We Study Billionaires - The Investor’s Podcast Network - BTC154: Bitcoin and Macro Mastermind Q4 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. On today's show, we have the fourth quarter, 2023 mastermind discussion with Joe Carlosari, Jeff Ross, and Stephen McClirk. We cover a broad range of macro in Bitcoin topics. Stephen and Joe come armed with tons of information about the Bitcoin spot ETF filings. We have a big debate on all the events that seem to be converging at the start of the new year, with the reverse repo aggressively getting drained to provide liquidity and much, much more.

Starting point is 00:00:32 This is one of my favorite conversations that have throughout the year, and this is definitely one you won't want to miss. 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 are back with the mastermind fourth quarter, 2023, man time flies. And I'm glad it does

Starting point is 00:01:12 because I look forward to this conversation every time we got Joe Carlisari, Jeff Ross, Stephen McClurg, gents, just a few things happening right now. Just a few.

Starting point is 00:01:25 I think you all know where I'm starting, right? You all know where I'm starting. There is so much drama. So much drama on the internet, on Twitter.

Starting point is 00:01:35 right now. Just so folks know, the end of last week was a Coin Desk came out with a tweet. Everybody, including myself, retweeted, and they announced that the Bitcoin ETF, the BlackRock ETF, was approved. And my lord, was there a reaction, not just in the price, but like with everybody wigging out. Okay, so then let me just play this for it a little bit more. So then this, this week. We're recording this on Tuesday. Monday, there is a DTCC website that lists ETFs before they, you know, the tickers before they go active and become, you know, what people can log into their trading accounts. And, wow, what was the ticker on it? It was like IBT. BTC. Yeah. So I shares BTC. Of course they get great ticker. A great ticker. Surprise, surprise. So this goes up.

Starting point is 00:02:39 The market goes wild. Who knows if it was actually because of that news or what, but Bitcoin is up huge, what, like $4,000? No, more than that. It was $6,000 at the highest from, I think the day started off at like $29,000. It got as high as $35,000 for a $6,000 in Fiat terms move on a single day after this ticker got listed on the DTCC website, which doesn't mean that it's actually. and having been approved. It's just getting listed almost like in a preparatory position for approval.

Starting point is 00:03:14 There was also some news that came out that said that BlackRock was going to begin funding their ETF, which I have no idea what the source of was that. I saw that on Twitter. Then today, Tuesday, as we're recording this, it got the DTCC website, D-T-Listed the I-B-T-C-E-C-E. ticker. Then in the afternoon, it was relisted again. And then I had somebody, this guy goes by Army of None on Twitter. He says, also apparently the spokesperson said that this has been up on the DTCC website since August. Yeah. Nobody noticed. And then Kelly Gormley, he tweeted that ARC ETF is also listed. So my gosh. And I just want to put this out there. I recently tweeted myself,

Starting point is 00:04:09 BlackRock isn't making the Fiat price go up. The countless psychopaths that have held through 70% drops and bought more is why the price goes up. And I stand firm on that tweet. I'm curious. What? Guys, what is happening? This is crazy. Is it, Joe, I'm going to you first.

Starting point is 00:04:35 And I know, Stephen, you probably can't say too much, if anything at all. Oh, I can say a lot. Oh, I love that. And I hope you do it. Okay, Stephen. I want to hear you first because I've actually seen a couple of things you've said, Joe, and you've been spot on. So hit it, sir. Do it, Joe.

Starting point is 00:04:51 Sure. Well, let's clean up the first one, right? I think it's kind of an hilarious story with the coin telegraph where they basically just had an intern put something in the telegram chat. And I understanding it somehow became news, which is hilarious in its own right. But Joe, I guess the, I don't know that it was an intern. I think there was a person that was in their telegram chat that posted it and then disappeared. And I don't even know that they know who the person was that posted it into the telegram. Has that been established?

Starting point is 00:05:23 I'm not quite sure either. Regardless to say it was clearly not correct, right? Like that it was approved. But I think, you know, you've got a lot of signs out there that, you know, this is the way we're going. it's kind of hard not to see that the sequences get lining up for this to eventually get approved. It's just a question of when. Now, you know, the one thing that I think is true. Is it that, Joe?

Starting point is 00:05:43 Is it just the question of when? Are we at that point where it is going to get approved? I mean, that's my base case. I think it will be approved. But the big hang up at this point, I think, is I believe, and this comes from some folks I've talked to close to the issue, that they want to set a clear precedent. Like, so when the, when the, when the Bitcoin futures ETFs long, launched originally.

Starting point is 00:06:05 They had to remember they did that without an order, right, explaining the rationale, which was specifically cited in the appellate court case regarding grayscale, that they didn't really carve out their rationale. I believe this situation will be slightly different. You will get an order approving these en masse. I think you'll get a shotgun approval for most of them. And the very key reason they want to do it in sort of more of a formalized way with an order is because I think they want to set a precedent so that they don't have the Dogecoin,

Starting point is 00:06:31 an ETFs filing next and the Solana and everything else coming down the pipe, right? They want to have some precedent for why they will list certain markets and not others. Putting that all aside, right? What's Mark Cuban going to do if the Dogecoin ETF doesn't get approved? I don't know. Take that up for them next time he's on. So here's what we do now. What we know from some official and unofficial sources, let's start with the official sources,

Starting point is 00:06:55 is that there was updates to various filing documents without getting too technical that many of the issuers, many of the sponsors had to actually submit. They have been updated. Arc, I think, updated one of theirs just today. In addition, there have been postings that were actually made prior to the supposed government shutdown or the expected government shutdown starting the comment period. And whenever I bring this up, folks generally respond, well, Joe, do you really think a comment period requesting people to solicit comments to the SEC and offer their opinion that's going to change

Starting point is 00:07:24 anything? No, I don't. But I do believe that they will go through the sequence of letting the comment period wrap up. And what do we know about that? We know that the comment period wraps up for the I-shares ETF on November 8th, right? What typically happens after the comment period is you get a few weeks where they digest the comments, react to it, and then you get some word from down high that these things are going forward. So where does that set the timetable? That would set it into the middle or early, middle of November, early December-ish, okay, about that's probably the best case scenario

Starting point is 00:07:55 for hearing approval. And then from there, you got, you know, some times with them to build it out and launch it. But keep in mind, they know well in advance of the public hearing the approval. It's not like BlackRock's going to read in the newspaper or any other of these sponsors are going to read in the newspaper that it's actually coming to market. They'll be well aware of it. So I do think it's a question of when, not if at this point, I think that the single biggest thing, which I don't know if it was out the last time we talked, I'm going to kind of remember it was August 29th, I want to say, when the Grayscale victory came down where Grayscale was able to prove that the SEC treating the futures market different from the spot was

Starting point is 00:08:28 arbitrary and capricious. That is a massive win, right? That's a very high standard under the law to meet in their success in that case, I think was sort of the impetus, the proximate cause for the SECs sort of waving the white flag on some of these things. The reason I was smiling as I'm listening to this is because the whole time I'm thinking about your bet with Greg Foss and the timeline, as you were saying, the comment period doesn't even end until December because so much of this sounds very procedural, like they're not going to break their standard operating procedure within the SEC for a comment period and like all these things. So for you guys that are closely dialed into this, are you looking at the Twitter comments

Starting point is 00:09:09 and like the people who don't understand any of this process and just like laughing your tail off because they're just so lost? Or do you think there could be some like one off anomaly where they just blow off their procedures and the way that they commonly do business and approve this thing? because there's so much outside pressure, political pressure, whatever, for the approval. No, look, I'm watching Twitter and just laughing because you've got a million people that stayed at a holiday in last night and think that they're, you know, the securities were. It's really funny. And it starts with, you said, it started with the coin telegraph article.

