← TFTC: A Bitcoin Podcast
TFTC: A Bitcoin Podcast
674: How Hedge Funds Became America's Largest Creditor with Infranomics
01:28:52
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- [00:07]
A
You've had a dynamic where money's become freer than free. If you talk about a Fed just gone nuts, all the central banks going nuts. So it's all acting like safe haven.
- [00:19]
B
I believe that in a world where central bankers are tripping over themselves to.
- [00:23]
A
Devalue their currency, Bitcoin wins.
- [00:25]
B
In the world of fiat currencies, Bitcoin is the victor.
- [00:29]
A
I mean that's part of the bull case for Bitco.
- [00:32]
B
If you're not paying attention, you probably should be.
- [00:34]
A
Probably should be. Probably should be.
- [00:37]
B
Robert. Welcome back to the show, sir.
- [00:39]
A
Good to be back.
- [00:41]
B
Good to have you back. I've been binging your, your YouTube channel last two weeks. Was telling you before that I was checking in once a week. But I think with all the madness going on in markets right now, you've been covering everything going on with great detail. It's astonishing the, the amount of detail that you can go into and the amount of data that you're able to surface. I reached out last week, I said hey, we'd love to catch up on the show. Last time you're on we talked about silent depression and sort of the more secular headwinds, if you will, societally in terms of the effect that I written the economy is having on, on individuals and society at large in aggregate. And I think you can definitely touch on that later because I think things are certainly accelerating as AI becomes more prominent and people begin to worry about what the job market is going to look like moving forward. But I think just to stay timely and topical, you've, you've been covering a Fed report that was dropped I believe over the weekend that highlights the dynamics of the treasury market are not what they were being reported. And it all stems from activity going on in the Cayman Islands, particularly around the basis trade. So what did the Fed just let the markets know?
- [02:10]
A
Yeah, so apparently we had suspected, according to the TIC data which is released by the Treasury Department, basically the official data on who holds US government debt and general cross border capital flows. That TIC data had reported that the holders of our debt were Japan at about 1.1 trillion, UK at about 900 billion, China at about 700 billion. And that has been coming down pretty notably. And then the Cayman islands as our fourth largest holder at about 400 billion. But because of this popular hedge fund trade known as the basis trade, the Cayman Islands, obviously a hotspot for hedge funds domiciled in the Cayman Islands. This has nothing to do with like the Cayman government when we're talking about the Cayman Islands, we're talking really about the fact that there's so many hedge funds based there domiciled there. The Cayman islands actually hold $1.8 trillion of our debt. And so that makes them by far the largest holder of US government debt.
- [03:22]
B
And before it was being reported that they held what, around 400? 400, yeah, 400.
- [03:28]
A
So undercount by $1.4 trillion.
- [03:31]
B
So what I'm trying to understand is why wasn't this reported correctly before the Fed released this report? And why did the Fed decide to let everybody know? Oh well actually here's what's going on.
- [03:47]
A
Yeah, that second question is one, kind of the first one that popped into my head after I realized the implication of this. My first question is okay, well why now? So it has to do with like how they calculate the repo. Because this basis trade is financed in the repo market which makes sofr and what's going on there I think pretty important. But it has to do with just the way the methodology with which they use to measure various cross border capital flows.
- [04:20]
B
Yeah. And so for anybody who's listening, you may need a refresher on the basis trade. What are hedge funds doing when they engage in this?
- [04:30]
A
Yeah, so the basis trade is treasury futures. Let's just use a 10 year treasury. There's the cash 10 year treasury which most people are familiar with. But then there is a futures contract that represents a ten year Treasury. That ten year treasury futures contract is obviously a contract for future delivery. But there is this optionality that the seller has when you sell a 10 year treasury futures contract. There's optionality there where you get to actually deliver, you don't have to deliver a ten year treasury at the end you can deliver six and a half year maturity, seven year. There's a range and so the seller gets to choose the cheapest option for them. Maybe at the time, you know, it's a 10 basis point difference between the 7 and the 10. So they deliver the 7 even though it's a 10 year treasury contract. And that kind of optionality or uncertainty premium is baked into the futures contract. So it's very small, it's only about 10 basis points or 0.1%. So that trades at a premium the future. And so what they do is they short the futures contract and then they buy, they long the underlying U.S. cash treasury and the difference as expiration years, treasury features kind of roll expire every three months as you near to expiration, that difference as the arbitrage gets worked out goes to zero and so you're basically just pocketing the spread between the futures contract and the actual 10 year Treasury. And so it's delta neutral because if bond yields go up, well, you're covered because you're short the 10 year futures contract, bond yields go down, you're okay because you're along the cash tenure Treasury. So it's delta neutral. Meaning. And also it's using probably, I mean what at least what the market considers to be pristine collateral. We have different opinion on that. But yeah. So the fact that it is using U.S. treasuries as the collateral for financing in the repo market makes it less risky. And of course you're delta neutral, so it doesn't matter if bond yields go up or go down. You're just trying to pocket the tiny little difference between that futures contract and the actual 10 year treasury as it approaches expiration and you lever it up. So if it's only 0.1%, that's not worth anything. That's not worth anyone's time. So what they do is they lever it up 50 to 1, to as high as 100 to 1. And that might sound crazy, but this is well documented if. Yeah, on Google and this has been an issue for years. This has been a risk that the Fed has known about. This has been a risk the SEC has been aware of, the cftc, various organizations. You can find all sorts of academic papers talking about the risk that this basis trade has. It's blown up. 2020. It blew up. It also sort of started to blow up in April during the Liberation Day. So it's a known risk and the leverage is well documented to be pretty insane.
- [08:03]
B
Yeah.
- [08:04]
A
And you cited it in one of.
- [08:06]
B
Your videos from the last couple of days. But the Brookings Institute came out in June, wrote a paper I believe in reaction to the April blowout of this basis trade. I think a lot of people have been focused on the end carry trade as well. And it just seems like wherever you look there's a ton of hidden leverage on the system. And again, going back to the original question, why did the Fed feel compelled to release this data, particularly after we had the SOFR spasm last week? So for spread to Fed fund rate spiked to 0.19% which is pretty high. Highest point since 2020, I believe.
- [08:49]
A
Yeah, it does make you wonder the timing of it. And of course Jerome Powell came out and you know, mentioned basically the end of QT funding stresses in the repo market. This was I think Wednesday and then yeah, we got data on SOFR for Wednesday and Thursday, which was quite elevated for Wednesday and Thursday. Sofr, the secured overnight funding rate was, was actually above the discount window rate, which is the Fed's attempt at setting a ceiling in the price of money. They actually have a range. They don't set one interest rate. They have this corridor or this range that they use to set interest rates. And the lower bound being the reverse repo award rate. That is the Fed's attempt at basically saying, no matter how overabundant dollars get, we will always buy them from you at 4%. And then the discount window rate is the upper bound. And that is the Fed trying to say, no matter how scarce dollars get, we will always sell them to you at 4.25. So by doing that, hopefully thinking of it that way makes it a little bit easier for people to understand. But by maintaining those two different interest rates, they're able to try to keep sofr, which is the actual funding rate determined by supply and demand of dollars within the repo market. They try to keep SOFR within that range by having those, those two tools. Yeah.
