C (3:04)

All right, Eric, crude oil time volatility swinging up and down is just non stop here. What's next for crude?

B (3:12)

Well, Patrick, EIA reported a huge build on crude oil inventories. 9.4 million barrels, gigantic build. Normally, that would be cause for, boy, maybe a big move lower in prices. It didn't happen, actually. As we got that report, the prices just kept powering higher. So why was that? Well, first of all, the 9.4 number is a little bit of an exaggeration in the sense that 3.4 million of that came out of the SBR. It wasn't actual produced oil. It was just oil, which I think was very irresponsibly taken out of the SBR at the worst possible time. So it's after making that adjustment, it's still a big build of 6 million barrels. But we're supposed to be getting builds this time of year, so it's really not that far out of place. Cushing, Oklahoma, building 400,000 barrels barrels. The drawdowns were in the finished products. Gasoline drawing down 3.6 million barrels. Distillates drawing down 2.9 million barrels. US production holding unchanged at 11.8 million barrels. Now, as far as the big picture, where's this all headed? As I said last week, my expectation has been that the oil market would continue to grind lower until the next chapter in World War three hits the tape. Well, basically, that's exactly what I think has happened here. We saw the market continue to grind lower through Monday. And then we got the combination of two catalysts that reversed that trend. And this is, I think, maybe the first glimpse of what the next chapter of World War three might look like. The first catalyst was Vladimir Putin saying, basically there's nothing left to negotiate about. This negotiation is deadlocked and we're going to continue our military operations. The peace talks didn't work out. So one part of this is that the Russia, Ukraine military conflict looks like it's going to re escalate, or at least that's the initial indication. The second catalyst is that a lot of people were getting concerned about the situation in Shanghai and how much difficulty China is having containing its Omicron outbreak. A lot of people were concluding, hey, think back two years. You know, what happened then is we were ignoring this big thing in China, kind of thinking, whatever, it's over there, and what's over there ended up coming over here. Is it coming? Are we about to see another lockdown globally? Because China's the early indication. It seems, Patrick, that what's going on this week is that sentiment is coming back out of the market, and people are realizing that the situation in Shanghai is not an indication that the whole world is about to go back into COVID lockdown, which is what some people were starting to think. Now, I do think this is an incredibly interesting subject. What's going on in Shanghai and what's happening there, and why are they doing what they're doing and what does it mean? So I'm going to do a little bit more detail on that right now. Although it's not really even directly pertinent to oil. It's just the bigger geopolitical picture. As I looked at Dr. John Campbell's videos, John Campbell was the guy who was, I think, the first one to authoritatively declare, look, everybody's looking at this Omicron thing is the next panic. It's actually a blessing in disguise. This is what's going to end the pandemic. He was very upbeat, and before Omicron was even named Omicron, very early, as the markets were just starting to crash on, oh, my gosh, Omicron is coming. Campbell was the guy who, in my opinion, called it right and said, that's not what people think. Now, what he said at that time is he said he was absolutely baffled to understand what China and New Zealand were doing with these lockdowns. And what he explained is that with the r naught of the Omicron virus at more than 12, I don't know what the exact number is, but it's super duper contagious. His point was simply that lockdowns are an effective mitigation against less contagious diseases. Something like Omicron is going to spread so that every human being on the planet will eventually be exposed to it. There's no getting around it. And what he said is, given how incredibly contagious this is, there is absolutely no sane reason to even consider lockdowns as a mitigation tactic, because they won't work, and they would only be counterproductive. So he was very outspoken in saying it makes no sense to him why China and New Zealand would be trying so hard with these zero COVID policies when they're actually counterproductive. And his point was, what we need to do is allow Omicron to crowd out the Delta and previous strains so that as Omicron takes over, it kills off those other strains. Omicron is much less dangerous than those other strains, are much less deadly. And that effectively is what ends the pandemic. Now what's happened is China is not giving up. They keep doing exactly what Dr. Campbell said would never work. And drum roll, please. Get ready for it. Here it comes. It's exactly what Campbell said. It didn't work, and it's not gonna work. And it's a mystery as to why they continue trying. I put a thread out on Twitter about this this weekend, and a lot of people with a lot of different conspiracy theories and other theories are saying, look, nobody has come back and said there's a good reason. Here's the science that says we're about to see the whole world lockdown like China did. There's a bunch of people who are saying China's just being stupid. Other people who are saying this is a intentional move on China's part to both save face and control its people and control and contain civil unrest because of dissatisfaction of the Chinese people with their government. But it's not really about Omicron one way or another. I don't know what's going on here, but so far, after looking at it as hard as I'm able to, I'm not an expert on immunology and so forth, but I don't see the Shanghai situation as an indication that the whole world is about to go into another wave of COVID I see it as an indication that the Chinese government is not listening to smart people like John Campbell, who told them months ago that this was not going to work for the exact reasons that it's not working right now.

C (9:25)

All right, Eric, let's touch on gold, because it's been moving slowly, starting to get some action. What's next for gold?

B (9:32)

Well, Patrick, I continue to be very unimpressed with the price action in gold. The gold bug narrative tells us that supposedly that's the ultimate geopolitical hedge, and it's the ultimate currency debasement hedge and supposedly inflation hedge. We've got geopolitical tension that's literally on the scale of World War 3. We've got currency debasement going on in spades with the Fed and central banks around the world printing money like it's going out of style. And we've Got inflation in a really big way for the first time in 40 years and gold has barely budged. If you listen to the gold bug narrative, it's all about there's nothing that can perform the way gold can under these circumstances. Yet if you look at any one of the obvious other alternative hedges, whether it be copper, crude oil grains, they've all performed orders of magnitude better than gold has in this environment. So it's really disappointing. It does seem to me like we are going to see a move higher, but it's a very disappointing move higher and it's a lot less vigorous than I would have expected given the geopolitical backdrop.

C (10:41)

All right Eric, let's wrap up with Talking about that 10 year treasury yield because those interest rates have been under quite a bit of pressure on the upside. Just driving in recent few days have been pulling back. What's next for treasury bonds.

B (10:55)

Well Patrick, it's definitely getting interesting. I see two spot 81 on the 10 year yield as I look at my Bloomberg screen this afternoon. And as I've said before, my inclination is to think that we're gonna see this backup in yields continue now longer term because I wanna kind of go with the theme of this episode. I think that there is a potential for a major systemic crash in fixed income prices as fixed income is completely rearchitected in the coming defi revolution. I'm not talking this year, I'm not talking next year, I'm talking over the next decade. If you look at re engineering financial instruments using decentralized tokenized technology, what Jim Bianco and I are going to talk about in today's interview at length and you consider the various different financial instruments we have today and where the opportunities opportunities are to re engineer them and make them better using digital technology. I think the low hanging fruit is fixed income bonds are really kind of a lousy design in terms of doing what they do. You could design a much better fixed income instrument with tokenized digital technology. And I think the day is coming where almost all bonds become obsolete. The way travel agencies became obsolete with the Internet. Some of them reinvented themselves as Internet travel agencies and made a killing. The ones that thought they were going to just be brick and mortar travel agencies went out of business. And I think that bonds are going to go out of business first in the defi revolution. And that could mean that treasuries as a reserve asset for central banks could just go completely out of fashion and that could have profound, profound impacts on the US treasury market in the long Run. I'm talking about a crash of U.S. treasuries happening over the sometime in the next 10 years. 10 years, not now. But I just want people to keep that in the back of their minds as they listen to this interview that's coming up with Jim Bianco.

C (13:06)

Now, this week's feature interview guest is Jim Bianco, macro strategist at Bianco Research. Eric, why did we get Jim back on the show this week?