Starting point is 00:09:47 But first of all, if you have the word coin in your name, you're not a real news source. so just you know Stephen that is harsh that is harsh number one right but by the way there's not a lot of good news sources even in traditional media anymore look at the Wall Street Journal

Starting point is 00:10:08 and they're reporting on the Warren stuff or that she was basically using the Wall Street Journal as you know authoritative source that $120 million was raised through crypto and now FinCEN's getting involved, and in reality it was $450,000 instead of $120 million, which is only what a third of a percent of what she's quoting and basically sending an official documentation to the White House. So, like, you know, that's the Wall Street Journal, and they still didn't go back.

Starting point is 00:10:41 And so although your comment does make me laugh, I think that we actually get better reporting out of a lot of these minus coin desk, you know, using a telegram chat. to post something on Twitter, which was, I could only imagine what that turns into, but sorry to interrupt you. Oh, yeah, no. I mean, it's just, so that's the first one. And then, and then the second one, of course, anybody that's ever launched an ETF before knows that you pick a ticker. Sometimes you pick it years in advance. So we locked down the ticker BRRR for our Bitcoin spot ETF. By the way, I think for I shares, IBTC is fantastic.

Starting point is 00:11:24 Right. That works for them. I think for us, Burr is the right ticker. Good Lord, sir. So we, look, we locked down that ticker in 2020. Oh, wow. So the process of getting a ticker, the process of simply creating a Coup for a a securities filing.

Starting point is 00:11:49 I mean, it's just, it's just boxes that you're, that you're checking. And you've got like, especially bigger shops, right? I mean, look, we haven't gone out and listed in that way yet, but if you're a bigger shop,

Starting point is 00:12:00 you've got teams of product managers, and they've got the list of things they have to do. And they're like, okay, create a two-step, done. Get a ticker, done. List DTCC, done. They're not saying anything by doing that. It's just the list of things to do,

Starting point is 00:12:17 they're trying to get through the list so that they can go on vacation. Right. Yeah. I mean, that's really all it is, you know, because you don't want to be, I mean, look, we're in late October. You don't want me coming up on Thanksgiving and be like, oh, man, I got to work on Wednesday before Thanksgiving because I didn't get my ticker done. I mean, that's really all it is.

Starting point is 00:12:35 It's just a bunch of low-level people that are checking boxes and getting everything in place so that they can just get this complete and ready to launch whenever the SEC decides that it's ready to launch. So the other thing that's really interesting. here too is I'm not going to talk about the gray skill stuff. I'll let Joe talk about all that. But that was a nothing burger as well. The court mandated. It's totally expected. They didn't appeal. You're going to get that order when they didn't appeal. Yeah, that's right. And the order was for the SEC to re-review the application. Nothing Burger, okay? The BlackRock listing, nothing

Starting point is 00:13:09 burger. I mean, the market's essentially moved up because Mr. Taylor Swift scored a touchdown on Sunday, right? I mean, so really what happened was the market started going up on all this news and all this excitement going on and short squeeze and then Asia trading overnight. The derivatives platforms were, you know, had had high volume and more unwinding of shorts. And so we had this massive swing and now everybody's realizing that, oh, all that news that happened yesterday really wasn't real news. So now we're starting to see the prices go down a little bit. But going back to the process and what's happening with Bitcoin Spot. I mean, look, I'll verify some of the things that Joe just said.

Starting point is 00:13:48 Yes, we received comments from the SEC. It happened, right? Everybody received comments from the SEC. Everybody that had a S1 with the word Bitcoin Spot on it or an S3 in the case of Grayscale received comments from the SEC right before the government shutdown was supposed to happen. And the process is, well, but that's actually pretty significant. because we filed our Bitcoin spot ETF in January of 2021. Okay?

Starting point is 00:14:18 This is the first time we've ever received comments. Oh, wow. You file anything, you get comments. So this is the first time we've actually got it. We understand it to be across the board. They're pretty generic. The way the comments work is you go through and you look at what they said and you update your filing based on those comments, right, to make sure that proper disclosures

Starting point is 00:14:38 are in there. Certain things are answered. You know, I'm not going to tell you what the letter said, but you can guess. But you just make sure that your filing is beefed up enough to where, because the SEC's job is to protect the public, protect the markets. And they want to make sure that all the right disclosures are in there. And there's nothing that, you know, there's no risk that could exist that didn't say exist or there's grammar. I mean, there's all kinds of things that go on. But it was a pretty generic list.

Starting point is 00:15:08 I expect another round of comments, by the way, this week or next. And where I think the timeline is, is I think Joe's right. I've been watching that November 8th date pretty closely because the SEC generally waits until the public comment period is closed before they allow something like this to launch. So that public comment period will close November 8th. And if I had to guess what the timeline is, has anybody here ever worked? for the government or knows people that work for the government? Oh, yeah.

Starting point is 00:15:42 Very efficient. Government employees don't work on holidays. Okay? So Thanksgiving is an entire week that people generally don't want to work. And the whole month of December is pretty much a holiday at this point in time, right? So if a Bitcoin spot ETF was approved, say today, tomorrow, that means that once the 19B4, which is the exchange rule exception is approved. It's about a 75-day clock until the actual launch.

Starting point is 00:16:18 And by the way, 75-day clock is really important because that's the period of time to the S-1. Now, it's not always 75 days. The SEC can make an exception. It can change things, but generally 75 days, and that gives the public ample time to know that something is coming. It's not going to be on Twitter that,

Starting point is 00:16:38 oh, this got approved and we're going to have a Bitcoin ETF tomorrow. It's a whole 75-day period from that approval of the 19B4 date until the S-1 goes live. And if you look at the timing, the SEC would typically want about the final 30 days before lunch to read through all the prospectuses, make sure that all the risk disclosures are correct, that everything that they need is in there. And they're not going to do that in December. I don't think anything gets approved until November 17th. I think what's going to happen is we get another round of comments this week. We go through, we answer them.

Starting point is 00:17:14 And then we get a very exhaustive list of comments on November 6th, on 17th, the week before Thanksgiving. And then the SEC is like, okay, we're going to vacation. That sounds like the government to me is right before the holiday they drop all their comments. We're going to go away. You're going to work through all this. And then, one, we're going to come back to see what you've done. and then we've got another like 30 days to like make sure that you know there's nothing else and then you can launch in February.

Starting point is 00:17:41 But any date before that doesn't give the government a full 30 day period after Christmas break to do their job. Oh, wow. That's a good point. It's looking good for you, Joe. It's looking really good for you and your Greg Foss bet. It's just a timing thing. I mean, it really doesn't change the fact that this is the direction it's headed right.

Starting point is 00:18:02 It's headed towards approval, which is the key thing. we can we can say whether it's December or January or November. Well, Foss just didn't, he didn't account the government, you know, calendar, the holiday calendar. He was, he was off. He didn't take that into account. See, that's what I've got on Foss, man. I mean, we were both bond traders, but like, I have, I have family that worked for the government.

Starting point is 00:18:24 I know how it works, man. You know the deal. You know the deal, Stephen. The other big thing we didn't mention is that, and I'm curious to hear of Stephen's take on this really quickly, is that we do. didn't get a new refiled 19B4 for the gray scale following the mandate. Were you expecting that or can you comment on that at all? Did you expect them to just go on the old app or what do you think about that?

