out of room on their balance sheet. We're issuing so much debt. So what do you have up here? So this is the U.S. bond yield curve over time. So people can see when it inverted, just by the durations there, the colors on the chart.

Starting point is 00:29:18 You can see how the one year is providing the highest yield. You got the 10 year and the 30 year providing the lowest yield. Yeah. So for your listeners, this is a perfect graphic of the market is 10%. telling us it expects rates to come down next year. There are a number of reasons for that, but the primary reason for that happening is that it signals a coming recession. Typically, somewhere around, you know, six months to a year out, you can see that

Starting point is 00:29:48 that started happening back in October, end of October, I remember correctly, some of these, and it's coming. It's coming. You know, when I'm looking at the inflation here in the U.S., it seems like maybe it's about to, like it's stalling out and that we're going to start to see a deflationary fit or deflation starts to come back in 2023. But whenever I look at Europe. You've got a used car now. True. But when I look at Europe, it doesn't seem like you're seeing that at all.

Starting point is 00:30:23 It seems like it's just going crazy over there. Energy, man. They haven't. Well, and so like my, I guess where I'm going with that is, is there going to be a spillover effect from Europe who can't get inflation under control that even though everybody's looking at these credit charts and they're saying, hey, you know, historically over the last 40 years, when we see this inversion, 12 months later, we're in a deep recession. And we go through these deflationary prices. The Fed has to step in, reflated. You know, the typical scenario that everyone has become accustomed to for 40 years. Conditioned to think.

Starting point is 00:31:03 Yeah. And so are we in a different dynamic with Europe specifically that they're not getting inflation under control and that they were extremely late to raising rates? They were so late. I could not believe that I was looking at their policy in July. They were still negative rates. They still were in negative. double-digit inflation. Overnight, nuts.

Starting point is 00:31:28 I think that, look, you know how I feel about Christine Lagarde. I think that, I mean, the incompetence is monumental. It's absolutely monumental. Yeah, I think that they're going to go headlong into a recession. It's going to be harder than ours. They can't print energy. Let's see, let's see what happens this winter. I'm actually, I'm worried for people out there, you know.

Starting point is 00:31:50 We talk about it in numbers and we talk, these are people's lives, man. these are people's lives. You have inflation that's absolutely stealing their stored energy from their work. It's unbelievable. And they're like, well, you know, some people will lose their jobs. Unbelievable. And the people even keep their jobs, they're not keeping up. And some people are going to, they're going to be throttled on their energy usage.

Starting point is 00:32:17 Some people will, even if they don't freeze, tremendously uncomfortable for a season, you know. I guess where I'm going with. The manipulation is, yeah. So, go ahead. Sorry, I got off in a little rabbit trail there. I got off my soapbox. I'm so, I'm so irritated with the manipulation. I'm afraid that we're looking at things that are very U.S.

Starting point is 00:32:35 centric here and we're saying, hey, all the signs are pointing to deflation setting in and rates coming down and us going through this normal. I don't know if I would call it normal, but what appears to be a cycle. When I look at Europe, I'm not seeing anything like that. And I'm seeing inflation raging. a central bank that's grotesquely behind the curve, and they're probably going to have to step in at a time where you got double-digit inflation and add more units, Fiat units into the game. And I'm just thinking, like, what's the knock-on effect to the U.S.? What's the knock-on effect to Japan in the global economy?

Starting point is 00:33:15 Well, when the U.S. goes to a recession, then everybody's going to follow. You know, I mean, we're going to drag everybody into a global recession, period. The problem is, like you're saying, that I think Europe lands harder. They just land that much harder. They were that much later. They land that much harder. So when we look at what causes inflation, everyone wants to immediately say, oh, it's the money printer. It's adding more units because that's really easy to understand and it's just intuitive.

Starting point is 00:33:44 What I think a lot of people fail to realize is if you have really bad policy and it's breaking the supply side of society. you get inflation because instead of 10 people being able to supply widget A, there's one company that's providing widget A because the other nine went out of business because they couldn't afford the electricity expenses, right? Is maybe that a better characterization of what's happening in Europe is they've just had such horrific policy that they're not going to be able to get inflation under control and maybe they're in some type of spiral at this point because of those policies? It's an absolutely, they add on the derivative effects of the energy policy has been, it's been breathtaking.

Starting point is 00:34:30 And so you're seeing it. You're seeing it everywhere. That's why they just had to raise. And you heard the UK and the ECB recently say that we're going to raise higher and longer like the U.S. Because they're shocked. They're shocked with, I mean, oh, that's what happens. Oh.

