We Study Billionaires - The Investor’s Podcast Network - BTC158: Systemic Bond Issues & Bitcoin's Impact w/ James Lavish (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I have back James Lavish to help understand an interesting situation where we're starting to see failed treasury auctions, enormous recessionary pressures building in the markets, along with a reverse repo facility that's getting drained at a breakneck pace. So what does this all mean for the start of 2024 and how will Bitcoin perform through such macro turbulence. We cover all of that and much more. So hold on tight because here's my chat with the thoughtful James Lavish. You're listening to Bitcoin Fundamentals by the Investors Podcast Network.

Starting point is 00:00:44 Now for your host, Preston Pish. Hey everyone, welcome to the show. I'm here with Mr. James Lavish. James, welcome back to the Investors podcast and Bitcoin Fundamentals. Preston, always good to be on with you. I appreciate it. So Bloomberg just banged out an article that says pulling off a soft landing depends on the pilot, sir. And they have one of your tweets in this article in Bloomberg. I mean, this is just ridiculous. So let's just start there.

Starting point is 00:01:27 So last week, I just noticed how many stories I was seeing about soft landing is one after another after another. So I just took a screenshot of my Bloomberg terminal. I just said soft landing, search that in the news stories. And boom, all these stories came up. And I just took red circles, circled all the soft landings and posted. I said, this is what the front page. It was like pages of these stories. And so they quoted that in this article.

Starting point is 00:01:54 I guess it came out Friday maybe because somebody just sent it to me. I didn't know about it. They didn't ask my permission for sure, you know. But yeah. So they're just, they just, it's just. It's kind of a search and exploration to whether or not there has been a lot of, like, there's a more scientific approach to it than just searching and looking at how many stories there have been per week versus hard landing stories.

Starting point is 00:02:23 And does it always, does it ever lead to a soft landing? And the reason I searched it, you and I talk about this is that it just feels like the market's a little bit complacent here. They were just laying it on so thick. Like everything you see coming out of the media drones, which is how I'm referring to any like traditional media at this point is it's just it's like they're just chirping all the exact same messaging as if there's one string puller at the top saying, all right. Now everybody's going to talk about soft landing from now on. And like you posted this and it was so absurd the amount of articles coming out with soft landing in the titling. And it's just like, it wasn't all, let's make you clear.

Starting point is 00:03:05 It wasn't, this is just in the Bloomberg term of the news feed. Yeah. So it was all kinds of different sources. It wasn't Bloomberg. It was like all kinds of different sources that they're quoting there and or, you know, that they're listing there. Whether it, you know, whether it's the Dow Jones or Canadian sources, it just, it's all over the map. So it's pretty widespread. And that's the point is that there's been a lot of talk of soft landing, a lot of talk.

Starting point is 00:03:30 Wonder why. And then today, you see. you see the market just march, march, march towards new highs here. Yeah. At the same time, you've got these banks laying off. I think Genevieve just tweeted something about upwards of 20,000 financial layoffs less far this year. I mean, there's, well, let's just, let's be very clear.

Starting point is 00:03:52 And like, let's define something that I think is really important for people, because you're right, the major indexes, whether you're talking about the Dow or the NASDAQ, like, they are on the. cusp of making new all-time highs. But when we look at what the composition of these indexes are, absolutely. There's a couple companies that got massive market caps, the apples, the Microsofts, you name them. And they are performing flawlessly, right?

Starting point is 00:04:24 They're performing better than ever. But if you go into like the smaller cap, they're getting crushed. When you look at bonds, bonds, I mean, there was this minuscule bid that's happened over the last two weeks ever since the Fed meeting. But like for all intents of purposes, bonds have had the largest sell-off they've had in what a two-year span on record. It's a couple companies. It's the consolidation of equity into a couple of these companies that is that people just chirp this narrative that the markets are, you know, almost at all time. No, a couple companies are at all-time highs, right? Right.

Starting point is 00:05:03 Yeah. And so it's true. The breadth has been pretty tight. We've seen, I think it's nine weeks straight now of net decreases in estimated earnings versus increases in them for analysts. It appears that we understand that there's a slowdown coming. We had that abysmal bond auction a couple weeks ago. We had one this morning.

Starting point is 00:05:28 It was a 20-year small auction, maybe $16 billion, which is really tiny now compared to the auctions that we're having. Which should have no issue, right, from getting that sold. And it didn't. It went off without a hitch. You know, it was actually, there wasn't even a tail. It stopped through slightly from the win issued. So the market, but probably in reality, the market was probably a little bit hesitant to buy these things at a price that they didn't over buy them pre-market. like they did the 30 year. That was just nuts. So, you know, it's interesting. There's,

Starting point is 00:06:03 you see the shipping slowdown. You see the inventory numbers, the industrial production numbers. Like, there's clear red flags. Yet, it seems that everybody is, is entertaining this narrative of soft landing. Okay. So let's, let's think about this. You could have a few different things that are going on here. Number one, Mike McLaughlin. And I talked about this morning, the analyst from Bloomberg, he said, typically, I agree, you have this escalator up and an elevator down in the markets, right? You escalator up, elevator, escalator, and we've seen it over and over and over again. But this past time, we had an elevator down and an elevator straight back, a slingshot up.

Starting point is 00:06:50 A slingshot. It was a rocket ship, right? You remember the markets in March of March, March, in April of 2020. And so, well, the issue here is that there was just so much liquidity poured into the market during that time that maybe that's enabling a little bit of an escalator down. And that could be the case. It could as long as we don't have some sort of credit event during that escalator down or as long as you don't have just a steep drop off of production and employment. Is this the new norm? Is this a slingshot up the new norm? No, I don't believe that that would be a new norm.

Starting point is 00:07:27 Can I see? I mean, anything's possible. So the question is, this is the real question for me. Is it because the market is so conditioned now to having a Fed backstop that they're going to buy risk assets and get ahead of it before we have a downturn and they miss it? because what if the market is up, 25, 30% from here? And then it draws down 10 or 15%. The Fed comes in and saves the market.