Starting point is 00:18:48 No, I think there's, I didn't expect it. Look, there's, I think there's like three camps of people, right? There are the nervous Nellys on one hand that are like every time that they get a single comment or something changes, they're quickly doing an update, quickly doing an amendment. Like, okay, we're here, we're ready to go. let's go. And then you got all the kind of the old pros that are like, oh, no, we're going to, we're going to do everything at once. You know, we're going to get, we got our comments in. We're going to get a few more. We're going to make sure it's correct. We're going to take our time

Starting point is 00:19:17 and because we know everybody's going at once. And then you kind of got the ones in the middle that are not sure that, okay, this could be this, could be this. And sometimes they're hurry up and wait, and sometimes they're not. We're just kind of watching and laughing, you know, and we're like, know we know how this works. I truly believe everybody's going on the same day. Will everybody be able to launch on the same day logistically? I mean, I agree with the approval, but you think they'll be able to logistically launch on the same day? Yeah, absolutely.

Starting point is 00:19:42 I mean, it will create a little bit of chaos with some APs and lead market makers, but I don't think it's going to be that bad. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using.

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Starting point is 00:23:49 Go to Shopify.com slash WSB. That's Shopify. slash W.SB. All right. Back to the show. Is the reason that you guys have so much conviction that an approval is coming is because they lost the case where, which was the main point of the case that they lost was that they approved the futures.

Starting point is 00:24:13 A spot is less risk relative to a futures approval. And therefore, that egregious action is the reason why the SEC is going to have to go down this path. Is that the rationale or that you have so much conviction in the approval? I think it's lawsuit prevention. Against the government. If you choose BlackRock first, even if it's by one day, then you've got a mass lawsuit. You'll see gray scales sue them again.

Starting point is 00:24:43 I mean, everybody would sue them. Yeah. But is your question, is your question why do we have a confidence that there will be approval at all? Yes. Is that the question of both, both of those things? Yes. Well, my answer to that is it's not any. one thing. It's just sort of the totality of the circumstances and, you know, losing the case,

Starting point is 00:25:00 asking folks to update these forums and, you know, just sort of laying the groundwork for a lot of this, the Ethereum futures. I mean, all of this is showing that they're going to, they've wave the white flag, I think, but the case was big. I mean, that was a huge part of it, I think, in my mind. Yeah, look, I mean, the comment, it's both things. It's the fact that we're already getting comments and the fact that this lawsuit did kind of push them into some kind of action, because I think it probably would have been another year without the lawsuit. But the comment period is really important because, you know, kind of going back to my earlier comment, yeah, the SDC has a lot of people, but they've got a lot of things they're

Starting point is 00:25:37 dealing with. You're dealing with, you're not just dealing with Bitcoin Spot ETF. You're dealing with making sure that markets are functioning. You're making, you know, you've got a lot of other ETFs. You've got a lot of these publicly traded vehicles. You've got private vehicles that you're, I mean, you've got asset managers that you're dealing with. I mean, there's a lot of. going on and a government employee doesn't create work for themselves unless they're actually going to do

Starting point is 00:26:00 something so going back to you know earlier comments you're not going to create a bunch of work just to create work for yourself yeah when you've got all this other all these other piles of work to do right and that's the common period right now so that tells me it's like no they're moving forward what are your thoughts on like so once we get approval on the other side of that i know sailor has said that you're basically creating a situation where now corporate entities have a turnkey solution to have exposure to Bitcoin without managing keys and all these other things. Do you think that that is going to be how this kind of plays out, which turns into a massive bull run?

Starting point is 00:26:45 Or do you think that a much more of the opinion that the hoddlers that just endured the drop over the last year and a half and stacked all the speculators coins through that period of time are the reason that the price action does what it does in the next cycle. But it's a little bit of both. What are your thoughts after approval, like the impact that something like this is going to have? Is it a major shift? Is it something that is going to be a whole new paradigm in this next cycle? I don't think it's as big as people think it's going to be. Joe, you agree. Jeff? Jeff. Jeff? Any thoughts? Any thoughts?

Starting point is 00:27:19 Well, I like hearing your 75-day window, Stephen, because to me that makes the most sense is I think it's going to be a buy the room or sell the news kind of event. So I think it's going to get, we're going to have a jacked up run for Q1 probably of 2024 if the timing works out. And that kind of works with my timing. And I'm sure we'll get into this a little bit later in the show, but macro events that are coming on things like the overnight reverse repo markets and liquidity and all those sorts of things, that would fit with what I think is. most likely to happen where we get a huge runup based on the ETF. And then it looks like the world's going to collapse.

Starting point is 00:27:56 The system's collapsing and Bitcoin just gets hammered back down again. And then we start this. And then it starts in earnest at that point. So then I think, you know, the QE starts again, the Fed steps in again. Then, you know, people get serious about the fact that we have these spot Bitcoin ETF's money kind of slowly enters into it. I don't think there's a huge wall of money that's just going to jump into it initially. I think a lot of the boomers and the cautious people who are waiting for this to happen,

Starting point is 00:28:21 they still, I think, are going to watch and wait. And yeah, so you pop this up. So I didn't mean to turn the conversation here, but this is kind of how I view all these things. I think at some point, what you'll notice is the overnight reverse repo, a market. It has absorbed a ton of the T-bill issuance by the Treasury. So as we all know, and I'm sure we'll talk about this to you, the government has been on the massive, you know, spending spree. They've been borrowing crazy amounts of money running massive fiscal deficits.

Starting point is 00:28:47 If you look, you'll see that little point right at the beginning of the year that, yeah, right close to the marker there. So the overnight reverse repo market at that point was $2.55 trillion. And if you fast forward to today, you can see in the upper left hand corner, and now it's about 1.1 trillion. So it's down about $1.4 trillion. That has absorbed almost all of the issuance of T-bills, the short-dated treasuries. So that's great. What that means is that net liquidity has been basically flat instead of getting hammered on the liquidity side. Liquidity has basically been flat, even though the Fed has still been allowing mortgage-backed securities and treasuries to roll off its balance sheet, and even though the Treasury General account has been filling up.

Starting point is 00:29:30 Why is that significant? At some point, this is going to run out, right? It's a pretty clear trajectory that we're heading down. If we continue the same rate that it's been going, it could be January, February, March, somewhere in that time frame where basically the overnight reverse repo market basically runs out of liquidity. At that point, I think things get interesting. And by interesting, I mean, things could get bad. The treasury market could lock up at that point. It'll be completely dependent on the treasury will be completely dependent on the private markets to absorb their massive, massive amount of issuance of treasuries. And if they don't, who's the buyer of last resort? It's the Fed. So that's kind of how I look at

Starting point is 00:30:05 all this stuff. I think that there's going to be, there's still a reason to be optimistic. We're still not in a recession technically. And I'm sure we'll talk about all this too. But at some point, this is going to come to a head. We're going to see lots of this play out with the move index, right? We're going to watch bond volatility. I think skyrocket at some point, probably Q1 or Q2. And that's because nobody is going to be willing to buy the treasuries or at least not enough people. And that's when the Fed will be forced to step and enact. And that's where we start getting the next round of QE. That was a huge divergence from where the question started. It's not. This is where I really wanted to go next. because as we're talking about this approval, which is right in the wheelhouse of this timeline that you're talking, which is next quarter, right?