B (13:13)

Well, Patrick, we just had Jim Bianco on very recently to do a macro interview, and we normally have a policy of not having the same guest on more than once every three months or so. In passing in that interview, Jim mentioned that he could do a whole hour on decentralized finance. And it was really just kind of a passing comment. We asked our listeners whether they were interested and we were thinking like six months or a year or something later we might do that. I don't know. We're scared now. We're getting overwhelmed with so many requests, it's almost feeling like threats. We've got to bring you Jim Bianco before there's a revolt so that all of the people who keep asking us for that Defi special, well get it. So that's what we've got in store for you. Jim and I are going to talk entirely about the decentralized finance revolution that we both see on the horizon. And then I'm going to have an editorial for you after the feature interview, which is also going to focus on the important things that you need to know and learn about in order to prepare yourself for the coming decentralized finance revolution.

C (14:15)

Eric's interview with Jim Bianco is coming up. But as Macro Voices continues right after this message from our sponsor.

B (14:30)

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A (15:46)

And now with this week's special guest, here's hedge fund manager Eric Townsend.

B (15:52)

Joining me now is Bianco Research founder Jim Bianco. This is a special episode of Macro Voices. This came about after Jim appeared on the show back in February. Towards the end of his interview, I asked Jim about the long term impact of decentralized finance, the a trend that's become known as defi. Jim reacted by saying, oh boy, I could do an hour on that subject alone. And holy cow, the listener response was overwhelming. So congratulations, Jim. You suddenly have a whole new following of defi enthusiasts who can't wait to hear what you've got to tell us about the future of finance and what decentralization will mean to it.

D (16:30)

Well, thank you. Yeah, it is a fascinating subject and a lot of epic changes I think are.

B (16:36)

Now I want to just first set the context for our listeners that I asked Jim to talk to me a little bit off the air about what the best topics to ask him were about. And he gave me just a hit list, a bullet list of what topics we might discuss. That conversation went more than 45 minutes. So Jim has about 217,000 hours of content in his head. I'm going to have a little bit more to say about how we might get more of that out at the end of this interview. But to just set the scope of this, we're going to start by talking about currencies, not in the sense of what's going on right now with Bitcoin and other cryptocurrencies, because so many other podcasts have addressed that so well. What I'd like to do is talk about the long term vision of what digital currency is going to mean to the global financial system. And from there we'll move on to decentralized assets as they apply outside of currencies to other financial instruments. But Jim, let's start with the big picture of the Bitcoin guys invented something really profound, truly digital cash, the ability to have a bearer instrument which is represented inside of a computer so it can be transmitted across a network. And when we transmit that value across a computer network, it's not like a check or a claim against an account someplace. It truly is a transmission of financial value in the here and now. Just like handing somebody $100 bill. Now. Now the way that I think about this is for decades now going back to the 1960s when Valerie Giscard d', Estaing, the French finance minister at the time, later became president of France, coined the term exorbitant privilege to describe how the United States, as issuer of the global reserve currency, kind of got an unfair deal, or at least unfair for the rest of the world, in the sense that since you have to have a global reserve currency and one country has to be the issuer, whoever gets to be the issuer kind of gets an unfair leg up on everybody else in the world. Now, it seems to me, Jim, that decentralized currency systems create the potential of at some point replacing the US Dollar is the world's global reserve currency with a supranational digital currency system, probably one that is controlled by a consortium of central banks rather than by bitcoiners. It's possible that Bitcoin could evolve into that. But what I'd like to ask you about is what, what it would mean if we had a global reserve currency system that no country owned or controlled that basically allowed everybody equal access to that currency system. And perhaps it's designed to allow central banks to administer monetary policy within their geographical domains, but the overall currency system isn't owned by any one nation. Is that a benefit? And do you think we're headed in that direction? And particularly, how do you think the United States government's going to feel about giving up that, that unfair advantage according to the French, that they've had for really 80 years now?

D (19:40)

Well, taking the last part first, it's fairly clear that the US Government is not in favor of any of the above because they are at the top of the heap. We, the United States, have the exorbitant privilege that the dollar is the reserve currency. And you're correct, everything is priced in dollars. Everybody needs to use dollars. So we've immediately, if nothing else, think about crude oil or commodities. We immediately buy them in our currency. We bear no currency risk. Europeans have to buy them in dollars. They have to convert their euros to dollars. They always bear a currency risk every time they do it because they don't know what the exchange rate will be at the time that they need to do the transaction. We do know what the exchange rate is going to be because it's priced in dollars. We just don't know what the price is going to be. We just bear that risk. But everybody does. If you do move to a global permissionless, meaning that no one can alter the system or no one can override the system, global currency, what you wind up Doing is making it fair for the rest of the world. Because one of the problems the current global financial system has is, is it's more of a tiered system that if you're further up the list and the United States is at the top of the list, you get more privileges, better, cheaper financing, better access to markets. As you move further down the list, you get less access, things become more expensive, and you wind up having also the possibility of being punished or rewarded by the more important players, Europeans, the United States, to give an example, depending on whatever your behavior is. And so what you're seeing with a digital currency is a push towards doing it. And in the United States, there's a belief that what Bitcoin or these digital currencies represent is a bunch of, you know, bros and Starbucks is in San Francisco that are trading these things. There is that. But really, if you look at a company called Chain Analysis that looks at adoption rates of Bitcoin and digital currencies around the world, and they look at it by penetration of the population, only one country in the top 20 is a developed country, and that's the United states at number eight. The other 19 countries are all developing countries, emerging markets as well too. So you're seeing the adoption rate. Really what's pushing this is Asia, Africa, the Middle east, knowing that they've been at the short end of the stick, having not to have access to world capital markets or to banking services at a reasonable rate and wanting to have that. That's why you're seeing the adoption of places like in El Salvador and potentially in Argentina as well too, because they have been shut out of the capital markets. They need the permission of entities like the World bank or the IMF to do certain things. They're punished if they do things that displeasures the First World or the United States or the IMF or the World Bank. And so that's why they want some kind of system like that. So what you're seeing is an outgrowth of a global currency. And you're right. For purposes of this discussion, let's leave off the technology and just assume or take that it's there. It exists that at the currency level it can't be hacked and it is immutable. Now, later on, when we talk about protocols, meaning I build a defi protocol on top of that currency, we could borrow or lend it or trade it, that could be hacked, just like your bank could be robbed. But that if your bank is robbed does not mean that the dollar itself is invalid. Bitcoin or whatever Digital currency we come up with is not invalid if your protocol gets hacked. So I want to make that separation. But beyond that, I do think what you're seeing is a lot of the rest of the world very excited about the idea of a digital currency because it gives them better access and they're not subject to being censored in ways that they are now.

B (24:05)

Now, Jim, in the beginning, I used to think where we were headed was toward a supranational global digital reserve currency. And I thought maybe that, you know, countries like China and Russia that had the most to gain from displacing the US Dollar as global reserve currency might be the early actors who worked together to design that system and somehow try to promote it to the rest of the world. But. But frankly, I think they would be up against a pretty difficult challenge because you can't just take a digital yuan or a digital ruble, especially with the difficulties the ruble has seen recently. You can't just take that and say it's going to be the new global currency everyone adopts. What's really evolved in my thinking around this is what I call SVDCs, Silicon Valley Digital currencies. The notion that some of the tech giants might recognize. Hey, wait a minute. What's actually up for grabs here, even though most of the governments don't realize it yet, is whoever can design a supranational digital currency system that gives a level playing field to the entire world so that you don't have one country that gets an unfair advantage over everybody else. They could sell that to all the central banks of the world. And whoever is behind designing that technology is putting themselves in a position of extraordinary power. So when I saw Facebook with its Libra project, which didn't go very far because of. I think they failed to bribe all the right politicians in advance. I think that potentially where we're headed is Silicon Valley coming up with a private digital currency system that might initially be sold as a payment system, kind of the way Libra was, but where their real aspirations are to develop a global digital currency system that could eventually replace the US Dollar as the world's global reserve currency. What do you think about that idea? And boy, what do you think US Regulators would do when they figured out that's what agenda is?

