What Bitcoin Did - TRUMP, INFLATION, MSTR & BITCOIN w/ Lyn Alden

Episode Date: January 21, 2025

Lyn Alden is a macro analyst, investment strategist and the author of Broken Money. In this episode, we discuss the impact of fiscal policy on inflation, the Federal Reserve's constraints under fiscal dominance, and the role of tariffs in shaping the economic landscape. We also get into a Strategic Bitcoin Reserve, and what Donald Trump’s Administration will mean for Bitcoin. MASSIVE THANKS TO OUR SPONSORS: IREN: https://www.iren.com/ RIVER: https://river.com/wbd CASA: https://casa.io/ LEDGER: https://www.ledger.com/

So the combination of ongoing physical dominance is pretty good for Bitcoin. The policy mix is probably neutral to bullish for Bitcoin. When I look at certain on-chain things, like really basic stuff like market value relative to cost basis, or the huddle wave, like what percentage of coins haven't moved in a year, and both of those still look kind of mid-cycle. Now, cycle structure could change, so there's no guarantee, but most signs to me still point up, you know, 12 months, anything can happen. But if I say 12, 18, 24 months, I'm still pretty bullish on Bitcoin at these levels. Good to see you, Lynn. How you doing? I'm well. It's

going to be back and good be back on the new form of the show. Glad to see you hosting. Thank you. I don't know what your job title is now. Are you Lynn the macroanalyst or are you a sci-fi author? I'm an analyst. I am working on a sci-fi book. It's a hobby. And for those who want to follow of it I have been posting on it pretty much on Noster only. It's kind of like a little fun side project. All right. Well, I think, so when I first booked this call in, I hadn't registered that it was the day, Trump's first day in office. So I'd planned for like a macro outlook show, but I think we've got to start with Trump. So as of right now, we're recording this on, what time is it there? 4 p.m. Eastern time on Trump's first day?

5 p.m. Yeah. 5 p.m. Okay. So as of right now, Ross isn't free. Hopefully by the time this show goes out, he signed some executive orders and that's happened. But what's been your kind of key takeaways from today? So far, I think it's been mostly on track of expectations. We saw generally what was expected. So we saw the speech that he gave. He covered a lot of the topics that are so far in line with what they campaigned on, basically America First, more aggressive of trade policy, interesting comments around Panama. We'll see how some of that shakes out. So we got a little bit of a rally on Chinese equities, a little bit of a sell-off in the dollar because there was no immediate early action on tariffs. But we can still see that show up in

executive orders, and they still made it clear that going after that trade issues are going to be a big thing. So so far, nothing surprising. I think the biggest surprise probably happened shortly before the inauguration, which was the meme coin launch. Not many people saw that coming, including myself. So that's probably the biggest surprise, at least in our industry. If you'd have told me a couple of years ago that sitting president would have a meme coin, I would have laughed you out of the room. How do you even begin to take that in? Because for him to launch an 80% pre-mined mean coin, and then I believe he's already sold like a decent chunk.

Like, where do you even say? It's like equally hilarious and gross, and I don't know how to take it in. Yeah, I think there's two ways to answer that question. I think that if we look at the whole crypto industry side of it, I think meme coins are kind of the final arc, or it's like the nihilistic narrative. So we had ICOs, then we had defy NFTs, and then now it's just kind of like memes. So a lot of the other projects were, you know, what a lot of them, I think, got rightly criticized for is that compared to traditional venture, founders and investors put capital into a project,

they work for years to make that project, and their financial gains are tied to whether not that thing they built has some degree of success. Either goes public with all the disclosures that are normally associated with going public, or they get bought by another company by professionals. And what we've seen in the crypto space is after some fairly short lockup, a lot of the early people, the insiders can get out wealthy, regardless of when not that product has any long-term success. And the vast majority don't. Memecoin just kind of cut to the chase. I mean, if there's one good thing that can be said is they're just kind of transparent about that, that there's no product or service.

But it's kind of the nihilistic later stage narrative after the prior narratives were again. exhausted. As for Trump launching one, yeah, that was surprising. And of course, the scale is relevant because, you know, meme coins are not a very strong narrative for a cycle. But I guess if you have a sitting president doing it, it adds fuel to that narrative for a period of time. It's actually kind of in line. They did Trump stakes. He's had what, like Trump vodka, Trump University, you know, the stock that they have. If you look at the market capitalization, compared to their actual operations. There's kind of like a meme premium to it in a way.

So it's really not in some sense that different than other things, but it does open things like campaign finance law questions that, you know, if you have a meme coin unlocking during your administration and you're selling it, you know, that opens kind of all sorts of campaign finance and, you know, other issues. So we'll see how how the different groups coordinate that. Do you think there's any signal to be taken from it in terms of how he's going to approach Bitcoin or crypto in the next few years? Because to me, like when I look at that, it seems like he's approaching this industry from a purely kind of self-serving basis, at least

right now. Do you think it creates any, yeah, do you think there's anything to be taken from that in terms of the likelihood of an SBR or anything like that? I think, I mean, he's, he's more of a crypto-aligned president, which includes Bitcoin, I think. I wouldn't characterize him as a Bitcoin president. I mean, he did NFTs. They did defy. Now we got the meme coin on Solana. You know, I think, yeah, I think a lot of his transactional. I don't think that surprises that many people about his history. I think we'll see what happens with the SBR. I think, for example, his incoming Treasury Secretary pick was at their crypto ball. So that's relevant. The fact that there's multiple pro-Bitcoin people in his administration is interesting. There's

probably competing voices. I mean, he's a big proponent of Dogecoin in his inner circle as well. So we'll see how that shakes out. But I think the main takeaway is probably on the crypto side,

you'll see more lax regulation. So the prior administration was characterized by a pretty aggressive SEC that tried to block things like spot Bitcoin ETFs and was very kind of haphazard in terms of the things they went after and even lost a lot of

work cases. It was, it was just not a, in my view, a very, and they wouldn't issue guidance on how to do things, you know, if someone said, okay, we want to do real world assets or whatever, whatever kind of, you know, crypto thing you're talking about, they say, okay, if these are securities, is there something we can do to make these legal, and they kind of didn't really provide that. So I think the pendulum probably shifting the other direction, which is unclear enforcement, as of yet unclear, unclear guidelines, and then the president himself has his own meme coins and their own kind of crypto security.

