We Study Billionaires - The Investor’s Podcast Network - BTC144: Bitcoin and Macro Mastermind 3Q 2023 w/ Joe Carlasare, Jeff Ross, and Steven McClurg (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. Well, back by popular demand is our third quarter of 2023 Macro and Bitcoin Mastermind Group. The group is Joe Carlisari, Stephen McClurg, and Jeff Ross. We cover a wide range of topics that include the current situation with interest rates continuing to climb higher and a resurgence in the global gas and diesel prices in what impact that might have on equity and fixed income. where we're at in the larger global macro cycle and what is causing Bitcoin to be so sluggish.

Starting point is 00:00:34 We also cover where all these Bitcoin ETFs and the gray scale lawsuit with the SEC is currently at and what a viable approval timeline might actually look like for some of these products. So with that, let's get started. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. We got the mastermind back here, the macro Bitcoin. I don't know what we call ourselves here, but we got Stephen McClurg, Joe Carlosari, Jeff Ross.

Starting point is 00:01:22 Gentlemen, thanks for making time to come on and have these conversations. Thanks for having us, Preston. Hey, so you guys sent your charts that we can go through here. We'll pull them up. We'll get to that part of the conversation. But I wanted to start off talking to Joe, because any time. time I get to talk to you about legal matters or what's happening in the news, I get kind of excited because you always have such an expert opinion on this. SBF goes back to jail. What is this?

Starting point is 00:01:50 Well, you don't want to tamper with witnesses. That's number one. You don't want to reach out to FTC's former general counsel and try to cut deals and cut bargains. And courts really don't look too kindly on that sort of thing. And the real story about all this is that I think, you know, he's going to go to this really, by all accounts, lawyers and judges tend to view it as deplorable conditions at this MDC in Brooklyn. It's, you know, well regarded as one of the worst in the whole nation in terms of how it treats some of its inmates incarcerated there. So that's going to be interesting, right?

Starting point is 00:02:21 And the big question now is he's set to go to trial in October and is his team going to say, well, we don't have the same access we had to him previously. So we're going to have to move to continue this trial. Will that be opposed by the government? That's a real question. Will the government similarly be ready to go to trial? It's a big issue, right? And I would not be surprised at all,

Starting point is 00:02:41 just knowing how slow things can move in the legal system if we get a motion for a continuance. But at the same time, now they're appealing, putting him into the MDC. So a lot of issues here, but suffice it to say, you know, his use of the VPN to try to influence witnesses, not a good move, right? Definitely the next step in a long string of horrible mistakes made by SBF,

Starting point is 00:03:01 I think we can all agree on. I'm a little shocked by it. I'm not. I'm not. The guy's nuts. Well, no, no, no. Yeah, that's a given. But considering the 100 million plus of donations to political candidates on both sides of the aisle,

Starting point is 00:03:18 he, you know, gets brought to the U.S. immediately gets house arrest type treatment for a guy that literally lost $9 billion, like up in smoke. Like, I'm just a little shocked that, hey, that. happened. And then I'm even more shocked that with that treatment that he got, then now all of a sudden they're like coming down on the guy. So like it seems like he was protected and like just everything that I have expected with this guy has literally been the opposite of what's played out. Yeah. My only my only comment on that is that I think they have been cornered. He's dead to rights. There's really not much of a defense in my opinion. I think this idea that he was, you know, he's sort of intimated that he's going to raise a defense that he was somehow misled or mismanaged by his lawyers. That's going to go. nowhere, in my opinion, I could be wrong. But I think that's a, it's a fait of complete at this point. I think he will be sentenced for at least a significant amount of time. And we can debate whether what's significant. But he's going down, right? And when you're going down, you're kind of desperate. And I think that's what prompted him to go out and try to massage some of these witnesses to saying favorable things about him. And also leaking the story about Carolyn to the New

Starting point is 00:04:27 York Times, totally reprehensible. What's going to happen to these people that had, like your everyday person that had deposits, let's say you had, you know, $100,000 of deposits on FTX. Like, what happens to these people? Well, if you, I mean, I don't know how closely you're following the bankruptcy action. And obviously there's go, yeah. Well, I mean, long story short is there's not enough money to cover all their liabilities, right? And you've got structures in terms of who gets preference right there, some of their bondholders,

Starting point is 00:04:55 some of the credit gets preference. So unfortunately, you know, we don't know. I can tell you this. They're not going to be made whole. If they're lucky, they're going to get, you know, some de minimis amount, 30 cents on the dollar, 20 cents on the dollar. If that, that would be a huge favorable outcome for them. But my guess is after the lawyers and everyone else eats into it, there's going to be

Starting point is 00:05:14 very little left for the guy who had six figures up there, if anything. Wow. Can I ask a question on this? Because I'm kind of intrigued too. I'm kind of where you are, Crested. And this is not how I expected this to play out. And I think it's just the size of the contributions that he made. If you remember Madoff, Bernie Madoff had contributed something like a quarter of a million dollars to various campaigns.

Starting point is 00:05:43 And a lot of that was returned. And, you know, I think Chuck Schumer was one of the biggest recipients of Madoff contributions. I don't know if you remember that. But the way that it sounds to me is, you know, a quarter of a million dollars isn't enough to keep you out of jail, but a hundred million is. And what's going to happen with that $100 million? I keep seeing commentary that, you know, a judge struck it down. It's not going to get returned.

Starting point is 00:06:10 It's not going to get clawed back. And then I'm hearing that it is. Are you following that part closely at all? Yeah. And with the revised indictment that they just released, we now learned that the $100 million was not like his personal funds, right? It was actually customer assets that were used to go out and make these contributions, which see you guys shaking your head.

Starting point is 00:06:28 I had the same reaction. It's horrible, right? It's different if you use your own money to go out there and try to cajole politicians, but to use other people's deposits, that's just awful. But to answer your question, you cannot return something that has been spent. That's usually an old sort of doctrine in politics, right? And a lot of this money had already been spent from my understanding and prior election cycles. I think that the money that's gone, very unlikely to be refunded or return,

Starting point is 00:06:52 But, you know, the clawback efforts for contributions are a little bit different, especially ones that were given is in his name, right? Because he effectively stole money, gave it to someone else unwittingly, not knowing that he was involved in these crimes, and then they spent the money. So clawbacks usually only extend out to people that somehow were part of the original apparatus, were, you know, insiders that were spending the money right before a bankruptcy was filed, those types of claims. When it's sufficiently removed, if it's six months or a year removed, very unlikely, not impossible, but unlikely to claw that back. So that's the short answer. You know, it's all about time and degree. You know, when the bankruptcy trustees come in,

Starting point is 00:07:28 they look at everything. And they start with, okay, what just happened in the last 90 days? And then if there are huge pots of money that extend out beyond 90 days, they think about it. They consider it. But the longer the time goes, the less likely to recovery. All right. Off to the next topic, unless you guys had anything else there that you want to talk about. Thank you. My only comment on it is when I watch him, every single thing, thing that he has done and said since he started getting in trouble a year ago. Seems like it's just a game to him. I mean, he's just like this cocky, absent-minded professor slash teenager that just

Starting point is 00:08:02 thinks it's a game. And I think he thinks he's just got enough people paid off and he's going to get out. And I just don't think it's going to end up well. Wait. Wait until you read the book Going Infinite by Michael Lewis coming soon, October 4th. It was supposed to come out, as I understand it, with the trial. They may be delaying that I'm hearing whispers about if the trial gets continued. So they want to like, you know, capture the moment.

Starting point is 00:08:24 But Michael Lewis, I mean, obviously author of the big short, a lot of excellent books, Liars Poker. That's going to be great. All right. Let's go ahead and talk about everybody loves talking about the ETF. And I think most are sick and tired of this conversation. But I want to cover it because I recently saw that the SEC is. saying they're going to push this out to 2024.

Starting point is 00:08:51 Is this just a rumor? Like, what's the ground truth here, you guys? So we have one unconfirmed coin desk report about their intention to continue it out to 2024. Obviously, the ARC, they did formally extend the deadline in that. But there's a host of other deadlines are coming up. And from following the SEC, I've never heard of them issuing like an en banc. Like, we're not looking at anything until the beginning of next year.

Starting point is 00:09:18 So I'm very skeptical. The Coin desk article doesn't even mention a source. So I don't know where they're getting this from. I wouldn't be surprised if they do in fact, you know, continue them out, particularly because they're waiting on the gray scale appeal, which by the way, we could get any day now. We can get the gray scale. We're supposed to get it today. I know there's some speculation about today. The next window is going to be 11 o'clock on Friday, which by the time this airs, we may have it. But that's really the linchpin. I've long said that I don't think they're going to make any move until you get some sort of resolution in that case. It wouldn't really make sense, right? Why would you, why would you rule favorably or unfavorably on the AETFs when you've got an appeal where you're fighting against gray scales conversion efforts right now in the appellate court? If you were going to change your opinion, you would just save yourself the potential embarrassment of losing the appellate court and say, you know, this whole action is moot. We're just missing the appeal.