D (26:01)

Well, I think you've somewhat answered the question too, because that was what Facebook started with their Libra project, which eventually evolved into diem as well, too. They were trying to create an exchange, a stablecoin, if you will, to be used on the Facebook network, remember Facebook has over 2 billion users and they've got Facebook market and everything else. And they were going to maybe create a medium of exchange that you can exchange value within that network. They were hauled in front of Congress in 2019 and Dave Marcus, who was the head of that group, was just grilled mercilessly that they didn't want it. The Diem project, actually, they tried to basically build a global central bank digital currency and offered it to the central banks as their gateway in. And that was also rejected outright as well too. So to answer your question, yeah, they're not interested in having any kind of a outside actor like a Facebook or a Silicon Valley firm put this together for them. I think largely because they're afraid then that they would have a loss of control. Now, the other side of that is, well, these central banks are going to put together their own central bank digital currency. Well, they've got two issues. Leaving aside the technology issue, let's just assume that the technology is there, which I think it is, that they can actually pull this off. The first issue they have, and let's go with what the Fed talked about in their central bank digital currency. Paper is if you create a Fed currency, you create a digital dollar. Okay, what do I do with this? How do I use it? The Fed would have to create a digital wallet in order for you to use the digital dollar. And they refer to this as a retail digital currency. Oh, so then I can hold my money directly with the Federal Reserve. I don't have to hold my money with Chase or Citibank or bank of America, Wells Fargo, whatever bank you want. And the answer is yes. And the Fed admittedly said that this could very well be disruptive to the current financial system. The deposit taking function of a bank could be disrupted by the central bank. They don't want to do that. So then they talked about having the digital currency be a wholesale digital currency where, you know, Citibank could trade it with Wells Fargo, but then you and I would have to have a wallet with Citibank or Wells Fargo to access it, in which case they've accomplished nothing. They've really accomplished nothing if they wind up doing, if they wind up doing it in that respect. So they're struggling to figure out how much they want to disrupt their own financial system, their own banking system. And the answer is they don't really want to do it in any great way. But if they don't, they're never going to get one of these central bank digital currencies off the Ground also, there is more of an enlightenment if we go back to February and we remember in February that we had in Canada the trucker protest. And then they instituted the Emergencies Act. And part of that was that gave them the ability without due process to suspend and to freeze bank accounts of people that were involved in the protest that they didn't like or didn't like what they were doing. I think even people that were against the protest started to realize that this was a giant government overreach, that you shouldn't have governments to be able to willy nilly just say, I don't like what you did, I'm taking your money away from you. A central bank digital currency makes that a lot more efficient. And so you've heard calls in the wake of that incident that this is going to hurt the adoption of a central bank digital currency. Yes, they may create one and yes, they might even take on potentially disrupting their banking system. But will people willingly say, I want to keep my money with the Federal Reserve? And then one day they might donate to a group. And remember this happened with the truckers back in February, that people donated to the truckers and it was perfectly legal and it was fine. And then the Canadian government invented a word called retroactive law that when you donated in the beginning of February to these truckers, that was perfectly legal and fine. But by the end of February, when we decided that we didn't like that group, we're going to go retroactively back and punish you by freezing your account for doing that activity. I don't want to make it easy for them. I don't want to keep my money with a central bank directly in a digital currency. So they've got issues that they have to resolve. The issues are not technological issues. The issues are more about control, privacy rights and policy that they have to work through. And so therefore, I think we're still a ways away from seeing a central bank digital currency because those issues haven't been resolved.

B (31:00)

Jim, I think we're pretty much in agreement, but let me just flesh out a couple of thoughts with you here and see if we are. It seems to me for the reasons that you state, you know, central banks and governments in general are not about to agree to a supranational system where they're not in charge of something. They want to have their central bank digital currency that they're in charge of. The Fed didn't talk in their Fed white paper about a supranational currency that the Fed doesn't have control over. They talked about how they could create a digital dollar that they're in charge of. And my prediction would be that the people who want digital currencies, and by that I'm not referring just to bitcoin enthusiasts, but I mean other nations who would like to see this unlevel playing field get leveled, who would like to see a supranational digital currency. There's going to be demand for that. And My prediction is CBDCs issued by Central banks will be designed, first of all to make it much easier for governments to do all sorts of crazy things like freeze people's bank accounts and you know, automatically if they say something against the government narrative, as happened in Canada, as you described. And I don't think that they're going to be open to a supranational system. So for that reason, and I think what's much more likely is the CBDCs get developed and they get launched with a big flop and nobody really cares and nobody wants to use them. But then somebody comes along with a private digital currency which is much more scalable than Bitcoin and the other first generation cryptocurrencies, but which is really designed to be that global supernational reserve currency system. And I agree with you that the US Government's not going to like it, but I think the rest of the world would like it and would be a big buyer for it. The thing is, the people that are best qualified to develop that are in the United States and I don't think they're going to get a lot of support from the US Government in building those products. So it's a big question mark in my mind as to how this plays out. But it seems to me like CBDCs issued by Central banks are never going to be supranational and they're never going to be designed to what the market actually wants. Would you agree with that?

D (33:11)

I absolutely would agree with that. And it's not only the permissioning too, it's the rules. To just give you one example, in China they have issued a central bank digital currency, digital yuan. And one of the things that they did with it was they put on a bunch of rules that if you actually bought into this currency, you were in to use the crypto version, you were airdropped money, they put extra money in your account, but they put rules on what you could do with the money. You had to spend it in a certain period of time. I think they gave you 30 days and you had to spend it on certain things and you Couldn't spend it on other things. And even in China, even though they were giving you free money with all those rules, didn't go over very well. People don't like, you know, to have all of those restrictions. Think about your frustration or my frustration. If you've ever had airline miles and you go, oh, I got all these miles, I'm gonna go get a ticket and go somewhere. And then they tell you, okay, but you can't use it here and you can't do it there and you can't do it on this day. And these are blackout days and these are blackout cities and you're very frustrated. You go, what's the point of this? Well, that was what happened in China as well too. So, yeah, the idea of a central bank digital currency runs at odds with the users and the creators. The creators want to do it because they say, good, we could do all these rules and permissions and we can affect behavior by changing the parameters. And the people that would use it say, well, I'd only use it if you left me alone, completely paramount with it, and let me do with it what I want, when I want it. And that's why you're seeing people more and more gravitate towards the crypto space that is permissionless, that is decentralized, so no one controls it as well too. And you're seeing the excitement in the decentralized finance space really starts around what is referred to as stablecoins. And a stablecoin is just a digital token that is supposed to have its value pegged to something else. Now most of them have their value pegged to the US dollar. There are some for the euro and the yen and gold. And recently there's a new one now for CPI as well too, and there's some others. But the mo. The vast, vast majority of stablecoins are pegged to the US dollar and people are gravitating towards those because no one can permission, no one can censor me, no one could put rules on me as to when I can use it or why I use it. And I could do with it what I want. So that has been one of the big attractions of these stablecoins that have been coming.