So probably a more lax and laissez-faire approach. Yeah, the shackles definitely seem to be off. What Bitcoin did is brought to you by our lead sponsor and Massive Legends, Iron, the largest Nasdaq listed Bitcoin miner using 100% renewable energy. Iron are not just powering the Bitcoin network. They're also providing cutting-edge computing resources for AI, all backed by renewable energy.

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Sure. And this is kind of quietly one of the more important macro things to watch. And the reason for that, and I'll get to your question in a second, the reason this is relevant and not just like a wonky detail is that the debt ceiling can affect liquidity. And as I covered an report with Sam Callahan and other work, Bitcoin price actions historically pretty correlated with liquidity. It's not the only correlation, but it's one of the more sizable inputs to Bitcoin. coin price in the intermediate term.

And so the debt ceiling, basically ever since roughly World War I, instead of Congress micromanaging every treasury issuance, they say, look, the Treasury Department can do those details, but you can't go over this limit. And that's different from authorizing spending. This is basically just how they pay for spending that they do authorize with their other bills. It's kind of like whether or not the government's going to pay their own previously agreed to bills or not. and for roughly a century, it wasn't really used by one party against another,

but ever since the global financial crisis, it's a tool, now we're in this age of more political polarization, it's a tool that can be used largely from the out-of-power party against the in-power party, or at least whoever is president at the time, it can be used against them to extract some degree of negotiation. And if it's not lifted, you get technically the risk of a technical default. In practice, use it the 11th hour. It's fixed. We have a fairly small sample size because it's only been used since the global financial crisis.

Usually it's used against Republican Congress against a Democratic president. But that's partially because most of the years after the global financial crisis have been run by a Democratic president. Democrats didn't really use it against Trump in his first term. And you're not really seen like intra-party usage. this, if it's used here, and so far it is a little bit, if it's used here, it would be the first time, at least in modern history, where the Republican Party is using it against a Republican president. And so if they do enforce it and they try to extract, you know, concessions, then essentially the Treasury cannot issue net new debt. They can't increase the total debt load

to the extent that some go are due, so they pay out, you know, to, you know, existing maturing debt and they can issue some new debt to kind of offset that, but they can't increase a total amount. And so they have to start taking what they call extraordinary measures. And that's the date that matters for January 21st because the outgoing Treasury Secretary Yellen and her team estimated the 21st is when they basically run into the actual debt ceiling and have to start shuffling their books around to keep things operating without issuing new debt. And the part that's relevant is that this starts going on for weeks and months, they have to start draining their cash balance back into the financial system.

So at any given time, the Treasury has a Treasury General account. It's their big checking account of the Fed. There's something like $650 billion in it right now. And if they can't issue debt, but they still have bills to pay, they can start draining their cash balance. And that's how they can keep running things for several more months. The last time this happened was the first half of 2023. And ironically, when the TGA is draught,

it's actually pretty good for liquidity because all that money is draining back into the financial system excess. Is that almost like QE? It's kind of like QE, yes. And so they can offset quantitative tightening with that unintentionally. And any excess liquidity from that will probably spill into the reverse repo facility. But yeah, that's basically all pro liquidity. And so that actually can be decent for asset prices. The risk comes, you know, first they have to get past the debt ceiling impasse, but then when they actually go to refill the cash balance is when they could run into liquidity problems. So my base case is that this won't be a protracted one because we've never really seen an intra-party dispute get really protracted like this, but it's not out of the realm of

possibility. Trump wanted the debt ceiling resolved before he took office. That didn't happen. And so now he has to solve it in office, but he has the benefit of his own party to work with. Just from like a complete outsider's perspective, the debt ceiling thing issue comes up every now and again. And it always just seems like political theater to me because it's this big deal. And then like you said, at the 11th hour, it just gets raised. So what's the point of it if that keeps happening? Well, so the initial point, and this is, it's kind of different than how other countries run things. The initial point was to not have to micromanage treasury issuance.

So it's a law that made sense a century ago. So before World War I, the U.S. government was simple enough that literally Congress could kind of micromanage treasury issuance. That eventually got too big, too bureaucratic, too much going on, so they can't micromanage it. They say, okay, Treasury Department do it, just don't go over this number. And that's how we've been operating for like a century now. And it doesn't really make sense because it's not about allowing more spending. It's about whether or not you're going to pay the bills that you are already authorized. So Congress, which authorized prior spending, is now authorizing a debt-sealing increase to fine into spending that they've already authorized. That's the part that doesn't really make sense. And that's basically an historical artifact that is kind of the way things work.

And yeah, it's mostly theater. And technically, if you had a really entrenched argument, you could run that into a technical default. And so it does put some pressure on the president to do things. but like I said, intra-party probably means less pressure, but we'll see. So do you think they're going to have to dip into the Treasury General account in the sort of short term? If weeks start going by, yes. There's actually already been a slight dip into it. So their current target is to have $700 to $850 billion in their account. And they dipped under $700 billion.

Now, at year end, at the end of every quarter, and especially at the end of the year, there tends to be liquidity strain in the system, like live it the last couple days of a quarter. It's possible that they dipped it a little bit to kind of boost liquidity for that few day period. I'm not otherwise sure why they dip below their 700 billion figure. So they're already a little bit dipped. But basically every week they starts going by, generally that has to start being drained. Now, any given kind of multi-week period, so if you have two to three weeks, you know, bills go out regularly. Debt matures irregularly.