Starting point is 00:10:05 You guys got anything else? Look, I'll say this. I don't know anything because, you know, I'm in the middle of this race. I really don't know anything. I'm only. speculating and guessing as well and being kind of close to it and watching it. I'm sure I'm missing the forest for the trees. But I can't imagine a scenario that BlackRock doesn't go first in some

Starting point is 00:10:31 form or another. But they wouldn't go far behind whoever does go first. That's right. I think it would be a really tough argument to just... There's no way they can approve that one first. Approving it a day late.

Starting point is 00:10:46 approving it a day later is the same as basically approving it first, right? Look, when it comes to, when it comes to Grayscale, let me tell you what my speculation is, okay? I actually think that Grayscale has a good chance of winning this court battle. I've heard that from a lot of people. And watching it closely, I think they're going to win. I mean, that's my opinion. And again, I don't know anything. But I think they're going to win.

Starting point is 00:11:13 but the SEC also has a lot of tools that they can use to hold things up, especially in this particular type of filing, because you have to have an actual rule change. So there's two pieces of the Bitcoin Spot ETF. There is the S1 or the 1933 application process, which, I mean, man, ours is still live and we filed it back in January of 2021. Okay. So that's that's the one piece of it.

Starting point is 00:11:45 The second piece of it is the 19B4, which is the application for a rule change by an exchange. And the way that the SEC is planning this out is they won't review any of the S-1s until, by the way, that review process is done by investment management, which is the division of the SEC, the investment management staff. They're not, they won't even look at it until the rule changes process, which is handled. by trading in markets. So it's really easy for trading in markets to either approve one or approve all of them or approve in whatever order they want because it's not necessarily about who filed the 19B4's first or second or third. None of that matters at all.

Starting point is 00:12:33 And I think there's a lot of people out there that are confusing the fact that, oh, they're the first ones that filed the 19B4. That means they're first. No. First doesn't matter. right matters, which one was done correctly. In my estimation and what I've seen, the Black Rock 19B4 was the first one that was done correctly. It included the surveillance language, which is essentially what the staff was looking for in my opinion. You know,

Starting point is 00:13:03 staff probably wrote it. Staff probably wrote it and sent it to Black Rock. The SEC staff? Yeah. Not a chance. And just to be clear, the surveillance sharing agreement that Steve's referencing, which, you know, is a linchpin, I totally agree with him on that. It is with Coinbase and NASDAQ, right? Keep in mind, the SEC is suing Coinbase saying they're not legally enabled to operate as in exchange.

Starting point is 00:13:28 It's sort of a stretch and logic there. But I take your point. I mean, the surveillance sharing agreement's been their whole thing. It surveillance sharing agreement with the market of sufficient size. The question is, if Coinbase, in terms of global market. share and volume is a market of sufficient size. And the SEC and their briefing against gray scale said it isn't. So which one is it? Is it the enforcement heads or is it the registration staff who takes precedent? Let me just put a little bit more public information that's out there. So the actual

Starting point is 00:13:54 director of trading in markets that wrote the brief on what is required in a 19B4 in order to get it passed was a woman by the name of Dalia Blas. Have you heard that name? Okay. So Dahlia's Blas was the person who wrote that letter, and every 19B4, after that point of time, had to answer all the questions that see posed, and they show up in three, actually four main categories. All the other categories have since been satisfied except market manipulation and surveillance. Dahlia Blas retired from the SEC in 2021. She's been working at BlackRock for the last two years. when you say the statement, you kind of jokingly said,

Starting point is 00:14:40 did someone from the SEC, well, yes, that, I mean, I can't tell you that that's what happened, but it's no point that the person who wrote the questions went to work for BlackRock and then BlackRock filed something that answered all the questions. But that's common of all throughout the securities lawyers field, right? I mean, I've got securities lawyers that used to work for the SEC at my office, right?

Starting point is 00:15:04 And they file cases and have cases against the SEC. and they lose. You know, just because you work there at one point doesn't mean you have the ability to control policy, which, you know, that's the bigger question. How long did she walk there? That would be the next thing. Because if she was there for two decades and then leaves and has all that entire network back there, like, you know, he was the director of trading in markets.

Starting point is 00:15:26 That's the senior most person in that division. Exactly. I think it's a little bit strange to look at it from the standpoint of like actually meeting a legal test, okay, because there are politics wrapped up in this. And there's clear animus towards Bitcoin and crypto from the SEC. Yeah. And they've effectively declared war on crypto. They couldn't make it more overt. So the notion that this is being driven by some legitimate policy defect in the registry, in the S-1, I disagree with that. I don't think it's the secret sauce. It'll get you past the finish line when you're dealing with a rigged system that is set out to not a proof. Just my thoughts.

Starting point is 00:16:00 I mean, maybe I just sound too much like a conspiracy theorist, but I think this is all. all just to buy Wall Street time. Like, I think this is all just to give them more and more time to play catch up. Like, I think that the relationship between the SEC and legacy finance, like the Black Rocks of the world, is way closer knit than anybody realizes. But, again, it might be a conspiracy theorist here. Well, look, Joe makes really good points. I mean, just because somebody works at the SEC doesn't mean that they can get things done.

Starting point is 00:16:30 I mean, that is absolutely a fact. But yeah, I think the person who very publicly runs a division, very publicly writes a letter of all the things that have to be contained. And then the firm that she went to work for for two years comes back with a document that answers every question. Specifically to do that. Was hired specifically to do that. By the way, there's nothing wrong with that. There's nothing wrong with that. I mean, look at the Bittowski.

Starting point is 00:16:57 You know, he supported the Bitt license in New York and then started a firm that got the very first Bit license. You know who was arguing the case on behalf of Grayscale in the appellate court? Don Verily, right? Former Solicitor General of the United States of America, one of the highest positions, legal positions you could hold. He's arguing on behalf of Grayscale's conversion efforts. I mean, they've all, these guys, when they leave the public sector, they make a ton of money going out, representing, you know, whoever will pay them the most usually.

Starting point is 00:17:23 Joe, one other question, kind of on the legal front. So the Ripple, the SEC is bringing them back. they were not satisfied with how that went down. Explain to folks what this is. Oh, maybe. Okay. Explain this for people so they understand what's happening, potentially. Yeah.

Starting point is 00:17:43 Just to pivot back one second, I wanted to give the audience to the date. So if you're following it home, you're really interested in the Black Rock, right? What the decision is. The SEC deadline to respond is September 2nd. Okay. That's a formal deadline. There has to be an official response. At that point, we'll get something.

Starting point is 00:17:58 It might be a delay. if they delay it, it'll be into the new year because that's their typical MO, right? But we will get some response formally, not just a coin desk article from the SEC on 9-2. But to answer your question about Ripple, obviously when you're in litigation and you're filing motions for summary judgment, many times the judges resolve some issues, but not all the issues. And what the judge did in this case, she judged Taurus, she resolved some of the issues on a motion for summary judgment and said other issues, particularly the involvement of Garlinghouse and Larson. They have to be tried. We have to figure out if they recklessly disregarded securities laws at trial. And that's going to be set in the near future.

Starting point is 00:18:36 I think the judge actually entered an order on that. So what the big question has been in legal circles in the crypto industry for like the last month or so has been, is the SEC going to seek what's called an in the locutory appeal? Because ordinarily, the way appeals work, you get to the end of the case, you do all your discovery, you do all your trial, and then you appeal what's called a final order. This has everything about, you know, wrapped up in a bow. All decisions have been made. there's nothing left in the case. Now it goes up on appeal. Well, there's a special mechanism in

Starting point is 00:19:04 my world, in the civil litigation world, where you can do what's called an in inelocatory appeal. Just a fancy way of saying an appeal in the middle of the case. They're granted seldomly. You have to meet special heightened standards to get up into the appellate court for an interlocutory appeal. And what the SEC did is they filed a letter motion to Judge Torres saying, we want to have the right to seek an inelocatory appeal. So the question is, will Judge Torres, Give them that right. Actually, they filed a motion requesting to file a brief in support of their right for an interlocutory appeal. That's the first sort of two-step process in her courtroom. So we're going to see whether Judge Torres is going to allow this case to go up. Now, the biggest wrinkle in all this is that one of the other judges from that exact circuit, okay, sits contemporaneously on the same level on a co-equal basis with Judge Torres, put out an opinion criticizing her opinion very quickly. He said, I disagree with the judge's analysis here, that Howie makes no differential between initial and secondary sales, and that's not part of the test. So that criticism from a very

Starting point is 00:20:09 well-regarded judge in that same district court may serve as a basis to sort of make Judge Torres think twice whether she will or will not allow an interlocutory appeal of the case. Wow. So more to come. Wow. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days. days in Oslo at the height of the summer. You've got long days of daylight, incredible food,

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Starting point is 00:24:31 All right. Back to the show. Now, is that the judge that had the opinion off to the side more superior in like how the judges are viewed or peers or how would that person be viewed and their opinion like that, voicing that. I would imagine this is really rare for something like that to happen. Well, judges within it, when things. in a district court disagree, right?