Starting point is 00:08:01 It goes right back up and you missed that. So you net net, if you bought all the way along, you were fine. So it could be the market is just conditioned to, oh, we're getting QE. The Fed's got our back. No problem. There's no way that they're going to allow for a dramatic drawdown in the market. the markets, why. It's not the equity markets. They don't care about that. They care about the debt markets. They care about the treasury market. That's number one. That is the number one

Starting point is 00:08:30 priority of the United States financial system. Make sure that we can sell treasuries, a lot of them. So don't wait for the handler to put the dog food in the ball. If you bite the handler's leg as they're carrying the bag of dog food to the bowl, the person will spill the dog food and then you can You can nibble it off the ground. Exactly. Exactly. So it's, I gotta tell you, man, I've been investing for almost 30 years. This is the craziest.

Starting point is 00:08:58 Well, you're right. Everybody's been conditioned to that they realize a very fundamental thing here. They're realizing that these aren't free and open markets anymore. They know the markets are manipulated. And so to, to outperform, you have to play a game of, okay. So I think the manipulation is going to happen at this point in time. So I've got a front run that. And any type of rational free and open market dynamics, like if you're playing that game,

Starting point is 00:09:29 like you're using the wrong. You're playing a game of basketball. All the refs are cheating and you're playing the game as if they're not cheating. Right. Like you have to play the game like they're cheating. Exactly. So what are the rules? You got to understand the rules.

Starting point is 00:09:43 And if the rules are, well, we can't have a steep drawdown. Okay, those are the rules. Especially in an election year. Yeah, yeah, exactly. Yeah, exactly. And look, I still have, I've lived through a number of these. I don't believe that we'll have no downturn. I just don't believe that.

Starting point is 00:10:00 I think we're going to have a recession. I think the Fed needs a recession to reset prices a little bit. That's what they need to make sure that there's confidence in the dollar and that will induce pain. But it can't be so severe that you draw down on. on the federal earnings, right? Revenues, tax revenues to a point where you exacerbate that debt and the deficit problem we have. This is the craziest thing. We're running $2 trillion deficit we can get into this, but we're not even in a recession and we're running these deficits.

Starting point is 00:10:36 Yeah. This is insane. I want to get to a different elephant in the room before we get to that elephant in the room because there's many elephants in this room. There's a lot of elephants. You can't barely even move in this room right now. Which elephant do you want? This is the one I want to talk about. So when we look at the backstop facility that was stood up with Silicon Valley Bank, you're dealing with a security that is extremely liquid, maybe the most liquid asset in global markets. Now I'm seeing, I just tweeted out today, I keep seeing these posts where people are like,

Starting point is 00:11:11 oh, this building that was $150 million three years ago is now going for an 80% discount in the open market. And it's like downtown real estate in, you name it, major city. And like every post I've seen has been like 70 to 80% discount from the previous purchase price. So what we're talking about is something that is extremely illiquid that is on everybody's balance sheet for banks and you name it, these are assets on these balance sheets that are impaired by maybe 70 to 80 percent. That's the word impaired. Yeah.

Starting point is 00:11:50 Impaired. That's right. So let's talk about that. And specifically, let's talk about how illiquid this market is and like what that means for manifesting prices. And like, it's very different than how they were able to react during the Silicon Valley bank where they're dealing with something that's really liquid. they stand up this backstop facility.

Starting point is 00:12:09 Oh, just push those digital units over here. These are real physical things that might only turn over every seven to 10 to 20 years. Like, what does that mean as we're like trying to manage this quote unquote soft landing that all the drones keep talking about? Well, first of all, the bank term funding program, right, the BTFP, that in and of itself, that just, that's going to continue to act as a backstop. I don't believe they're going to allow that to just expire. There's no way. It's mathematically impossible, right? It's not as though these regional banks are suddenly happening upon more liquidity,

Starting point is 00:12:49 especially with this commercial real estate downturn. I do foresee this downturn to continue, but I believe that there's significant activity going on in behind the scenes to be sure that these regional banks are individually not running, into problems on their balance sheet because of them and whether these these deals are being struck at prices that are just barely getting these regional banks buy without impairing their own balance sheets. And so it's difficult to know.

Starting point is 00:13:21 I don't know exactly what the behind the scenes negotiations are. But it would be interesting to see who winds up buying most of this real estate because the function of it is the, and I wrote about this. in one of my newsletters, but the function of it is that you have the buyer of the real estate, right? So they've got, they own the real estate. Now they put whatever down for it. And they've got this, what they've got their mortgage on it with the bank. Then typically it's, it's a regional bank in that area that knows the business, the business area and they're, they're willing to lend against it. So they, we have this lockdown, occupancy rates are down. So workers are not going

Starting point is 00:14:05 into work, which means that each company is, they're not resigning leases for as much square, for as much square footage. So the amount their leasing is down. So you have the occupancy rates are down significantly, 20, 30 percent in areas, right? So then the owner of the building has a cap rate that's not really covering what he thought it would. And so he's deciding to say, well, at this point, if I just turn in the keys and give the building back, I lose my equity in it, and I'll just walk away. And it's a non-recourse loan so the bank can't do anything about it. They're just like, okay, now we have this asset. And to your point, it's impaired. And so now they're going to be sitting on this asset that's impaired, 60, 70, some of them,

Starting point is 00:14:56 80 percent from where we underwrote it. And now we've got to get it off. our books because we're just sitting on an impaired asset, an ill-liquid impaired asset, as opposed to an impaired asset that is covered under the BTFP. Exactly. That is, you know, we can get capital for that at par and it's not, it's liquid because we can just put it to the Fed. So how does the Fed deal with this illiquidity issue? I mean, I joking- Are they going to have a new acronym? Yeah, see that. That's exactly where I'm going. That's the shoe I'm waiting to the drop to see if they have a new acronym this spring. Because remember, a lot of these leases are, you know, they're just now coming due again. And so describe what you mean by new acronym just in case people don't understand what you can.