So not every week is going to be signal, but as you get in February, March, April, May, if there's no debt ceiling resolution, then we should start to see that cash balance drain. This episode is brought to you by River. There are many places to buy Bitcoin, but there's no exchange like River. They have innovative products, phone support,

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Open an account for yourself or your business at river.com forward slash WBD, which is r-I-V-E-R-com forward-slash WBD. Okay, so I was talking to Jeff Ross recently, and we've talked a lot about these liquidity cycles. Can you just give some context? what that is again. I know you've talked about this a number of times on the show before, but then explain where you think we are in that liquidity cycle. Right. So there's domestic liquidity and global liquidity. If you focus on domestic liquidity, there's basically a handful of big moving parts to

determine what's happening with liquidity. So one is the central bank increasing or decreasing the monetary base. Basically, quantitative easing is pro-liquidity. Quantitative tightening is anti-liquidity. Then there's other sources of liquidity. So because they did, a ton of excess QE, a lot of excess liquidity was created, even more than the financial system could take. And so a lot of that was stuffed into reverse repos. That's kind of like a black hole of like excess liquidity or a void to kind of put it there temporarily. And as they've done various anti-liquity options, some of that is actually starting to come back out into the system. It's kind of like a buffer. So that as the reverse reposility is drained, pro liquidity,

and then the TGA is, you know, filling it is negative for liquidity. draining it is positive for liquidity because it goes back into the system. So all those things kind of affect, you know, one way to think of it is if you're, if the government's spending, but they're not issuing new bonds to do it, then they're spending money into the system and not really extracting money from the system. That's kind of juicing up the system. On the other hand, if they're borrowing money, but they're not spending it yet, they're pulling liquidity out of the system and holding it in this void, their TGA, that they're not recycling back in yet. And so that can tighten financial conditions. The other things are harder to pin down, but it's like credit

availability. So are banks tightening loan standards to various businesses and consumers, making harder to get a loan than they were a quarter ago? Or are they easing their lending standards? They're more optimistic. They're a little bit more relaxed. That affects basically day-to-day liquidity for businesses and people. And of course, industry rates also factor into that as well. And then when we take a step back and look at global liquidity, a really big component there is the strength of the dollar relative to other major currencies. And the reason for that is because around the world, especially in emerging markets, but this is all intertwined globally, you'll have a lot of borrowing in dollars.

And it's not even usually the U.S. entities making those loans. Like literally a firm in France could make a loan in dollars to a borrower in Brazil. It's because the dollar is global reserve currency. And the problem is that when the dollar strengthened significantly, all those liabilities basically increase in value relative to all these entities' cash flows. It could be a sovereign entity, it could be a corporate entity, and they start getting squeezed. And if that happens, a lot of these areas with dollar liabilities, not all of them, but a lot of them have dollar assets as well.

On average, the world has a lot more dollar assets than dollar liabilities. And so they can start selling dollar assets, could be treasuries, could be stocks, and then getting dollars to service their dollar debts. So if a company in, say, Brazil has a dollar shortage, Brazil as a sovereign entity, could help it. And it could be selling some of its reserves to get dollars to do that. And so generally any sort of spike in the dollar strength, is pretty negative for liquidity when it happens. At least there's one really big variable.

So that's why when, say, the Dixie's going up, the dollar's getting stronger, Bitcoin tends to underperform. On average, yes. There's other components, but yes, that is generally a pretty big headwind against a lot of assets, and Bitcoin happens to be the one that's probably the most correlated with liquidity of any other asset that I track. So why do you think then in the last few months, the dollar's been doing quite well while Bitcoin has also been doing well?

What's different this time? I think the election outcome is a big difference. So like I said, it's not the only impact. So it's not been a great few months for global liquidity. But when you have a major election outcome like that, that impacts the industry more than other things. So basically a strategic Bitcoin reserve went from 0% under if the other administration would have won to some number that polymarket is trying to guess. We don't know what the chances of a strategic Bitcoin reserve are.

Maybe by the time this airs, there'll be an executive order. I don't know. So as at this moment, we don't know the odds, but they've suddenly increased a lot more than zero. Other kind of pro policies for the industry have also shifted upward. And so all of that had to be kind of priced in. And I think that that was a bigger positive force than what is a fairly small liquidity drain.

So the dollar going up was not great for liquidity, but we're talking, you know, single digit percent change in global liquidity. All right. So just back to Trump briefly, one of the things that I did see a clip of him saying today was that he wanted to tackle inflation. Now, for years at this point, you've been saying you think inflation is kind of the theme of this decade. What do you think, if you had to predict the sort of the next 12 months, what do you think will happen with inflation? So I think inflation's probably going to be a little bit sticky above 2%. It's tricky because the CPI is a partially lagging.

indicator. So we've seen generally the headline inflation is kind of sticky. Core inflation is still coming down. But that's because a really big component of core inflation is shelter inflation. And the way they do shelter, like owners equivalent rent and other things, is inherently lagged. So when we spiked like 9% inflation in the U.S., it was actually higher than that. But the shelter inflation was kind of delayed over several more months. And then as we kind of came back down in disinflation, some of the readings were actually higher than the real inflation, is that shelter component was still elevated compared to what it should be. And so we're still getting cool off from the shelter component.

That's probably going to continue for several more months. Outside of that, as long as these big ongoing fiscal deficits remain, we're probably going to see inflation above the 2% target. And the other big component to watch is energy. Now, that's not really been the major issue lately. Energy's been pretty range-bound. Oil's been pretty range bound in the U.S. Natural gas is cheap in the U.S.

compared to Europe and Japan and elsewhere because some of it's landlocked. So any policies that they do, they kind of promote more energy abundance can be negative for inflation around the margins. But the problem is that tariffs are potentially pro-inflationary. So if you tax imports,

now the pro-tariff narrative, like when they were questioning Trump, incoming Treasury Secretary, his argument was, we're going to tariff them and it's going to come out of their profit margins. So if China is selling electronics and we tax, you know, we tariff it by 20% that's going to come out of their profit margin. The problem is a lot of those types of industrial things have 10 to 20% profit margins. So at some point, they either have to raise the price or they just stop selling to that market. And so that can trickle in as higher prices. Or a company could say, well, I could build things in China, but it's going to get tariffed. Instead, I could,

I could build things in the U.S., and I'm only doing that because of the tariffs. It's a higher cost area to build things. You know, the U.S. has the highest healthcare cost per cap in the world. So every technician I hire in the U.S., I got to pay all their health care as an employer and things like that. And so I'm going to charge higher prices for my products if I'm making them in the U.S. that's not to say that's a bad thing. I do think trade has become very imbalanced. But part of what has been disinflationate for the past 30 plus years is globalization. China had a billion people that were largely disconnected from the global economy in the 80s.