Starting point is 00:30:47 So when we talk again after Christmas, we're going to be getting right into the heat of what you're talking about, which is the TGA has been heavily utilized by the federal government in order to provide liquidity into the system so that we don't get disorderly moves in credit and equities in financial markets at large. Even though they've been heavily utilizing that and draining that reverse repo facility, we continue to see bonds sell off in this past couple weeks with quite a bit of volatility, basically setting new lows way beyond where I would have thought that this would have gone. And you combine that with a narrative that, well, I don't even know that I would call it a narrative that's running rampant on Wall Street, which is, are we in a debt spiral and are we beyond an event horizon with respect to this, especially in the face of multiple wars and conflicts and issues that will just make the money printer go,

Starting point is 00:31:54 you know what, which is Stevens ticker, which is one hell of a brand, sir. I'm thoroughly impressed with that ticker. When we look at all of these factors kind of converging into the first quarter, second quarter, of 2024, I guess my question to the group is, like, they have to turn the printer back on at some point. So for you, where is that and when is that? And how in the world does the Treasury market respond when they do that when we have yields this high and prices this low? Well, bonds are a very simple function of supply and demand, right? And of course, government intervention. So we're at a spot right now where we are having to print more bonds or sell more

Starting point is 00:32:41 bonds than demand can absorb. And I've been saying this all year. It's going to happen, right? When there's a lower demand than the amount of supply, rates go up because that means that someone's like, well, I can't really take more bonds. Well, unless I can get a higher rate, then I'll take it. because now I'm having to, you know, I can sell something else that has a lower expected rate of return than what I'm getting over here. All that's going to do is continue to drive yields up. It's why the 30 year cross 5%. It's by the 10 years floating up. It's not because we're coming out of a, it's not because we're, we don't expect a recession, which by the way, in my opinion, we're already in a recession. And the yield card's inverting because things are

Starting point is 00:33:31 going well, the yield curve isn't really de-inverting. It's still inverted, but rates are floating up on the long end because that's just what it's going to have to take for me to buy those bonds. Plain and simple. So I know Joe disagrees with this, but before you go, Joe, I just want to pose a thought experiment that goes to Stephen's point, because I agree with Stephen. For the last 40 years, when we go into a recession, Treasury's got bid and rates got compressed.

Starting point is 00:34:05 If we're truly on the other side of that 40-year bull market, and now we're in a bare market, okay, wouldn't a recession do the opposite of what it did in the past, which means yields would go higher and prices would go further down during a recession, which he's making the argument we're in right now, which is completely, which is completely, I only traded bonds during the last recession, I don't know. Which is completely antithetical to the consensus on Wall Street, right? Well, the last recession, they went to zero. So, I mean, you know, that just shows you where money goes when it's afraid.

Starting point is 00:34:40 It goes into bonds. And you had this year, okay, if we were truly in a different dynamic, right, why do we see the largest single day drop in yields in 30 years since 1987 when the SVB bank collapsed? Because all money managers bid up treasuries because that's where money goes when it's afraid. And as growth has re-accelerated, right, which we've seen a growth in. impulse through the last half of the year that we just experienced, you know, you've seen these pre-recessionary trades get unwound. But I do want to talk about the funding because what Dr. Jeff brought up, I think, is the key. That, I think that tells the whole story of what,

Starting point is 00:35:12 what's going on if you want to go there, but I don't want to, didn't want to interrupt you. I'm sorry. Are you talking about this here? The no, no, no, no. So I want to go back to what, what Jeff said, which I think is really key. Let's talk about like the dynamics of supply and demand, which Stephen brought up. Basically, since late 2020, to the extent Janet Yellen was able to fund the government, she chose to do it mostly through the use of bill issuance, which are far easier for folks to absorb from a balance sheet perspective. You don't have the duration risk, you don't have the exposure, just rolling the bills. And then you can make an argument that there was actually a dearth of bill issuance as evidenced by the fact that people were choosing the park money

Starting point is 00:35:51 in reverse repo. What she has done since basically the debt season, ceiling were being resolved, she has issued bills, right? And starting within basically July, she gave her intention through the quarterly financing announcement, quarterly refunding agreement, that basically she plans to issue more bonds, right? And that's when you've seen the equity market peak. You've seen the long end sell off because you're finally getting supply of duration coming to the market. Because keep in mind, QT, the QT mechanism itself, okay, a passive roll-off does not actually introduce new bonds into the system. It rolls off the balance sheet. and effectively it's repaid, right?

Starting point is 00:36:27 It's not like the Fed goes and actively sells that paper into the market, which is a big difference. Now that she's issuing the longer end, that's going to change the supply demand and dynamics that Stephen was just talking about. And then to the point, I think Jeff made earlier, the Fed in many ways was kind of hampered by the Treasury's decision that they were going to basically just spend down the TGA. They were not going to do any issuance. That was going to provide liquidity to the market, and they wouldn't have to issue anything,

Starting point is 00:36:52 right? So net net, not draining liquidity from anything. But now we've got a double whammy because now she has to rebuild the $1.6 trillion TGA, which she's doing, right, by the issuance of bills. But she's also trying to keep that balance sheet composition where she has sufficient bills and bonds, right? She doesn't just issue the TGA's entire account in bills. They have to generally keep, I think I've heard between, you know, 20 to 25 percent of it in bonds in longer term paper. and a shorter term paper is like similar 30, 40 percent thereabouts, and then there's

Starting point is 00:37:24 sort of belly of the curve issuance as well. So that that composition affects the supply and demand dynamics, which, you know, it's not a coincidence in my mind that smart and savvy bond traders saw there's a heck of a lot of supply of bonds coming to the market as opposed to the last year and a half where there's just been bill issuance, just short-dated paper, which is far easier to a resort. I mean, look, when yields were spiking in June and July, we run a hedge fund that's supposed to be focused on crypto, but we didn't really see a lot of opportunity in crypto during that period of time. So what did we do? We sold out all of our risk positions and started trading

Starting point is 00:37:58 tables. And I'm just pulling up the chart here so people can see in the summer right here where we were getting this volatility spike. You were talking to May. Okay. Yeah. So this was the bidding from call it October of 2022 until May where you saw that bidding stop. And, then it's just sold off, it's just sold off aggressively since that period of time. So Joe, as it's sold off, we've traded, we've traded out of that and back into, you know, more, more, more risk positions. So Joe, the point that you made earlier that in COVID, how it got bid, I mean, it got bid down to, I think the 10 year was down to like 50 bips or something like that.

Starting point is 00:38:42 For me, when I'm talking about the thought experiment that I proposed, right, like that was literally the top, that moment in COVID, when the 10 year was a call it 50 bibs, that was the sheer top of a 40-year bull market in bonds. And now, I think now that we're on the other side of that hill, and now I would say we're getting ready for a long-term bear market in bonds, I would expect the yin and the yang of what we've seen historically that when you go into a recession, instead of it getting bid, you actually see it sell off and the yields pop even more through a recession. What do you just say, the yin and the yang, right?

Starting point is 00:39:26 Yeah. Pull up that chart of the 10 year, right? What you see in the 10 years, you see it basically like a step ladder down all the way. You're saying during the Silicon Valley Bank scenario. No, no, no. I'm talking about the 30-year chart. Pull up the 30-year chart of the 10-year, just a long-dated chart of the 10-year going back to the 70s and 80s.

Starting point is 00:39:44 If you pull up that chart for the 10 year, you see a stair step down, right? And what tends to happen is as you're entering a period of growth coming out of recessions or sort of downturns, even not if it's a formal recession, but downturns in the economy is yields tend to rise coincident with economic growth. Yields rising are generally a sign of strength in the economy, whereas yields falling are a sign of weakness, right? Every single major recession led to the yield. So to your point, if you're going to go to the opposite or the opposite chart, and you're entering a structural. bear market in bonds, you wouldn't expect it to just go straight up regardless of economic conditions. You would expect it to go up and then in a recession decline, but not go back down to the low to set a higher low, right? That's the opposite, right? So imagine a recession where the 10 years

Starting point is 00:40:33 currently trading, you know, close to 5%, you know, 4.8, whatever it was at today. Imagine it goes into recession and you only get it down to three and a half. And then the economy starts to reinflate. And then the next cycle, you take it above the prior high. You go instead of four, five, you go to six. And then it goes to five in the recession, but then it goes after that because you can't get inflation under control. And there are many economies where you see this. You see it moving these large historical trends where it goes, trends down, hits the generational

Starting point is 00:41:02 low. And then if you have a more inflationary decade due to structural supply shortages and other issues, you have a stair step up. But markets don't generally go in a straight line. they, you know, tend to, you know, go through cycles like everything else. Stephen and Jeff, what are your thoughts? Anything to add on that one? I'll just throw it out there that I agree with Joe.