Starting point is 00:15:46 A new acronym. So like, yeah, so like the BTFP, that's an acronym. That's a quasi. It's a new facility. Yeah, QE and people, a lot of people have debated this. And look, if you're, if you're injecting liquidity, into an open market that's not there. That's QE. And the difference between, and it's not a massive amount, but the liquidity of it and the ease of getting in and out and the ability for these banks to just shore up their balance sheets with it is it's important. It's QE.

Starting point is 00:16:16 It's not a ton, but it's there. That's what it is. It's more significant that they have the ability to. So they don't have individual banks that are impaired. So the question is, what would the next acronym be? is it going to be some sort of commercial real estate investment trust, Fed promoter, fed backed investment trust? I don't know. It's just we're going to have to see when these mortgages reset or whatever the, you know, whatever the next, the next waterfall event is for each of

Starting point is 00:16:54 these commercial real estate holdings and how big they are, we're going to see a number of them come up. that's the question. I'm waiting to see what happens. 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

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Starting point is 00:21:27 auctions. Last week, we briefly covered this earlier in the show where last week there was this really bad auction that took place. And the narrative that was spread, I'm kind of curious your take on this as well, was that there was a cyber attack. And one of the banks that were going to buy couldn't access and they were using pin drives to try to conduct trades and whatnot. And Like, that was the excuse that was slapped on this of why the auction was so bad. I'm curious if you agree with that, first of all. And then second of all, get into a little bit of the dynamics so that people can kind of understand how even that market that we just got done saying is so liquid was demonstrating

Starting point is 00:22:08 illiquidity last week in the auction that normally doesn't. I think this was, what was this? Like a three standard deviation kind of tail on this thing or something? It was something Sigma event. It was crazy. Well, let's back up. So a few weeks ago, we had the Fed was announcing their decision on the rates, whether they were going to raise or keep rates the same. And that was on a Wednesday. And as typically the entire market will have their attention on that event. And so they'll be focused on what's the Treasury, I mean, what's the Fed going to do? Well, the same day, by happenstance. The Treasury was announcing their fourth quarter funding program, their refunding program. So they've got a, for your listeners, there's a lot of, a lot of people blame the treasury for all the spending that's going on in the United States. But the Treasury's not the one who's deciding the spending. It's Congress. The Treasury's just facilitating it. Now, they could

Starting point is 00:23:09 have done a better job of issuing bonds that were longer dated way back when we had zero interest policy, but that's neither here nor there now. So, but a couple of weeks ago, they announced what their funding was going to be. And all eyes were on this, because why? Because over just a few months since the end of the debt ceiling crisis and middle to middle to end of October-ish, the Treasury had issued another over $2 trillion worth of debt. So, and in over $600 billion in just a few. weeks. It was just insane, the amount of debt that they're piling onto them onto that

Starting point is 00:23:51 that we're already sitting on. And so all eyes around this say, what is the Fed going to, or what is the Treasury going to do, how much are they going to need to issue, how much are going to need to borrow? And so when they announced this, it was actually very positive to the markets because they said, well, we're just going to borrow 776 billion, which was less than the market expected, a little bit less than the quarter before. Now, remember, we're running $2 trillion deficits right now annually. So we're on a run rate of $2 trillion. There are things that don't add up. Part of the issue when they borrow is they've got to pay off, they've got to give principal back to bonds that are maturing. So it's not just how much the deficit

Starting point is 00:24:37 is. They've got to refund all that debt that's maturing as well. And there's a lot of maturing. Why? Because we're issuing so many T bills right now in order to keep the engine going. We'll talk about that in a minute. But long and short of it is, the Treasury announced that they'll be borrowing more on the shorter end, more T bills than bonds, which are 30 year, you know, 10 years and on. They'll be borrowing less than that. And so when you look at the schedule, they issued, they said, you know, we're going to, the three year, the 10 year, the 30 year note, or the 30 year bond, we're going to, we're going to, we're going to, we're to borrow about one or two billion dollars less on each of those auctions. And so the market was like, hey, the treasury's got it under control. Everything's great. No problem. We trust the treasury.

Starting point is 00:25:24 They've got, they're not going to issue too much debt. It's all under control now. Not really I'm being facetious, but you get the point. So the market was happy with it. Now, flash forward. Well, actually, there were a couple of nuggets in that release. So in that treasury release, when they told the market what they were doing. One of them was they said that the primary dealers, they basically admitted that they're getting a little bit nervous. They said that in their words, noted a high degree of uncertainty overall around deficit and growth forecasts,

Starting point is 00:25:59 reinforcing the Treasury's need to maintain flexibility in their issuance strategy. Right there, they said primary dealers are getting nervous. Okay, who are the primary dealers? Basically, they're the auction houses. So when the Treasury has an auction, they use Citigroup and J.P. Morgan and Wells Fargo, and they're out there reselling this to their investors, basically, right? But they're the backstop. They're like, well, we'll buy this much to make sure that you get all of your debt issued

Starting point is 00:26:29 and you can borrow as much as you need. We'll buy this much from you. And so they backstop the Treasury, basically. And for that, that's for the right to be the primary dealer and get fees for that. The second thing they said is that the Treasury anticipates an additional quarter of increases to the auction sizes. Well, that's normal. Of course, they're going to have to issue more.

Starting point is 00:26:53 That's not atypical. But they did make that note. They said, just FYI, we may auction more off than we've just now announced. Then the third thing they said was this is the one that gets me. And there's a lot of uncertainty around this one. But they said the Treasury continues to make significant progress on its plan to implement a regular buyback program in 2024. What's that mean? Okay.