They started coming online. And Russian energy at the fall of the Soviet Union, that kind of came into global markets and connected with Germany and their car manufacturing. and then Western Capital came with Eastern Labor and we built all this stuff. And it was very disinflationary, very intertwined, very fragile. And if you do start to purposely reverse some of this, that is around the margins inflationary. And that could be offset by productivity gains in AI, you know, if accounting services get cheaper because one accountant can do the work of 10 accountants with a bunch of AI assistants

and, you know, do that for graphic design and do that for, you know, job, all sorts of different white-collar work, that's a disinflationary force, but it's up against money printing, it's up against potentially higher cost of manufacturing, and then we'll see what happens with energy. Okay, I want to get onto the tariffs, but just before, you said that as long as the fiscal deficits remain, they're inflationary. Is that because of just the interest on their debt? Not just, no, it's, that's one component.

Basically, the deficit is them spending more money into the economy than they're extracting from the economy, especially if they're monetizing it at a given time. There's multiple ways to monetize it. So the Fed can monetize it or currently prior Fed QE is monetizing it because reverse repo facilities are basically monetizing it. And that's basically excess Fed QE from the past. So all this is kind of more dollars flowing into the system. It's not really being extracted by the same amount. And a lot of that is spendable. So Social Security, for example, right? If Social Security Trust is paying out more that it's getting in because of top heavy demographics, all those people can spend their checks and they're not working anymore.

So they're consuming and not producing. I see. Right. And if that becomes imbalanced, that can be inflationary unless we are very productive and we offset that. And then, of course, inflation is a spectrum. So if you, let's say you grow money supplied at 8% per year, but you have massive productivity gains in electronics and manufacturing and all this stuff. A lot of that stuff won't go up in price.

And what will go up in price is anything that's scarce. Fine art, gold, real estate, the best equities, anything that productivity is not making better like, you know, hospital services or things like that. Right. So those types of things are going up in price. And so when we look forward to inflation, we have to look at a couple major variables. What is the rate of basically money supply growth going to be? And a lot of that is fiscal driven. at the current time. And then what kind of productivity can we expect? And where does that productivity mostly show up?

So those things won't necessarily get more expensive, but other scarcer things will. Okay. So on the tariffs, do you believe the narrative around tariffs that Trump's kind of selling at the moment? Or do you think he's just using them as a bargaining chip? I think a little bit of both.

I think that by having a strong, aggressive starting point, that's kind of negotiation 101. is you say, look, we're going to do this. And, you know, if they believe there's a chance, he'll do some of it. They're more willing to maybe negotiate or concede some things. But like you mentioned before, a lot of that can be inflationary on the U.S. consumer. So there is a limit to how aggressive they can be in practice.

And other entities have cards too. Like China has a pretty good hand overall, not a perfect hand, but they've got a hand that they can play. I think the bigger issue is that this is structural. And this is something I've written about before and talked about before, which is the global dollar system. Having the global reserve currency inherently has a balance of payments imbalance. And so in the current version of it, the whole world needs dollars, right? And how do we get dollars to the world? Well, we run a very persistent trade deficit is how we get dollars to the world.

And if they can't get the dollars, they're going to sell U.S. assets and they're going to have to find other things to store value in and make contracts in. So on one hand, if the administration says, we want to keep the dollar of the reserve currency of the world because we want to build a sanctioning anyone we want, but we don't want the trade deficit. You know, they kind of go together. And I would argue that after decades of this imbalance, the costs of maintaining the system as is outweigh the benefits. which is to say that our deindustrialization is probably more negative for the U.S. than the U.S. gains from being able to sanction anyone. So if you had to make that tradeoff, I would err toward reshoring and more balanced economy. But they're going to have to compete with these different pillars that they say they want.

And I think that things like tariffs, while interesting, are they're kind of at the surface of the issue. don't necessarily get to the heart of the issue. But if you do enough of those surface things, they can start to change global capital flows and get to the root eventually. Okay. So if tariffs are inflationary, you think inflation is going to be sticky above 3%. Do you think we're likely to ever see the numbers that we saw a couple of years ago, or at least in the short term? So I think what you said, we'll say about 3%. I think we'll stay above 3%, I think we'll stay above 2%, which is the Fed's target. There are multiple scenarios to stay above 3% as well, but I'll start by saying above the Fed's target.

To get to something from a few years ago, you probably need an energy shortage to get there. It's pretty hard to do that with oil, you know, below $85 a barrel, unless there's some other major blockage somewhere. If you have very high tariffs, you could get back up into high single legit inflation. If you have completely out of control, money supply of growth, you know,

if you double the deficit and monetize the whole thing, then sure, you could get up there if you have sort of big emergency and another burst of money supply all coming in line at the same time. But the base case, and those things are hard to predict, you know, if a war happens and oils brought offline, then yeah, potential inflationary spike. But my base case would be below those levels, but higher than their targets for a while. This episode is brought to you by CASA. For those of you out there who want to protect your Bitcoin, I want to tell you about CASA, the leading Bitcoin self-custody solution.

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with ongoing advisory, advanced verification inheritance, a 24-7 security emergency line, and lots more. To find out more about CASA's private client solution, go to CASA.com. which is c-a-s-a-o. One of the most interesting things that I think is going to happen in the kind of short term is the Fed and Trump's relationship. Because Trump obviously likes to have control.

I know Elon's been really critical of the Fed and Jerome Powell specifically over the last couple of years. And he seems to be like digging in his heels. He's not going to quit. And it seems like he's not going to be influenced by Trump. At least that's what he's kind of posturing for now. How do you think that will play out? Well, it's funny because Trump appointed him.

initially. I think basically probably we'll see Trump want more dovish policy. The Fed have to contend with the fact that inflation is above their target. And they kind of have to follow their mandates. And they have some say in how they define their mandates. So like the 2% is not enshrined in the mandate. You know, stable prices and maximum employment and financial stability are basically their mandates. In addition to the one that never really gets said is like moderate long-term interest rates is one of their kind of other mandates. And so I think that he's, Powell's going to try to keep operating with his mandates. I think the problem is that the Fed's tools don't address fiscal. They're mostly of those tools are around kind of like 1970s era inflation, which is if

If banks are lending a ton and money supply grows coming from banks, their tools can, like, encourage more lending or slow down lending. They can't really affect fiscal deficits. So if you have fiscal-driven inflation, like the 1940s or the 2020s, and not like, say, the 1970s as much, the tools are just kind of less inclined to impact that. And so, and during COVID, Powell came out and said, we need more fiscal policy. but if then fiscal deficits are keeping inflation elevated, so far he's been reticent to say fiscal's too loose for our targets. It's possible he would get more vocal about that.