B (35:54)

Now I'm going to make the argument, Jim, let's pretend that stablecoins are analogous to Microsoft Windows version 1. What does Windows version 10 look like? In my mind, it's not just a stablecoin, which would be a supranational digital currency system, but it's one that is tightly integrated with a Supranational digital sovereign bond market. So instead of saying that all of the central banks around the world, the way that they work today is their central bank reserve assets are usually in US Treasuries because that's the most liquid market. What if the most liquid market that exists in the world that has the depth and liquidity characteristics that we today associate only with US Treasuries? What if that was these digital sovereign bonds which all countries have an equal right to issue? They get credit graded and so forth. There's digital tools in order to not only grade their creditworthiness and, and allow them to potentially have different rates of return depending on who the issuer is, but they're all denominated in the same supranational global reserve currency system. If you take the stablecoin concept and you create a framework which allows the financing needs of all of the nations on earth to work in a level playing field as opposed to one where the United States is in charge of everything, to me that means the whole rest of the world ought to love that system. And the United States has a very serious national security threat in terms of what it would mean to lose that reserve currency status. I think that's coming. I have no idea how it plays out. I had been skeptical in the past that Bitcoin would evolve into that, but the more I think about it, I just can't see central bankers having their act together to recognize the market's going to demand that supranational system that no one country owns. I can't see any national government letting go of control and ownership because that's just their culture. They think they have to be in charge of everything. What the world wants is a fully decentralized, permissionless, supranational digital currency system. And I think if you tie it to a digital sovereign bond market, it completely changes the playing field for the issuance of sovereign debt. Does that make sense?

D (38:09)

No, it makes perfect sense. And in fact, that's what's indeed happening. So you've created these, these stablecoins, these representations of a dollar that are outside of the financial system. You can't censor them, can't restrict them or control them in any way. And they're pseudo anonymous. Pseudo anonymous, meaning that I can see an account using something like Bitcoin Scan or Etherscan and see that this account has these stablecoins in it. But all I know about the account is it has a bunch of numbers and letters as the account name. I don't know who personally controls that account. That's what I mean by pseudo anonymous. So this system of these stablecoins will never work within the traditional financial system. You can't take them to JP Morgan or Citibank or Barclays or fill in the blank and exchange them for value within the traditional system. So we're creating a whole new financial system around them, and that's decentralized finance. And in decentralized finance, you wind up having another set of. They use the word protocols in decentralized finance to separate them from platforms, you know, like Facebook and YouTube and Twitter and the like. So you create all these protocols that you can go to and trade your stable coins for other coins, borrow against your coins, lend against your coins. And so we're creating an entirely new financial system that is outside of the financial system that we have currently. And this, you're right, has really got regulators around the world very, very worried because. And it's very worried. And to be honest with you, they use the words, you know, that they. They're very worried about investor protection, but it's clear from what their actions are is they're really worried about incumbent protections and that they're saying that they want to protect the little guy from these systems, but it's really that they want to protect themselves from being overwhelmed by these systems. Because the little guy. You know, you'll hear this a lot. Well, somebody might get into a stablecoin that's supposed to be pegged to the dollar. And what if the peg is lost and it goes to 80 cents? The little guy's lost 20%. Okay, yes, he has. But what's the current system? The little guy in the current system? If you're a poor migrant worker in the United States and you've gotten a few hundred dollars of pay and you want to send it back to your family, it's going to cost you 20, 25% to use the current banking system to send that money back to your family. Anyway, you're already at 80 cents to the dollar in the current system. So you're really no worse off if that stable coin loses its peg. And if the stable coin doesn't lose your peg, you're actually better off in that system than you are in the current system as well. So decentralized finance is the answer for what to do with this. And so what we're essentially doing in the defi community is recreating a whole new financial system with a new set of rules. And those new set of rules is no permissions, no rules, no punishing. People for actions that we don't like or rewarding people for actions that we do like. And that's been a fascinating thing to watch evolve, especially over the last two or three years as it's really taken off.

B (41:36)

Well Jim, as you just alluded, currencies are only the tip of this iceberg. So I want to move on now to talk not just about some of the early actions that are going on in the DEFI community, but let's set our focus on the long term of where the global financial system is headed. Because for hundreds of years now we've had this idea called the public corporation or listed company. The idea of a corporation which is a bunch of shares. What are the shares? It's a piece of paper, a share certificate. And people will tell you that financial system has been digital for 30 years. That's absolute nonsense. What we've had for 30 years is digital accounting systems that keep track of conventional assets that are anything but digital. So we've got this paper concept of share certificates that says you own one small slice of this publicly traded corporation. And then that corporation has what's known as a capital structure or a cap table where it has equity, which is the outstanding shares. And then it has various different forms of subordinated debt and non subordinated debt, senior debt and so forth. Something that you said in your interview back in February is, you know, you know, that whole model of a public corporation and its capitalization table or its capitalization structure is really subject to being re engineered completely from the ground up with this new decentralized token technology. Tell us more about that. We didn't have enough time in the last interview. Expand on what that means.

D (43:07)

So yeah, so let's start with what you mentioned about the history, the modern corporation, the fractional banking reserve system as well too. They were both invented during the Renaissance. So we are using systems, the foundation of finance, you know, the capitalization structure, Equity representing ownership in a corporation, debt representing claims on that corporation in exchange for money and interest rates that we pay on that money. This stuff is 3 or 400 years old. And as you correctly pointed out, it really hasn't changed a whole lot in the last three or four hundred years. Yes, we have come up with digital accounting systems to make it more efficient to track that 400 year old system. But we haven't really redesigned that 400 year old system from the ground up. But now we are starting to do that. And that's because of the new digital economy. With the digital economy coming into being in the last 20 odd years with the inventions of the Internet, whole new structures are taking place in terms of creation. So you're a creator in the digital economy with the Macro Voices podcast. I am a creator in the digital economy through Bianco Research, my advisory firm as well too. And so are millions of other people. And if we look at the value of a lot of the fang companies and other companies that are involved in the space, it's many trillions of dollars of value that they have created in this space. Well now what we've learned in using that old 400 year old structure of equity and debt is as this new digital creator economy comes into being, you and me, we don't own any of it. You don't own Macro Voices, I don't own Bianco Research. If anybody else deals in this economy, you don't own it. If you have a Twitter account and you have Twitter followers or YouTube account, YouTube followers, you don't own it. Twitter owns it, YouTube owns it, and they make money. So we are in an unusual situation where if you are in this digital creator economy, you spend all day long creating value for Twitter or creating value for Facebook, or creating value for YouTube or Instagram or any of the other entities in that if you get to a critical mass, they will reward you with a portion of advertising revenues that they have made off of you. But it's only a portion and it's only when you get to a digital mass. So people have argued maybe we ought to rethink this with this new digital economy. And that's where the phrases metaverse and web3come from. From now these are undefined terms, but what they really mean is everything we're doing on the Internet now, we do in web 3 and in the Metaverse, but we own it. I own Bianco Research, you own Macro Voices, I set the terms for Bianco Research. And whatever value it accrues or Macro Voices accrues goes directly to me or you directly. It doesn't go to some platform company like a Twitter or a YouTube or something, and then secondarily comes to us as well too. And in doing that, we are redefining the ideas of debt and equity and that there might be a whole new capitalization structure within this digital economy that has tokens, non fungible tokens, NFTs. And these would be the representations of the value that we would create in our world. Now again, this is being designed as we record this and will be for the next several years. So there's, you know, there's no quick consensus as to how it would look. But conceptually it would be that as a creator, I could issue a token. You need my token as permission to work in my universe, or an nft, which would be a version of a subscription as well. And as people come into my network and use my tokens or my NFTs, they accrete value. They become worth something. What do I do with those tokens that become worth something? I can trade them them in the decentralized financial world, on a decentralized exchange, in exchange for other tokens that have other value or use, I can borrow against them by pledging them as collateral. I could stake them to earn interest on them. And so it's really turning the whole concept of the capitalization table and what is finance upside down. And we're inventing for the first time in 400 years, a whole new system. And what this also allows is for companies to start thinking about their cap structures very, very differently. So if you are a traditional company, a McDonald's, you can change your capitalization structure in ways that you haven't before. You could use tokens to incentivize customers. You can use tokens or NFTs to incentivize investors and the like. You know, there's an example that's been thrown out there. One of the successes of Apple and Tesla, leaving aside all the other issues, is most people that buy the products of Apple and Tesla most likely own the stock of Apple and Tesla as well too. So you become a natural cheerleader for that company. I bought a Tesla. I drive it around proudly, I keep it washed to make sure everybody looks at that cool car. And I tell everybody it's very, very cool car, and I'm very happy that I bought it. And other people then have a high opinion of it and the stock goes up and oh, by the way, I own the stock and I benefit as well, too. Well, if you're a customer of McDonald's, doesn't quite work that way. You don't own a bunch of McDonald's stock and then walk around and tell everybody about the virtues of McDonald's and go buy in McDonald's, technically you could, but most likely you don't. Because most likely the people that shop at McDonald's or think $ Tree, if you want to think of a better example, they don't have the means to own the stock and go around and promote the stock, but maybe in a tokenized world they would. And you turn your customers into promoters of your company, just like you've turned Tesla and Apple customers into promoters of their companies. And all of a sudden the whole capital structure of debt and equity starts changing in the tokens and NFTs, and the whole world starts looking very, very different in terms of finance than it did for the last 400 years. This is still evolving. We're still trying to figure out the ends and how this is going to work. But this is what's got people a lot excited about when they look into the digital world and decentralized finance and cryptocurrencies and they go, yeah, I can see where this could really change things and change things for the better. Open it up to a lot of people that are currently not available, that it's not available to, usually the poor, usually people that are less fortunate, or in other countries that don't have the ability to buy a Tesla and drive around town and own a bunch of Tesla stock and tell everybody else they should buy a Tesla because it's such a great car. There's only a limited few people that can do that and they are doing it and they are successing from it. But why can't that model be brought to everybody else? Well, tokens and digital currencies and decentralized finance is starting to think along those ways and bringing it to them.