Starting point is 00:27:19 Yeah. Oh, my God. Keep going. So they've done this before where they buy. Okay. So what they're talking about there. This all kind of leads up to this 30-year bond. But what they're talking about there is so back in the day when the bond traders, the big guys,

Starting point is 00:27:40 the bond traders had these big, huge reams of paper that have all the issues on it, the treasuries and the mortgage backs, they were like, they had these huge runs. And you remember the dot matrix printers? So it's all connected to the, it's all just one big ream, right? And so when you called back then in the 80s, 90s, when you call the bond desk, they didn't have all the quotes up here. It wasn't as efficient as it is now. They had these reams of paper. And so they would check, and you want to sell a bond, they checked the quote from that morning, and they would, they would kind of give you a price. Well, if it wasn't on that sheet,

Starting point is 00:28:18 it was, that was the run. If it was not a sheet, it was considered off the run. So it was not something that was typically traded. It wasn't very liquid. So they're like, oh, it's not on the run. I don't know. I'll bid you this for it. And you'll, you typically, wouldn't get as good of a price, typically because it's not as liquid and they don't know. So that's called off the run. The treasury, this buyback program, which they've done before, is for off the run treasuries. Well, but have they done it before when the market has had such a shock that bonds and treasuries have had their worst years in history?

Starting point is 00:28:55 Right. So now you've got these bonds that are illiquid and they're impaired because maybe they're 20 year treasury, they're 20 years left in a 30 year treasury that, I mean, they're down significantly. That's what they're talking about. Are they going to buy them right at the price? Are they going to buy them the market price? They're going to make it a little bit easy. Like, it's just, they're providing liquidity to ensure. They're basically saying they need to ensure liquidity in the treasury market. And so sounds to me like a little bit like a little bit like quasi yield curve control slash QE to me. It's unclear exactly how the program's going to work yet. So we'll get more details

Starting point is 00:29:38 next year. But they did announce it and they were working towards it. Okay. By the way, it makes it it makes total sense that when they eventually do roll out yield curve control, they're going to do everything they can to kind of obfucate the terminology of yield curve control as much as possible. There will be, yeah, there will be acronyms. There will be, this is not. this is not QE. This is not yield curve control. Well, similar to the backstop facility, right? Like, I would argue that even that's a form of yield curve control for banks only.

Starting point is 00:30:10 Yeah. And here's the point is that, look, I do not expect the government. I do not expect the treasurer in the Fed to team up and do outright yield curve control like Japan. That is not what I expect. However, I do fully expect that they'll do these backdoor kind of hidden. obfuscated deals where they're giving liquidity, they're injecting liquidity into the markets without, it's not really yield curve control or QE. Now, flash forward.

Starting point is 00:30:46 We have a 30-year bond auction. I'm on a call for my hedge fund. We'll talk about that later. But I'm on with a company listening to what their projected earnings are. and I'm getting these messages pop up. And one of them might have been from you. I can't remember what it was like, did you see that bond auction?

Starting point is 00:31:08 And I was like, but bond auction? But no, I haven't heard anything. I'm focused on this call. And so we end the call. I pull it up. And I'm like,

Starting point is 00:31:16 oh, the 30 year bond auction was today. Oh, how'd it go. You know? And I look up and I was like, I couldn't, I thought I was reading the numbers wrong.

Starting point is 00:31:22 It's like, this is wrong. This is the 30 year. Isn't it? Like, what? The bid to cover was what? To make it really simple for your list. There's a few metrics that you look at when you, and I do have a thread all about this. It simplifies it for you.

Starting point is 00:31:36 If you want to go back and say, well, I'll give you the link to it. But when you look at a treasury auctions, there's a few things you're looking at. The first big thing you're looking at is the bid to cover. It's like how many bids do they get versus how much the treasury was trying to sell? And that includes primary dealers. It includes everything. The bid to cover for this, it's typically for the 30-year treasury, it's typically, it's been in like the 2.5, 2.6, 2.7 range, somewhere around there. And in this auction,

Starting point is 00:32:05 it was 2.2.36. Absolutely terrible. I mean, it was like, whoa, is really? That's really low. Then the second thing was the foreign bidders. So it's called the indirect bidders. So indirect bidders dropped. They've been steadily dropping, but they dropped from 65% last auction. which was down from 75% at the beginning of the year to 60% this auction. So foreign bidders only bid for 60%. Now, do the math. So you've got 60% there. The direct bidders, which is the hedge funds, the investment funds,

Starting point is 00:32:45 and institutional funds, me and you, whoever was in there, buy an auction, I wasn't buying, but anybody in there who's buying these treasuries, they only took down 15%. So 60 plus 15. that gives you 75, which means that the primary dealers were left with 25% of the auction, which was like, wow, that's a lot. These guys usually take down around 10%, maybe 9% or 10%. They were left with 25%.

Starting point is 00:33:12 That means there was a big hole there for demand. Again, to make it easy for your listeners, these auctions are called Dutch auctions. And so what that means is that if you or me, a retail person, wants to buy, a treasury bond. They go on to Treasury Direct. They put in, they say, I want to buy a thousand dollars worth, and they just put in their order. Well, they're going to get whatever the auction ends up being. But for everybody else, for the institutions, what they do is they submit a bid for the amount of bonds that they're willing to buy at what yield they're willing to buy it at. So that yield, basically the ending yield that the Treasury decides on for the

Starting point is 00:33:55 auction is as high as it needs to go in order to fill the number of bonds they need to sell, the amount of bonds they need to sell. Say if they have 10 million here, 20 million here, three million here, they've got to keep going up. If they have, like, only say they have, it's a $30 trillion, or a $30 billion auction, and $20 billion is down at 4.75%, but then another $10 billion is up at 4.8%. Well, then everybody gets 4.8% because that's where the order is filled. Okay, does it make sense?