Not sure, but I think we're probably going to see a little bit of a standoff. I think either way, probably what we see by the end of the year is the Fed ends quantitative tightening. And I think they would do that regardless of who wins because I think they're going to run into a liquidity floor in banks probably by roughly the end of the year. I was actually looking at the Fed balance sheet before we did this call, and they've drawn that down a lot in the last couple of years. I remember sort of when we were talking about that a while ago, a lot of people were saying they wouldn't be able to sustain that tightening for very long or something would break, and it's not really. I know we had the banking crisis in March 23, was it? But are you surprised they've been

able to draw down that balance sheet quite as much as they have? a little bit, but not really when you look at the reverse repo facility. So basically what happened was they did so much QA that a lot of the excess QE they did wasn't really impactful. It kind of just spilled into the, it was too much. The banks have supplementary leverage ratios and other longish things. They kind of limit how much liquidity they can contain. It's like if they're a bucket and it's completely filled up with water, any more water just spills out.

And so they opened up the reverse repo facility to suck all that excess liquidity in. And so one thing they've seen starting in, especially in 2023, so 2022 was a really negative year for liquidity because the Fed was doing quantitative tightening, the Treasury was not offsetting. But starting in 2023, the Treasury started issuing more of its treasuries as bills, the shortest duration that there is. And those are very cash-like. And money market funds like to buy T-bills. And during the, in the prior time, when there was excess liquidity, there was not

enough T-bills for them to buy. And so they would stuff their money into reverse repos. That's where a lot of the excess liquidity went. But when they started issuing more T-bills, they could take out money from reverse repos and buy T-bills with it. So basically, the excess T-bill issuance was the Treasury's way. to pull money out of reverse repos and back into the system. And there was like $2 trillion of that.

So it's kind of like taking older QE that was excess and then slowly draining it back into the system when the Fed is doing quantitative tightening to smooth the whole thing out. So actually, if you look at domestic liquidity in the system the way I measure it, which is basically Fed balance sheet plus TGA plus the reverse repo. So you kind of take those together and see how they're offsetting each other. we've had flat liquidity ever since 2023. You've had almost perfect offset of the Fed's quantitative tightening with the reverse repo draining in.

And now it's down to something like $100 billion out of over $2 trillion. And so that's part of why, roughly by the end of the year, they're going to have trouble to keep drawing it down because they're not going to have that offset anymore. And that's where it's probably going to start getting more contentious. So just to go back to something you said a little earlier, one of the mandates for the Fed is moderate long-term interest rates. What does moderate mean there?

That's the magic question. It's also kind of like what does stable prices mean, right? Stable prices mean no inflation. That's probably how we would interpret that, is the prices are stable. And they say, well, stable inflation is 2% every single year. So half life of 35 years. And so I think long-term industry, it's again, like they have a lot of wiggle. over what that means. It probably does not mean double digits. So they have probably a lot of leeway within the mid to low single digit area is probably where that's considered normal. Because the 30 year, I think, in the US, did it get to about 5% last week? What is that signaling? I mean, that's signaling that one, we talked about before, that there's kind of an insufficient

foreign buying for it. And the Fed right now is not buying. So there's been some demand weakness of them. A lot of issuance because they're running very big deficits. Now, it's actually muted by the fact that they're issuing so many T bills, that they're actually not issuing as many long-duration ones as they normally would be with deficits this big. So they're actually, if anything, the Treasury is suppressing long-term rates a little bit there. It's a combination of inflation.

So if you expect 2 to 3 percent inflation and you're buying a volatile, asset. So long-duration treasuries are volatile because you don't know what future inflation is going to be and those things can be priced significantly based on future yields. You know, they're demanding a little bit of a higher premium. And that's putting more, it's just more interest expense on the government. So as long as they keep running 7% of GDP deficits and the Fed's not a big buyer, you know, you have to have the market absorb it. So that's to clear at the market rate. So I saw on Twitter a few people saying that this was signaling like incoming recession. Do you put any credence in that?

Well, generally speaking, if the treasury market fears recession, yields go down because people buy treasuries rather than other things that could default. Now, when a country has a balance of payments crisis, like an emerging market country or like the UK recently, you can have currency down, yields up at the same time. That's basically the world taking out capital. entirely from that jurisdiction. And so it does signal some balance of payments issues, I would say, but also it signals basically fiscal dominance, that if you're running 7% of GDP deficits, GDP readings keep

coming in kind of hot because you're kind of permanently stimulating the economy, you know, that that puts pressure. And where the recession thing could come in is that by those yields inching up, it's Generally speaking, other things are inching up. So mortgage rates are inching up when that happens, usually, unless that spreads compressing, which makes it harder for people to afford a home. They have been less discretionary expending because more of their income is going to servicing their debt. And so, yeah, that can strain certain parts of the economy.

But then it's offset by the fact that, again, deficits are spilling into the economy. So you have kind of this bifurcated economy, whereas if you're on the right side of the deficits, that part of the economy is doing pretty well. And areas that are not receiving deficits, but then are dealing with the higher cost of funding that those deficits are contributing to, they're generally more impaired. So you see commercial real estate, housing market in general, manufacturing.

Those are areas that are not currently on the receiving side of major deficits, but that are dealing with the higher funding costs that are associated with them. Whereas if you're in health care or defense or travel, you're kind of on the right side of deficits because those deficits are Medicare, Medicaid, DOD spending, interest expense, and Social Security. And so Social Security is going out to retirees and what do they buy? They buy travel, they buy things, you know, anything that they buy, and then they're getting their health care covered.

So those are areas that are generally doing okay and other areas are struggling. Okay. In preparation for this, I listened back to the show, you don't. with Peter last year. And in the kind of recap of 2023, you said there was a really good balance between sort of fiscal and monetary policy. Now you're talking about fiscal dominance.