Starting point is 00:34:48 Yeah. So I think that you're right. I do. I think you're spot on. And they're going to sacrifice some of the weaker countries. And that's the problem. So you're going to see problems start to crop up in the credit markets in Italy, Spain, Portugal, Greece. They're going to start cropping up.

Starting point is 00:35:06 That's the problem. They're sacrificing those economies. And they're going to go down hard first. And then, unfortunately, Germany is going to take the debt load for all of it. So people, you know, this is a Bitcoin show. people were hearing all this and they're saying, all right, James, we'll just explain it to me like I'm wearing a mask in my car, driving down the road by myself,

Starting point is 00:35:28 which was one of the more funnier memes I heard on TV. Not on TV on Twitter. What am I saying? But explain this to people. What does this mean in Bitcoin terms for them? You know, it's interesting is that you're seeing Bitcoin kind of hold in here. And as we go into this kind of recession with rates rising, you want to hold hard monies.

Starting point is 00:35:53 You know, you want to hold things like gold and silver and Bitcoin because you're having inflation at the same time as you go into a risk, you're having inflation, then you have a recession and rising rates at the same time. All of the risk assets kind of, they kind of crash, right?

Starting point is 00:36:12 But you want to own those assets that will store your value. I think this is going to be a big test for Bitcoin personally. I think it's going to be a big test. I don't personally think we've seen the bottom yet because as we hit a recession and risk assets sell off, you do have major holders of Bitcoin in particular that are going to need to raise money. They're going to need to sell Bitcoin to pay margin calls and other assets, for instance, even if they don't have their Bitcoin margin. It's going to be one of the first things they sell.

Starting point is 00:36:45 I think you just have to be careful. That said, I do think that once we do get through. this period and into the next year and toward the end of the year, I think that things like gold and Bitcoin rip, you know, I think that they, they do exceedingly well. Those are the things that I'm looking at. How about this? For the, whenever that bottom comes, let's say we hit a bottom in six months from now. From right now to that point, to that bottom, does Bitcoin outperform the S&P 500? Does it outperform the NASDAQ, the major risk on indices? I personally think it does.

Starting point is 00:37:22 I think it does. And I think that both, because you're seeing how it's reacting right now, I think that we felt the majority of the pain. I could see the S&P and the NASDAQ going down another 20, 30%. I mean, that can absolutely happen. If we hit recession really hard, you look at multiples. We won't get into this. It's not really a market show.

Starting point is 00:37:43 But if you look at multiples, they're just not pricing in the forward earnings. They're just not pricing in the cost of capital yet. the decrease of earnings. I think it does outperform, but that doesn't mean that it's going to do well. I saw Yuri and Timmer. I think Uri and Timmer from Fidelity just came out with a very similar chart, kind of backing up what you're saying is the earnings aren't priced in.

Starting point is 00:38:05 Yeah, they're not priced in to risk on at this point at all. Yeah. So I'd be careful. I would add opportunistically, if, look, if Bitcoin gets decimated, it goes down to $9, $12,000, I would start backing it up, back up the boat, you know, but back up the truck. But, you know, Don't lose your keys out of the boat.

Starting point is 00:38:22 You're just taking there's Bitcoin straight onto the boat. Exactly. I have a truck. You only pick them up at the board. It's late. We're getting loopy. Yeah. So that's how I feel.

Starting point is 00:38:38 But I would be, I would just caution people. That's all. You know, I don't. You can't say, oh, it's different. All I can say is that I'm seeing signs that look like we're going to hit. We're going to hit. it hard. I don't think that Powell is going to let us get decimated. I don't think he's going to allow that. But I do think he's going to push it right to the precipice, which means that he wants

Starting point is 00:39:02 risk assets to sell off across the board because he knows that that will tamp down inflation. He knows it. And that's important for him and his legacy. And so that's his primary. Does he get it down to 2%? I don't think so. Like I said before, I think that he's going to get it in going the right direction and then declare victory. It's going the right way. You're down to like four and a half, five percent. It's all good. And then we're just going to knock around between three and five percent for the foreseeable future so we can inflate away to our past debt, which you and I have talked about before too. But look, you're seeing everything. All the data is, it's so clear, right? I mean, the inverted yield curves. You've got housing demand is falling off a cliff. You've got consumer credit is