Starting point is 00:34:28 So that's, I know you understand this, but that's basically how these work. The way that this auction went was they weren't getting enough bids. They had to go all the way up to the price they had to go to, the yield they had to go to. And so what happens is these bonds trade before the auction in something called pre-market or win-issued. And so investors are expecting to know where that yield is going to be. They're expecting that it's going to come out to a certain spot. And if their expectation is that the yield is lower than it actually ends up being, in other words, the Treasury had to offer more yield to get the bonds that they needed

Starting point is 00:35:11 to get the money they needed to borrow, that's called a tail. And a tail in a bond auction like this, which was $34 billion, I'm sorry, $24 billion, I believe. And a tail for something this large of two or three basis points is it's kind of like, that's kind of an ugly tail. That's not great. That means that the win-issued market was trading two or three basis points more optimistically than the actual auction occurred. So the win-issue was like, ah, man, I bought this.

Starting point is 00:35:45 at too high of a price. And they paid more money they needed to. And when you're talking about billions and billions of dollars and you're talking about 30-year treasury, that's a lot, that's a, that's a big number at, you know, in return over 30 years. That's a pretty ugly. So this, when I looked at this, when I looked at the returns on this or the, the, the, the results of this.

Starting point is 00:36:08 And I saw the tail pressing 5.3 basis points. 5.3 base points. If you're like four, five or six base points, it is abysmal. It is near catastrophic. You've got to multiply it by the size of the offering, right? Which is those are huge numbers. And for the, yeah, exactly. And for them, the investors who bought a pre-market,

Starting point is 00:36:30 oh, yeah, they got. They lost five basis points. Yeah, which is massive. Or the whole duration of that treasury for 30 years. Yeah. That's, I mean, it's a big number. It was abysmal. Put it this way.

Starting point is 00:36:42 is the worst tailing auction. That's the biggest tale that we've seen in a 30-year treasury since 2011. And that's when the S&P downgraded the U.S. debt for the first time. Yeah. So there was no event in this one. It just tailed down really ugly. No, there was the cyber attack. Come on, James.

Starting point is 00:37:02 So that's the next thing. So then he, okay, so the Chinese malware. So there was apparently, there was a malware attack on ICBC. Bank of China. It's one of the largest banks in the world. And you're right, it was forced them to take USB sticks and run them back and forth between desks and offices and buildings to settle trades and move capital because they couldn't get online. Their systems were literally down. So you started hearing people say, well, that's why the, that's why the Treasury auction was so bad because the Chinese bank was down. Okay. But in reality, in one of the Bloomberg articles I read

Starting point is 00:37:41 right afterwards. It said that that unit of ICBC only has the one that deals with the U.S. treasuries only has $24 billion of assets. So how big of a bidder could they have been of this auction anyways? Number one. Number two, which means they were likely not material. And number two, Janet Yelling came out right afterwards. She was asked about it. She said they didn't see any evidence of that malware attack having any impact on the treasury market. Also, she didn't get the memo in time. She either didn't get the memo or there really wasn't. I mean, of course.

Starting point is 00:38:18 They really just had to admit it was a dismal auction. How did the, how did the market react? The market reacted. Well, the market moved over 4% in just a few hours. And most of that was in a few minutes. I mean, 4% on a treasury. This is the global reserve asset. I mean, this is not a meme stock.

Starting point is 00:38:42 4% on a treasury in just a, in most that in a few minutes, it was mind-boggling. Yeah, because you're talking close to $5 trillion, you know, really round math, but something of that magnitude in nominal size to the global economy because of that, right? Exactly, exactly. So it was ugly. Well, maybe not that much because you're only talking about the long. You're talking about the only the 30 years. But still.

Starting point is 00:39:11 But still, it's a big. It's a really big number is the point. Well, but remember, it's not just that. The whole market reacted. Yeah. The entire, like, when you look at the react, the reaction of bonds across the spectrum, I think it was their worst sell off. It was the worst sell off in years.

Starting point is 00:39:29 I know it was a worst sell off this year. It was the worst sell off since the, since the silicon. Valley, which was a really bad one across the spectrum. But the point of all of this is, Preston, there was no event. It just happened. It just, yeah, there was nothing other than. So it wasn't like you could point to, oh, it was Silicon Valley Bank or, oh, well, you know, Lehman Brothers just, oh, because the US state got downgreated.

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Starting point is 00:43:18 fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So I got one more thing that I want to talk about, and I would classify everything we've talked about since the start of the show as the backdrop behind Bitcoin at the centerpiece of this whole episode, right? So we're going to get to Bitcoin. But I got one other thing that I want to talk about in the backdrop as we're talking about all of this. Everything that we've said right now, today, you have long duration. bonds being the biggest overweight position in U.S. portfolios since 2009, with all of that said.

Starting point is 00:44:03 Yeah. Okay. Hiled into it. Yeah. We already have 8% deficit to GDP right now, which is the lowest I can, the chart that I see going back into the 1960s. It got lower than that through the COVID, very brief spike. But this is the lowest that we've been in a non-recession period.

Starting point is 00:44:24 for since we've been on the petro dollar system. You start getting to like 12% deficit to GDP. It's getting very squirrelly for that, that country. Luke Roman's projecting, when we do get into a recession, it could go to 14 to 16% deficit to GDP. Yeah, because you've got to draw down on both your earnings, your, your revenue, your tax revenues. They're decreasing.

Starting point is 00:44:53 and your entitlements are increasing because of unemployment and social welfare. So all of that and the majority of portfolios are long duration or long on long duration bonds. Typically when you see Wall Street and everybody retail, everybody piling into something, there should be red flags and alarm bells going off like, hey, I'm probably the sucker at the table. But everything that we're seeing from these deflationary, whether we're talking about commercial real estate and how illiquid that is and how it's basically going to impair and just all these monetary fiat units evaporate with a snap of a finger, you've got the reverse repo that I'm hearing is going to not be this supply of liquidity into the system call at January February any longer, which will evaporate, you know, fiat units in the system like the snap of a finger, it seems like that would be a smart place to be. But everything about everybody being there, like, just has me saying there's something seriously wrong. Yeah, hedge funds are piled in. They're piled in. Piled in. Okay. So let's talk through that. Let's unpack a few things there.