Starting point is 00:24:55 Like everybody, you're not publicing, right? Well, he did in the form of an opinion. He was actually writing an opinion because there was a citation already. Everybody's citing the Ripple Lavis decision in all these other district courts. And it's Judge Rakoff. That's his name, very well regarded judge, senior judge in the Southern District of New York. He was effectively saying, I disagree with the judge's logic here.

Starting point is 00:25:17 I'm not going to follow it. I'm going to apply my reading of Howie in that case, right? He wasn't just in a vacuum criticizing the judge. because they don't really do that to your point. He was saying, I know you're citing this precedent from one of my peers, but I disagree with that. And it's not binding on me. It's where we're co-equals, right? So I don't have to follow it. Judges are typically bound to follow decisions from superior courts, from courts of appeals or the U.S. Supreme Court above them. They don't have to follow ordinarily decisions of their co-equals.

Starting point is 00:25:47 And so the SEC is running with that. They're basically waving that around saying, this is why we can step in in the middle of this and try to reverse it. He did not have helped them more in sort of pushing them towards filing an in locatory appeal. So he's on payroll. All that boring legal stuff. I'm sorry to bog us down. Hey, can I make it exciting for a bit? Yeah, because I'm obviously, I got nothing from the legal perspective.

Starting point is 00:26:12 But I was in the room the day that Joe and Greg Foss were going back and forth about when a spot Bitcoin ETF would be approved. And I believe, Joe, you gave Foss 10 to one off. that it would not get approved to be this year. Is that correct? That's true. I don't like so bad. I know. It gets people excited.

Starting point is 00:26:31 I'd love to know your and Stephen's opinion on what, what odds do you give a spot Bitcoin ETF approval this year? What's the updated odds? What's the updated odds? Yeah. And to be clear, this year, meaning ending 1231. Yeah. Because we're launching this year or a plon approval?

Starting point is 00:26:50 Oh, you say. Oh, either one. So either one. approval, which is the SEC says stamp approved. You're in. We're good. You can buy the ticker. Yep.

Starting point is 00:27:00 I give highest odds to some time of being approved Q1 of next year. That's highest odds. I think it's going to be like, frankly, what I think is going to happen is the final deadline for Arc is going to expire. And then they're like, and then they're out of the race.

Starting point is 00:27:16 And then it's going to be like, all right, Black Rock. Or everybody at once. Those are, those are really the two things that I think happen. I do think there's a small chance that the, you know, like the 19, a or several 19B4s get approved this year.

Starting point is 00:27:32 I think there's a chance. I wouldn't take it off the table, but that means once that happens, it starts the clock for a 75 day statutory approval period for the S-1s. Anything launching this year, I think is like hardly no chance. But getting a 19B4. approved this year, I think is possible.

Starting point is 00:27:54 This was back in June. And the reason why I made that bet with Foss is just looking at the calendar. I mean, these things move very slowly. And even if you're bullish, which I told them, you know, if you had a gun to my head and made me calculate odds back then, you know, I would say 40 to 50% chance we get a spot ETF in the next year. That was back in June, right, in the next year, okay? Which is pretty good odds, in my opinion.

Starting point is 00:28:17 But considering how long we've had to wait, having it approved by the end of the year, I think while possible, it was unlikely. That's why I took the bet. But ultimately, what I'll tell you is this, when you look at the big wrinkle in all this, I continue to believe it's the gray scale case. The gray scale case, if Steve's right and they win in that case, that can expedite a ton of stuff.

Starting point is 00:28:38 So that's the big wrinkle. And we could get that Friday. By the time you're listening to this, we could have a decision on it. Wow. Nice. Yeah. Steven, you agree with that?

Starting point is 00:28:47 Maybe back on that because I fully agree. I think they, a very, there is a good possibility that that they win. The SEC says, great, you won. Congratulations. Now, go get in line. Go file everything over again because there's a process here. And we'll approve you once the process is over.

Starting point is 00:29:08 And then the next decision date for BlackRock is actually October 2nd. That is potentially the date that there's a chance that October 2nd is a, is an approval of 19 before date and basically everybody's kind of grouped around that time, you know? Most people, the next dates are either October 1st, October 2nd, October 4th. And you get like a slew of 19 before approvals. That is the only, I would say, possibility because, you know, that would then start a 75-day clock. That's absolute best case scenario.

Starting point is 00:29:46 I think that would be their go-to. If they lost that case, if Grace goes, one, the SEC would absolutely throw them to the end of the line. And keep in mind, they could lose it and also, they can also appeal it, right? They're entitled to an appeal to the U.S. Supreme Court. All right. So Stephen wants to rub your nose and some stuff here, Joe. So we're going to pull up.

Starting point is 00:30:11 Love it. So we're going to pull up a chart. Can you guys see the chart? Yep. Okay. Notice how Stephen took the. time to put the tweet back in between you and Joe. Okay, for people listening and not looking at the charts, we're showing a 10-year U.S.

Starting point is 00:30:30 Treasury over the last 30 days, and we're showing the sell-off. And because of the last time we talked, Joe and Stephen were talking about the Treasury market, and Stephen thought it was going to continue to sell off. Joe, you were bullish. Stephen, take it away. What are you trying to prove here based on the price action over the last 30 days? Just to be clear, I've been, when you say bullish, I've been short treasuries since like Q1. Like I've been arguing publicly about this, but $100 billion is not the issue.

Starting point is 00:31:03 But anyway, we'll talk about that later. You should be bullish on treasuries because the economy isn't rolling over. I mean, or bearish on treasury because the economy isn't rolling over because we're having a bare steepening. So, I mean, that's that's the trade. But Joe. Joe, the last time, I don't remember when we recorded last, but the last time you were here, you were bullish on treasuries. You thought that the sell-off was over and we were in a bit. Because of the recessionary dynamics, which we didn't get, right?

Starting point is 00:31:30 Everything is re-accelerated into the fall and into the summer here. So that's the problem. Like the recession didn't come. Like we still have consumer demand. Look at the retail sales. Look at all the economic indicators. They're still robust for now. The bare steepening is going to send yields to probably 5.5%.

Starting point is 00:31:46 Steven, what's your, yeah, look, I really only did this to have fun with Joe. But, no, other than that, no, seriously, I mean, this is actually a really good chart here. Really what I think is important is where treasury yields are going. I'm not convinced that we're, let's back up a little bit. We had a generational, first we had a generational bare market in bonds in it around 1981, and then we had a generational bull market in bonds that essentially ended in COVID. And right now, I think the treasury market is kind of trying to find its footed.

Starting point is 00:32:27 And are we going to continue on in a bull market and bonds? Or have we entered into the next generational bear market and bonds? The real, and we talked about this a little bit earlier, I don't know. That's the question. That's the biggest question on my mind is I don't know which way it's going. But what I do, what I do speculate on is what's happening in the short run. So in the short run, we definitely are going to see, we're going to continue to see yields rise. We still live in a world with an inverted yield curve.

Starting point is 00:33:02 And we even went through a period of time, you know, a few months ago where short-term yields got to 7%. And what was what was a lot of fun was in our hedge fund at Valkyrie, we actually traded out of a lot of Bitcoin and bought, you know, 7% short-term treasuries back in May, carrying them through June because everybody was afraid that, you know, the U.S. might default. We were buying them, hoping that the U.S. would default. And even if they didn't, you know, we'd get a massive pickup and yield when everything else we expected would stay flat. Where we stand right now is we're still in a really bizarre situation where the yield curve

Starting point is 00:33:42 is predicting a recession. Short-term rates are higher than they've been in 22 years. And you still have low-ish rates on the long end of the curve and even in the belly of the curve. What's happening in capital markets, and this is bond traders, which I used to be one of, a lot of bond managers are moving out of longer duration treasuries and longer-duration bonds in general and moving to the shorter end.

Starting point is 00:34:12 So they're moving to, you know, one, three, five year, even belly of the curve, treasuries and other instruments because of the yield pickup that you get right now. I mean, why wouldn't everybody be doing that right now? Because they can't. Because they can't because they structurally have to hold duration. Yeah. Insurance companies, there's plenty of players that have to hold it. But just to be clear, like, okay, rates right now, the long end are at the same level they were last October.

Starting point is 00:34:40 with the Fed funds at 100 pips higher. We're 100 pips higher at the short end and we're the same yield we were last October. You have to ask why. And the real reason why is because the economy is not rolled over. As soon as the economy enters a recession, if that's your play, which I still think we're a way away from, you're going to see the lung end crater. I mean, we're going to be back at 2%. It's not like my opinion.

Starting point is 00:35:04 This is just the math. The math has to flow into the bond market in times of crisis because of equity risk off. That's all the bids will be to the long end of the bond market. And you saw this in March, right? Just to be clear, you know, the Treasury was doing massive issuance right before the death ceiling debacle. You had the long end collapse. I'm looking at the 10 year right here. If you bought the 10 year chart, we went from 4% in two weeks down to 3.2. We dropped 80 bips at the long end despite the issuance, which is not an unfactor. It's economic growth that drives the long end's sell off.