- [10:29]
B
And typically when you see spasms in these markets, it means that a liquidity crunch is on the horizon, like you said. Jerome Powell implicitly seems to believe that may be the case with his comments around the end of quantitative tightening. There was regional banks last week hit a pretty tough middle of the week with many down more than 10%. And you saw the sort of reemergence of a theme that reared its head a couple months ago with the tricolor auto loan subprime auto loan collapse. It seems like there's other similar lenders that are out there under a lot of stress. And you have banks as big as JP Morgan with exposures to them. I think JP Morgan had to write down $200 million in credit loss on one of these deals last week. And that's the question. Is there a liquidity crunch?
- [11:28]
A
Well, yeah. What sofr? So the first video I did on liquidity and repo market and sofr, and I think it was back in like July, because I think that was about the time when they announced they were going to rebuild the treasury general account or the tga. This is the government's checking account. Just like you would like a buffer in your checking account, the government does too. It was down to, I think only 300 billion or so. So they wanted to build that back up. And basically when that was announced, I started to kind of warn that there would be increase, that that in and of itself would cause, you know, a shortage of Liquidity, at least compared to what it was before the reverse repo was dwindling down. And so you know, normally the reverse repo, it's not a primary method of managing liquidity, it's more one of those, I think of it as a shock absorber or a buffer. And so as that buffer was drawing down, meaning the amount of buffer for dollar liquidity was getting smaller, kind of all of it was lining up and you were starting to see some elevation in SOFR spreads. SOFR minus reverse repo or fed funds, you're starting to see that kind of back in June, even at the end of June. And it's normal to see at the end of the day, at the end of the month or end of the quarter or tax deadline, which we saw a couple of weeks ago, I guess about, about a month ago, it's normal to see SOFR start to kind of blow out. But what has been happening recently like over the past couple days is we've seen SOFR notably above, like I mentioned before, discount window rate, IORB fed funds, reverse repo award rate. And then you couple that with the credit issues and the fact that credit spreads have started to widen. They're still near kind of all time tights, almost historically tight credit spreads. So we're starting from a pretty stable or decent position. But the fact that credit spreads have started to widen, you couple that with what's going on with sofr, then you start to kind of factor in this basis trade and an unwind of the basis trademark threat I guess you could call it. And it's all, you know, it's like you, we found out, we, we, we know that sofr, we know funding stress in the repo market from sofr. We know the reverse repo is empty, the TGA rebuild is basically done. So that's not, shouldn't have any further negative impact on liquidity, but it certainly did. They, they removed half a trillion dollars from the financial system. That's not nothing but that, that is done. But you have the reverse repo empty the TGA rebuild remove 500 billion. Bank reserves are declining. They're right around 3 trillion last I checked. And so yeah, you kind of couple it all together and it's like, okay, so the largest marginal buyer of our debt, foreign at least is a bunch of 100 to 1 levered hedge funds in this basis trade. It's extreme. That basis trade must be financed every night in the repo market. So you start to get, you know, widening of SOFR spreads that could put funding stress on the basis trade, causing an unwind of the basis trade, which could cause and what an unwind of the basis trade looks like. Remember, you're. You're long the cash treasury and you're short the future. So if you are forced to unwind that position, it puts upward pressure on the future and downward pressure on the bond. You're forced to do the exact opposite of how you got into the trade. So it involves selling of the bond, which means yield sharply up and then buying, buying of the future to close your short. And so we've seen this before. In 2020 you can look at TLT relative to ZB, which is the long bond futures contract. You can see this happen for example, in March of 2020. It also started to happen again in April with Liberation Day. You get yields sharply higher. Not good for liquidity either.
- [15:46]
B
No. And on top of this, last week we had the standing repo facility tapped for the first. First time since COVID I believe. And it was not that.
- [15:58]
A
Yeah, not the first time. But what happened was if you think of the reverse repo, which is that storage tank for kind of excess liquidity you can think of, you take the reverse repo and you subtract out how much standing repo has been is being used. That spread kind of gives you an idea. Are we in an abundant liquidity regime or a scarce liquidity regime? It's kind of how I think about it. So previously we've been in an abundant liquidity regime where the reverse repo has been as high as two and a half trillion dollars. And that storage tank of that shock absorber has been full of cash of dollars. And what we had recently was standing repo's been hit. I think it was hit back in, I want to say August, might have been June. There have been a couple brief moments in the past year or so where it's been hit. But what we had recently was that standing repo, which again is the opposite of the reverse repo, the standing repo or srf, that is for when there's a shortage of liquidity and, and hedge funds need emergency dollars. That standing repo got tapped. And you take that spread, the difference between the reverse repo and the standing repo that went negative for the first time, going all the way back to March of 2020. Sup, freaks?
- [17:19]
B
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- [18:13]
A
This RIP was brought to you by.
- [18:14]
B
Our good friends at Obscura. If you've been listening to the show long enough, you know we care deeply about privacy. Particularly as you peruse the web, it is important to be using a vpn and Obscura is our VPN of choice. That is because it is a VPN built by a bitcoiner. For bitcoiners, it is the first VPN that can't log your activity and outsmarts Internet censorship. Obscura VPN works even in the most restrictive Wi Fi networks where other VPNs simply fail to connect with server locations across America and the globe. Obscura keeps your Internet access unrestricted wherever you are. I've been using it since it launched. I see no problems with speed. I can get on YouTube TV without any problems. It simply works. They can't log. You can pay in bitcoin. Go to obscura.net, use the code TFTC25 for 25% off an annual subscription. It's already a good deal. Their annual deal, the TFTC25 code, gets you 25% more off. Go check it out. Obscura.net, use the code TFTC25. Now, as you're explaining all this too, and you have the government shutdown in the backdrop of all this too, was the Fed release of this Cayman data. Sort of like a signal, like, hey politicians, we've got a pretty massive exposure to this carry trade by predominantly American hedge funds domiciled in the Cayman Islands. It may be time to turn the government back on so that we can, we can solve this crisis.
- [19:35]
A
If it does emerge, it could be a lot worse. If it was a debt ceiling debacle like we had earlier, that I think would be significantly worse. That's probably coming. You know, we go through those debt ceiling debacles all the time. It seems it's like a constant thing in American politics. So whether it's a government shutdown or debt ceiling debate, there's always that kind of embedded stress that seems like it happens every year or so.
- [20:06]
B
Yeah. Well, and then I just recorded with Luke Roman, another variable in the backdrop here is this, I want to call it. I don't know if it's an attack or it seems like China, the BRICS countries, many others are noticing what's going on with the U.S. treasury market. And not only the treasury market itself, but the US Government, which is backing this market. And they're saying, I don't know if you're a good counterparty if we're going to be buying your debt. And so we've seen massive transition towards this gold settlement network, which is many people are surmising. What's happened with China registering its gold on warrant at the Shanghai Gold Exchange. That chart became popular about a month or two ago, but I saw Jim Bianco updated it and seems like that's only increasing at a rapid pace. It's almost doubled in the last month. The amount of gold on war at the Shanghai Gold Exchange.
- [21:02]
A
Yeah, it's vertical.
- [21:04]
B
Yeah. Right before we hopped on, I saw that Ethiopia made a deal with China to settle their trades in yuan. What do they say exactly? Ethiopia in talks with China on converting dollar loans to yuan loans. And so it seems like the US treasury, the Fed, are in a very precarious situation where they're walking a tightrope 200 yards above, above the earth, trying to make sure that they can manage any liquidity crisis that may be emerging. And then on top of that, they're getting attacked from another angle, which is one of the largest superpowers in the world. China basically opening up a competing settlement network backed by gold and trying to use that as a reserve sort of assets. And I think Luke said something that I've been thinking about since we recorded last Monday. It's been a week now. Posted the episode on Saturday, though. But it's like foreign governments now officially hold more gold in reserves than US Treasuries. Is that a signal that the US Dollar reserve system has been supplanted?