Starting point is 00:46:09 First, let's unpack the reverse repo. I wrote all about this, very simple terms this past weekend. For anybody who wants to read it on my newsletter, very simple terms. But the bottom of the bottom. online is the reverse repo facility has just under a $1 trillion left in it. It had two and a half trillion. Now it has one left in it. What has been going on is the Treasury has been issuing, as we said the beginning of this segment here, is the Treasury has been issuing shorter term T-bills in order to fund the government. Why are they doing that? They're doing that because the reverse, the money that is in the reverse repo facility is excess capital. that's at banks. The banks take that capital and park it at the Fed overnight. And they park it in

Starting point is 00:46:54 the facility. It's called a reverse repo facility. They get an interest rate on that. That's a little bit better than Fed funds. Now, what the Treasury is doing is they're saying, okay, well, we can tease that money out by offering a little bit better rate on the T bills, which are four weeks, eight weeks, 16 weeks, whatever they are. Okay. They're offering these T bills that are a little bit better and they're taking money out of that reverse repo facility. And as those T-bills mature, that money gets re-upped right back in there. Also, the deposits from individuals, they're using deposits from banks. They're getting drawn down and put into money markets. Money markets by T-bills because it's almost like cash. There's very little interest rate risk for the short end of the

Starting point is 00:47:42 curve. So even if interest rates go down by 1, 2%, you only have a few basis point risk if you're in a 30-day T-bill. It's not a big deal. That's why they're almost like cash. It's very low risk. That's one thing that's going on right now. And then that's being drawn down. And you're right. I talked to Lynn about this at Pacific Bitcoin. We were talking about that facility. And I think it's going to be drawn down by the end of January. I don't see how it gets past that. at this point with this amount of spending. Now, the trade, the basis trade. And so where all these hedge funds are piled into this, you know?

Starting point is 00:48:24 This is what you and I talked about on Peter McCormick's show, just for a reference. If people listen to that, that's what we're about to talk about right now. Go ahead, James. And so what's important about this is I do believe that it is a pretty good trade for the moment. things can change fast. But for a trade, because I do believe we're going to have a harder landing than that soft landing narrative that we keep hearing about, I do believe we're going to have a downturn.

Starting point is 00:48:56 We have a sharp uplift in unemployment. And we're going to have a deflationary event that forces the Fed to lower rates next year, which means that the long duration, treasuries will go up in price and their yields will come down. So as a trade, it's pretty obvious if you think that we're going to have a recession. That's a good place to be. Now, this is such a liquidity trap, right? The flip side of that is it's dangerous. It's dangerous. Why? Because of what you just said about Luke Groman, I agree with him that we're going to see deficits widen even more because you're going to have a decrease in tax revenue and an increase in entitlement spending.

Starting point is 00:49:48 And so as those deficits grow, so does the need for the Treasury to borrow more. They're going to end up then the issue that we've seen over the last number of months that has all but been forgotten today and the last couple of days is that there are what we call the bond vigilantes who are out there saying, no, I want to be compensated for something called term premium. That means that the further I go out on this yield curve, I want more interest for that risk that the Fed or the Treasury is going to have to issue a tsunami of debt, which is only going to precipitate the need for perpetual high inflation, money printing, monetizing our own debt and having more inflation.

Starting point is 00:50:41 What I was going to say is, to your point, as they're demanding a higher yield for this because of that risk, that yield is going to be like a massive incentive for more and more people to pile in with even more leverage because they think that they're able to capture additional yield, almost like what you saw during what was happening in the crypto market where there was these massive, for a basis type trade and everybody's like, wow, there's tons of money to be made here. So they all pile in. And as they all get in there, it turns into a massive, massive liquidity shock that manifests itself in a snap.

Starting point is 00:51:22 So what we saw in that 30-year treasury auction last week, remember, Wall Street sees that first. Why? Because they have professional instruments to know where the win issue traded, what the tail was. what the tail was, how big the bid to cover was, like they know immediately. So if we have a, we have a shocking event in a treasury auction, they're going to know it first, and guess there's going to be getting out of treasuries first, right? So they're going to be able to just, and Preston, we're talking about these trades are massive, massive, you know, I mean, it's not unusual to have a few hundred million dollar trade.

Starting point is 00:52:02 I've done $100 million trades in treasuries. you just, you know, I just need to move $100 million. Like, these are huge markets that can just completely overwhelm little investors. And so the problem is trying to time that is going to be difficult. So if you can, like, you're trying to time this down to back to zero interest rate policy, that's a dangerous trade in my mind. In my opinion, I think that we're going to go back to higher structural interest rates because we're, we're going to need higher inflation. You know, that's just, there's, and investors are going to want to be compensated for it at some

Starting point is 00:52:42 point here. You're going to have such a rivalry going back to this idea of liquidity, right? They can get on the keys, they can clack on the keys and get more units added into this market very easily to save it into, or I'm using quotes when I say save it, but stabilize it. But in the background or at the same time simultaneously, how about the commercial real estate market? It's going to be having all sorts because you're going to be watching wild fluctuations in yields, right? And like none of that is getting solved for those people's balance sheets that are getting prepared in physical, hard, very illiquid things. And I think you're going to see such a dichotomy of who's getting rescued and how they're getting rescued for.

Starting point is 00:53:32 versus people that are squatting on those physical real estate. Yeah, I expect significant consolidation of the banking industry. Investors are going to, and depositors are going to just continue to flee to the globally systematic important banks. Something interesting, though, is that I think it was S&P. I just saw a headline before jumping on the show about the S&P saying that they're concerned, that, and they put them on, they put these banks on, on rating watch, because they're concerned that the government's not going to have the ability to just backstop the globally systematic important banks.