Starting point is 00:41:23 A couple points. I think that we are officially back in a bare market. I think we're in a 40-year, 50-year type trend. I think the bull market is over for sure. In bonds. In bonds, yes. And so during periods of growth, as Joe says, we see interest rates rise. I think we're going to see something in this decade similar to the 70s,

Starting point is 00:41:40 even though there's a lot of difference from the 70s. from the 70s. I do think one thing we share is that we're going to see these large moves in bond yields. So we're going to see these periods where we have this inflation as a concern. Yields are rising. You know, we've already gone from zero to five percent. We saw back in the early 70s yields went up to like 8 percent or so. And then during a recession, they dropped all the way down about 3 percent or so. I would not be surprised to see the same kind of move this time around. Maybe we get up to five and a half or six percent on the 10 year. Recession hits.

Starting point is 00:42:10 Everybody piles into the 10 year. I think maybe go back down to three, two and a half somewhere like that. But I don't think we go back down to zero. I think the zero interest rate days are over. This is where, by the way, this is, sorry, press and go. I was just going to say that where I think this is so different than anything we've seen in the last 80 years is you were never at a debt to GDP of 120 percent plus. Now you are. Now you are.

Starting point is 00:42:34 And I think everybody's looking at the fiscal responsibility of appropriators. And they're saying it's getting worse by the day. They're getting more irresponsible by the day. And their issuance to cover this irresponsibility plus the existing debt burden, which is 120% plus is why I guess I have the opinion that it's not going to get bid. But I want to emphasize this. I wouldn't be surprised if it did. It doesn't make sense to me from the math standpoint and looking at the holistic picture of how in debt we are, that that would be the case.

Starting point is 00:43:12 But if I was going to argue with myself, I would say the fractional reserve nature of Fiat itself and how it becomes impaired and disappears because it's nothing but promises is why maybe it would, right? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure

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Starting point is 00:46:58 I can tell you. Go look at the chart we posted. That's the segue of the B-O-A chart. I mean, which one are you talking about? Think about the different segments of investors. You know, so first of all, retail investors are completely done right now.

Starting point is 00:47:13 Retail investors typically spend excess capital on investment. But if you can't afford food, gas and housing, you're not investing your money and you're certainly not investing in bonds. Okay. Now let's look at the larger pools of capital. Let's start with a pension fund. Are pension funds going to buy treasuries in a flight of safety, in a flight to safety? The answer is no, not in a high inflationary environment. The reason why is because pension funds have to earn even more money in a higher inflationary environment to pay their pensionary.

Starting point is 00:47:52 It's not 5 to 8% anymore. It's going to be 8 to 12% to be able to fund pensioners. The reason why, number one, inflation. Number two, you're not going to get that yield and bonds. So pension funds will typically stay risky, right? When I say stay risky, it's not going to be treasuries. It's going to be things like asset back securities, mortgage back securities, high yield bonds, even Cuspi credit, double B, triple B.

Starting point is 00:48:22 single a minus to get enough yield to overcome that. Insurance companies, that's the next one, right? So insurance companies have to manage their actuarial assumptions, right? Actuarial assumptions go up in a higher inflationary environment. So if inflation's at 2%, that's fine. You're probably targeting 5. But if inflation's 3, 4, 5%, now you're targeting 8%. You're not going to get the yield you need in treasuries.

Starting point is 00:48:49 So even in a flight to safety there, you're going to go after higher yielding products and higher return products might even be increasing their allocation to things like private equity. And there's a big, there's a big area to invest there. So you've got that and then you've got financial advisors. That's another big area, right? So financial advisors, when you have low consumer sentiment, you've got higher inflation, their clients feel a little poor. so they're not necessarily buying treasuries there in a flight to safety. They're buying defensive stocks, right, because they still need to hit targets. So you don't have a bid on treasuries.

Starting point is 00:49:33 If you could pull up the chart, Preston, this is the one that start, the one you had up, the treasury flows one. Yeah. Okay. This one's the only chart you really need to look at along with the BOA flows one. If you look on the right side for the viewers that can't see and they're just listening audio. There's a black line, okay, and the black line indicates when the Fed started raising rates. There's a green line that shows the Fed is obviously in a steady decline. They're doing

Starting point is 00:49:58 passive roll-off in the form of QT, but you see the fastest increase in terms of buying from households, which is the blue line at the bottom. The orange line or yellow line that says real money, that has declined, but is now ticking back up. That is defined as institutions under of the graph. The foreigners obviously are also increasing their holdings of treasuries based on maybe not to the highest level, but they're nearing record highs. And then if you look at the second chart I sent you, the BAA private client flows, that's a stunning chart. It tells you the preference of private clients, which BOA Global Strategy Investment, my understanding is defines those in excess of holdings with a billion dollars. And you see the fastest flows to debts as a

Starting point is 00:50:46 percentage of assets under management in the last over 10 years. Can you pull that one up the, it says B-O-A? Yes. Okay. Is it this one here? Yeah, it's a little small, but I don't know if you can make it bigger, but yeah, see, look at that. I mean, look at you basically went from massive outflows through 2013, 2014, and also, you know, huge sales of bonds when the Fed's buying them, really in 2020 to where we saw the last year, which has been effectively, let's ape into bonds. And this is also confirmed by some of the flows to TLT. Believe it or not, the number two ETF right now in terms of purchases by retail this year is the TLT ETF, the long bond ETF. And it's kind of stunning.

Starting point is 00:51:30 I think Lynn Alden posted a chart about this, that despite getting their faces ripped off by a constant decline in bonds, like the retail is aping into bonds, particularly older folks who can say, hey, if I can just get 4% of my money, I don't really care about any of this else. I will be happy with three or four percent on my money. That'll get me through the next 10 years. Little that they know that inflation is a problem. But I think the way to look at it is like the Fed is effectively paying a premium right now, mostly in the form of having these really high rates, which I disagree with Powell. I think they are restrictive.

Starting point is 00:52:02 I think it's just a matter of time before you have to get the maturity walls hit. But they're paying a premium probably above our star, what the natural rate of inflation would be to conquer inflation. They're trying to smack the economy hard enough to bring inflation down where these bonds actually have value and are attractive on a real basis. And I mean, you've got real rates now across the curve. And that's a different dynamic than we've had for the last 10 years. That's a different dynamic for investors.

Starting point is 00:52:29 I was listening to a podcast today about tips. You know, you're getting 2.5% on a real basis for tips. That's unheard of. So I definitely think there's a bid there. Now, whether the bid comes at a higher yield, sure. You know, it's like the old adage says that I know Stephen's aware of. It's like, you know, there's no bond, there's no bad bond, no bad bonds. There's bad bond yields, right?

Starting point is 00:52:52 There's bad bond prices. There's bad. You're paying for bad instruments at bad value. But that's a different dynamic than we've had the last 10 years. What's their policy? And to that, you're saying that in a world where everybody's got massive issues, the U.S. debt, because it's better than all the other turds out there. is why it would get bid.

Starting point is 00:53:14 Yeah, and keep in mind, it will get bid in a recession, right? When you're on the doorstep of a recession, and you're afraid to hold some of these other assets we've talked about, stocks and, you know, private equity in a recession, man, I wouldn't want to have exposure to a ton of that. Same thing with real estate, other aspects, other assets, right? But I think from my perspective is if you don't get the recession, if there isn't a recession, you're exactly right.