- [22:17]
A
Yeah, I mean, going back to February, China held about 784 billion. Now just in the past what seven months or so? Or I guess it's five months. I'm looking at July data. So just in five months from February to now that's down to 730 billion. So reduction of 54 billion, that's significant. And then you couple it with what you mentioned about Shanghai and what China's doing with gold. I think it's interesting because it kind of is what the US needs to go back to the discussion we had the first time kind of on the silent depression and some of the kind of structural issues. It's actually in my opinion going to help that situation. As countries move away from the US treasury and into something like gold, something neutral like gold. I think that it will actually improve a lot of the issues that we had talked about. With a 4% of GDP current account deficit that and of course the resulting capital inflows that disproportionately benefit the those that have capital, those that have financial assets that are buoyed by about $1 trillion of forced mandatory structural capital inflows into, into financial markets in the US I added up from the bea, the current account data I added up from, I think it was 2011 or 2012 up through 2024. If you look at foreign purchases of real estate, those get recorded under FDI Foreign Direct Investment. And then you add in the estimated portfolio investment into REITs and MBS mortgage backed securities, you add that all together and going back to 2011, 2012, I can't remember exactly which year it was. Foreigners have purchased about 700,000 single family homes worth of real estate. That's significant and that's that you know, these are price insensitive buyers they are buying to balance that current account deficit. So the same thing is true of course with equities. We know foreigners, that's one of their favorite places to recycle dollars into. And of course Treasuries that kept yields very low, artificially low. And so yeah it a move away from that recycling of the trillion dollars that we send out to the rest of the world in the form of our current account deficit. That trillion dollars is being recycled into dollar denominated assets less and less. And it's not happening. You know, it's not, we're not talking about overnight changes of like 50%. This is around the margin and it would take years if not decades for this to fully play out. But if those foreign countries start to, instead of buying equities or Treasuries or US real estate with those dollars, that trillion dollars we are running in our current account deficit every year. If instead of dollar denominated assets like those, they start to buy gold, that'll bid up the price of gold in dollar terms. And so gold can, and this is something Lou Groman's been super out front on, you know, going back like two years, maybe even more. The gold as, as there is a shift away from the, the, the U.S. treasury or other dollar denominated assets into some neutral reserve asset that freely floats in all currencies like gold. What you could get is a, is a revaluation of some of these currency crosses because again, China's not running a trillion dollar current account deficit with anyone. They run a massive current account surplus. I think it's like 5% of GDP. So there is no country right on the other side from China going, well, yeah, we used to recycle these into, I don't know, yuan denominated bonds, government bonds, but now we're going to buy gold. So you don't have the gold price in yuan terms, at least from foreigners being bid up in yuan terms. There's no offsetting kind of bid in yuan terms. Now domestically, of course, we know they buy gold, but just kind of generally speaking, this is one of those kind of subtle forces that over a decade or two would eventually lead to a higher gold price in dollar terms and a lower gold. Gold will still get bit up in yuan for sure, but to a lesser degree. And so then what you have, you cancel out the two denominators because they're constant. Gold to gold cancel out the denominator. You've basically just set a new exchange rate. And this is something Luke has been talking about for a long time now, the need for a revaluation specifically of the dollar, yuan cross rate. There's of course, other currency issues. The dollar structurally overvalued. In fact, on a purchasing power parity basis in 2024, the dollar with the Dixie at like 105 was more overvalued than it was 1984, 1985, when the Dixie was 163. And of course, the Plaza Accord was just about a couple months later. We were even more overvalued on a purchasing power parity basis in 2024 than we were back then when the Dixie was 162 or 3. And of course the Plaza Accord happened right after. And we know what happened to the dollar. So I still think that whether it's a gradual revaluation like you mentioned, the adoption of gold, it's happening more rapidly than I think some of us Thought it would. I expected it to happen around the margin, but kind of more gradually. The degree, the rapidity, the velocity with which it's happening, kind of surprising to me, but whether it happens gradually in the mechanism I just described, where you get a weaker devaluation of the dollar versus gold to a greater degree than devaluation of yuan gold, then that could take 10, 20 years, but eventually you get a new exchange rate where the dollar is weaker versus the yuan. And of course, China has made it pretty clear in various statements they've been making for five, six, seven years, top CCP officials that they are trying to, number one, internationalize the yuan and number two, reorient their economy much more in a US model toward domestic consumption rather than this subsidized overcapacity, export dumping sort of approach that they've taken where it's just gained market share at any cost. There's a recognition in China, just like there's a recognition here in the US with the current administration at least, that our structure of debt fueled over consumption and insane twin deficits, that, that has kind of run its course and the pendulum has, has gone too far in our, you know, in that direction. Just on the other end, China has recognized that their model has gone too far and they, you know, you don't get public statements by top CCP officials like that unless it has the blessing of over there, you disappear. If you say something that over here we get to have leaks and all this kind of public comments about stuff over there, not so much. So the fact that they have been pretty vocal about that. I think there's a recognition that both of our economic models kind of went to their logical conclusion and we've seen peak globalization. In my opinion. I think that's pretty clear. I don't think it's controversial anymore and that there's likely to be a meeting in the middle. Whether that happens by Mar a Lago accord or the mechanism you mentioned where it's kind of a gradual gold adoption in place of the U.S. treasury. I think either of them have the same end effect, which is a weaker dollar, stronger yuan. Yeah, and it's.
- [30:43]
B
Very interesting to try to think through which happens. I mean, I'm looking at the price of gold right now. It's approaching $4,350. So it's cooling off a little bit after the run that went on last week and the week before. But that could certainly accelerate again. I think that's one question on many people's minds, like is this a blow off top? Is Gold about to correct. But I do think we are in uncharted territory in the sense that I think this bid seems very different than anything I've seen in my life. Not that there's been many material bids under gold outside of, what was it, 2011 and 2012. Obviously the last two years. Last year has been very good, but it seems like somebody's buying hand over fist or multiple people are buying hand over fist, sort of seeing the writing on the wall. And then you pair this with the sort of geopolitical saber rattling between us and China over the last two weeks, specifically with, with rare earth metals. And are we just getting a sort of show between Trump and G where they both recognize like, hey, we need to get to the table, but there's some showmanship, or is the showmanship actually public sort of exertion of, hey, who, who has the leverage at the end of the day? And after my conversation with Luke, he would say that China has all the leverage. Particularly if you believe that we need to go into this hyper industrialized reshoring they do of the United States.
- [32:19]
A
They. I don't understand how anyone could argue that China is not the one with the leverage. I mean, we lost effectively a proxy war to a country with one twelfth of our GDP because we have so completely hollowed out our industrial base that we can't even make the shells and artillery and, and Patriot missiles needed to, to, you know, for our own military, to defend our own people. We rely on China for 65% of active pharmaceutical ingredients. So the actual drug that goes into the medication, those APIs, about 65% come from China. You kind of go down the list, right? China has everything that is actually needed. What do we have? We have a bunch of derivatives traders, we got a bunch of meme coin traders, we got high frequency trading firms that build the best high frequency trading algorithms. We got the most deep and liquid treasury debt market in the world, sovereign debt market in the world. But you compare those two, China's got commodities, they've got the chips, they have the active pharmaceutical ingredients, they got the rare earths. Go down the list of what they have versus what we have. And I don't know, the deepest, most liquid capital market in the world doesn't seem very important when you're talking about, when you get down to it. Look, maybe in 1990, peace, dividends, world that matters and that has value. But in a world that is, like you mentioned, more polarized, with higher tensions, geopolitically, more multipolarity, I think that it Matters much less how deep your sovereign debt market is, how liquid your sovereign debt market is, and matters much more who has the commodities. Now we necessarily have energy, which that I think is one of the areas of leverage that we do have over China. They are so utterly reliant on imports, energy imports much more so than we are. We have abundant oil, natural gas and energy resources here in America. And I think that this administration accurately identified that as being one of the strong suits, one of our pros, one of our benefits here. But at the end of the day, I don't think that the most liquid capital market in the world is really that important. Especially when you're talking about a world that looks a lot different than the world we might be used to in the peace dividend era. But maybe I'm crazy.