Starting point is 00:54:15 Like, that's a what? Well, who's going to backstop them then? Like, who's, right? If the Treasury's not going to backstop them, who's going to backstop them? Of course they're going to backstop them, but it's going to mean massive money printing to do so if we have a major credit event. I've been saying all along that I think that there's a much higher than non-zero probability of a credit event between now and 2025. Oh, yeah. I mean, that's my base case, right? Like, you're going to have, well, my base case is definitely

Starting point is 00:54:50 a hard landing. The question is how bad of a credit event do we have? I would be, yeah, I would be surprised if we don't have one between now and the end of next year, because of just the sheer amount of leverage in the system and the rate at which we raised rates, and because it's not an even distribution of who has all that capital. We keep talking about all this capital that's out there, all this, there's so much money in the system, but it's not an even distribution. So at some point in some place, like you're like you're alluding to, it could be that you have a cascading event from a commercial real estate event, credit event that winds up imploding some either a lot of eyes are on these regional banks, but it could be a private lender that we're just not expecting that causes them to implode. We'll have to see. Because the private lenders, it's opaque.

Starting point is 00:55:53 It's hard to see who's doing what. And they will have counterparty. There will be counterparty risk to those that could be large. So that's the question. That's another thing that I'm just starting to dig into is like, how much of this private credit is out there and what are the actual risks? I guess maybe I'm pushing on this too hard, but to me it almost seems like if you have a lot of exposure to physical things, commercial real estate being the prime importance. And the big banks that are heavily exposed versus the ones that aren't, Wells Fargo, citizens, Morgan Stanley, those are

Starting point is 00:56:31 some of the bigger banks that are heavily exposed to commercial real estate. J.P. Morgan, Goldman, some of them are less exposed. But the three that I named there are just off the top, those are the ones that I think are going to just get hammered in this coming thing that's, that's materializing itself because of their exposure to physical reality. We talk about Bitcoin and like how like proof of work and how it's tethered to energy and how it's tethered to physical reality and how it's these digital energy packets that preserve your buying power. I think we got to look at traditional finance and we got to look at how it's tethered

Starting point is 00:57:12 to physical reality and how maybe some are less tethered to physical reality and they're able to kind of like lever the government to basically protect them because they can just clock on some keys and produce another couple trillion units to save them. That's going to make it very interesting as we come through into this next year and we do get these ETFs approved, which I fully expect that we get multiple ETFs approved. They're going to have to tether themselves to it, right? Like, they have to. Bitcoin ETF.

Starting point is 00:57:43 And so when we have that, I mean, just imagine that we get the spot Bitcoin ETFs approved. It provides an instant super highway on ramp for institutional investors, RIAs, small family offices that just don't have the ability or don't want to take on either the career risk or that small institutional risk of holding their own keys and all the settlement and all that stuff we've talked about before. But imagine that's happening at the same time that you have meltdowns over here. And investors are searching for places to put their capital. Well, it also, James, it also provides an anchor for really distressed assets that if there's some type of Bitcoin or hard asset that's also associated with the balance sheet or ownership of that equity or even a bond, right? I think that there's something there, and I think that once people start to maybe even insert a small

Starting point is 00:58:41 amount of it, commingle, and I know that has a very negative connotation, but like you mix Bitcoin with these legacy assets, even in small proportions, it might calm the volatility of the price swings that you see in Fiat terms, especially for like commercial real estate. Yeah, eventually, absolutely. And it will eventually. But that's the, and those are the events or watch it. So this year should be very interesting. It's going to be very interesting for Bitcoin. Between the ETF, the halving, you know, we have a likely recession, in my opinion, possible credit event. It's going to be interesting to see just how Bitcoin reacts to all this and how people react to that and look at Bitcoin. Because once the investors, once you have these

Starting point is 00:59:28 investors, and I use this term this morning, talking to a few people, it was the investment. investors, when they have this, the ETF, they're going to be able to just leg into a trade. They're going to buy a little bit because then they're going to be forced to learn about it. Because now it's there. They have no, they have absolutely no defense of saying, well, I mean, I couldn't do it because I didn't want to deal with the settlement or the custody or the operations or the pricing. Like, that's all gone. Now it's like what's just like a stock on the stock exchange at this point, if you can buy it, you know, you used to not be able to buy gold. because you didn't have a place to store it, you know, how to custody it, a way to move it

Starting point is 01:00:11 back and forth, like you're going to buy $10 million worth of gold. Like, how are you going to get that? Like, who's going to, where are you going to put it? So that's what people are claiming with Bitcoin at this point. That's what in institutional investors and RAs and small family offices, like, they're like, but we just can't deal with it. Now they're not going to have an excuse. So once you have that, then that learning, they have no choice.

Starting point is 01:00:34 start learning about it at the very same time that these things can be happening that we're talking about. By the way, if you're a CFO of a large organization and you're trying to buy Bitcoin and you do it through a BlackRock ETF vehicle, I have pity on you. And you need to get smart and understand why taking physical custody is so much more important, especially in the long run when you understand where this is going to be going on layer twos and fees that are collected for, you know, sitting on actual Bitcoins and not letting BlackRock hold them. You need to do your research. That's all I'm going to say. For treasuries, yeah. For institutional investors, it's much more complicated. But yeah.