Starting point is 00:35:40 Now, what's really interesting is we've almost come back to match that. Yep. 10-year yields are popping back up, mainly because people don't want it. And they're going to go higher. They're going to, no, I think they're going back up. I agree with everything, but why they're, it's not because they don't want it. It's because the economic growth indications are strong. We just got a real, we just got Atlanta Fed GDP now of 5% growth projected for the Q3.

Starting point is 00:36:04 That's all Atlanta Fed now is saying 5% growth. Now, Atlanta Fed always misses to the upside. They'll probably revise that down. But the growth expectations at long and long-end bonds are directly proportional to the growth expectations in the economy. That's why you're seeing it sell off so aggressively because the recession everybody has been prognoscating hasn't come yet. So there's two factors that you look at as a bond manager, right? There is there's duration and there's rating. Okay.

Starting point is 00:36:35 So we just actually had a downgrade of U.S. government bonds. So what does that do? So what does that do to the market? Well, if you're managing duration, you're also managing rating. Insurance companies actually don't have so much of a duration matching program as pension funds do. So there's a lot more flexibility, but what there's not flexibility is weighted average rating. So if a treasury rating goes down, you would think that, oh, if you're going to, you're going to to sell, you're going to sell out of treasuries. No, actually, you're going to buy more.

Starting point is 00:37:16 And where are you going to buy more? You're going to buy more on the short end. Right. So you're matching that rating with rating. And the way that you match that is you barbell treasuries with high-yield bonds. High-old bonds have a much lower duration. So you have to match that duration in the rating game. So that's why you're getting a lot of uptick on the short end of the curve and purchases. downtick on the long end. So you're selling out a long end buying short end buying buying in the belly. Couldn't you just make though? Because you have to wait more into higher rated securities to get that average rating that you need. Stephen, maybe I'm just simplifying this too much. But like I'm looking at the announcement that the Treasury announces a 1.85 trillion in net borrowing in the second half of

Starting point is 00:38:08 of 2023. I'm looking at that. I'm looking at the fact that for a decade, they've had none of this under control and it's going parabolic on the amount that they have to keep spending to add into the system, right? And I'm saying, who wants to own long duration bonds and something like that? None of this is under control. The math doesn't work. Is that what these people managing billion-dollar bond tranches are thinking? Are they thinking long game or is it much more of a shorter game? and that's not necessarily the mindset of people that are selling out of long-duration bonds. No, I mean, if you're a bond manager right now, you're having to, you're essentially having to manage to the quarter, right?

Starting point is 00:38:52 Because every quarter, you've got to present to your clients, whether, you know, your pension clients, your insurance clients, your sovereign wealth clients. And you've, right now what people are doing is scrambling to match the duration needs and to match the rating needs. and there is more 10-year paper coming on to the market than what these bond managers want to absorb, which is why we saw,

Starting point is 00:39:18 so if you go to my chart, you can see that's why 10-year yields are going up right now because there's more paper in the market than people are actually buying. And I think this trend is going to continue until we found some kind of equilibrium. But to Joe's point, So I want to pull on something that Joe said.

Starting point is 00:39:39 He said that a crisis will eventually happen at some point. And then everybody's going to pile in the long duration bonds. And I don't know that I buy that at this point. 10 years ago, I think like that's what we always saw every cycle, right? But I think now the math is way different than any because we haven't even seen a cycle since 2008. Really? Well, that's what financial advisors do, right? You know, this is more retail financial advisors are doing that.

Starting point is 00:40:09 But like, you know, if you're, if you're an insurance company or pension fund, you're not, you're not blowing out of equities and buying bonds. You already own bonds. You already have your allocation. So you don't see that type of rotation. And that's where the real money is. Why did the tenure drop 80 Bips in five days? Which five.

Starting point is 00:40:28 In March after the SCB collapse. Why did the tenure drop 80 Bips? Was it because of supply getting cut? No, it's because that's the safe haven trade. because it's huge money managers doing. It's not just retail. You saw cumulative buying from the belly of the curve, all the long end record setting levels

Starting point is 00:40:45 because people thought the banking system particularly the region banking system was going to collapse. That is the fear of trade. And what has changed since then? You've seen growth uptick. You've seen consumer spending uptick. You've seen retail sales uptick. You've seen liquidity improve.

Starting point is 00:41:00 You've seen foolish indications, at least from a leading indication standpoint, extend throughout the summer. And that was not the doom trade, right? The doom trade was we're going to have a banking meltdown. So when you see real productivity and you see real wages step up, which we have seen, you see the bond sell off. It's that simple.

Starting point is 00:41:19 Economic growth generally means higher yields. I have the chart pulled up for people that are watching. I mean, right here. There's right there, Preston. I mean, that is it. If you think that and if there's a recession, you're going to see massive amounts of bidding from the middle of the curve out to duration. So, Stephen, do you agree with that?

Starting point is 00:41:40 Like, let's say we're a year into the future and we see the recession finally hit. Things are slowing down, grinding. And do you see the entire duration of bonds, the U.S. bonds getting bid like crazy? When you have a situation where a very short period of time where people are trading out of one sector and to another, that was a crisis situation,

Starting point is 00:42:03 that doesn't always happen. So that happened then. That's not what's driving markets today. We truly have the potential of banks failing and some banks did fill. So that is what caused that bond selloff. But what's driving markets today is something entirely different. Now, also when you enter into a recession, a lot of times people know that you're going into a recession and it's a much slower tradeoff. It's not like a five-day crisis period. know, COVID, a war, banking crisis. You know, these are things that cause very, very fast sell-offs. When people finally realize or if some data comes out, it's like, okay, well, the party's over, that also causes it. But no, I think it's going to be a much slower sell-off. But I do agree.

Starting point is 00:42:49 I mean, we're going to recession. And we will have a slow rotation out of equities and into bonds. I mean, you look at the 2018, 2019, right? 2018, you had a 10 year at 3.2% and then by the COVID, I mean, it basically got bid the entirety of 2019. We were at 3.2. By the end of 2019, we were at 1.9 and then we bottomed after COVID at 0.4 on the 10 year. So the entirety from basically 2018, late 2018 forward to COVID, you had a bid of the 10 year plus. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect

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Starting point is 00:47:18 on the bottom rail. You can see where the S&P 500 is. It's peaking out right as you get the largest amount of negative spread between the 30 year and the three month. You see it again, and that was in 2000. You see this again in the 07 time frame where it's peeking out and you have the S&P 500 making its high. And then as the yield curve gets back into a positive slope, the thing melts down. Here we are now the deepest spread that you've seen between the 30 year and the three month on record. And another important note here is when you're looking at when it goes back into where it's not negatively set, that's pretty much when the unraveling is happening on all of these historically. We're not there yet. It's still deeply negative between the three months.

Starting point is 00:48:10 And this is what Stephen was talking about. like everybody's going in the short duration. And I'm not seeing a breakout in the volatility here between the spread. Is this just, are we forming at top in equities right now? And is this going to get really nasty and call it 24 if this starts to reverse? I'm just really trying to zoom way out and look at the really big picture as to like, what is this thing that's brewing right now that they seem to be doing everything they possibly can to prevent from unraveling itself.

Starting point is 00:48:43 Well, I don't know if that's properly framed. They seem to be doing everything they can to get this thing to pop and it won't pop. So go ahead, guys. What are your thoughts? Dr. Jeff, I haven't heard from you. It's been a great conversation. It's been fun to listen. So, I mean, obviously, when you look at these charts, it kind of freaks you out a little bit, right?

Starting point is 00:49:01 Like, are we at another kind of generational top right now? I continue to think that this is going to be more of a slow, painful grun full grind and we're just going to continue to get this crab-like, unsatisfactory, nobody's happy, bulls are mad, bears are mad, more akin to 2000 to 2003, less akin to 2007, 2009. Like, I just don't see a catastrophic event. Could we get a, you know, obviously you got a factor of Black Swan, right? Like if we announced we're going to war with China tomorrow, that would be a huge, you know, hit to the markets. And that may be the catalyst that would set us off and the floor could drop out under risk assets. I just don't see that.

Starting point is 00:49:40 event, though. To me, it just feels like we could just continue to be, you know, surprised to the upside like Joe said light. Q3 GDP may come back again, surprising people once again. And I'm one of those people who I've been waiting for the recession since I've been calling it since Q2 of 2020, right? Because after we had two consecutive quarters of negative GDP growth. And then it was a surprise in Q3 and then it was a surprise in Q4. And then everything changed with the liquidity scenario. And now, you know, getting back to liquidity and net liquidity and bond yields and things, net liquidity is we had this nice ramp higher from October, basically late September, October of 2022 through the Q1.

Starting point is 00:50:20 And that's been grinding lower and lower and lower. And while the economy kind of hangs on, right? We have this manufacturing side of the U.S. and of the world that is clearly in a recession that's in contractionary mode and has been for several months. And then the services sector just keeps hanging on, though. And it's so dang frustrating. For people like me, I'm a tear the bandit off. It was like stinking roll over services.