- [35:05]
B
I don't know. No, I mean I've been, I've had Luke on B, had somebody who's been over in China advising Western companies of how to do business in China for 30 years on the show. And that's one of the main pieces of feedback is like these guys are just like pro China.
- [35:24]
A
Like I'm not. Just to make it super clear, I am extremely patriotic. I love America more than anything. I could not be. I do not want to live in China. I would, I would rather, I don't know, I'd probably rather die than live in China. Is not out of a pro China. There's such this like knee jerk reaction nowadays to when it came to the war in Eastern Europe is the same thing. And, and with China I, I see that sometimes too. There's such this like effort to pigeonhole just because you make a criticism about your country. I think it was Mark Twain that said that there's no deeper patriotic duty than criticizing your own country. That's kind of how I look at it. It's not that I'm saying these things because I hate America or that I love China. Couldn't be further from the truth. It's more that I want to see America return to the strength that we all know it has potential for. Yeah.
- [36:26]
B
And the reason I bring it up is because I agree with you. I think there's people that are just denying objective reality. When you look at it like you go through. Yes, we do have liquid capital markets and good high frequency traders and a great services economy at the end of the day. But if you do believe that we're moving into a more multipolar world, globalization has seen its peak and we're going towards a more deglobalized world and you're trying to look at the objective facts, it's like, yeah, the leverage is going to be.
- [36:55]
A
Yeah. How many. How many lawyers do we need?
- [36:58]
B
We need less. We need probably 10% of the amount of lawyers that exist. Because, I mean, to a whole. Another can of worms is like, the problems they create by writing more laws and regulations and permitting requirements, whatever it may be. But digress. The. When it comes to China, people saying, you're on Patriot, never bet against the United States. I completely agree with that. But I think before or even place chips on the table to make a bet, it's like, all right, let's acknowledge objective reality and try to figure out the best solution based off of that objective reality. You can't put your head in the sand and just say, ah, don't worry about China. Nothing's going to happen. I think the last two weeks have proven that they do have leverage as it pertains to rare earths specifically. And that's one thing through these conversations that I've been trying to sort of tease out is like, what is like? Ideally, in my mind, it's like China in the United States, Trump G. However you want to frame it, get to the table and get a deal done. And I think China just wants to be recognized as a legitimate economic power and political power on the planet. They don't want the US Meddling in things in Southeast Asia and observing objective reality. And with that in mind, saying, hey, we may need to make some concessions in terms of swallowing some pride and saying, hey, China, yeah, we agree you guys are doing some pretty miraculous stuff. And let's try to work together and not get into some kinetic war. Because in 2025, kinetic war or even economic war is not good. The leverage in the system is too high, and it's a tinderbox for a calamity. I want to see the routes where we figure out how to work together and just increase the quality of life for all humans.
- [38:48]
A
Yeah. Same goes with Russia, in my opinion. You know, my ideal world is global cooperation, not globalization. Not this neoliberal approach that both parties had taken for decades. Right. Not that, but peace, I think. I think, well, hopefully most people, at least our age, are of that mindset. There is certainly a camp that. That is not. Does not wish for peace. Does. You know, it's always yearning for conflict with some new country. Every, every. Every week, it's a new country. But I would like to see tensions with Russia and China decreased. But, you know, I think that we have to be Honest about the shortcomings. That, that, that the U.S. economy, that U.S. society, all. Again, it kind of goes back to our prior conversation. Like all of those criticisms. When I bring up deaths of despair and the suicide rate and all those various statistics, it's because I think the first step is admitting what the problem is. Most people don't even talk about that stuff. Although I will say that in the past, I don't know, six months, nine months, there's been a growing discourse, a growing conversation when it comes to the kind of silent depression stuff. Someone told me the other day, they're like, what do you call it? That's not. So it's not very silent anymore. And I said, well, when I started talking about it was, you know. But I think that that's the first step is recognizing the areas. Look, I think that like, you know, the average American would, if they were polled, be able to tell you. Especially average young American would be able to tell you, yeah, like, I don't know what world you live in. Right. If you have $5 million in your 401k, you got two or three homes that are up, you know, 800% and all the equity, you know, all the wealth created there. Yeah, like, the boomers are doing great. Of course they're not going to see any of these issues. So there's a. There's a large amount of generational gap there as well. But I think that the first step is to. And I think to some degree, it's going to take some of the younger people starting to come into power politically, and you already kind of see that already on both sides. I would argue, to some degree, you're already seeing a bit more representation from the younger crowd, the millennials, and to some degree, the zoomers. And I think that that's important because there's a huge generational component to it too. Boomers seem to live, like, every time I see one of these kind of head in the sand type, type speeches or comments or whatever, it's always a boomer that is living in 1960s America in their head. 1970s American. It's not that way. I think that the picture would be a lot different if you spoke to especially younger people.
- [41:51]
B
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- [41:52]
A
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B
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- [42:53]
A
Retirement system is taking on Water.
- [42:55]
B
On October 28, Mark Moss and Unchained's Jeff Vandrew will explain why 401ks were built to serve the system, not you, and how fees and hidden risk create an illusion of wealth. You'll learn why bitcoin security and growth curve make it a powerful long term savings asset and how a Bitcoin IRA can let you roll over an old 401k with tax advantages intact. If you want a retirement plan that prioritizes sovereignty and purchasing power, this is the event Register now@ Unchained.com TFTC Unchained.com TFTC now with that in mind, I'm obviously Trump and surrounding himself with something like J.D. vance. Most importantly, as vice president Millennial, he seems to get what's going on at least domestically. I think he's stood up against H1B visas and really standing up for the American worker specifically. With that in mind, in terms of domestic policy to fix these problems, how would you grade Trump's performance so far?