Starting point is 00:39:47 rising while interest rates are spiking and the savings rate is dropping off the cliff. And if you look at the different income levels and the different quartiles, that savings, it's all consolidated at the top income level. You've got at the same time, you've got banks that are tightening their lending standards across the board as interest rates are up. Jobless claims are starting to tick higher. You've got weak PMI numbers. It's all pointing that way. I don't see anything that says, oh, no, we're going to be fine. We're going to pull right through. My concern the way I think they're going to go about handling this. So for the past decade, prior to COVID, they could step in with a massive amount of QE. At the first signs that things

Starting point is 00:40:33 were becoming stressed. And I mean, it was just a shotgun blast, right, into the market because they could not produce inflation. And so they kept doing this for a decade. And it's, like no matter what they did, no matter how much liquidity they brought to the market, it just didn't seem to do anything to create quote unquote inflation. So now they get it and they get it in a major way. And I think a lot of it goes back to what I was saying earlier about policy and breaking supply chains and those types of things. So they get it in a major way. They're raising aggressively. And I think it was Powell who said it recently that they're going to be more surgical with how they step into the market to provide liquidity where it's needed and where they're seeing

Starting point is 00:41:17 stress points. We saw this over in the UK, right? Perfect example of a surgical response. So my concern is they're going to keep doing these quote unquote surgical responses, plugging the holes in this dam like with their fingers and their toes and everything else, only for the systemic part of it to only get bigger and bigger and bigger until literally the dam breaks open and then the response isn't going to be surgical. It's going to be such a fire hose 4X what they did with COVID and the numbers are going to be so substantial now that

Starting point is 00:41:54 they're just completely meaningless to everybody. They were meaningless in 2008, 2008. But it's people are numb by them. They're totally numb by it. They're conditioned to be like, oh, well, what's different? Another trillion dollars. It's another trillion dollars. You know, we talked about the trillion dollar coin? Well, now you mean like 10 of them. Yeah. Joe Wisenthall, you know, There you go, Joe. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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Starting point is 00:45:53 It has to stay orderly, period. It drives the world. If the U.S. treasury market breaks, forget it. It's over. I mean, it's absolutely over. Everything revolves around the U.S. treasury market. It's still the reserve asset of the world. That's where they're plugging those holes.

Starting point is 00:46:09 And then eventually they pull a string that they hadn't thought of. It's so complex, this whole system. And they've manipulated so severely that they pull a string that they hadn't thought of. So you were talking to me, you were asking me about the Fed remittances. For the people, for your listeners, and it's already been an hour, so I don't know how much longer you want to go. But, you know, for your listeners, and there it is. Preston just brought up a chart that shows the liabilities and the earnings, basically, the remittances that the Fed pays the U.S. Treasury.

Starting point is 00:46:44 So the Fed typically makes money, and they remit that to the Treasury every single month, right? And so actually they do more often, yeah. But the problem is that you've seen it here fall off a cliff, and now they are running such a deep deficit. I mean, they're losing money every single month. It's such a tremendous amount that you see this tight band, the amount of money that they sent to the treasury every single time they had to send it. And then it just fell off a cliff. Literally fell off a cliff when we started raising rates.

Starting point is 00:47:19 Well, why? Because the Fed bought all those U.S. treasuries during QE and it receives interest payments. It's so stupid. I can't believe this is. them. Oh my God. So they can't legally, the Fed can't buy treasuries in auction. So the dealers buy them and then they sell them to the Fed. And then basically the Fed gives the dealer's money and says, hey, buy this one. It's like you're an 18-year-old. You're like, hey, can you go buy me the six-pack? You know? But you're 18 years old. So the Fed bought all these

Starting point is 00:48:01 treasuries from the U.S. Treasury through their buyer, through their dealer. I mean, literally the dealer, right? So they've got them. And they're, so they receive interest payments from the treasury on those. But the Fed pays the bank's interest payments on the bank's reserves that are at deposit at the Fed, right, on deposit the Fed, plus the reverse repo overnight window. So they're paying them interest on that. Okay. Here's the process. The Fed bought all these treasuries in QE that are yielding half a percent to a percent and a third or something. Yet, now they've raised rates so much that they're paying the banks to not lend an overnight

Starting point is 00:48:49 rate and they're reserving. They're paying them a rate that's far above that. So they're losing massive amounts of money. I mean, $300 billion a year. If you end up $300 billion, $200 billion a year. That's right. It's like $500 million a day, right? Yes.

Starting point is 00:49:07 Yes. That they're paying these guys. Basically, it's impaired their balance sheet. So now the Fed has this loss that they're running every single month. But they're supposed to be sending money up to the Treasury. Yet they have this loss. They have this hole. They literally have a hole in their balance sheet.