So what has changed in that? So we were under fiscal dominance then. I think that without listening to the episode, I think the balance I'm referring to is what I spoke about earlier about that T-bill thing, which is the Treasury has been putting liquidity into the system. Relfit is almost exactly the same pace that the Fed is pulling,

liquidity out of the system with quantitative tightening. And so ever since early 2023 and this continued through 2024, we've had almost perfectly flat domestic liquidity and that's because they're offsetting each other. And that has a time limit because eventually they run out of the reverse repo facility. There's only, like I said, you know, a hundred-something billion left. And the tragedy is no longer able to do that. But as long as that persists, they've been kind of balancing each other in terms of targeting a pretty flat liquidity regime that's different than the scope of, you know, deficits and all that. I see.

So why does fiscal dominance stop monetary policy being able to affect inflation in the same way? It impairs it. So it's because, again, the Fed's tools are mostly geared around bank lending. So if you go back for most of the past several decades, in any given year, net new bank, so money creation, broad money creation happens from either monetized fiscal deficits or bank loan, fraction of reserve bank lending. And in most years, new bank loans, net new bank loans are bigger than the amount than the deficit. So more money is being created from fractional reserve banks lending it into existence than it is from the government spending it into the economy

and having the central bank monetize it. And generally speaking, the exceptions for that are recessions. So bank lending slows down, everybody's more cautious, and then physical spending increases, either because tax revenue is weaker or because they're purposely trying to simulate. So you have brief periods where fiscal deficits are higher than bank lending, but not usually. In the current period, throughout an entire business cycle, fiscal deficits exceed bank lending. So we have fairly sluggish to moderate bank lending and higher than normal fiscal deficits. And the Fed's tools, I mean, the Fed can't do anything about oil, right? So if you have an oil shortage, that's just not something they can address for obvious reasons.

But likewise, you know, if the fiscal authority came out and said every American gets $10,000 checks right now, right? The Fed, that's going to be inflationary and the Fed can't really do anything about that. And so basically, tools are less effective at fighting inflation when they're not based on bank lending, when they're based on the government spending more money into existence. The only way the Fed can really fight back is try to do quantitative tightening while they do that. But then we see who blinks first because one of the Fed's kind of shadow mandates is financial stability. So if Treasury start fluctuating in price like a meme coin and banks are like facing solvency issues and treasury auctions are borderline failing, the Fed kind of at the end of the day, if the Fed and the fiscal authority, fight each other, the fiscal authority wins and they can override the Fed.

One of the tools obviously they have is rates as well. What do you think they're likely to do with rates in the coming sort of 12 months? Probably flat to down, but I think right now when they say that they're data dependent, they actually kind of are. I think they messed that up in the past, but I think that right now, basically, any time you get, if we have like big new fiscal spending that happens and it kind of juices the economy, you'll probably see the Fed be a little bit more hawkish. Another hand, if you do see signs of slowdown, like let's say they introduce tariffs

and that's starting to slow things down a little bit, then maybe the Fed cuts. So I would expect as a base case, probably slight cuts. But it's more like I view that as one of the less consequential things in the market, which is to say that 50 basis points in either direction is a lot less,

it's like 10th on the things I'm looking for this year compared to bigger things like what's going to happen with the deficit, what's going to happen with tariffs, what's going to happen with things that affect the flow of energy, those are all much bigger inputs to inflation than what the Fed's going to do? Are they going to cut once? They're going to cut twice? Are they going to cut three times? That's kind of actually marginal because that matters more under monetary dominance,

but it's less impactful under fiscal dominance. This episode is brought to you by Ledger. If you're serious about protecting your Bitcoin, Ledger has the solution you need. Their hardware wallets give you complete control over your private keys, ensuring that your Bitcoin stays safe from hacks, fishing and malware. With Ledger's easy-to-use devices and the Ledger Live app, managing your Bitcoin has never been more convenient. Whether you're a long-time holder or new to the world of Bitcoin,

Ledger makes it simple to keep your assets protected. If you want to find out more, visit ledger.com and secure your Bitcoin today. That is L-E-D-G-R.com. Last question on the Fed. A little earlier in the conversation, you said they're going to reach a point where they can't tighten anymore because it's going to affect liquidity. What do you think their game plan will be there? Will it be to try and stay flat for as long as possible? So they've actually already outlined a game plan, which is to keep the balance sheet roughly flat relative to GDP, which means mildly growing.

Now, for a period of time, they could be flat. But yeah, then I think they go toward gradual increases. and they kind of state that that is what they view as the new normal. That was kind of what was happening before the global financial crisis. If you look at the Fed's balance sheet, it was mildly upward inclining. And then ever since then we've had, you know, it increases rapidly, and then they start tightening it and then it increases rapidly again. It's like this big zigzag.

I think they want to get back to gradually increasing. They've also talked about how they want to sell off eventually all their mortgage-backed securities. And they do so by letting them mature without buying new ones. Why do they want to get rid of them? That's, I mean, that's, that's, that's all post 2008. That's basically them supporting the housing market. And a more streamlined or hawkish view is why should the Fed be holding mortgage back securities? Why should they be affecting the price of that? You know, the Fed pretty much just wants to hold treasuries as its assets, as its collateral. So their current plan, we look at their annual reports and things like that,

like there's some good things that they publish on this. They target something like 10% of GDP for the size of their balance sheet, which means it gradually grows over time. And they expect to keep selling off mortgage-backed securities while going back to treasury accumulation. And I think that that's how they'll deal with liquidity. And I think that they'll describe that as normalization over time. It only gets tricky when, you know, if prices are above, if inflation's above 2%, and they're going back to net balance sheet increases, that gets a little bit awkward.