Starting point is 00:53:38 Yields are going higher. This is why people like Jamie Diamond are saying 7% rates, are possible, which, you know, if we don't get a recession, I think that's where we're headed, to be quite clear. But if you're predicting imminent doom and the economy rolling over, you know, bonds are going to get bid. And by the way, this is what Bill Ackman said, right, when he said, I covered his bond short the other day that caused that reaction in the marketplace. And you saw 17 BIP drop, I think, within an hour or two at the long end. Crazy moves, right? It's trading like an alt-coin. You don't see that with the U.S. Treasury

Starting point is 00:54:08 market. That's crazy. But the interesting thing he said was that, you know, the world's too uncertain. much risk in the marketplace to be short treasuries. I mean, I think that's telling what, you know, at least some big money managers are thinking. He didn't say that he went long either. No, he didn't. But he said it's too risky. He's too risky to be short, right? Because you would blow up if bonds get bid.

Starting point is 00:54:27 Yeah. Yeah, the government steps in and basically. Either one. Yeah. It doesn't matter, right? So, so you posted this idea on Twitter. And Joe, if you don't want me putting this up here, I just, you know, I'm going to quickly show folks this.

Starting point is 00:54:42 If I can find it on my screen here, here it is. You quickly posted something back in September about this idea that foreign countries are dumping these. I responded with a Luke Roman report that I had recently read, kind of providing a counterpoint to your argument. And then Luke piggybacked on my comment and was basically saying that this gap, this ever-expanding gap between the federal debt, the total public debt, and the amount held by, foreign entities, international investors, is diverging and growing further apart. And that's the point that's more important than just looking at the nominal value of treasuries being held by foreign entities. Because as, and I'm just going to try to explain his point of view, if maybe I'm doing him a disservice, but his argument is as the Fiat money supply, M2 money

Starting point is 00:55:35 supply is drastically expanding, that expansion relative to the amount that foreign entities can buy up is the point of why it's becoming uncontrollable, to which there was a long exchange back and forth between the two of you here. People can go dig this up and, you know, read for themselves what they think. But if you were going to counter that argument that Luke was making in his response to you, like, how do you respond to that? You have to look at who holds the debt right now. Now, right? I mean, you hear this constant hysteria over China's selling treasuries, right? And I posted a follow tweet to this. China holds less than 2% of all U.S. debt, okay? Less than 2%. If they were to dump all of their debt, they would cause volatility and yields would spike on an interim basis, right?

Starting point is 00:56:23 But 2, 3%, all that means effectively is you need more, you first of all would make it more attractive to domestic buyers, which hold the majority of the debt anyway. And guess who holds the single biggest amount of the debt right now. The Federal Reserve, right? They hold the majority of the Treasury. So for folks constantly fretting and wringing their hands about foreign buyers not buying it, but to me, which, you know, depending on your political perspective or however you want to see Bitcoin succeed and respond to all this, all I think it means is you will eventually move closer to having the Fed have to monetize more of that debt. But I mean, the fact that we're in a debt spiral when you've got, you know, many countries well worse off who don't have access to the

Starting point is 00:57:04 dollar, don't have access to the U.S. Treasury as a collateral asset. I think it's just kind of fantasy. I mean, the Federal Reserve, I expect it before any, you know, sort of collapse of the system that you hear people talk about, I expect their balance sheet to eventually go north of 20, 30 trillion. I mean, I think that's where it's going. That could take 20, 30 years from now. I see Jeff nodding his head. I'd be interested in his take. I mean, the notion that we're at the end of this is just kind of, I think it's extreme. Yeah, I'll jump in there. I agree, Joe.

Starting point is 00:57:32 And I feel kind of like the anti-boy who cried wolf because right now it's super sexy to talk about the debt spiral. I don't think there is a debt spiral. I think it's just business as usual personally right now. I don't think that that because a debt spiral insinuates, there's an acute, terrible, out-of-control type event that's going to lead to massive more and more debt issuance and eventual hyperinflation. I do not think that's going to happen.

Starting point is 00:57:56 even though, yes, we're at 120% debt to GDP, I think 10 years from now, if we're still having these conversations, the debt to GDP is going to be like 190%. And we're just going to be kicking it talking about, like, is that sustainable or not? Are we in a debt spiral or not? I think it's going to be just kind of more of the same. So I guess I agree with Joe, I think there's too much concern and worry about that, even though is it a problem for sure. But look at Japan, right? And I know we're different from Japan. But I just think that this is the way the world works. And unless the one caveat to all of this is if we do hit a World War III, that's where spending it's out of control. That's where the U.S. dollar would be at risk for actual hyperinflation. But barring that we don't enter a World War III type event, I think we're just going to continue businesses as usual. We're going to continue to pile up debt. And it's not an out of control debt spiral. It's just more of the same. Stephen, that's unpopular.

Starting point is 00:58:48 Stephen, if, unless you have something to add, I'm going to move on to one more topic here. Nothing to add. Nothing to add. Hey, can I add one anecdotal thing? Yeah. To correlate with what Joe's chart showed. You know, I've been running a fund since the beginning of 2014. For the first time since 2014, this month, I've actually added fixed income to my fund and for my client accounts above and beyond.

Starting point is 00:59:12 So not treasury, but actually so like senior loan, senior credit. taxable munis, those kind of things. We're getting a yield of about eight-ish percent, seven and a half, eight percent first time. And so basically 10 years. So I actually think this rise that we've seen in treasuries is healthy. You know, could it go higher for sure? But then I plan on buying some more and pushing my yields up to more like 9 or 10 percent, which I think would be fantastic. So I think what's fantastic about this, this rise in yields is that there finally is an alternative to stocks. we finally have another asset class to invest in, which I would say has been uninvestable practically for the last 10 years.

Starting point is 00:59:51 Which is so important. If I could just jump in real quick, okay, everybody knows the pitfalls, I think, of the passive indexation, right, and the passive 6040 portfolio. We all complain about it, right, because it's not, I don't think it's a good risk return to have 6040 bonds stocks, right? But there are a ton of people that do have it. And what I think is really key to understand right now is as, as, you know, you know, bond yields rise. The bond prices fall, basic bond math, right? And in that dynamic, your 40% of your

Starting point is 01:00:22 portfolio loses value. And what happens? What does that do to the equity market? That causes all the passive indexation and all the vehicles that the 6040 portfolio responds to. It causes them to sell their equities and rebalance into bonds. And you see this in some of the Van Gogh target date funds ever so slightly. It's probably why we didn't reach a new all-time high this year. You see some of the passive flow is starting to turn from equities to fixed income because of that reason. So I think that's going to really re-cavick on the folks that are 6040. I think they will continue to sell their equities, which are better performing into bonds to rebalance. Are you guys bullish here on bonds because you know the government's going to intervene or because you think market

Starting point is 01:01:03 forces are naturally going to create a bid? I'm not bullish on bonds. I'm not somebody who's saying, go go load up on fixed income. That's not what I'm. So, Don't accuse me of that in the comments for the trolls. That's not the point. All I'm saying is there are structural reasons in place why bonds could catch a bid. Okay. I have no exposure to these things at this point. You're giving a little nod down there.

Starting point is 01:01:30 We've completely changed. And Jeff said this, right? We are in a generational bear market in bonds. most of us have only lived through a generational bull market of bonds. Well, all of us here have. Yeah. Right. And certainly, you know, there's very few people left that are still very involved in capital markets that were, that were pre-1984.

Starting point is 01:01:57 That, you know, and those are guys that I love talking to, right? I mean, I love talking to Mike Milken, who was around right before that and some of the stories that he tells. But there's just, there's just not many guys like that. that left. And it is a different market function when you're in a different super cycle. So things don't always work the way that we expect them to because that's the way that we've always observed them working. Right. And on top of that, we also have a 1970s-like environment where we've got high inflation. We've got a bond bear market, a generational bond bear market, and moving into a recession at the same time.