Starting point is 00:49:21 And they're like, well, we're going to call it a deferred asset. Say that again. They're calling it a deferred asset. So it's not really that we're losing money. It's just that we haven't made the money that we're going to make yet to pay the treasury. So we're going to call it a deferred asset. And then they're calling an asset because they're basically saying it's going to offset future remittances to the treasury once that net interest margin inverts. Comes back if it ever comes back.

Starting point is 00:49:52 And it's positive again. It's just fancy accounting. It's just it's ludicrous. But that's what they're doing. And so now, until basically the Fed flooded banks with cash and kept rates on the reserve high enough so they would keep those trillions of dollars out from flooding into the economy. Exactly. And that's the so what, James?

Starting point is 00:50:14 That's the so what? Exactly. These banks are flooded with cash. And so how can we make sure that they don't lend this money out? Well, we've got to pay an interest rate. We have to pay a competitive interest rate to the rest of the market. to make sure that all this money that these banks are squatting on doesn't get out to everyday citizens or else we'd have inflation.

Starting point is 00:50:37 But where's that money coming from? Exactly. That they're giving them. They're giving them this money they don't have. They're printing it. They're printing it and giving it to them anyways. Now they're doing to the tune of $500 million a day. I'd like some of that.

Starting point is 00:50:53 You want some of that? We're not getting into that. But anyway, but it's money that's going, it is going into the same thing. system, right? James, this is what's so crazy to me. If we were going to quantify $300 billion, like this is almost half the budget of the U.S. DoD, which is $800 billion a year. Yeah, I mean, you're almost at half the DOD budget.

Starting point is 00:51:16 And so what is it? It's interest expense being paid directly to the too big to fail banks, and then they're just slapping it on their balance sheet. And then what are they doing with that? They're going to go buy more treasuries and put those on deposit so that they can get more interest income. It's insane. It's insane. I need to add that to my button here on my mixer.

Starting point is 00:51:41 I can just play it. It's insane. It's insane. So here's the string, right? They're like, oh, no, it's fine. It's fine because we're, you know, we're making money and we're going to send it back up the treasury. It's no, you know, this all works when rates are at zero. but now the rates are inverted.

Starting point is 00:51:59 They're paying so much more on the overnight than they're getting for their 30 year and whatever they bought. So now they've got a hole in their balance. We haven't even talked about the fact that they don't they don't mark to market their treasuries that they own. Yeah.

Starting point is 00:52:13 That are down 25%. Could you imagine? Hey, man. You know what? Can we make that a deferred asset? I know that we bought all these treasuries. Can we make that a deferred asset? I got my head.

Starting point is 00:52:23 I'm my private equity, my hedge fund. I know we bought all these treasures. and they're sitting on a balance sheet and they're down 25%. But you know what? We're going to wait it out. So we're not going to mark them. That doesn't fly for anybody. Anybody.

Starting point is 00:52:37 So they don't mark them. And they print money to give to the banks every day, $500 million a day. So that's what happened. That's what's happening. And definitely shout out to Luke Grombe because he's been all over this too. And it's been all over it. And he takes it even further saying it's just,

Starting point is 00:52:55 it's a form. of QE that we're just dumping money and it's and it could lead to more inflation in the United States. I don't know. I've got to work that I've got to work that through because the rates going up, we're so levered as an economy. I think it just, it completely overwhelms this level of QE. I think that we're so levered that we need massive amounts of QE to turn this. Like we are the, what is the QE2? The Queen of England's a massive ship that you've, you can't. You could chop. That's what we're doing here.

Starting point is 00:53:28 We've got to like turning that thing around. It's not like a helicopter, Preston. It's insane. And I think for most that are just hearing all the fancy terminology, like at the end of the day, if you were going to put these in business terms, I mean, it's just, it's absolutely asinine. What's happening? This company is defunct.

Starting point is 00:53:51 Yeah. But somebody give somebody, basically it's a company that has. an endless checkbook. You know, you got your first checkbook and you're thinking, I could just write checks. You can write checks. You do think that. But then you realize, oh, somebody's going to cash when I need the money in the account. You know, you're like, what, 14 years old, right?

Starting point is 00:54:13 This is what it is. They just have a checkbook. Nobody's checking the bank account. It's okay. You know, they have a, I think the funniest part of the academics that then go and wave their hands in the air and say that this is all just a lot. and it's normal. You're distorting the reality.