Starting point is 00:50:42 Like just let's go into this recession and get this thing over with, right? And let's get the Fed to reset. But I just don't think it's going to happen. And I think that that's what's killing everybody is the lack of patience because we could just go crab sideways for another two, three, four quarters. We might be having this same discussion, you know, nine months a year, a year from now. And I think everybody's going to just freak out. And I've got some data I can show you that. leads to that analysis and sort of that conclusion if you want.

Starting point is 00:51:09 Preston, you can throw it out real quick. Yeah, let's do it. Yeah, let's do it. Okay. So there's two charts. We'll go through them real quick, not the board of the audience. And we'll try to describe them for those listening on audio. The first one, if you could pull up, it's the net interest chart. Yeah.

Starting point is 00:51:20 Hold on one second. And this one's a stunner. Like, and I think it, I would love to have this on the chart you just showed with the inversion of the yield curve because I think this is critical. Have you seen this one, Stephen and Jeff? I'm not sure. I don't know, I don't know if Preston said him over, but. Yeah, I'm pulling it up.

Starting point is 00:51:36 now. Okay. By the way, while you're pulling that up, we can keep going higher, although we should not, but that always happens. Yeah. You're staying on the interest, you're staying on the interest rates. Overpriced assets that keep going up, right? We're in a bullmark. This is it. Okay. Yeah. Okay, guys. So for the viewers at home, this is a line chart with two lines on it. The top is a red line. It is U.S. non-financial corporate net interests. And on the bottom, you see the Fed funds. And the biggest takeaway, okay? So this is net interest payments as a percentage of post-tech economic profits, right? So you had that big chart up with the S&P 500 and you had the Fed funds rate at the bottom and you have the same Fed funds rate on the bottom and here in a black line.

Starting point is 00:52:20 What you see here is that as Fed funds have started to rise in prior cycles, non-financial corporate net interest costs were very responsive. They immediately sort of in a proportionate way started to rise, eating into the bottom line of companies alongside the Fed Funds rate. And you see this in the 2000 leading into the dot-com bubble. You see this into the great financial crisis. As Fed funds rose, you saw corporate net interest rise as well. And then the gray bars are the recession on the chart. What is actually different this time based on the data is you see, despite this very

Starting point is 00:52:56 rapid, fastest hiking cycle in history, we've continued to see corporate net interest payments, meaning the amount to service their debts decline. And this is updated to the end of Q2, okay? Eat into the bottom line of companies, right, to actually affect them from an interest rate perspective, making them sensitive, that needs to rise. They have to start. Why isn't that?

Starting point is 00:53:16 That doesn't make any sense. It makes tons of sense. The reason is because they locked in duration, because they borrow a ton of money and they don't have maturity walls pressing that start to hit until the end of 24 and really accelerating to 2025, 2025, 2026. A ton of people took out money. Sorry, go ahead.

Starting point is 00:53:32 I was going to say it's the same reason housing hasn't rolled over too because everybody locked in low interest rate mortgages. And so nobody's, sorry, go ahead. No, no, you got it. We're not, we are not as sensitive. People were smart, right? They locked in these low, especially companies, companies were, you know, they were, you couldn't take the punch ball away from them to get as much low cheap debt as possible. And they're not as sensitive. They're well protected from a balance sheet perspective.

Starting point is 00:53:57 Fed can hike to 12% overnight. It's not going to affect them in the short run. Now it's going to cause a banking crisis. because they are far more affected by holding duration. And that's what are we seen? We've seen stress in the banking system, but corporate profits have tended to hold up. Then other chart is that you can pull up right there. It's the one at the top, I think.

Starting point is 00:54:16 Dude, when they roll this, when they have to refy this, it's going to be, it's going to be cataclysmic. But here's the thing. Let's back up for a moment, because when it comes to corporate debt, let's really break things out into three categories. And two of those categories are subcategories of one. Okay. So there's companies like Apple, right, that was issuing 10 and 30-year debt at ridiculously low interest rates.

Starting point is 00:54:47 Now, does Apple need to borrow money? No, they're cashful positive. They have lots of cash, one of the biggest corporate treasuries in the world, along with a lot of other companies like that that began this trend where usually tech companies that are highly profitable don't borrow money. But because rates got so ridiculously low, they borrowed money and essentially created an arbitrage. The money that they borrowed and they reinvested it at higher rates. So in one bucket, you've got companies that are either playing that barb trade or borrowing

Starting point is 00:55:23 money for growth, right? They don't actually need to borrow the money. And they're actually profitable, which, you know, know. So that does actually skew that data a lot. And those companies are going to be reissuing debt because they don't need to. Yeah. The debt is the debt. And these are the companies that need to issue debt. Some of them are high yield bond issuing or junk bond issuing companies. Some of them are investment grade issuing companies. And those are the two sub buckets that I was talking about. A lot of the corporate debt issuing companies are high quality investment grade issuing

Starting point is 00:56:00 companies, they typically issue debt at 10-year tranches. And because the tenure is still around 4%, that's actually not too bad versus where they were issuing before, which is between two and three. They're only getting charged an extra point. A lot of them had the ability to and did issue a lot of debt while rates were still low for 10 years. And it's going to be a long time before or they even have to do anything again. They just caught up really quickly. And the people that were buying that debt were locking in, we're just locking in duration at that point in time.

Starting point is 00:56:37 Okay. The second bucket, and this is the bucket that I'm highly worried about, is your junk bond issuing companies. Those companies typically issue debt for two, three, and five years. They don't have the luxury of issuing 10-year debt because nobody's going to buy it. You don't know if these companies are going to be around beyond five years.

Starting point is 00:56:55 typically it's two, three, five-year debt. Sure, they did issue a lot of debt when rates were still low, but they're going to be coming up very quickly, and this is in the next two to three years, they're going to have to reissue debt to just pay their principal back. None of these companies have enough cash balance to pay the principal. They always have to continually reissue. And typically, like let's say that they issue five-year debt,

Starting point is 00:57:21 you typically refinance between three and a half and four years. You never let it play all the way out because you don't know if you're going to be able to get that loan again or you're going to issue that debt again. So it's actually for that bucket of companies, you've got a really short time frame. And if I were, you know, managing, you know, a high-old bond portfolio right now, I would be very selective in the companies that I'm buying bonds for. If there's a field of 300, I might be buying, you know, maybe 20 to 30 companies because you're going to see very high default rates in the coming years, especially if interest rates don't come down, which I don't believe that they're going to in the five-year part of the curve. All right.

Starting point is 00:58:01 That was a fantastic roll-up, and thank you for breaking that out. I'm going to go back to Joe here on your chart that you told me to pull up. This is a selected single most important problem. So just to circle back for a second. If you look at high yield, okay, you always look at the weakest part, right? high yield in the early 2000s average loaned maturity was 1.5 years. Now it's 3.5. And if you look at the walls of maturity that we're about to hit into Steve's point,

Starting point is 00:58:32 they will start to hit in mid-20204. So from a timing perspective, from a sequence perspective, okay, and that goes back to the first chart you see, yes, it's true that different companies are not situated in the same way. But high yield in particular, those maturity walls will hit in the middle of next year. So if rates are still at where they're at, that is very difficult environment for those folks. And you can't wait until obviously maturity to have to roll that paper, right? You have to do it sort of in the months leading up to it. So the clock's ticking.

Starting point is 00:59:02 But the interesting thing is this is from the, where did I pull this chart, the small business optimism survey, right? The NFIB, the small business optimism index as updated this week, right? What you see on the bottom, okay, and it's, I don't like how. they did the gray scale on this chart. But what you can see in the bottom is that you see what percentage of the firms, small businesses, which make up half of the U.S. economy, are identifying the biggest challenge moving forward.

Starting point is 00:59:32 And what you see is that line at the bottom, it's fewer than, what is this, 5%, 6% are saying interest rates in finance. You're not seeing the stress on the smaller shops that you would expect to see with the fastest rate hiking cycle in history. Maybe it will come, but they're far more complained at this point about, complaining about taxes and issues with their poor sales and issues with their labor, that labor is still a very dominant issue near the top of the list here in terms of what is the most important problem self-identified by half of the economy effectively through

Starting point is 01:00:03 the NFIB survey. If it were truly financing costs, you would expect to see this number tick up. It's ticked up a little bit, but not out of line for the 2014-2015 range for those that can't see the actual chart at the bottom. I tried to highlight it just so you can spot it. All this is to say that consumers, as well as many companies, have protected themselves from very short-term spikes in interest rates. And I think that's why many have been misidentifying an imminent recession since early 2022. Wow. And why we may be talking about this a year from now. And to you notice, Stephen's point, too, these zombie companies, right?

Starting point is 01:00:39 I mean, people are waiting for this wall of these companies to go down and to go bankrupt. but we're talking 2024, probably, 2024, 2025. So again, everybody's waiting for this to happen where they, you know, like acting like we're sitting on the edge of, I'm in Twitter spaces all the time where people are, we're going down, everybody's effed, like, you know, and people are going into bonds already and they're going into their safe haven assets and they think this is it for stocks. Like, we just peaked and we're going down. And I just like, don't think so.