- [43:53]
A
Not as good as I was hoping. A little disappointed. Could have been a lot worse. You know, I'll say that. But yeah, there's a lot of talk on, on a number of things that we haven't exactly seen follow through on still early. Like the one thing I'll say, you know, I is it's still he still Got some time. I'm not going to totally condemn the performance because we still have time. Like you mentioned, JD Vance has been pretty vocal on some pretty important issues like the H1B. So I'm cautiously optimistic. But unfortunately I think that due to the fiscal dynamic, due to what's going on kind of economically, I think that we're going to get into a situation where, for example, that K shaped economy probably actually gets worse. We know Trump wants negative real rates. We spoke about that in the prior conversation. That's not going to be good to fixing the K shaped economy. Ironically, go back to early April and Liberation Day. Chaos. Stock market is plummeting. Who was on CNN and kind of CNBC and these various kind of normie mainstream media outlets, it was a bunch of rich boomers that were upset, that were crying the hardest that stock market decline. Now we know Trump capitulated mainly due to what was going on in the treasury market, not necessarily the stock market, but we know he ended up capitulating. But something like that. I was starting to get pretty optimistic. Okay, Bessant all of the talk about Main street, you know, it's their time to win. I'm starting to get a little optimistic there in that first week of April because you know, you talk to the average 25 year old about their stock portfolio. They got like, you know, $200, they're living paycheck to paycheck, they're working three jobs. It's not exactly like they have millions of dollars in some stock portfolio. And if you look like the top, the top 10% of income earners own 92% of U.S. equities, right. So the, the bottom 80%, 90%, they weren't really affected. You know, the average holding in a 41k is like $51,000, which is not even, it's maybe a year worth of expenses, is nothing, is basically a rounding error. So yeah, you know, I think that the bottom 90%, it was starting to look like, okay, they're willing to break things. They're willing to. Because really what that would have been was a wealth redistribution. Which is funny given the kind of political implications of that. That's really what it was. You want to fix the K shaped economy, okay, you have to be able to tolerate a significant equity market decline. The problem is that again, Luke has been upfront on this. I've done my own, I've done my own fact checking of it and found it to be correct, which is the government can't afford the stock market to decline in a meaningful Prolonged sort of, sort of way. Or it so utterly hurts the wealth, the wealth effect starts going into reverse and you start to negatively impact. You start to impair the capital gains tax revenue, blow out the deficit. As Luke says, the equity market de facto backs the US treasury market. So they were never probably going to tolerate a significant equity market decline. But that was one of those areas where I was like, okay, maybe they are willing to break things. But then as soon as treasury yields started to go vertical, two days later it was capitulation. So I think that that's really the governing factor there is the treasury market, not necessarily the equity market.
- [47:52]
B
Yeah. And this is something I've been saying the last couple months too. I think based off of the scenario or the reality that you just described, that the government cannot afford this. So it looks like we're going the route of melt up, probably melt up equity markets, incredible debasement. Individuals need to really take it upon themselves to protect themselves with assets like Bitcoin. And I've been pointing at Square's release of the Bitcoin functionality in their point of sale terminals. It's like, all right, this is, you're not going to go fix this at the polling booth. You need to take advantage of this tool that Square has afforded you as a, as a small business owner and begin saving some of your revenue. Your cash flows in Bitcoin over time. Because it seems clear to me that melt up is, is the way forward. And I think the gold price is screaming that as a leading indicator right now.
- [48:52]
A
Yeah. And just to like make it really clear, even a bunch of tradfi people don't really get this. They look at gold as just a thing. Like they don't, they don't really actually understand what, what you're actually looking at. Which you have to think of gold as a FX pair. Right. So dollar yen, dollar euro, it's the same thing. It's dollar gold or gold dollar is how people normally look at it, which is how many dollars does it take to get one ounce of gold, the gold price denominated in dollars. But you take the inverse of that gold chart, which is just going vertical. You take the inverse of that and that is the dollar denominated in gold terms. Gold has been money for thousands of years. That has its flaws for sure. All the properties, I think bitcoin objectively does better each of them. But, but that being said, gold has been money for, you know, hundreds, thousands of years. JP Morgan said, you know, gold is money, everything else is just credit. I think there's some truth to that even in today's day and age. So what is that really telling you? Well, what it's telling you the way that the gold price gets bid up in dollars and is that more people are willing to sell dollars to buy gold than are doing the opposite, which is selling gold to buy dollars. That's really what it's telling you. So what that reflects now that you have now, once you understand that way of looking at it, that lens to view it through, it's a pretty damning indictment of not only the dollar, but of course, kind of the institutions that back the dollar. And it's not just the dollar. I mean, gold is getting bent up in every currency, but historically the dollar served as some sort of safe haven asset. And we're not really seeing that too much. I do think that short to medium term, the dollar could show some strength here, just kind of generally speaking. But we've been seeing the yen, the euro and the Swiss franc replacing the dollar in terms of when it comes to those risk off sort of moments, what is getting bid. And this is true, going all the way back, I noticed in January, February, I'd wake up, I wake up early here on the West Coast. I'd wake up and see equities would be down, yields would be up a little bit and the dollar would be down. So bonds down, stocks down, dollar down. And I started looking at, okay, well what's up? And it was gold, euro, yen and Swiss franc. And that theme is holding true. Which, look, I don't think that you have to replace the dollar with the yen or the euro. I think that we're moving into a world that is much more. You mentioned multipolarity earlier. I think that's accurate. And I think that we should look at kind of global FX reserves and current, you know, not one global reserve currency, but multiple diversification of the sovereign holdings away from, you know, 65% I think it was at the peak in terms of dollar denominated assets, mainly U.S. treasuries and much more to, you know, Maybe we hold 10, 15% in U.S. treasuries and 10% in yen and Right. I think that sort of world with gold and eventually I think Bitcoin, given enough time, that sort of world. Right. Because people always push back so hard on like nothing can replace the dollar and it's like, well, gold kind of is number one. Number two, nothing has to be the global reserve currency. There can be multiple reserve currencies. You could imagine a world where dollar euro, yen and the yuan are all 25% or call it 15% and then maybe the rest gold, something like that, which would take some time to get to. It's not going to happen overnight, but I think that that's much more where it's going. But what I think once people need to really kind of abstract out what the gold, how to think of what the move in gold is actually signifying. Because once you get it, it's red alert, you know, what's going on in the gold market. And also it should be noted that the breakout like this is gold has been breaking out. It's not just in this current administration. This started before. So.
- [53:21]
B
Yeah, and that begs the question, like.
- [53:23]
A
How.
- [53:25]
B
How underexposed are not only governments but institutions? I mean, how many of these hedge funds in the Caymans just trying to leach off this, this basis trade underexposed gold? I think there was a Bank of America report that came out a few weeks ago that something like 4% of hedge funds have any material exposure to gold. Is there a whole class of institutional capital that's just completely missing this wave when their fiduciary responsibility is supposed to see it before it comes and benefit from it when it actually does manifest?
- [54:01]
A
Yeah, I think institutions are, at least in the west, probably. I've seen similar reports. I think institutions in the west, firms in the west are underexposed, but also individuals. You had made the comment before about the debasement and kind of the run it hot sort of approach and how badly that's going to crush. We were talking about the K shaped economy getting worse. What I really worry about is the average American getting crushed by a run it hot sort of regime, by negative real rates. We know Trump thinks that since our discussion we had mentioned negative real rates, how Trump thought that the fed funds should be. I think back then it was like 1% or something, which would represent at the time a negative 200 basis point real rate. Well, now you have Stephen Myron, who Trump picked to be the chairman of the Council of Economic Advisers and now on the Federal Reserve, he came out, this was like month and a half, two months ago, and he said, I believe the neutral interest rate is 2%, which is notably below where we are now. And I thought, oh well, that's interesting. But then like a week or two later he comes out and says, no, the neutral interest rate is 0.5%, which is just insane to me. When you have inflation at 3%, like solidly at 3% and assets at all time highs, you know, It, I think that they're trying to tell you where, which direction they want to go and look like it's not necessarily that they have a ton of optionality or choice in the matter. You know, this has kind of been starting to get baked in the cake as Luke says years ago. So it's not that they're choosing to do this right. And, and I wouldn't it. It's unfortunately just where we are and just kind of what you have to do. Absent a productivity miracle, we're not going to cut spending because you cut spending. I've done the math. And if you cut spending, if you bounce the budget, it would result in a GDP contraction worse than 2008 in the GFC. So you can't, can't just bounce the budget, especially given what's going on kind of with the dollar's reserve status and what that might do to other assets. Of course, in the mid-90s to late 90s we ran a surplus and that caused all sorts of problems in say the equity market. And then that got kicked to the housing bubble, which by the way, even the Economist on the wikipedia article for 2008 and the causes of 2008, even the Economist, which is a fairly pro globalism sort of outlet, even they admitted that the, the 5 or 6% trade deficit as a share of GDP in the early 2000s led to the 2008 GFC, the bubble, to the housing bubble. So even they're admitting that. So you have all these other issues with balancing the fiscal budget, but yeah, you would plunge the US into a recession that would be catastrophic. It would be a margin call on the debt. So you can't do that. What other option outside of a productivity miracle which could also bring about mass unemployment. Right. And all these other issues, like they don't really have a good option here, unfortunately. Run it hot. Devalue the debt in real terms against scarce assets like gold and Bitcoin. That's kind of the only option that they, that they really have. Negative real rates to try to get the interest expense, which is one of the largest outlays, try to get that under control. Negative. Real, real rates. But that's going to be stimulatory, it's going to be inflationary. That'll make the K shaped economy worse. They'll fuel the asset bubble even more. So yeah, it's unfortunate because I don't really think that they have much of a good option outside of a run it hot. And they started telling us back in what May or June that they were I mean it was Scott Bessant, David Sachs and Elon Musk all within a week of each other. All came out back in, I think it was May and said, yep, like can't cut, can't cut. That's not how we're going to get out of this. We got to grow our way out of the debt. They all mentioned that nominal growth has to be above the cost of the debt. And unfortunately that's just kind of where we are. That's what we did after World War II and inflation was 18, 19% at the peak coming out of that.