B (51:02)

Jim, I want to share an epiphany that I had when we were talking about this off the air with our listeners, because honestly, when you started talking to me off the air about the Metaverse, my emotional reaction to that was, come on, Jim, where are you going with this? You know, the Metaverse is this big virtual reality game thing that Mark Zuckerberg wants to invent to kind of extend social media so that people are living in this virtual reality metaverse place and pretending to operate virtual businesses and virtual things, and it's not real. Why do you want to talk about the Metaverse? Let's talk about how we're going to someday get to a global supranational currency system and a new global financial system. I said, wait a minute. If the Metaverse is this big sophisticated thing that's going to have this make believe, non reality financial system that's all based on the latest technology and it's going to have a digital currency system that works across the Metaverse independent of national borders, and it's all virtual reality and it's not real, that means that all of the technology infrastructure is going to be built in the Metaverse. And the question of where would a new global financial system come from might actually be to Simply take the virtual reality Metaverse financial system and grow it into the real world financial system. Is that the path that you see ahead? Did I get that right? Or tell us more about that vision and where it's at.

D (52:30)

Yeah, I think that that's definitely the path that we could see it move forward. Right now the Metaverse is, you're right, it's tagged with being a bunch of games. Gamers are playing in that space as well too. Think of the movie Ready Player One. And that's what people think, what the version of the Metaverse could be. Now, keep in mind one thing about gaming, and I try to tell my traditional boomer friends, I'm a boomer too, about gaming. It is as far as entertainment goes. Gaming is the largest entertainment source in the world today. Gaming earns or revenues from gaming is larger than all the revenues from professional sports, television, movies, radio combined. It's larger than all of it combined as well too. And so when you think about starts off with gaming, and I want to point out that's very, very big to start off with as well, but it can morph into something more than that. What did we learn from the pandemic? That there's been a shift to work from home. What do traditional people do when they work from home? They talk to people on Zoom. They probably update spreadsheets and they send around emails all day long. Well, that's efficient. Maybe from doing it in an office, if you want to measure it that way. That's why we prefer working, working from home. But it's not very efficient. How do we integrate that whole system of work from home to make it a lot more integrated? Well, there is an example of that. Look at your teenage son or daughter who's been playing games all day long and why they like to do it, why they lock themselves in their room and do it all day long. They're not punishing themselves. They enjoy it. And if you've ever tried it, it is quite something. And I say this because a lot of people that turn their nose up on this, they haven't tried games. Go see what is happening with some of the latest role player games, World of Warcraft, Minecraft and stuff. These are kids that are communicating with other kids online. The older kids mentor the younger kids. They've created their own economies in these games as well too. So they've set up incentives to be rewarded when you do certain things and punishments to be meted out when you do incorrect things as well too. And all of a sudden you start looking at it and you go, that's how online work is going to be. It's going to be the same type of thing that we're going to create online communities, online economies, and that's how we're going to start working more. It's not just going to be answering emails and talking on zoom and updating spreadsheets. That's still digitally making, that's the analog world, just being more efficient, efficient digitally. And once we start moving towards that, then you're going to start to see these online economies that we're going to be creating that are more than just games, but the real world economies, especially people in service sector jobs that can do it remotely, they're going to need a financial system for that online economy. Because I've created value, I've created digital value. Okay, how do I express that digital value through some kind of a token or nft. What do I do with this? Because now it's worth something, what do I do with it? I can't take it to J.P. morgan and say here's a bunch of tokens, so give me a bunch of dollars so I could pay my mortgage. But what I can do is create a financial system within the digital world that I could do value with it. And as that system grows, it will become more and more integrated with the physical world and so that they will start to merge from each other. And so that's how I think this is going to wind up going and why, you know, it's going to be a lot more. So this metaverse web3 argument that you hear too is integral with it. You've created a digital decentralized financial system for what? What are we going to do with it? It's going to be the financial system for web3 in the metaverse. Well, if you think about the size of games and if you think about the potential of work from home and creating economies online, this is many, many trillions of dollars size that this is going to be. This is not insignificant. Why do we think that the Fang stocks are worth more than all of the companies in Germany right now? Because they are the current representation of the digital world. The problem is all the value is in those five or six stocks. The value isn't in the billions of people that use those platforms and create the value. And so what the web3 the metaverse is going to do is take the value from those faang stocks and distribute it to all of the users, the billions of users. And then decentralized finance will be their financial system to realize that value. And do something with that value. This is one of the reasons why you also don't hear, you kind of hear like lukewarm response out of Silicon Valley. The big Silicon Valley tech firms. Yeah, you know, Defi is kind of interesting. Ethereum's kind of interesting. The web3 is kind of interesting. Other than Mark Zuckerberg changing the name of his company to Meta Jack Dorsey changing the company square to the name block. The rest of them, Amazon and the like, they probably more see this as a threat to them than another opportunity. And so they're more threatened by it than they do see it as the next big opportunity.