Starting point is 01:02:40 It's not quite something that any of us have experienced. And it's even difficult to look at history to determine what will happen. I mean, a lot of the things that we're talking about is like, okay, well, this is what's been happening for the last year or the last six months are happening today. But that will all change when, I mean, we hit on it briefly, World War III, right? We've got a war going on in Ukraine that looks like it's never ending. we just entered into a war in the Middle East that has never ended since 1947 and it's going to continue at a pretty interesting level.

Starting point is 01:03:16 We've got, people aren't even paying attention because of those two situations. What's going on in Korea, what's going on in Taiwan, what's going on in the Philippines. So we could very easily move into a situation where we've got war in the Middle East, Asia, Europe, all at the same time and sides are being determined as we speak. I mean, most people kind of already know where the sides are, but this does look like World War III. And that changes everything. Well, before it was the movement to the petro dollar system, and now we're just moving

Starting point is 01:03:52 to a Bitcoin system. That's right. You know, if only people could figure out, like, what the education is on Bitcoin, I think we could have a whole lot more peace around the world. Anyway, the last thing I want to talk about here is the high yield spreads. So I'm going to put up a chart here of the high yield spreads. Joe and Jeff both submitted this slide. So I figured we should cover this.

Starting point is 01:04:21 What's the narrative? What's the voice over here? Why is this important, guys? Well, I'll just start. Since we both submitted it, I included it all the way back to like 98. Joe's, this one goes back to 2016 here. So the point of this is when high yield spreads start to blow out, that's usually a good sign that we're heading into a recession. It doesn't always mean that, but it's one of the indicators I look at. I know it's one of the indicators. Joe looks at. I'm sure

Starting point is 01:04:44 all you guys look at this too. There's lots of things you can look at, right? The price of oil, high yield spreads. You can look at unemployment, those sort of things tell us that a recession is actually imminent like we're heading into it. So right now, the spread between when we say high yield, Most people know that is junk bonds. So the spread between junk bonds and their underlying treasuries is still, if you look at it, it doesn't say on here, but it's about four and a half percent or so. That is to the level where I start to notice it. I don't really pay attention to this until it gets above 5%.

Starting point is 01:05:15 Once it hits 5 percent, I think, okay, this is worth paying attention to now. Sort of like the move index, which we had talked about earlier. Once it gets above 125, I think it's concerning. Once it's above 150, I think the central banks have to decide what to do about it. So we're still in the part of the OAS spread where there's really nothing to do about it. It says that we're not yet in a recession. I think that's why when we talk about, are we in a recession? I don't think so.

Starting point is 01:05:40 I still think things are okay. And then one other thing that I didn't submit a chart for, but the S&P Composite Index came out today. It's 51. It's still, it's an expansionary mode. It's actually increased a little bit. Yeah, here's a longer data chart. So same chart that Joe showed. But we're really not out of the range of normal for where.

Starting point is 01:05:58 the spread is right now. If it jumps above five and heads towards six, then I'll start getting concerned and I'll start probably telling people that it looks like we could be headed into recession if other indicators correlate that. But as far as I'm concerned, you know, that's why remain crabbish because liquidity continues to remain crabbish. And that's one other chart I showed is we're still range bound for from a net liquidity perspective since April 2020. We're literally in the exact same range that we've been in since April 22. That's what, 18 months or so. So I don't expect much from risk assets or even Bitcoin, honestly. Yeah, here's another chart.

Starting point is 01:06:31 I showed it's kind of a sloppy chart. But basically what that shows that big long blue thing on top, WAL, CL, that thing. That's the net liquidity since the beginning of April 2022. And then what I put over that is what the NASDAQ stocks have been doing, small caps, the S&P 500 in Bitcoin. You'll notice that the small cap stocks, which is that teal line, is basically trading in parallel with what net liquidity does in the U.S. The cues are outperforming it.

Starting point is 01:06:57 They're up about 16% over that time period. I think it's because the cues in general, mega cap tech stocks are seen as worldwide assets and not necessarily just U.S. based assets like U.S. small caps are. So that's why I think around the world they tend to view that as kind of a safe haven asset, almost not quite on par with treasuries, but it's sort of up there. And then Bitcoin, you see, it took that big dip down and it's been catching up again. So a month ago, before, if you kind of negate that last line, I was saying that I was saying that I think Bitcoin is still oversold and it needs to catch up basically to net liquidity,

Starting point is 01:07:30 whereas the cues look kind of overbought and need to come down a little bit. And then one last point, and then I'll stop talking. The bottom part of the chart with that pink box, that's my poor man's version of worldwide, basically M2, kind of worldwide liquidity. And what you'll see there is that it has dropped since April of 2022 by about 10% or so. And so if you wonder why risk assets, Bitcoin and things have not been performing very well and why I still remain crabbish and not overly optimistic. It's because of those factors. I think of that is the oxygen for markets, especially for risk ads, especially for

Starting point is 01:08:04 Bitcoin. And until those things make a noticeable move higher, I just won't get overly optimistic or overly bullish. Sorry, I dropped your chart there and I brought up the Global M2 combined here of all the different M2s all denominated in USD. So people can kind of see what that's looked like over the last decade or so. I love it. And notice the rate of change, which I think we're showing on the bottom there. Yeah. Like it has bottomed.

Starting point is 01:08:33 It did bottom in the fourth quarter of 2022. I remember we talked about this on this show a couple, couple episodes ago. But it's generally trending higher. But we still haven't seen sort of the all in, you know, all the central banks thrown in their hats and going back to QE. They're very reluctant right now to do any sort of QE because of the higher inflation. But at some point, and I think probably some point soon, like, Q1 or Q2 of 2024, I think they're going to be forced to do QE, and that's where things get

Starting point is 01:09:00 real again and get kind of exciting again. You know, I look at the high yield spreads, and I actually see something entirely different. If you look at that chart again on option adjusted spread, what I see is institutional investors are trying to hit targets, right? And they're simply reaching for yield. What you have to remember is typically high yields are maximum five-year maturities. So this spread is actually to, it's actually to the five-year, in some cases the two or three-year. It's not actually that indicative of what's happening on the long end of the curve.

Starting point is 01:09:40 The second thing that I'll point out is so institutional investors are simply reaching for yield. So they're getting, in some cases, up to 10%. But, and that's enough to really pat a portfolio and to enter into a barbell strategy of riskier assets with the 10% yield that they can hold on to for the next five years. And I believe investors are doing that because there is a belief that the Fed is going to have to lower rates. And this is simply a trade. but what I see is high yield bond investors aren't actually getting rewarded for the risk that they're taking. I think default rate, so this is also indicative of what a potential default rate is, right? Potential default rate of a 5% in my opinion is pretty low for the risk that we're in right now.

Starting point is 01:10:35 The spread should be closer to 7 to 8% given the environment that we're going into. So I think you're going to see in some cases faces getting ripped down. off. And this happened back in 2006, 2007 as well. There was, there were, there was, there was, there was, there was, there was, there was, there was, there was, there was, there was, there was, spreads were really tight. And then they blew out all at once, right? And you, and you, and obviously you saw that on the chart. But there's two different types of high yield managers, right? There's the type that actually analyzes the debt that they're going into and they're only buying higher quality bonds that still have a little credit rating.

Starting point is 01:11:17 And then there's a type that are just buying the market, right? It's no different than guys on Twitter that we deal with in the crypto community, right? There's the people that actually understand what they're buying and focusing on Bitcoin, the high quality stuff. And then there's people that are like buying Doge hoping for a quick lift. People think that traditional money managers are super sophisticated. And most of the time, they're actually not. They're just buying the market.