Starting point is 01:01:07 I think this is just going to drag out for a very, very frustratingly long time. You just got to buckle up and prepare for that. Let's talk about something that could potentially accelerate because it seems like the general consensus in here is we might have another year before things really start to get interesting. Something that could potentially accelerate that. We're seeing gasoline prices. I saw Euro wholesale diesel prices are the highest that they've been in eight months. Yeah.

Starting point is 01:01:36 So we're looking at oil. Anything from a momentum standpoint seems like you could potentially be seeing a share. shift into a bullish market. We've had quite a long sell-off here. What's it been about nine months to maybe even a year at this point? I've got to pull up the oil chart here. You're talking about oil? Yeah. It looks like we hit the highest in oil about, wow, 526 days ago. We saw $138 a barrel on the UK oil prices. So yeah, I mean, we've been in a bearish, sideways down kind of movement. And, And it seems like we might be seeing a little change in the price action. And Europe seems to be kind of leading the charge with respect to that.

Starting point is 01:02:21 So what are your thoughts? I know the last time we were here, Stephen said that he was a bull on oil. Joe, you were thinking maybe that wasn't going to be the case. How are you guys seeing it right now? And is this really, tie it back to the treasuries because I think everyone knows where we'll go with that if oil prices are starting to surge. Yeah. I mean, I think we're kind of in the early stages.

Starting point is 01:02:44 And I sent over a chart for just the last month in oil, which I expected kind of end of the summer is when oil prices would start going up. Because we've had a bit of demand in oil across the board. There's been a lot more air travel and travel in general. But at the same time, our supply has been dropping and demand has been increasing. But here's the more important fact. right and there and there you go there's there's price of oil kind of shooting up and I think that's from the last time we spoke I think it goes up higher and and here's the reason why that area of time between May and June when oil prices were bouncing below 80 bucks a barrel a lot of

Starting point is 01:03:31 countries that are their primary production is oil based their national budgets on a certain price of oil. This is going to be countries like Russia, Saudi Arabia, UAE. And if the price of oil stays low for too long, they have to either adjust their budget or they collude to produce less so that they can essentially maintain their national budget. Eventually, we're going to see that happen. Also, when oil stays at a low price for too long, even in the U.S., activities such as fracking and other drilling activity does begin to stop, which means that there's less oil being produced and eventually the supply goes down and eventually obviously the price goes up. There's been two factors in the U.S. that have really made me concerned. One of them is almost an

Starting point is 01:04:26 absolute stop and fracking activity as well as discovery of new oil fields and new drilling. one has to do with price in the general bear market that we've had in the price of oil, but two has to do with regulations. One of the most interesting things that I saw was in the state of California, they're actually suing oil companies for climate change. And the court system is allowing this. So the cost now to produce oil is going to continue to go up if you can sue them for climate change. So both of those things put together makes me believe,

Starting point is 01:05:02 that the price of oil could potentially double the next six months. Double. Yeah. Joe's laughing. Joe? I just don't see it. It doesn't make any sense. Okay.

Starting point is 01:05:15 So here are some facts. Oil's cheaper today. Suing companies for climate change does not make sense. Well, I agree with that. No objection there. I'll just tell you. Sorry for interrupting. No, no worries.

Starting point is 01:05:28 So you have one of the largest consumers of oil in the world that is, by all accounts and measures seemingly on the verge of collapse right now in China. I mean, I don't know how closely people are following their decision to not even report youth unemployment, their decision to cut rates. I mean, they are on they are on the verge of entering recession and you're going to take a ton of demand out of the system. You've had multiple Saudi cuts of production in an effort to shore up the oil market and oil is still trading, despite the cuts, under where it traded last September. In real terms, oil is cheaper today than it was decades ago.

Starting point is 01:06:03 Okay. And despite production cuts, despite lack of, you know, new permits being issued, you have all these structural things that should be in this secular bull market for oil that never seems to come. And in my view, it's because you have poor demographics, too much debt, and low productivity. You have an over-indebted world, and you cannot have a robust commodity super cycle until you have strong demographics as a tailwind. Okay.

Starting point is 01:06:26 Now, in Brazil and these India and these developing countries, that could change the dynamic. But ultimately, right now, why after several Saudi cuts to shore up the market and we're coming out of the summer, right, moving into the winter, which structurally in the oil market, oil tends to actually decline in price going into the winter. LNG in Europe is a little bit different story. But crude itself is sort of peaked for the year. And look what happened today. We had to sell off an oil coincident with the China fierce. So if China answers a recession, you should expect to see oil prices significantly cheaper when where they are. Now, structurally, that's decade out, you know, can oil be higher? Yeah, absolutely. I mean, I don't think there's enough oil in the world. That's a, there's a supply side shortage. There's no beef there. But short term, if your base case through all the things we're talking about is that we're headed for maturity walls and rocky shores with the economy and unemployment rising and recessionary levels of declines and growth, then why would you be bullish on oil? I mean, that doesn't make any sense to me. Well, Joe, I mean, we just talked about that not really arriving for a

Starting point is 01:07:30 another year. So if we've got another year, like, for sure, you know, Luke Roman's argument, so Luke Gromans on the bull side, Luke's big argument is that he's saying that the U.S. shale industry has completely rolled over. It's very capital intensive. The higher interest rates are wrecking havoc. Here's something that he wrote in one of his reports. He said, US shale production has been 90% of global oil production growth over the last 10 years. and U.S. shale production declines faster annually than global oil demand has ever declined annually in any recession in the last 60 years. So he's saying that on a net basis, the shale has been the thing that's been basically adding all the excess supply. That has turned. It's rolled over. And that's one of the main reasons that he thinks that the price is going to run higher here into the second half of 2023.

Starting point is 01:08:22 It could run higher, but run higher is 90 bucks, right? It's not the, I don't know, the, doubling in the face of a recession is what I'm sort of, that's what I was responding to. Yeah. Well, there's two things to look at. And the first one is, let's talk about China for a moment. China is in a recession. The data just isn't out yet. But here's what happens when China moves into a recession or China faces a headwind. China is the largest planned economy in the world. And it's 100% plan. So if people are starving what happens, then China reduces the price of rice, right? China has that ability to subsidize rice, lower the cost of rice, subsidize oil, subsidize gasoline, lower the price of gasoline. And their goal is to continue to build

Starting point is 01:09:17 into an industrial economy. And if they're not continually producing, then the government will simply subsidize the things that they need to do to continue to produce. Despite the fact that China's in a recession, the government subsidizing the price of gasoline and oil will simply drive the price higher. So that's one side of it. The second side of it is when you have a, when you have supply demand mechanics that you have now, a lot of oil is actually stored. and it takes a long time to run through the actual stored oil. So when you have fracking activity and other drilling activity and other wildcatting activity beginning to decline or completely fall off the, it's going to take a while for

Starting point is 01:10:05 the supply dynamic to catch up with the production of gasoline. We're not seeing it immediately, but we'll see it in the coming months. Now, there's one other thing that I want to point out, and this is kind of going back to something that Jeff said that I think is really important. We need a catalyst. The economy will just keep running hot until there's a catalyst, right? And that is always the case. I think it's a strong possibility that the price of oil is going to be the catalyst of a recession, not the other way around. I agree with that. Real fast, just to kind of piggyback off of the point that you were making as far as China. Joe, if you look at Europe right now, I'm going to pull up a chart here. This was out of

Starting point is 01:10:47 another Luke Roman report. Let's see if I can find it here. Here it is. This is Europe's manufacturing index. Luke says, we're already in a recession. We're practically in a depression of manufacturing over in Europe. Yet they're making new highs in their gasoline and diesel prices over there, despite the drastic slowdown that you're seeing in manufacturing.

Starting point is 01:11:15 So why would that happen? Pull up the chart again. Just to say, I want to. Yeah, yeah, sure. So, so. It's a Jeff Snyder. It's a Jeff Snyder chart, by the way. Oh, he stole it from Snyder.

Starting point is 01:11:26 Is it a Eurodollar university one? Yes, it is. There you go. Okay. Global Eurozone manufacturer, right? And I think this is the Sunner, right? So you see the Eurozone and Steve's exactly right. Like, I wouldn't be surprised because the official numbers are always suspect coming out of China.

Starting point is 01:11:42 They probably are in recession. And to me, looking at this, like this. manufacturing in terms of just overall production levels leading indicators of oil prices, a chart like this should tell you oil should be trading a $50 barrel. I mean, this is like I said. And that's, and that's, look where it's pointing to. It's pointing to the COVID bottom. What was the oil price of oil during COVID?

Starting point is 01:12:05 Negative. It craters. Yeah. Well, the futures. The futures were negative, right? When you have manufacturing recessions, when you have service, the service-based recessions, you tend to see oil sell off rapidly. coincident with lack of economic growth.