B (58:03)

You know, I think back to the early days of personal computers and people like Bill Gates just laughing at the Digital equipments and the IBMs of the day. And they were laughing at Gates because he's just a little nobody. And they said, look, we've got the thing totally locked up. You know, our IBM mainframes running on the MVS operating system or DigitalHat VMS. You know, these are world class operating systems that run on much better computers than you've ever even seen, little boy. And Gates was smart enough to know, yeah, but my stuff runs on computers that cost less than a thousand dollars that everybody can buy. And yours run on computers that occupy entire rooms that require air conditioning systems just to keep them running, that cost a quarter million bucks.

D (58:44)

Bucks.

B (58:44)

I'm ahead of you and you're too stupid to recognize that. And of course, you know the rest. Gates becomes the most, you know, wealthy man in the world for a while. It seems to me if you fast forward that to five years from now, I can just imagine a young entrepreneur walking into a meeting with Goldman Sachs saying, you know, you guys are an investment bank. I want to take my company public. And they say, well, you know, it's, it's kind of an old boy network. You got to have people on your board who are well connected and it's not so easy to do. You gotta be a Harvard boy like us. And I can just see this young entrepreneur laughing at him, saying, dude, you don't get it. This is so much easier in the Metaverse, the way that we finance things. I'm going back to the financial system that's in the Metaverse, the one that I know, that I know is better. And I think that what happens is just as personal computers completely took the minicomputer and mainframe industry by surprise and, and everybody got displaced and nobody saw what was coming. I think that traditional finance could get run over by a new Generation of entrepreneurs that are just not interested in financing their companies through the conventional finance system because they know about something that the conventional guys thought was just a virtual reality game. Because as you say, they were too lazy to go try it themselves because they're thumbing their noses at it. Because they're old guys like us who don't play games on computers. And they don't know that it's not just games on computers, but there's actually an entire economic system that exists with payment systems and everything else in the metaverse. It seems to me like that is a very plausible way for things to go from here. Am I right?

D (60:20)

No, you're absolutely right. And you're absolutely right that it is unlocking tremendous, you know, creativity and you know, ideas that were probably bottled up. Look, if you look at some of these, if you look at some of these systems that have been created, and I'll use the one example that everybody knows is Ethereum and the Ethereum network. The Ethereum network was developed by Vitalik Buterin. Russian born, grew up in Canada. When he was 19 years old, he wrote the white paper for describing Ethereum months out of high school. Holy crap, Eric. This is one of the foundational things of, of finance that was written by a kid barely out of high school. I mean, unless you want to put him in the category of Galileo and Newton and Einstein and by the way, I do think he is in that category. There's probably been other creative people like him that get stuck into these big bureaucratic corporations and just wiped out, you know that all their creativity is just sucked out of them. Them that they're not allowed to think outside the box and do kind of things like this. Well, that's what's happening in this system. So whether it's a Sam bankman Fried who's 29 years old, who runs FTX and Alameda Research, or whether it's a Vitalik Buterin or some of these others. There is some serious talent here. And you go, was there 29 or 22 year olds 15 or 20 years ago that were seriously talented? Yeah, their names were Bill Gates. Gates and Steve Jobs. And where were the rest of them? Oh, they probably were working at Goldman Sachs and they were probably working at JP Morgan and they had the life sucked out of them and they became very good managing directors probably and made a very good decent living. But they were never able to realize the transformational abilities that we're seeing with some of these guys as well too. So yeah, these systems and what is happening is Truly revolutionary. And they're thinking at levels that no one else is thinking. And yes, you're right. When you go to that direct, that board of directors, that it's a bunch of old boomers, it's really hard for them to get their head around what they're thinking about and how they're doing it. Just like Bill Gates had with the problems when, you know, in the 80s when he came up with the personal computer. And by the way, when you were giving me that example, what I was also thinking about too was IBM was very centralized. It was a very centralized permission system, the IBM mainframe computer. And what Bill Gates was proposing was a decentralized, permissionless network of computers that we eventually got through 3Com and the invention of the Ethernet as well too. And that's kind of the same thing we're doing. So that's kind of what we did to IBM, you know, 30 or 40 years ago with the invention of the PC. And that's kind of what we're doing with finance right now, with the invention of decentralized finance, that at every step the evolution seems to be not we need to centralize it and concentrate more power in the hands of the few, but decentralize and allow more people to have value and enjoy the abilities of the network. And what we're starting to realize is it all revolves around a very important concept that if you don't realize it is the driving force of the economy today, and that's Metcalfe's law, and that the network and the growth and the ability of a network, then you're not really getting it in terms of where the digital economy is and what is really behind it. Because I'm thinking of also the famous line from Orrin Hatch when Mark Zuckerberg was speaking before Congress in Orrin hatch, which was 86 years old at the time, and he said, how does Facebook make money? It was just such an alien concept, this whole idea of networks, Metcalfe's law, the ability then to create value within that network, realize it in the terms of what Facebook was doing in advertising value. It's just such an alien concept for somebody whose concept of companies was born out of the 40s, 50s and 60s. And I think we're going to always have that be the case. When Vitalik Beerdin's 80 years old, maybe there will be a new System and another 29 year old's got something else. And he'll be pushing back against that as well too, saying it'll never work. But for right now, he is the leading edge of what we see happening.

B (64:56)

And I'll add another prediction building on that same analogy going back to the computer industry. By the early 80s, it was crystal clear that the desktop computer revolution and networking was going to drive the future. But as much as 20 years later, in the early 2000s, you still had a large group of people and frankly, a whole lot of them were in the finance community saying, nope. The IBM mainframe asked in programs written in COBOL for the MVS operating system, and the CICS transaction processing system is so far superior in architecture that it will be our solution for all time to come. They still thought that stuff because those guys were too lazy to go find out what was really going on on the new platforms they weren't familiar with. And I think we're going to see exactly the same thing in finance. Everybody who knows the old systems, and especially guys our age, Jim, are going to insist that it can never change and that senior subordinated debt and capital tables and the things that we know about corporations that have been the same for 300 years can never change. And then a bunch of young kids are going to reinvent the world out from under them and they're not going to know what happened to them. In any event, Jim, I'm going to cut it off there because believe it or not, we've only barely scratched the surface of these topics. We're already running out of time. So I'm going to shift gears here and I want to invoke an analogy for our Macro Voices listeners. Many of you remember our good friend Jeff Snyder. After I'd interviewed him a couple of times, I realized Jeff had an extraordinary perspective on the commercial Eurodollar system. And we created Eurodollar University, a series of podcasts to really get all of that brilliance in Jeff Snyder's mind out into a format where people could consume it. If anything, I would say the amount of DEFI content in Jim Bianco's head is at least as big as what Jeff Snyder had to say about the commercial Eurodollar system. The difference is I do not have time or ability to create a defi university. I really want to encourage our podcast community. When I did Eurodollar University season one and then season two, and I told Jeff, I'm sorry, I don't have cycles to do season three, and our good friend Emil Kalinowski took the baton and created a Eurodollar University podcast that allowed Jeff to continue expressing those ideas. Somebody, I don't know who should steal that idea, get a hold of Jim. And create Jim Bianco Defy University because this guy has a lot to say just to tease them. Jim, Jim, give me off the top of your head a few bullets of what topics you could spend another hour talking about if we had time.