But, you know, that's probably a thing they're going to cross when they get there. So one of the things that Bitcoin is love to talk about is this idea of QE infinity, we're going to have the Fedprint bucket loads of money. Do you think there's any likelihood of that actually happening in the next few years? Base case, no. Now, there are events that could cause that, you know, some major, I mean, tariffs or like huge trade war, huge shooting war that, that, you know, causes some sort of crisis. So it's certainly possible. But I actually think what we're going to see is more gradual and persistent printing,

which is to say they go back to balance sheet increases, but they're not like vertical like during the pandemic. and they might look more like post-2008 or less, but that it's upward. A lot of times, if you look at emerging market finances, you'll see persistent debasement rather than bursts of debasement. And when a developed country enters fiscal dominance, they kind of have like emerging market like characteristics a little bit,

which is things kind of just run a little hotter in terms of just a little bit more background structural debasement. and, you know, more unevenness, but it's kind of persistent. And so one of my part of where the nothing stops is trained meme comes from is the deficits are a lot harder to reduce than most people think the way that it's all structured. So I have pretty low odds that they're going to successfully do austerity in the next several years. And the other side, there's a lot of things that would prevent just completely out of control

issues in that time frame. let's say the rest of the 2020s. And so I think we're kind of stuck with running hot somewhere in the middle for a while. And so I would say that we go back to balance sheet increases by the Fed. They're probably not going to want to call it QE, kind of like how they didn't call the balance sheet increases before 2008 QE. But ultimately that's what it'll be.

And I think it'll be persistent, but not explosive, unless they have a very specific catalyst that they have to be explosive for, like some sort of mass global sell-off of treasuries or some sort of major bust coming from somewhere. That makes sense. So I want to get into what all of this means to Bitcoin, but just quickly before we do that, I did see recently that Germany posted their second year in negative GDP growth.

What does that signify, especially in terms of sort of the relationship of Europe and the U.S. I mean, I think that there's a couple of components there. One is I don't think Germany's been very smart on energy policy, and they need to be smart energy policy if they're going to be a manufacturing hub. So for years, they benefited from cheap Russian gas as well as their own, you know, strong work ethic and industry and, you know, really good industrial economy. Now that their Russian gas is impaired, you know, L&G is generally more expensive.

You know, they've been anti-nuclear. And so on average, they, you know, they don't have a ton of energy security. Part of ironically how they solved their energy crisis was energy-intentive industries went elsewhere. So deindustrialization partially alleviated, you know, energy shortages, but then leaves you with the shrinking GDP. And I don't really see fixes in sight anytime soon. I think the Eurozone has a lot of structural issues. So it generally is an area that I'm not too bullish on because I think they have a lot of structural things to work through.

One of those is reasonable energy policy. If you look at, you know, you either want to be really good on energy or really good on tech. And if you're not great on either, it's going to be a rough period of time, I think. Do you think the Arizona survive this? I mean, a long enough arc of time, I think eventually probably there's a breakup, but maybe longer than people think. I mean, even some of the Eurosceptics are now kind of not really prioritizing, wanting to break up the Euro anytime soon.

But, you know, within our lifetimes, and we're both still fairly young. So, you know, that's a long time. So it's kind of a non-answer. But I don't think it breaks up in the next couple years. but I think it's structurally long-term doomed, is how I put it. Yeah, I agree with that. Okay, let's go on to Bitcoin. So we've covered a lot there.

It's a very broad question. What do you think all of that means for Bitcoin in the next 12 months? I mean, generally, there's a bunch of variables. So the combination of ongoing physical dominance is pretty good for Bitcoin. tariffs or anything that could reduce liquidity. So tariffs, a dollar spike, that's around the margins, negative for Bitcoin. So I would expect probably some of those events happen this year. They're probably not sustained for very long.

Kind of negative liquidity is not really, it's hard to sustain for long periods of time, given how lever the system is. The policy mix is probably neutral to bullish for. for Bitcoin. And then when I look at certain on-chain things, like really basic stuff, like market value relative to cost basis, or the huddle wave, like what percentage of coins haven't moved in a year and how many of them sold into the bull market? Because bull markets are characterized by the market value getting way ahead of the cost basis, and are characterized by some of the older coins that are up 5, 10, 20x selling into the new buyers.

So I look at those types of indicators to see are we stretched here. And both of those still look kind of mid-cycle. Now, cycle structure could change. So there's no guarantee, but most signs to me still point up. 12 months, anything can happen. But if I say 12, 18, 24 months, I'm still pretty bullish on Bitcoin at these levels. One of my kind of left curve takes, I really like the halving tracker. I don't know if you ever follow that.

And just this cycle looks far more sustainable than the last. Do you think we'll see more of a 2017 style ball market where we do have big drawdowns and it's not just up only, but therefore it goes higher? We could. I think the problem is that as numbers get bigger, it takes more and more to move the needle. Yeah. But the upside of that is it's a more liquid network. So Bitcoin in 2025 is more liquid than Bitcoin.

Bitcoin in 2017. And, and, you know, I think a lot of that money is pretty sticky. So I would generally expect, you know, drawdowns to be controlled. But then upside, if you shoot upward really quickly, you do get a lot of selling pressure from older holders, like people that have been holding longer and then are up significantly, either rebalancing or, you know, upgrading their house, like they're, you know, the quote and go buy in the Lambo, you do see some of that cycle. So I think it is healthier not to go straight up and to kind of go over time. So it could certainly prolong the cycle in exchange for

less than any given six-month period of going vertical. Yeah, I think there's going to be a lot of people in a kind of similar boat to me where it came in 2016, 2017, and are at the point now where I'm still going to be only Bitcoin, but I also want a house. Like at some point, I'm going to start looking at selling off some Bitcoin. And I think there'll be a lot of people in that kind of bracket as well. Dee, what kind of credence do you put on the idea of a super cycle? A lot of people are talking about post-ETF. So with gold, there was an eight-year bull market after their ETF.

I personally don't believe it, but I'd like to know your opinion on it. I think you could get a super cycle in time, but it probably would come at the expense of magnitude in any given unit of time. So I certainly think I would give some credence to the idea that market structure could change and feature cycles might not look the same shape as prior cycles. But if we define a super cycle is just up only and explosive, I would generally be disinclined to expect that because the problem is that any sort of strong upward move attracts leverage and attracts euphoria, and that's what causes some of those major pullbacks.

And if it gets excessive enough, that's what can call as a multi-year pullback. So to the extent that you prolong having a multi-year pullback, it's partially probably because you never got super euphoric or leverage to begin with. It was probably meant that the price action was good but not stellar. So that really long gold bull market was a bigger market and moving at a level that was significant, but not like what Bitcoin can do in a year. So you can have a cycle like that, but you also get the downside to the cycle like that, which is that you get more gold-like moves.