Starting point is 01:11:40 you know, if you look at, you know, some of the bigger, bigger asset managers and you think, oh, you know, I'm really impressed. You know, they have over a trillion dollars in assets. Well, when you have that much in assets, you're forced to buy the market and you're forced to buy the crap along with the good stuff and anything that's available. And you're forced to buy yield and duration. So what I'm seeing is I'm seeing a potential disaster in the high-upon market. Yeah, if I could tie both of those comments together very briefly, Preston. So if you pull up the chart, the one that says net interest costs, I think it tells the full story of what's going on here and why this cycle has played out very differently than prior cycles. Most of all of us really on the call here, we have lived through a period where the Fed hikes, particularly they're hiking aggressively, and you see a leverage player in very short order get blown out and the Fed has to respond very quickly.

Starting point is 01:12:33 And what this chart shows, and I think it's confirmed by also some of the maturity data we have regarding high yield, is that in past hiking cycles, you see almost right away a response as a percentage of net interest costs from companies that they have to absorb those higher rates, right? You see a very responsive, reactionary effect on companies, particularly their net interest costs from a hiking cycle. You haven't seen that this time. We've engaged in the fastest hiking cycle in the last 40 years, and you have seen actually net interest payments as a percentage of post-tax profits decline. Why is that? How can that possibly be the case, given what Stephen and Jeff is saying, in my read of it, is that many companies and individuals were pigs at the trough loading up on cheap debt,

Starting point is 01:13:24 many cases they loaded up on five or 10-year paper, longer dates of maturity than at any point in the last 40 years, which makes sense. because interest rates were at zero. So when the Fed engages in their hiking cycle, they could hike rates to 10%. In the short run, it's not going to effectively affect the people that impact the people that took out a lot of paper and have that paper

Starting point is 01:13:44 until it has to be rolled most of beginning in next year and into 2025. There's very little high yield that had to get rolled this year on a relative basis. Most of it starts to pick up next year and really ramps up into 2025. And if you talked to various clients that are entrepreneurs and innovators and small businesses, they are telling you that they're banking on the fact that interest rates are going to come down.

Starting point is 01:14:06 They're going to be able to roll this paper in the middle to later part of next year. I've talked with CFOs on this subject in particular. There just seems to be this blind faith or maybe it's some sort of illusion that they're all playing that they believe that they're going to be able to roll this paper when in reality they're going to have to roll it at two, three, four times higher and that's going to really start to affect things. But the problem is they haven't had to roll it yet. So, you know, if you're a company, if you're an individual and you haven't had to roll of paper yet, interest rates in the short run are kind of, you know, they're not particularly meaningful. Well, and you make a good point.

Starting point is 01:14:41 The higher credit rated companies aren't going to have a problem. It's the, you know, the triple Cs, the single Bs. They're the ones that can't even get five-year paper done. Right. They're the ones that are issuing two, three, four year paper, and they're forced to refinance often as opposed to waiting. So they're the ones that are going to be impacted the most. And so we'll likely see default rates among those groups much higher than, say, double B. So you see this in the charts, right? Everybody says, well, the stocks are in a bull market. Pull up the microcats, CTF, the IWC, right? Microcaps, you just hit a new low taking out the 2022 low. Look at IWM. IWM, same story, hovering right at the 22 lows. Looks like it's going to break down eventually at some point.

Starting point is 01:15:36 Those are more interest rate sensitive companies where you have your mega caps, which Jeff talked about, they're bulletproof, right? They're international assets. There's no way Apple's not going to be able to arguably that people are going to want Apple bonds over the U.S. government bonds. So, I mean, they're not going to have these sort of issues with higher rates, whereas the smaller players are going to get knocked out. Yeah. And what's really interesting here too as well is that when this really starts going down, the highest correlated assets to high yield bonds is actually the S&P. So if you start seeing high yield bonds blowing out or start seeing defaults, then you're going to see a massive move down on the S&P. Look at IWM, Preston. You had IWC. That's real small microcaps.

Starting point is 01:16:19 Look at IWM. Look at the chart. Does that look like a bull market? Doesn't look like a bull market to me. Yeah, you've been in a sell-off for how long here? 719 days. Right. So that's the interesting thing. I'd love to hear Jeff's point on this. Like, if it were purely liquidity that was driving assets, right, why is IWM look like this? To me, go ahead. Yeah. Well, if I can, it actually almost perfectly mirrors net liquidity. Remember what I said, that net liquidity is chopped sideways and has been range bound since April 2022. Look at this, how it, where it starts, not that, if you can go to April 2022 with your marker, I don't know if you can get that in there July, June.

Starting point is 01:17:02 See that? Yeah. Yeah, you're right. See how it's choppy right there? It almost perfectly correlates with the movements of net liquidity. I don't make the rules. I'm just, and I could be wrong, but it's uncanny how closely it follows net liquidity. But it's a totally different chart with S&P.

Starting point is 01:17:19 right? So like those S&P is different, but because S&P has the mega cap tech stocks, which are the international assets as we talked about. Yeah.

Starting point is 01:17:27 That pulls it higher. So would you, would you characterize it that assets like the S&P are not as liquidity sensitive? Here's since April right around here. Yeah,

Starting point is 01:17:39 it's pretty interesting. So what I've noticed with the cues and the S&P 500 because of the mega cap tech stocks, they do have a different characteristic to them. Why that happens? I'm not totally sure, to be honest.

Starting point is 01:17:51 They diverged from underlying worldwide liquidity as well, which they traditionally have followed that. But if you look recently over the last several months, there's a huge increased jaws, like the jaws are getting wider and wider, between what worldwide liquidity is doing and what the cues have been doing. So at some point, those jaws need to close. And I don't know if it's because liquidity is going to take off. I don't think so. Or because the cues and S&P 500 also need to fall enough to. to close that gap. Because historically, they have followed very close with worldwide liquidity.

Starting point is 01:18:24 I don't know if that answers your question. Yeah, no, it definitely does. And do you think passive indexations, most people just piling into S&P and not thinking, like, that's at play here? I think that's a big part of it for sure. We're at the end of the show. And what happens just so folks now, like, when we stop recording, we continue to talk about this stuff for like another hour after we're done recording.

Starting point is 01:18:47 And we only say, oh, we should have recorded. the rest of this. But gentlemen, I think that that's where we're going to wrap it up. Those were the topics that I wanted to cover. Always such a pleasure to chat with all of you guys. Let's go around the horn. You guys can give a handoff if people want to learn more about you. Jeff, go ahead and start it off. Sure. You can find me on Twitter. My handle is at Vailshire Cap. I also run a hedge fund and RIA. It's called Vailshire. So if you just go to Vailshire.com, feel free to shoot me an email or a message if you're interested. Stephen?

Starting point is 01:19:21 My Twitter handle is at Stephen McClirk. Love that. And I'm with Balkyrie and also run a hedge fund and some ETS and some other things. Joe. Yeah, Joe Carlosarri. At Joe Carlisari. If you also Google me, you can find my firm's website. We represent a variety of Bitcoin miners.

Starting point is 01:19:39 We're involved with disputes in the litigated disputes in the crypto space, which there's a lot of fraud and wrongful conduct going on. So if you have been a victim that has been wrong by a bad actor in crypto, please feel free to reach out if I can't help you, somebody else will. And if you have any claims, breach of fiduciary duty, litigated commercial claims, happy to help and happy to talk with you at any point. Just reach out to me on my website. On Twitter, I mostly post macro stuff and don't post it much legal stuff as I probably should.

Starting point is 01:20:07 But looking forward to talking to anybody wants to pick my brain about something. Jens, thank you so much for your time. This was a blast. Thanks, President. 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.

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We Study Billionaires - The Investor’s Podcast Network - BTC154: Bitcoin and Macro Mastermind Q4 2023 w/ Joe Carlasare, Jeff Ross, and Steven McClurg (Bitcoin Podcast)

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