D (67:36)

Oh, you're very kind. You know, if I had more time, I could get into the more nitty gritty of what is going on in this space. How does decentralized finance work? How does a protocol work? I mean, you know, getting an electronic wallet, how do you borrow, how do you lend, how do you stake, you know, those types of things? How do you perform transactions in this space? What are some of the ideas that are coming up in this space as well too? You know, whether or not you're talking about yield farming, a protocol owned liquidity which is known as DeFi 2.0, there might be a DeFi 3.0 as well too coming. You know, how do these stablecoins work? How do algorithmic stablecoins work versus you know, centrally backstable coins like USDC circle and tether? And once you start to realize how this all works, it starts to make a lot more sense. And the biggest problem when you know, people have in thinking about this and why, you know, there's series and people are trying to do this is that it isn't easy. I can't tell you how many conversations I've had with professionals, you know, boomer professionals in finance that have been around for 30 or 40 years and they want the two hour course on what is defi. Well, you can't learn it in two hours. You have to really apply yourself and spend a lot of time and effort relearning this whole system anymore. As I like to say, you can't tell a 17 year old as a freshman in college. Go take this two day seminar called what is Finance? Okay, now that you're done, you could send your resume to Goldman Sachs. Well, no, Goldman Sachs will want you to get a college degree, if not a master's degree in finance before they'll hire you for an entry level job. Well, it might take as much work as this as well too because it's all new, it's all different, it's built with different concepts and different ideas. I started in this space in 2017, so I've been playing around with it for five years. It won't take you five years, but it is a big space to think about. So yes, want to get into the nuts and bolts of it, you know, and stuff some people have and there's some out there. But yeah, when you start really understanding it, you find it to be, quite frankly, one of the more interesting things I've seen in my multi decade career in traditional finance.

B (70:02)

Jim, I think the key to this is there's so much out there already that is coming out of the crypto community which really is focused on tokenization and technology and so forth forth from the perspective of the technology, bringing the perspective of someone like yourself who has worked for decades in traditional finance and really understands the global financial system and what reserve currencies are and what Triffin's Paradox is, and can then frame all of this new technology in terms of how it can be applied to bettering those aging systems which we know and tell ourselves we love, but we don't really love them that much. Jim, I have to tell you, I think you're the only voice I'm aware of. There's lots of washed up macro guys who reinvented themselves as self proclaimed crypto experts. I don't think most of them really know what they're talking about. They're full of BS as far as I can tell. You've got a lot to say and I really want to encourage somebody out there. I don't know who to do the Eurodollar University of Jim Bianco Going deeper on this subject. I can't do it, but I sure hope someone else does. We're going to have to leave it there. Patrick Seresna and I will be back as macro voices continue right after this message from our sponsor. For decades, quantitative hedge funds like Renaissance, Citadel and Two Sigma have benefited from the development of systematic or rules based trading. Renaissance's Medallion fund returns 66% per year from 1998 through 2018. Medallion is run by an army of data scientists, mathematicians and neural engineers that build code to take advantage of exogenous market movements. There's a reason why over $1 trillion is managed in quantitative hedge funds. However, unless you have a PhD or a Python expert, building trading algorithms has been next to impossible. Until now. Composer is a VC backed startup that lets anyone build quantitative strategies for free. No code or Excel required. With Composer you can easily build strategies with their drag and drop no code visual editor or invest in their pre vetted strategies like paired switching S&P 500 and bonds or buy the dips NASDAQ. To learn more, go to Composer Trade Today. That's Composer Trade Today.

A (72:29)

Now back to your hosts, Eric Townsend and Patrick Ceresna.

C (72:34)

Eric, great interview with Jim Bianco. What did you take away from the Interview.

B (72:39)

Well, Patrick, I am inspired because I see Jim Bianco as a conventional finance kind of guy. As far as I know, he's not a computer guy, he's not a computer programmer, he's not a geek like me. He, he's a finance guy. And he's one of very few finance guys who's got his eyes wide open. He can see that the world is about to change dramatically. The entire finance industry and all of the financial instruments it contains are about to be re engineered. When I say about to be, I'm talking on a long time scale. About to be means over the next 10 years, not in the next 10 minutes. We're going to see a complete revolution where bonds won't exist anymore, stocks won't exist anymore, and we'll have a robust new array of financial instruments that are dramatically better than the old ones, all of which are based on tokenized digital bearer asset technology. So what I see when I take a step back and look at the finance industry and its reaction to digital assets and cryptocurrency and so forth forth, what I see is a whole bunch of people in denial who just don't pay attention to all that crypto stuff because it's for the millennial kids and they don't care about it. And then you've got the washed up macro guys, failed TV hosts and so forth, that try to reinvent themselves as crypto experts despite having absolutely no background in the subject matter. And then you've got a very, very rare guy like Jim Bianco who says, wait a minute, I got to learn all about this. And he's actually involved himself in staking Ethereum and doing a whole bunch of stuff that I have no experience with. I'm the guy who in theory, you know, as a, is a former software engineer and distributed systems expert. You would think I'd be the guy that's on top of all this stuff. To be honest, I'm much more interested in the long term, so I don't bother with the immediate stuff. I think that we're still in the infancy of this revolution. Jim Bianco is the kind of guy who's jumping in, in and actually getting his fingers dirty and really learning about this stuff. So my hat is off to him and I strongly encourage all other finance professionals to recognize you've got a major revolution coming and if you don't change. This is exactly what happened with computerization of a lot of industries 30 or so years ago where suddenly everybody was getting a computer on their desk and the old guys didn't want to, and the old guys ended up turning into dinosaurs and getting laid off because nobody needed them anymore. If you don't want to become obsolete, you got to do what Jim Bianco is doing and really learn about this stuff.

C (75:19)

Eric, in the past you put together short editorials to discuss in the post game, which have gotten a lot of great feedback, so we figured we'll do it again. What's on your mind this week?

B (75:28)