Starting point is 00:54:30 You know, it's not really like that. You can't look at it like that. Recently, you're getting involved in a fund that's doing the stressed debt. Talk to us just in general about the stressed debt and help people understand because you and Greg Foss and some others that are involved in this Larry LaPard, you guys are extremely smart and have experience in this area. And it can be a really lucrative, especially with. with what we're about to go into.

Starting point is 00:54:58 If you can get your timing right with raising the funds and what you're able to step in and buy and find value in things that are distressed, talk to us about some of this stuff. I'm super excited. That's why I've been working on. That's why I haven't been on Noster. But I'm launching a hedge fund with my co-managing partner is David Foley. And he is Larry Lepard's, one of his partner in his hedge fund. So we've got Larry and Greg, Greg Foss, Mark Moss, and those are the main operating partners.

Starting point is 00:55:32 And then we just partnered with Swan. So Corey's going to be on our board and working with us as well. And Corey Clipson. What it is is, and you're right, a lot of its timing. It's a distress asset and distressed bond fund where we're looking at and it's all focused on Bitcoin, the Bitcoin ecosystem. So companies that need money that are in distress, we've seen it in the miners. You're starting to see it in some of the smaller companies, some of the Bitcoin financial companies, some of the hardware wallet companies that raise money, they need more money.

Starting point is 00:56:06 But the space has dried up. It's been really tough. There's a tough part is that people get scared in these markets, but there's tremendous value out there. And it's to help these companies. that are so important, but also that as an investor, you can do really well. It's the one that's a gut check that you have to step in to the market now, like, is it starting to get really ugly in this world? And I can't say too much, but we've been in some of these bankruptcy data

Starting point is 00:56:39 rooms and where they're selling assets from these companies. And they're selling for some of them are pennies on the dollar. You've got this tremendous opportunity to help those companies and to get a great rate of return for your investors. We're helping them and helping grow this ecosystem. But that's it. We're focused on the Bitcoin ecosystem and that's it. No other crypto, what we can do, we can do both private and public investments. And so that's our advantage.

Starting point is 00:57:07 We've done between us, we've got like 150 years of hedge fund, private equity venture capital and experience doing anything from distress, convertible bonds, all the way up and down the capital structure. We've done arbitrage. We've done CDS's. I mean, you know, option strategies. And a number of us have been investing in Bitcoin for years. And so we have people like you and our network of contacts that we see a lot of stuff.

Starting point is 00:57:35 So it's exciting. That's about all I can say about it is for accredited investors. I can't pitch it or anything. But that's what we're doing. We're excited. We think we have something here that, and I love my partners. They're all, like you said, super smart. super driven and they're good guys.

Starting point is 00:57:52 Awesome, man. Always a pleasure chatting with you. Yes, such a pleasure. Give people a handoff. I know you're active on Twitter. I'll have a link in the show notes for your newsletter, but yeah. Yeah. Thank you, Preston.

Starting point is 00:58:06 I love coming on here. You always ask the engaging questions. You're on top of it. So it's fun. And you're super smart. But yeah, I'm active on Twitter just at James Lavish. and I have the newsletter that's called The Informationist. And it's just, I take one financial concept and break it down super simply every Sunday.

Starting point is 00:58:26 I believe this Sunday's Christmas. So we will, we'll be skipping that one because I am going to be with family. And that's important. But every single week, it comes out. And I think it's something that just helps people, whether you're in finance or you're not, it'll give you an explanation of some of the topics and some of the big buzzwords you keep hearing from week to week. I love doing it. It's fun. And I really like making people smarter. So it's fun. I like it. I can tell you as a reader of it, like this one that you just published this past week with the dot plots,

Starting point is 00:58:59 it's so helpful. And it's grounded in first principle thinking. And so for people that hear a lot of these terms and stuff, I think it's such a great tool to kind of go in there and just read. I know myself, I feel like I'm versed on some of the stuff, but it's so great to go back and kind of read some of your material because it's just, it's grounding you in some of the ideas that, you know, sometimes you think you might understand something and then you read something like that. And you're just like, okay, so I really didn't have a firm understanding of what I thought I knew. So, kudos to you in the newsletter. I love it.

Starting point is 00:59:31 Well, I'm flattered that you read it. And I'm glad it helps. I'm glad it helps the people that read it. I really do like that. So thank you, Preston. And I love coming on here. Look forward to our next conversation. Absolutely.

Starting point is 00:59:43 Thanks, James. Maybe it'll be on no story. Absolutely. Absolutely. All right. We'll see you. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires.

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