- [58:36]
B
I know we touched on this last time you were on, but the productivity miracle, it's right around the corner. Have you seen everything going on with AI? All these data centers being built up. There's not enough supply of GPUs to feed the insatiable hunger for tokens in the world. Do you believe that there is any hope of an AI productivity miracle actually materializing?
- [59:00]
A
I mean, I can say for myself that it has notably improved my productivity. I use it in a very particular kind of way and it has significant limitations. Right. But it's kind of constantly improving and tends to be getting better. Like for example, you can tell it to write a pine script code for TradingView and it just spits out like, I could never do that. I'm not coder, I have no idea. So things like that. And it's very quick to. It certainly boosted my productivity when it comes to say the YouTube video research or, or you know, preparing charts. It certainly helped me. How much and how quickly the real productivity gains actually appear is totally different story. So like I've looked for good high quality data on that very issue and not really been able to find a ton of data, which is kind of surprising. I did put out that post job openings to the S and P kind of as a joke. It ended up going like giga viral. It was kind of a joke. But you know, there's probably some amount of. I was hoping to spark some amount of conversation because I do think that there is some amount just from what it's doing personally for my productivity. I believe that there's got to be some amount of productivity gains coming from AI. Productivity for Q2 did come in significantly higher than expected by. By a lot. I think it came in at 3.3 and the expectation was like 2.6. So it did come in notably hot. Q3 I haven't seen yet. Government shutdown. So yeah, I would imagine that there's some amount of productivity coming, but you know, then you start creating other problems, right? Which is, okay, say it is going to be as transformative as some people say. Okay, well now you might be talking about an unemployment rate of 20%. How do you fund that? And so, yeah, I think that that's why and I think Luke's correct on this. The productivity miracle option has to come at just the right pace and it has to come at just the right intensity. Otherwise it actually makes the situation worse. Because we know government's so inefficient. Like for example, Medicare outlays as a share of tax receipts when back in the early 70s it was like 2%. Now it's like 24, 25, 26%. So we know how inefficient. And it's the same with Social Security as well. These government programs are incredibly inefficient allocators of capital and the number of administrators and the bureaucracy and all that. So it's not like a one to one, right? There's probably for every dollar in unemployment benefits that someone actually makes, there's probably another 50 cents that's getting paid to government bureaucrats along the way. So yeah, I think that the problem is if it does come, if the productivity miracle does come and it is transformative and it'll cause significant dislocations in the labor market, those people have mortgages and car loans and they go to the local Starbucks to buy coffee and whatever. And so I being extremely deflationary, I've kind of understood this concept. I've been talking about it for a year and a half. I don't, don't really know like how it ends up resolving. But immediately I thought, okay, if AI is as transformative and revolutionary as people say, okay, well that's massively deflationary. And then I was like, okay, but you know, the government debt to GDP is 125% now. Private household debt, they have de levered after 2008. But, but on the sovereign side we are so highly levered. 7% pro cyclical deficit, 22% of tax revenue is going to interest, you know, kind of go down the list. So okay, if it's super deflationary, we're in this highly levered debt based monetary system. Like I kept telling people guys like this is the story is how those two end up resolving. And the only conclusion that I've been able to come to, I keep pointing it out and never really knowing how it ends up resolving. The only thing I can kind of rely on, I guess or bet on is that they will have to overcome the deflation from AI and robotics by printing even more money. Right. So I think that's kind of where I've landed. I don't really see another option because it's incompatible with a highly levered debt based system. Maybe someone can reach out and tell me another solution, but the only one I can think of is they print even more money to offset the deflation.
- [64:02]
B
That's what they've done already for the last five decades. I'm sure you saw, but the new head of product at X, Nikita Beer, whatever his name is, was tweeting, basically making fun of bitcoiners and gold bugs, saying all the bitcoiners and gold bugs are expecting hyperinflation when AI is going to be extremely deflationary. It's like, well, all tech is deflationary if applied the right way. Or most tech people are nitpicking because I quote tweeted by thaltech. But we've seen incredible deflation driven by technology advancements over the last five decades. And the cost of living has gone up consistently. Quality of life for the bottom 90% has gone down consistently despite incredible leaps and bounds and advancements in technology that have led to overall deflation in that sector. But it is not enough to combat the money printer. They need to print to keep it up. So despite all this tech deflation, until we pair that tech deflation with a reserve currency that is a sound money, Bitcoin is what I think it ultimately will be, you're not going to reap the benefits societally of that tech deflation.
- [65:14]
A
Yeah, or until you've de levered the sovereign balance sheet. If we could get debt to GDP back down to 50, 60, maybe even 70%, then it's a bit of a different story. The problem is the leverage is so high that a recession or bout of deflation, sustained deflation basically acts as a margin call on the debt. In the past three recessions, if you take an average tax revenue in a recession falls by about 25%, spending goes up by about 15%. Oh, and GDP, the denominator in the deficit as a share of GDP is falling. So you end up talking about like a $5 trillion deficit in just a normal recession. And so yeah, it's, it's a tough situation. They're trying to thread a needle here and I don't know if it's going to work. Maybe there's some secret technology they have that they've known about that could help. But I mean, absent something like that, I think that it's just going to be even more inflation to offset the deflationary forces, unfortunately.
- [66:27]
B
Yeah, well, I guess to tie bitcoin into this, obviously gold's been running. I think bitcoin is a solution for individuals, institutions, governments alike to a certain extent to protect yourself as it seems obvious that we're going to have these extreme bouts of inflation moving forward as the government needs to inject liquidity into the system to make sure that doesn't completely implode. But I think that's one question that's been on many people's minds, particularly bitcoiners over the last month is why do something? Why aren't you doing it? Gold's running to all time highs. It's sucking the air out of the room. And bitcoin where it is in the halving cycle, if you believe in having cycles, signals that the price should be running a lot hotter. People are very disappointed. How does bitcoin play out into all this? What is your short, medium, long term view on bitcoin and where it fits into this bigger picture that we've been describing?