Starting point is 01:01:15 It's much more complicated. But if you do the work, pull out the, the micro strategy playbook and understand how they did it if you want to. Yeah, eventually they will. Yeah. They're going to have to. Well, they don't have to. But if they want to do it in a way that yields to better results, they should. Exactly. So the last thing I want to talk to you about on the Bitcoin side, I have something that I'm watching that I'm looking at that's just blowing my mind. Before I tell you what that is, I'm curious if there's anything that you want to highlight that you are excited about or that you're seeing in Bitcoin in particular that you think is noteworthy right now. Oh, I mean, look, you know that I have that we recently launched

Starting point is 01:01:57 the Bitcoin Opportunity Fund. And I am, everything we're talking about, the economy macro, all of this stuff, all of this stuff just emboldens me and gets me more excited and more optimistic about Bitcoin and the ecosystem. And the people that we're meeting and the operators of these companies, the founders, the, there's some smart cats. I mean, I feel some of the, I don't understand some of the stuff. there are some really smart people out there. And I'm super excited about this space. I'm super

Starting point is 01:02:32 excited about the opportunities in this space. So you remember back in the day of the internet when I was taking off and you're trying to find places that you can benefit from and you can help. And this is what it feels like right now. It feels like the dawn of the internet in Bitcoin. And it is super exciting. And we're seeing awesome opportunities. So I want to make that clear that I'm optimistic as optimistic as ever in the Bitcoin space. And the fund is for accredited investors. I have to say that. It's not my rule.

Starting point is 01:03:07 It's the SEC's rule. But we're still taking some investors before the end of the year. We only have 99 slots. Again, not my rule, the SEC rule. But we're super excited. And so I just want to make sure that anybody's watching this, you hear any doom and gloom and the macro outlook, that only makes this space more exciting and more opportunities here. This plays on a theme that I just love talking about, which is we are not talking about just the problem.

Starting point is 01:03:39 Sure, we defined it very clearly throughout the show, but we're also talking about what the solution is and the engineered solution that already exists that's there that can solve all of these problems. and you see so little of that in legacy financial news and media. It's just all day long, problem definition. There is no solution except for a vote for this politician, which is just laughable, right? Anyway, so the point that I wanted to bring up, James, real fast, I am blown away by these hoddle waves in how you have 70% of issued Bitcoin that has not moved. You are a person that understands the supply demand dynamics of a stock or a bond or whatever

Starting point is 01:04:26 it might be and how that drives price. And we're looking at something that's literally up over 100% on the year. I'm pretty sure it's up over 100% on the year. And you have seen even deeper conviction of the people that are holding their coins even tighter than they were when the price was 50% lower. than where we're at right now. This is, I guess, my question to you as a veteran of financial markets. Have you ever, ever seen a stock or a bond or a commodity or whatever? That is up 100% on the year. And you don't have anybody taking any profits. In fact, you have people buying even more,

Starting point is 01:05:11 like heavily buying. By the way, this is the highest. It's at 70%. That's the highest number. It's ever been since inception of Bitcoin right now. What does that mean going into 2024, in your opinion? In my opinion, well, first of all, it's like a closely held stock. Right. So you've got these, the people who really know the company the best. These hodlers know Bitcoin the best. They're buying more. They're buying more. They're holding, they're hoarding it just like a closely held company that it's very difficult to get liquidity in the other side. So in the markets. And so what do I see? I see in the near future, again, like, we don't need the ETFs for Bitcoin to grow by factors. But when that happens, I do see a period of price

Starting point is 01:06:06 discovery, which is the, that's the operative phrase. Because what happens with institutions is, when they need to buy some, they just say, buy $10 million, buy $25 million, by $50 million, today, just participate, meaning just go along with whatever's going on the market, meaning try to be as much percentage of the trade as you can without moving the price yourself. Just participate. And so what happens is you have all the institutions getting in there and all of the them just participating because they're just, they're like, well, I got the average price. You know, I didn't do better or worse. And I did just as well as anybody else. They just want

Starting point is 01:06:54 to exposure at whatever. And so price discovery happens when you have these pockets of illiquidity where it just jumps up. And they all just move up together. And they'll just keep doing that and keep doing that and keep doing that until they get the amount that they need. And it doesn't matter if a few million dollars worth trades or a hundred million dollars worth trades, it can move the price depending on whether or not there are any closely held shares willing to be given up at that price. And so that's when people who are confused by this, they're like, well, but you need an additional half a trillion dollars to come into the market for Bitcoin to double from here. And the answer is no. If nobody sells between.

Starting point is 01:07:42 here and $70,000 Bitcoin and you trade one sat, you're just getting warmed up. Just one single sat, the price of Bitcoin has doubled. And now it's worth it. Then everybody's shared of that chain is now worth a trillion dollars. It's hard to conceptualize, but that's just reality. So yes, that's a good point. All I heard was James Lavis makes forecast of God candle in 2024. I do.

Starting point is 01:08:10 I do see a God candle. in Bitcoin's future. I don't know when, but I do. I agree with you. I think there will be one in 2024. Okay. So you mentioned your Bitcoin Opportunity Fund. Is there anything else that you want to highlight to the audience or throw out there? I'll have a link to your Twitter. What else you know? Yeah. Yeah. Thank you. So if you are interested in learning more about the fund, just go to Bitcoin Opportunity. Fund. And we'll, you know, we can send you a package and, uh, you just, you just have to check off that you're a credit investor and make sure that we know that.

Starting point is 01:08:44 And I see your little buddy. Oh, yeah. The door was supposed to be shut. They've never made it into an episode until today. Okay. And so, uh, I'm special. So, uh, and then, yeah, and then I write the, uh, information is newsletter. And, uh, every week I take one complicated concept, financial concept and simplify it for people.

Starting point is 01:09:04 and it's free. You can just go to the link in my Twitter bio or go to just James lavish.com and sign up and it's been doing great. People love it. So I appreciate it. It's a fun thing to do. Every Saturday, just sit down and write something about the market and get people to understand a little bit more about what's going on in the real world of finance and these institutional worlds and how these things work. Well, James, I appreciate you making time and coming on the show. and this is what was brought over to me right down here. So I guess I got my word cut out for me. All right.

Starting point is 01:09:38 You've done have fun. All right. Thank you. See you. All right, buddy. See you next time. Bye. If you guys enjoyed this conversation,

Starting point is 01:09:45 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, 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.

Starting point is 01:10:12 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. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC158: Systemic Bond Issues & Bitcoin's Impact w/ James Lavish (Bitcoin Podcast)

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