Yeah, I guess when I think about Supercycle, really what I think is we don't get the big 80 plus percent drawdowns. It's more like 40 to 50 percent. Do you think that next bear market will be as negative to the downside as previous? I would answer that. I'd have more confidence than that at the top. So, for example, right now, like I've mentioned, those on-chain indicators are not euphoric. So we said, okay, if we're going to have a drawdown from here,

I'd expect it not to be huge because the highs aren't as kind of overstretched. Now, if we get something crazy like, you know, sovereign FOMO and we hit all those same, you know, extreme sentiment, then maybe we do get another 80% drawdown. So I'd have to answer that based on indicators at the time. But on average, I expect that as cycles get bigger, they, probably get less explosive to the downside and the upside because there's more liquidity, more spread out. There's less ability for one actor to kind of mess up the whole thing, unless you're like

a sovereign entity, like a massive sovereign entity. So like that kind of smooth things out a little bit as my base case. Yeah, one of the things, one of the areas that I could see kind of big sell off pressure from is I think there's going to be a number of companies that try and do the micro strategy playbook. And I don't think many people are going to have the stones that Michael Saylor does in a bear market. I think, yes, some of them might not have the stones. Some of them might not structure their debt as well as micro-strategy structured it. So even if they have the stone, they might just not have the choice.

In addition, kind of like how in the prior cycle, when GBTC's premium went away, that kind of marked the top roughly. Like after that, that was early 2020, it started chopping kind of sideways for a while. So that didn't blow things up right away. But it just kind of like it took away this kind of arbitrage demand for Bitcoin. And you could see a similar thing, which is right now microchratage is a huge buyer. They have a premium, so they're going to keep buying. And eventually, if they exhaust their market for a cycle, so it might not be permanently.

They previously exhausted their market, then it now it's obviously a lot more demand. but they could for a period of time exhaust their market through no fault of their own, just the market only is so big. And then they go back to not buying anymore because they don't have a premium that allows them to keep issuing securities. And then you could remove that marginal buying source and then enter kind of a longer bare market. Maybe it's not explosive to the downside, but that can trigger kind of weakness.

And if there are over levered entities out there, that's how they can kind of send it down. So we have to kind of see what the market looks like in late 2025 or mid-20206. We can have this discussion again and see, okay, by metrics, how euphoric does this look? Right now, I think the industry is pretty healthy. No major signs of euphoria. Occasionally, a little brief periods of slight euphoria, but nothing that looks kind of like a multi-year drawdown to me. So I think that'd be healthier to see a little bit less boom-bust and a little bit more grinding higher. over years would be ideal.

I don't know if we'll get that, but I think that's ideal. I would love to see that. On the micro strategy thing, where would you start to like exercise caution? Because to be fair, it's a trade that I've not paid too much attention to. I'm going to try and get someone on the show to cover it in depth. But at what kind of premium would you start thinking, okay, that might be getting a little too overheated? Two and a half to three X premium or higher.

And I say that in practice because I've been long microchartagy in my portfolio publicly since August 2020 when they initiated the strategy. You've done well. Well, I haven't done it as big of a size as I've done Bitcoin. So I could have done it well if I was bigger in size of my strategy, but I prefer lower leverage. But what I generally do is I trim it when it gets euphoric because that that slice becomes a very big percentage of portfolio. And then I have new people to follow my work.

And I don't want them buying in super high micro strategy at that time. So I rebalance back down to kind of a target level, and I generally do that historically when we're at like roughly 3x nav or two and a half times nav. And all of Twitter is talking about micro strategy. That's what I publicly have trim some. And there's no real upper limit to what I can touch briefly. But basically it's self-correcting because the higher it is, naturally, the more aggressive they're going to issue securities to buy Bitcoin.

and recalibrate that. So if anything, when I see a positive premium on micro strategy, it makes me bullish on Bitcoin because it means they're going to go out and buy a lot more Bitcoin. But when I see a very high premium, I get a little cautious of the micro strategy to Bitcoin, you know, performance going forward for a period of time. And when we come to like top of the market, whether that's the end of this year, whenever it is, is that something you're going to completely get rid of from your portfolio? because last bare market micro strategy traded at a pretty significant discount to NAV.

Do you expect the same going forward? It's possible. I did not completely get rid of it last cycle. I just trimmed it when it had that crazy run in like the late 2020, early 2021. So I rebalanced. Unless something changes, I don't perceive doing that. I think the company is well managed, not just the chairman, but also their treasurer. their CEO,

other people there, I think they're well managed. And so unless something structurally changes my thesis, I'll probably remain long, but you can remain long at lower levels. If you say, okay, this is getting you fork, I want to dial back.

I'd rather just hold unlevered Bitcoin. So the way that I kind of do it is, you know, I never sell like actual Bitcoin, but in a portfolio where there's ETFs or microchrategy, I will dial things around based on not having the entire portfolio turn into Bitcoin,

especially because a lot of people, you know, from Tradify kind of monitor those portfolios and might consider investing in those portfolios. So I have a little bit more like a lower volatility kind of benchmark that I target. One thing that I think will be interesting to watch and might help sort of mark a top in Bitcoin is when you see other companies trying to do the micro strategy playbook, but you don't see their share price going through the roof as soon as they announce it. Yeah, that'd be a sign that they're exhausting demand for the strategy. Or when you just see that micro strategy's premium is starting to reduce a little bit,

which is saying, okay, they're getting so big, and there's only so much market demand this cycle for this type of product. And again, that wouldn't be market strategy's fault, that they're offering the products that they can to the industry that has a pretty high demand for them. but all demand is finite, at least for a period of time. And so, yeah, I think that eventually, you know, if you start to see that premium go away, if you start to see other companies have less success with it, those would probably be early signs that things are euphoric.

But I would also look at things I mentioned before, like market value compared to cost basis on chain, or what is the hot wave doing? There are probably a bunch of a cluster of things together that we can say, how kind of overbought euphoric or yellow flags do we see in this market? compared to things still look fairly smooth. Hopefully we've got a long way to go until that. Thank you very much, Lynn. Nothing stops this train.

Appreciate your time. Thanks for having me.