- [67:26]
A
Yeah, short term is hard. Short term is really hard. Medium to long term though, I'm very bullish. I look at it. My conviction in bitcoin is so significant that I like it. I like pullbacks. I like when it is not ripping higher because when it's ripping higher again going to the prior conversation about gold like my wages or my earnings are getting devalued when gold and bitcoin are ripping higher. So I actually like when it's not ripping higher. I would like to accumulate more because yeah, inevitably I know how this all ends up resolving. And look, it could take longer than we think. It keeps feeling like, okay, well we're nearing this event horizon or maybe even past it. Why isn't it feel like we are gold I would say indicates that we probably are. The way gold is the price action on gold, I mean it was up like 3% on Friday or Thursday. I think it was had this like 3% monster date. Like you don't see that in gold especially routinely day after day after day. It's every single day, it's like up a percent or more. So I think gold is kind of signaling that we're nearing an, an event horizon. I think that bitcoin has too much of a NASDAQ high beta aspect to it unfortunately. So there's been a bit of kind of volatility recently, short term at least in SPY and qqq. So I think that that's probably not helping with bitcoin. Although today both were up when we started to record. And then you had the cascading crypto liquidation thing that happened a week or two ago. And there's probably some amount of residual, you know, deleveraging or going on there. But medium to long term, I'm grateful for this pullback. I wish it would pull back more. I want it back at 70k, 80k because yeah, it's like if you have enough conviction, you should be enjoying pullbacks, you should be wanting it to pull back because you're looking out into the future and again, you have high conviction of that medium to long term view. So that's kind of how I look at it. The longer that it is not going parabolic, the more time I have to accumulate because inevitably, whether it takes a month or a year, 10 years, it's going much higher in my opinion.
- [70:14]
B
It is hilarious to people pointing at Gold's performance this year particularly and say, oh, bitcoin's not catching up. It's like if you zoom out at the five year chart, Bitcoin's up, up like 900%. Gold's up like 130% since the ETF.
- [70:28]
A
It's up like what, 250% since the ETF was announced. Yeah, that was just two years ago or so.
- [70:35]
B
Yeah. I think it is a signal of the high velocity trash economy. People that are in bitcoin and I think they have visions of things they want to buy and things they want to do and sometimes let those visions.
- [70:49]
A
And I think, I think that illustrates the problem. Right, which is if you look at bitcoin as just a number go up sort of phenomenon or asset. If you're just purely looking at it from that lens and you have a low time preference, you have that kind of fiat mindset of I want bitcoin price to go up so I can sell my bitcoin for dollars. I think that that is a different camp than a lot of, a lot of bitcoiners who don't view it that way and view it as the denominator of choice. I use Gold and bitcoin as denominators for a lot of things. And again, plot average hourly wage. Anyone with a trading view, plot average hourly wage divided by bitcoin. Your wages are getting devalued when bitcoin goes up. Like once you start to realize that, I think that you start to kind of see things in a different, in a different lens, I guess.
- [71:46]
B
Yeah, the. What was it going to say? The not only the devaluing, but the. I lost my thought there when.
- [72:00]
A
Talking.
- [72:00]
B
About the speed at which this happened. Oh, that's what I was gonna ask. Like, then it's one thing we talk about a lot at 10:31 is like, there's an order of operations to Bitcoin's ultimate success. And I think, again, going back to the Square point of sale system, a lot of people are excited that you'll be able to pay in bitcoin and merchants will be able to accept Bitcoin, which is interesting. But the merchant adoption meme's been around since 2013 when Roger Ver was out basically trying to convince everybody to accept Bitcoin. And if I'm being honest with myself, I feel like that part of the stack that they just released at Square will probably most likely be the least used out of all of it. But the tool to be able to sweep cash flows immediately into Bitcoin and hold that on the balance sheet is probably going to be the most used feature and the most valuable feature, not only for those individuals, but for Bitcoin more broadly. And I do think there has been a degree of complacency in the broader bitcoin sphere of people just focus on number go up, number go up. It's like, well, we need to increase the utility, increase the utility of the tools around the bitcoin stack to make it easier for people to adopt. And so I think people should be focused on that. Like, where can we begin to fit Bitcoin into these different nooks and crannies and get people exposure to it more easily?
- [73:26]
A
I would say even outside, I would agree. But then even on the number go up part, I had someone who sits on a board of a publicly traded company ask me about this person knows I've been following Bitcoin for a while and I'm into it. Asked me about it a couple days ago and I said, well, what makes you bring it up now? They're a boomer and older and was always very avoidant or dismissive of Bitcoin. Why are you asking? And she said, well, our accountant asked us if we had any bitcoin holdings. This is a publicly traded company. So I think that there's an element for. Of course, we know it individually as a pretty amazing savings technology. Individually. But even as you gain adoption of it, just psychologically, once it becomes more of a valid. Once people start looking at it more as a valid form of savings technology, which is the primary method, I look at it as. I think even that is a step in the right direction for Bitcoin because then those people adopt it and then maybe they can start to play with a lightning wallet or whatever. Right. So I think the primary funnel for most people, whether it be corporations, whether it be sovereigns even or whether it be individuals, is the savings technology. It preserves your purchasing power because in dollar terms it goes up in price. But then that once you're exposed to it, once you've used it, once you've bought some bitcoin, once you've sent it to a wallet, maybe you have a self, a cold, you know, a cold card or hold in self custody. And once you understand the concept of like holding your own keys, once you start to kind of play with it and go down the rabbit hole, I think that it leads to all of the other benefits, all of the kind of more peripheral sort of benefits that you know, whether it be like as a means of transaction and that sort of thing. So I think it, I think the primary funnel will continue to be the number go up component, but that's only because the denominator is melting, unfortunately.
- [75:48]
B
Yeah. And then in terms of not the converse but the other side of the coin and number go up is distributed peer to peer cash that nobody can control. I think governments are doing their best to funnel people towards the point of recognition like oh, maybe this makes sense for this reason, particularly in the UK where they're launching digital IDs and speech laws and I think come for number go up and then Trojan horse peer to peer digital cash that can't be censored by despotic governments. They're doing the job, the governments are doing the job behind the scenes to make sure people understand that. They need that as well when the time's right.
- [76:29]
A
It's not a pretty looking landscape out there politically, not just in the uk. And you know, I worry sometimes about three years from now, what will the US look like? We might have bought a little bit of time. Some people would argue that some of what we're seeing even now is leaning in the kind of technocratic or techno dystopia with certain companies and stuff. So you can make the arguments even happening now here in the us but at the very least, if you reject that argument, at the very least it could happen here in say three years. So right now it's the uk, But I think that that could make its way over here. Unfortunately with the rise of populism and look if, like, if the average American, the average blue collar American that's been on the lower Leg of the K that has watched the capital class just get obscenely rich and so on and so forth. If that lower leg of the K that elected President Trump, if they don't feel like he has adequately fought for Main street, as Besson always says, it could get pretty crazy. I think people dismiss AOC presidency, but I think that they'd be wise to rethink that because I think that populism is not just going to be on the right. We're seeing a rise in populism. I think if you look at New York, I think Houston's going to cross the board.
- [78:03]
B
I think New York's going to be. Luckily, it looks like we're going to have a case study in left leaning populism in New York. Hopefully they can blow, that's what's the word I'm looking for there. They can mess that city up to a certain extent in a quick enough amount of time that people are able to point out and say, look, this is what AFC wants to do the country. Let's not go down this route.