Well, Patrick, I wanted to keep the editorial consistent with the theme of this week's show, so I have a three question quiz for our listeners focusing on what I think are the three most important things for finance professionals to build a deep and complete understanding of in order to be successful in today's markets. Question 1 Do you understand monetary policy concepts and specifically the hypothesis that central bank liquidity has been the principal driver of stock prices since the gfc? I would contend that that is one of the most important things to understand, and if you don't understand that, you got to start there. Question number two for today's finance professional. Do you understand the inherently self reinforcing vicious cycle aspects of inflation where inflation begets higher inflation expectations than those higher expectations influence behavior of consumers and the cycle repeats in an accelerating inflation spiral that could devastate the economy? We have the biggest inflation surge in 40 years, so if you're not on top of that one, you're in big trouble. Now, I'd like to Hope that most MacroVoices listeners already knew the answers to my first two most important topics for finance professionals to understand. In fact, we're very proud to have educated many of our long term listeners on these subjects. But here's the rub. Question three is the most important of the bunch in the long term, but I predict fewer of you are going to know the answer. I know that Jim Bianco does Question number three do you know what the merge is and why the evolution of the Ethereum distributed ledger from its original proof of work architecture to a new proof of stake architecture is so profoundly important to the future of the finance industry. I predict that 2022 is going to be remembered as the year when the Defi revolution really took off and started to gain traction thanks to the availability of a truly commercial grade scalable distributed ledger system free from the profound performance and scalability shortcomings of a proof of work validated blockchain. Look, that wasn't meant as a trick questioner, as a joke. I truly believe that it's every bit as important for finance professionals to understand the merge and the pivotal moment in history it represents as it is for those same people to understand monetary policy and inflation. And for the record, it hasn't happened yet. Ethereum still runs on the same pathetically inefficient proof of work technology used by Bitcoin today. But later this year, an upgrade will occur, replacing proof of work with the profoundly more performant and efficient proof of stake algorithm. Them. It's becoming more and more clear that the future of finance will run on Ethereum tokens. And I think this advance pretty much locks in Ethereum's place as the most likely heir apparent to the coming tokenization of finance, which will be a bigger and more important event in world history than the invention of fractional reserve banking. So what's all of this about in simple lay terms? Well, look, you've been hearing for years about how the Bitcoin network consumes more electricity than entire nations. The whole reason for this is the astonishingly inefficient proof of work algorithm. Now, for distributed systems engineers like myself, who truly understand these things, there simply can be no question that proof of work has to go and that we need a distributed ledger that doesn't suffer proof of work's severe scalability and performance shortcomings. Shortcomings? It's been years in coming, but Ethereum has finally reached the point where they're ready to ditch the proof of work algorithm in favor of the far more performant proof of stake algorithm. Now, this hasn't happened yet, so that means it might go poorly and maybe it'll fail and maybe it'll take longer, who knows? But they're very close. This is coming. I predicted it in my book four years ago. I didn't know it would be Ethereum, but I predicted that there would be eventually a fully decentralized, permissionless distributed ledger that would not require proof of work and that would be scalable to the degree that it could support the entire global economy. Ethereum's not there yet, but it sure looks like it's about to secure that first mover advantage of being the first cryptocurrency system to offer tokenized secure digital bearer assets without the burdensome proof of work algorithm, which basically prevents current systems from really being scaled up to primetime level, where they might be able to truly run the global economy. This is a major game changing moment. Remember when blockchain first got popular a full decade ago? The big prediction at the time was that distributed ledgers, what novices often refer to as blockchain technology, would find myriad applications in finance well beyond cryptocurrency systems. But those defi applications were slow in coming. And the reason is that the proof of work algorithm is so woefully inefficient that a cryptocurrency system is about the only thing that you can run on it. Because the promise of making a coinbase fee for mining the blockchain creates a financial incentive for miners to exist at all. So what most of the pundits overlooked a decade ago when they made these predictions was that the profoundly inefficient, wasteful design of Bitcoin, Bitcoin and other proof of work blockchains had to be fixed first before we could really see this defi revolution that people began predicting a full decade ago. All of this is about to change. Assuming that Ethereum 2.0 is successful in the merge, which hasn't happened yet, at replacing proof of work with proof of stake, Ethereum 2.0 provides what is effectively a financial network operating system that allows decentralized financial applications to interact directly with one another over the network. In other words, Ethereum has now evolved to become the distributed ledger system that is actually going to be suitable for building scalable mainstream financial applications that process millions of transactions per day. And it will be orders of magnitude faster and more efficient once the merge is completed. It was originally scheduled for June, that's just a couple of months off. But the upgrade has been postponed to Q3 now. And hey, I worked in the software industry for my first entire career. Anything that's ever scheduled to happen anytime is always going to get delayed. So I won't be surprised if it slips even further, and I won't be surprised if it doesn't go very well on the first try. Maybe they have a couple of stumbles, they'll get there eventually. We're getting closer and closer to a distributed ledger system, which is not held back by the incredibly inefficient proof of work algorithm. I predict there's going to be plenty of confusion and misinformation in the coming months. The reason is that despite its profound deficiencies, proof of work has found something of a religious following in the crypto community. There are actually people who have deluded themselves into believing that proof of work somehow stores intrinsic value. In other words, these people actually think the single biggest deficiency of blockchain is a feature rather than a serious design shortcoming, which is what it's really always been, and that's frankly been completely obvious to everybody who understands how this stuff really works. But unfortunately, smart people who truly understand how this stuff works comprise only about 0.000002% of the so called crypto community. So don't be surprised if something of a religious war erupts between Bitcoin maxis and Ethereum fans. Here's the spoiler. The Ethereum fans have it right folks. And I'm saying that before the merge even happens, the Bitcoin maxi crowd who thinks proof of work is an inherently good thing is basically smoking something. They have no clue what they're talking about, they don't understand distributed systems and they are flaunting their ignorance. It really and truly is that simple. It is still too early to declaratively say that the winner of the blockchain wars upon which the entire future of finance will be Ethereum. I'm not saying that. But if you question whether proof of work has to go or not, I am declaratively saying getting rid of proof of work, replacing it with a more scalable and efficient algorithm is the game changing moment that will allow the Defi revolution to proceed. And all indications right now are that Ethereum, after the merge is completed later this year, is going to be the hands down winner. Now I certainly don't mean to suggest that present day Ethereum is the solution to everything. Even after the merge occurs, this is still revolutionary technology that's being introduced very quickly, so there's plenty of room for more growing pains. Perhaps another bug will arise in ethereum and another $50 billion worth of ether will be stolen by hackers before this is over. Perhaps there will be other bugs and challenges to overcome, but in due time I predict that Ethereum is the most likely platform upon which the entire finance industry will be re architected as a tokenized digital bearer asset system, effectively eliminating most counterparty risks in the present system. So please do pay close attention to Ethereum. All of those things people were promising a decade ago where blockchain was going to be used for so many things other than currency systems have fallen flat. And in the entire reason that they fell flat is proof of work. So when Ethereum ditches proof of work later this year in favor of proof of stake, suddenly we'll be able to start delivering on all those decade long predictions and the Defi revolution will really take off. One thing's sure, we live in interesting times. We're gonna leave it there for this week's show. This episode of Macro Voices was made possible by farmtogether.com diversify your portfolio with US farmland one of the most inflation protected and recession resilient asset classes in the world now available to all accredited investors and by composer making institutional grade quantitative algorithmic trading and backtesting available to the masses. Patrick, Tell them what's in this week's Research Roundup.

C (86:18)

In this week's Research Roundup, you'll find a transcript for today's interview as well as a number of links to articles that we found interesting. So you'll find this and so much more in this week's Research Roundup. That does it for this week's episode. We appreciate all the feedback and support we get from our list listeners and we're always looking for suggestions on how we can make the program even better. Now, for those of our listeners that write or blog about the markets and would like to share that content with our listeners, send us an email@researchroundupacrovoices.com and we will consider it for our weekly distributions. If you have not already, follow our main Twitter account Acro Voices for all the most recent updates and releases. You can also follow Eric on Twitter rickstownsen. That's Eric spelled with a K and myself, Patrick Ceresna. On behalf of Eric Townsend and myself, thank you for listening and we'll see you all next week.

A (87:20)

That concludes this edition of Macro Voices. Be sure to tune in each week to hear feature interviews with the brightest minds in finance and macroeconomics. Macro Voices is made possible by sponsorship from BigPictureTrading.com the Internet's premier source of online education for traders. Please visit bigpicturetrading.com for more information. Please register your free account@macrovoices.com Once registered, you'll receive a free weekly Research Roundup email containing links to supporting documents from our featured guests and the very best free financial content our volunteer research team could find on the Internet. Each week you'll also gain access to our free listener discussion forums and research library. And the more registered users we have, the more we'll be able to recruit high profile feature interview guests for future programs. So please register your free account today@macrovoices.com if you haven't already. You can subscribe to Macro Voices on itunes to have Macro Voices automatically delivered to your mobile device each week free of charge. You can email questions for the program to mailbagrovoices.com and we'll answer your questions on the air from time to time in our mailbag segment. Macro Macro Voices is presented for informational and entertainment purposes only. The information presented on Macro Voices should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions. The views and opinions expressed on Macro Voices are those of the participants and do not necessarily reflect those of the show's hosts or sponsors. Macro Voices, its producers, sponsors and hosts, Eric Townsend and Patrick Ceresna, shall not be liable for losses resulting from investment decisions based on information or viewpoints presented on Macro Voices. Macro Voices is made possible by sponsorship from BigPicture Trading.com and by funding from Fourth Turning Capital Management, LLC. For more information, visit macrovoices.com sa.