Starting point is 01:12:18 But you're seeing the opposite. I've never seen it. Joe, you're seeing the opposite. It's going up. What do you mean? It's going to, we're stuck in real terms. We're below where we were a year ago. So I'm looking at the oil try right here.

Starting point is 01:12:30 And on September 29th, right, oil was trading, what's like crude, 80 bucks a barrel. It's the same price. And you've had production cuts by OPEC, production designed to shore up the market. So explain to me, like, if oil went, higher if you approach the 90s, OPEC would restart those, you know, those wells. I don't follow the logic. I'm curious. They've cut, they've cut, by the way, whose camp are you in, Jeff? Yeah, just to that, you know, the OPEC production cuts, the OPEC production cuts have decreased daily new supply by as much as 8%. Imagine if they didn't do that. If OPEC hadn't done those cuts, we'd be talking about $60 barrel.

Starting point is 01:13:10 But they do these cuts. They don't change instantaneously. No. As a result of actions of cutting supplier Sure they do. Sure they do. That's the futures. No, no, the future to respond instantly. The futures price in the cuts almost immediately. That's why we were in backwardation in the futures curve. As soon as they started cutting.

Starting point is 01:13:27 But anyway, Jeff, sorry. You guys are going to hate me because like everything, I'm not in either of your camp. I'm in the crab camp. We're going to chop sideways. Like, you guys are giving the great bull cases and the bear cases, and we're going to just continue to waffle in between is what I think. And that's going to be the same with equities. And it's going to be the same with basically.

Starting point is 01:13:46 basically any investable absent, including treasuries, by the way. So could 10-year yields make a new high? Sure, they probably will in the near term. But then they're going to come back down again. And then they're just going to continue to chop sideways. And inflation, we haven't really talked about inflation, but inflation, I believe, is going to chop sideways between kind of the two to four-ish range indefinitely. We're going to be talking about it nine months from now that it's still in the two to four percent range, I think. Because for every reason, every reason I can come up with why the economy could be boosted, inflation could be boosted, oil, prices could go up. I can get the counter to everything that why you should be bearish on inflation on the economy. And so anyways,

Starting point is 01:14:23 my answer to everything is really boring. It's just I'm crabbed. This is my thesis, Joe. So when I look at the pressure in this current cycle that we're that we're experiencing, the real pressure to it is just higher interest rates, it just seems to never end. And the higher they go, it just isn't enough to make this thing pop. So when I'm looking at that, I think that that's going to continue to persist until something actually pops. So what takes the interest rates higher and higher? It has to be some type of energy input to the inflation number. Like, they're not going to get, I don't think they're going to get inflation under control. I think energy is going to be really kind of the catalyst that continues to insert that pressure. And I think you're going to see the

Starting point is 01:15:08 treasury blow out to the point where all of a sudden it is becoming an issue for these companies that have to roll over their debt. And then it just dominates their interest expense or their entire expense structure. And then that's when you get this. Maybe it's in commercial real estate or whatever. But like, I just think that inflation has to continue to be persistent for the overall catalyst of this entire cycle to keep going to the point of breakage. Can I ask you, Preston, what do you mean by persistent? Do you mean at these levels or do you think it's going to go back up again? I think you're going to see inflation.

Starting point is 01:15:45 Yeah, I think you're going to see it continue to creep up. Now, the pace, I don't know. Like, it could just be like this slow grind, which I think really plays into what everybody's saying here is maybe this thing pushes out until mid-2020. I think if that inflation is really slow to manifest itself, then yeah, I think it continues to push out. If it's pretty aggressive and we get like what Steven's saying, which I don't think it's going to double in six months, I think that's pretty aggressive.

Starting point is 01:16:13 But let's just say that that's the scenario that plays out. I think a lot of this is going to pick up that the pace of everything is going to really accelerate if that's necessarily the case. So real quick, just because I'm on this little crab roll. So I agree with you with the pressure of, I think oil prices will go higher, although I don't think they'll double. I'm more with Joe. I think they could go up to maybe 100, you know, so 25% or so from here, and then they chop sideways. As they add that upwards pressure to inflation and therefore to interest rates, I think that there is an equal but opposite downward pressure because of owner

Starting point is 01:16:47 equivalent rent and because the comparisons from a year ago for inflation are really tough now. So we had that really rapid disinflation from 9 to 3%, as everybody knows. From now, it gets much more difficult for the comparisons. And so I think that puts some pretty impressive downward pressure on the CPI. So I think oil pushes it up. OER and comparisons push it down. And that's why, to me, we just sort of stay a range bound. And I think that's going to hold treasuries down as well.

Starting point is 01:17:17 So let's do some basic math. Oil prices, crude oil goes up 15 bucks from these levels between here and end of the year. Let's assume that to be the case. OER declines by 3%. You're sitting at CPI with a 2.6 handle, which is within the Fed's target. You can pull up that chart, press from real quick, that one about its contributions to CPI. Can you get that one up real quick? I'll just show this 30 seconds, Steve, sorry. Okay. So this one, for those that are following the audio version, this is a U.S. contributions to annualize CPI. There's two bar charts. One is the, it's a break down really of the housing, which is OER.

Starting point is 01:17:56 That's how it's calculated on the CPI. And then it's everything else. And what you've seen is you've seen basically the housing remain sort of sticky, right? It sits there, but basically above 2%. And you've seen very gradual, ever so slight cresting of this and moving down. But everything else is cratered, right? Everything else outside of OER has fallen like a rock. And then the second one, you see the Zillow one.

Starting point is 01:18:20 It's OER. This is the leading indicator of OER. OER is lagging, right? Because people don't, their leases aren't up every month, right? So they try to annualize it. It's a very laggy indicator. If you move that other chart that says OER, you can see the forward leading indicator on where OER is.

Starting point is 01:18:35 This is the Zillow Observe Rent Index, right? So their new metric as to trying to gauge new leases that are expiring in a monthly basis and built that into a model. You see that compared with the CPI primary rent month over a month percentage. It's set to crater through the rest of 2023, down to point. which is below the 2017-2018 trend. So if you get, again, just the math, oil goes up because the way the basket's constructed and we all know CPI is a flawed metric, but because how the basket's

Starting point is 01:19:04 constructed, do you get $15 more on oil and you have OER to decline somewhere between, you know, two, three, four percent, you're going to see two point, you know, two handle inflation sit. I like that. Sorry, Steve. I really like that counterpoint. Well, I'm actually going to support that counterpoint for a moment. if you don't mind pulling up that same chart, I want to mention something that's really important

Starting point is 01:19:29 here. And that is how you touched on it, Joe, but the way that OER is actually calculated is based on a survey. So there's a survey that occurs every six months. And the results of that survey, and by the way, these surveys aren't very accurate. So CPI isn't accurate. But that being said, there's a survey that happens every six months. And what happens is based on the results of that survey, the results are broken out month by month and calculated into the monthly CPI almost equally. So you won't get new survey results until I can remember when the next survey happens. But we're still, our monthly CPI is still calculated on a survey that happened many months ago.

Starting point is 01:20:15 So I agree. You know, the rent index is, by the way, rent's still going up. It's just going up at a smaller clip. This chart is kind of, it's a little bit skewed. It's making it look like rents are going down. They're not actually going down. They're just going up by less, right? So they're not additive to CPI as much as it will be in the future.

Starting point is 01:20:37 So, yeah, rents definitely aren't going to add much to CPI. Now, here's the thing about energy. energy. So the price of oil doesn't just add to the price of energy and gasoline. It also is inclusive on the price of food, which is a really important metric because oil or petroleum is used to fertilize the ground. It's also used to transport food. So cost of food is very sensitive to the price of oil. So that's another big factor here. So it's not just energy cost. It's also food costs that would potentially be affected by petroleum costs. Yeah.