- [78:30]
A
But I mean, look, going back to 2016, this is not like a new phenomenon. I Remember back in 2016 in the Rust Belt, they would go, you know, CNN, MSNBC, they would go and interview just average people, just average blue collar, middle of the road, you know, just average people. And they say, who are you voting for? Who is it between? And they would say, well, kind of, I like this Trump guy, but I also like Bernie. And it like just completely broke their head. These, these kind of, you know, partisan type that live in Manhattan or live in Washington D.C. like, it just completely broke their head that you could be between Trump and Bernie. But I think that going back, that, that was a signpost that was back in 2016. So I think it's only going to kind of accelerate from here, unfortunately, because populism, look, going back to what we were talking about, debasement. And in that whole conversation, populism. The last time the US had populism really was 1965 through 1982. In dollar terms denominated in dollars, S&P 500 basically went sideways. In gold terms, the S&P 500 lost 90% of its value. We now have bitcoin back then. But in gold terms, S&P 500 lost 90% of its value. Populism is not good for financial assets. It's not good if you care about inflation. And so that'll eventually, that'll come into conflict, of course, with the bond market, which we kind of have an idea how they're going to resolve that conflict with QE or yield curve control or something. But populism is a period in time where you want to own scarce bearer assets. And I think that bitcoin is the best because gold can always be confiscated. They could kick down your door and you have to physically hold it or it's held in a brokerage account. So it's not really your number one, it's not real gold. Number two, it's not actually yours. So yeah, I think memorize 12 or 24 words makes it the best asset to own. In a period of time of increasing geopolitical tension, a period of time of increasing political polarization, ideological polarization, even racial division here in America. And of course, you know, the, the economic side of it as well. I think that it's pretty much the only thing when people ask me, they're like, you watch this stuff all the time. You, this is all you do all day. Like, what should I do? You know, I got 10,000 or 20,000 or whatever. And like, I've thought about it a lot. And at least for myself, the only option I keep coming back to is like the only thing that I'm really, that I have high conviction in is bitcoin and to some degree gold. Although the parabolic run in gold makes me wary of recommending that I was buying some in 22 and 23. But after the run that gold's had, it's kind of hard to recommend gold. And then so the only thing that you're left with is bitcoin because we know cash, cash had been good, right? Money market fund, you get four and a half percent. That's cool. But like that is a melting ice cube. More and more with what they're doing with, with the federal funds rate. So like that was kind of the last straightforward thing outside of bitcoin. So now it's kind of like it's getting to a point where for me at least, only thing that makes sense is bitcoin. I'm not going to buy the s and P500 at a price to earnings of 3,000, whatever it is. Price of sales at 3.3 times. I will say that's not to say the S and P or the NASDAQ stocks equities can't go up. I looked at the price to sales of the Lebanese stock market during their currency collapse. People were making such a big deal about the price to sales ratio of the S and P at 3.3 times. That is so historically overvalued. And so I looked in Lebanon and it reached 62 price to sales. So it's not to say that the equities can't go up in dollar terms, but what people really need to start doing, and I've been trying to bang this drum, is start changing the denominator. Whether you like gold, whether you like bitcoin. Gold is good because it's been around a long time. So if you're a macro nerd like me trying to evaluate data, you have more price history. But use bitcoin as a denominator. Denominate stocks in bitcoin, whatever you're thinking about investing in housing, denominate the average sales price in bitcoin. It's, it looks a lot different than in US Dollars.
- [83:19]
B
Yeah, I mean, just two points there. To your point on populism not being good, going back to 65 to 82, to your point, if you price everything in bitcoin going back to 2016, when populism really became as big of a thing as it is here in the United States today, S and P is probably down 95%, 99% going back there in bitcoin terms and gold, obviously Luke and many others were sharing that chart a few weeks ago. If you price NDX, S&P, real estate prices and gold and bitcoin, they're down significantly. So this could be a conversation we're having where we're in the middle of the debasement of the populism, whatever it may be, and people will look back retrospectively 50 years from now and be like, oh yeah, they were in the middle of it as it was happening. And then to your point on gold too, like China just discovered what, a mine with 83.5 billion.
- [84:17]
A
Yeah, the world's largest gold mine.
- [84:21]
B
Yeah. And so supply of gold is not nearly as inelastic as bitcoin. Bitcoin is perfectly inelastic. No matter how much demand for bitcoin there ever is, at any given point in time, you're not going to be able to create more of it. And China just found the largest gold reserve in history.
- [84:39]
A
That's the consequence of a higher gold price. Right. Is you find more gold, it unlocks supply, whether it be through people willing to sell their gold to buy fiat currency or whether it be through new supply. So that's a consequence to the higher gold price. Like you mentioned with bitcoin, Bitcoin could go to $10 million per bitcoin tomorrow and there's no now. Sellers could be encouraged. Right. Long term holders that go okay, well, that I'll sell 10 million. But there is no new bitcoin supply wise that can come in. That's one of the reasons it's so much better, I think. One of many reasons, but.
- [85:17]
B
Fascinating times. Thank you for taking some time out of your Monday morning, early Monday morning to rip it. This is great and I really value your consistency. As we were talking before we hit record. It's admirable how consistent you are with the analysis and it's been a great Infonomics has been a great channel for me to check in once a day and just see what you're thinking, what you're looking at and trying to get a better, well rounded view of what's going on in the world of finance.
- [85:48]
A
I appreciate that. Yeah, I just, again, I, you know, my, my prime goal is to help kind of the average person that I know, everyone, not very many people can watch all of my videos because I do release one every day. But hopefully, you know, those that you might find interesting, take a look because. Yeah, my only hope is to explain some of these very complicated macroeconomic concepts and phenomena to people, normal people that don't have the time to nerd out to the degree that I have. Because you shouldn't have to, you shouldn't have to be so obsessively devoted to, you know, I'm crazy, so. Shouldn't have to be crazy to understand how your money works, how your economic system works, how the global trading system and global capital flow shouldn't have to, shouldn't require that much energy. So that's kind of the first, I think the first step is for the average American to understand the problem because once you understand the problem, then it makes a solution, I think, pretty straightforward. So, yeah, that's the prime goal. If that sounds interesting, go check it out.
- [87:00]
B
Passionate's the word. I don't think it's crazy. I think you're extremely passionate about this.
- [87:04]
A
Yeah, I always liked puzzles. When I was a kid, I was a nerd. I didn't play with the kids. I did puzzles, puzzle books and stuff. And when I kind of came to markets it was like, well, this is basically the world's biggest puzzle with the most high stakes. So it's kind of how I look at it.
- [87:22]
B
Fun puzzle to solve.
- [87:23]
A
Yeah, for me it is at least. Yeah.
- [87:27]
B
Well, hopefully we do this again. Let's catch up. Beginning of next year, maybe see how everything's playing out in the world of bitcoin. Gold. Debasement, polarization, deglobalization, all the buzzwords. It's interesting. Time to be alive and appreciate you joining us today.
- [87:46]
A
Yeah, thanks for having me on.
- [87:48]
B
All right, Peace, Love Freaks. Thank you for listening to this episode of tftc. If you've made it this far, I imagine you got some value out of the episode. If so, please share it far and wide with your friends and family. We're looking to get the word out there. Also, wherever you're listening, whether that's YouTube, Apple, Spotify, make sure you like and subscribe to the show. And if you can, leave a rating on the podcasting platforms, that goes a long way. Last but not least, if you want to get these episodes a day early and ad free, make sure you download the Fountain podcasting app. You can go to Fountain FM to find that $5 a month get you every episode a day early ad free helps. The show gives you incredible value, so please consider subscribing via Fountain as well. Thank you for your time and until next time.