Starting point is 01:21:16 And I was referring to the model where they take the $15 additional price oil and they filter it through all the different food stuffs and medical services and how everything is affected by it. And that's how they get to a two handle by the end of the year. One other final point on CPI here for me anyway is the other thing that we're not really factoring in is the substitution effects. When the price of some things go up, like, you know, the actual things that are used to calculate CPI, people start substituting one thing for another, and you don't always see the

Starting point is 01:21:47 substitution effect. So whatever the CPI is, the way that it affects a normal family is probably a lot different. And you're seeing that played out right now. Because this is the group living for somebody, you know, for an average, an average blue collar worker is extremely high compared to, you know, a year ago. Yeah, this is the great, you know, your substituting, you know, chicken, for beef, right? You're substituting now chicken for, you know, beans, right? Whatever is even cheaper than beef or cheaper than chicken. And that's really true, right? But the only reason it matters, we all know there's huge flaws with the metric. It matters because that what guides fed policy, right? They have to be able to go out there and say, you know, we conquered the beast of

Starting point is 01:22:29 inflation. We brought it down within our range and all is good in the world. Like that, that's why it matters. Other than that, it's just sort of a foolish exercise. Guys, one final thing that I want to talk about before we wrap it up, and it's just the price action of Bitcoin. The past couple weeks, I guess, it just seems like all the volatility is being sucked out of Bitcoin compared to what we have historically seen. When I look at the chart of Bitcoin for the last decade, there's these moments in the middle of the boom cycles, right smack in the middle, where you get into these really low-val price action, and it just is this real slight grind up. And I'm kind of curious if that's what your expectation is over the second half of

Starting point is 01:23:16 2023 into the beginning of 2024, is if we just have like this reduction in volatility with maybe this really slight climb in the price like we've seen previously at this kind of point in the cycle. Is that what you're expecting? Or is there something else that's happening in the background, maybe the ETF or whatever that's causing the price action that we're currently, or at least that we've been seeing lately. I'll jump in first and then, you know, get the other answers from you guys. So my take on it is that this is all related to liquidity, right? I consider Bitcoin to be the

Starting point is 01:23:49 great absorber of liquidity. And a lot of people ask me like how to keep up with liquidity metrics. And I say, you don't need anything fancy. All you need to do is look at the price action of Bitcoin. It will tell you if liquidity is expanding worldwide or if it's contracting. And so we've been in this sort of contractionary phase of liquidity since the end of Q1, both in the U.S. and world wide. There's lots of different ways to do it. Michael Howell from Crossborder Capital. He does some of the best work on this. But I do these, you know, poor man's versions of liquidity. And it basically tells the same trend. Until something changes with liquidity and until that changes from slightly declining sideways to slightly down, I wouldn't expect anything different for Bitcoin.

Starting point is 01:24:29 Now, I will tell you from a trading perspective. So I look from three perspectives, short term, like a trade, midterm, like out a year or so, and then long run. Long term, massively bullish, right? I think all of us are. I think we think that at 24, 25, somewhere in there is going to be really, really exciting for Bitcoin once again. Very short term, it's getting to the point where it has been, at the technical indicators I look at, it's been fairly oversold. So I wouldn't be surprised if we had one more dump or, you know, we could have this just excruciating, painful, low volatility sideways movement for another week, two weeks, three weeks. I wouldn't be surprised to see a 27 handle or 28 handle on Bitcoin. If it tags maybe the 200 day moving average, I would,

Starting point is 01:25:09 expect at some point, and I thought we might get this yesterday, but we didn't. It's not, not yet. I thought China might capitulate and start really adding liquidity again. So what did they do? They lowered interest rates. That's step one. Step two, obviously, is go back to the liquidity pool, right? So if we see China, who knows, maybe Europe will get into the game at some point, and they'll capitulate it a little more quickly since they're more clearly in a recession than we are here in the U.S. They may just start adding liquidity. If they do, I would expect a nice bump in Bitcoin, in the price of Bitcoin, and I think we could see it head up towards 40,000 or so. Midterm, again, choppiness. I think midterm by the halving, which is expected to be in the end of April of 2024, as you guys know,

Starting point is 01:25:50 I'm not overly optimistic or pessimistic. I think we're going to be sitting out about 40 to 45K based on past cycles. And I think just where we are, you know, liquidity, what the economy is doing, all that kind of stuff. If it gets too far above or below those levels, I would get nervous, you know, if it's down at 20K around April, around the having time, I would think, man, this thing is going to just shoot higher. It's going to be insane. But if we get up to 70K, maybe, you know, there's a lot of people calling for new all-time highs in Bitcoin, even this year, which I think that's kind of crazy personally. But if it did, I just think, well, we're just going to correct again and we're going to get back down and head lower again heading into the first quarter of 2024. So that's kind of

Starting point is 01:26:28 my take on it until liquidity changes until something changes or some kind of big catalyst type event, I don't really see anything too exciting other than just choppy sideways for Bitcoin. Gent, do you have anything to add? Can I just say diddo? Joe, did you have anything else to add? I largely agree with that. The only sort of caveat that I have in the back of my mind is that I'm looking at sort of more high beta stocks, right? more speculative areas further out on the risk curve in the equity market. And a lot of them have just been sideways for like over a year, right? And that's sort of what we've seen with Bitcoin.

Starting point is 01:27:09 Bitcoin obviously had to sell off and it was it bought them very close to the equity market. So the big question I have is like if one of the things I can never really, you asked like, what's a question that lingers in my mind? Okay. One of the things I can't really figure out is how Bitcoin's going to operate in an environment if the equity market does, in fact, start to sell off. Because, you know, historically, obviously they've been very closely correlated. You've tended to see, you know, price action mirror one another.

Starting point is 01:27:38 We obviously had an prolific run in the equity market this year. I mean, the NASDAQ retraced, what, like 80% of its down swing, whereas Bitcoin, I think, from the all-time high, only made it back 30%. And I think part of that speaks to sort of these overarching issues that sort of plagued the greater crypto market, not necessarily Bitcoin, but these issues with litigation and some of the choke point 2.0 measures on ramps to some of the exchanges being potentially jeopardized. I think some of that is affecting our market in a way that has never been affected in prior cycles.

Starting point is 01:28:12 So I wonder if some of that overhang is still going to, if not cause a selloff, just going to hold back the price action because that's what it feels like, right? It feels like we're kind of stuck in this range and we can't get going. And you'd expect it in an environment where we're seeing, you know, the NASDAQ within, I thought, what did we get, Jeff, like within 5% of an all-time high, 6% of an all-time high, somewhere thereabouts. You'd expect Bitcoin to make a run to at least 40K. It's kind of, you know, been disappointing, at least from my perspective, it hasn't.

Starting point is 01:28:39 But obviously, structurally long term, there's nothing but blue skies and being bullish for Bitcoin. I don't know why anybody would, you certainly not sell Bitcoin at these levels. The only question is whether you get another amazing opportunity to pick up cheap coins, you know, in the low 20s. That's the really only thing I see. All right. Guys, go around the horn. I just want to tell you, I thoroughly enjoy these conversations with you guys because it's very candid. It's just a lot of fun to be able to kick around ideas and everybody's vulnerable and we can poke fun at each other. And I greatly appreciate that. I know the audience and the people that listen to it. That's the feedback that I always get from people, was to thank you guys for coming on and making yourself vulnerable with some of your ideas. Some are right. Some are wrong. But go around the horn. We'll start with Jeff and give people a handoff or, or just let them know where they can learn more about you.

Starting point is 01:29:30 Sure. Well, thanks again for having us, Preston. It's just super kind of you to host us and to do this. I love these. I learn a ton from these conversations as well from all three of you guys. So thanks for having me aboard with you guys. You can find me most commonly on Twitter still. I'm trying to spend more time on Noster.

Starting point is 01:29:46 You can find me there too. But Twitter is still where there's a little more engagement. My handle is at Vailshire Cap. And or I also run a hedge fund in an RIA, if you want to learn more about that, that you can go to veilshare.com. And if you want to just shoot me an email, I manage all the accounts personally. Info at veilsharer.com. Joe?

Starting point is 01:30:05 Thank you, guys. Thank you, Jeff. Stephen, Preston. I got to tell you, I love these conversations. If you can't tell, I love the respectful disagreement. It's awesome. Same thing as, Jeff. I learned a ton here.

Starting point is 01:30:16 And this is really complicated, right? Like, it's not like there's clear cut answers for any of this stuff. So we're all just trying to figure it out together. You can Google me and you'll find tons of articles. And also my firm website, Joe Carlisari at Amundsen Davis. I'm a partner there, primarily a litigator, if you have a litigated matter, particularly one that's focused in the crypto space or the blockchain space or even the Bitcoin space, preferably.

Starting point is 01:30:40 At your disposal, I'm happy to help in any way I can. On Twitter, at Joe Carlosari, you can reach out there. But if it's a professional legal matter, I try to funnel all that through the official channels. But thanks again, Preston and Stephen and Jeff. Thanks, Joe. Stephen. Yeah, no, thanks for having this. This is always a lot of fun.

Starting point is 01:30:58 I enjoy Joe trolling me. I enjoy trying to prove depressed in that WorldCoin's going to win at the end of the day. They're all going to be staring at a giant eyeball on our screen and happily hand over our personal data for a few bucks. Where you can find me, mostly an Oscar, but a little bit on Twitter at Stephen McClurg. It's pretty simple. I love that. I love that you just said that. That's awesome.

Starting point is 01:31:25 But no, no, this is a lot of fun. I really, I really enjoy this segment in the show. And, but yeah, I don't post a whole lot anymore. I'm a little bit more reserved. I've just, I've been heads down, just focused on our funds. But, yeah, and I'm at Valkyrie, Valkyreary investments doing a lot of fun things. We'll have links to all of this in the show notes for people, if you want to check this out. And gentlemen, thank you for making time.

Starting point is 01:31:49 This was a blast. Thanks, Preston. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable,

Starting point is 01:32:08 if you can leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening. And I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only.

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We Study Billionaires - The Investor’s Podcast Network - BTC144: Bitcoin and Macro Mastermind 3Q 2023 w/ Joe Carlasare, Jeff Ross, and Steven McClurg (Bitcoin Podcast)

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