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- [00:00]
A
Welcome back to the hurdle rate, episode 53 for the week of March 30th, 2026. I'm Tim Kotsman. I'm here with Ben Workman, Jeff Walton and Matt Cole. And I think it might be wise to start off with a public service announcement. This Wednesday is April Fool's Day, so be careful out there in the news. We have the blackrock CIO Rick Ryder today saying he thinks the Federal Reserve will cut interest rates. We have the Federal Reserve currently reducing their balance sheet. We have an announcement this morning of the Strive application for the T Strive DGCR Digital Credit etf. We have the richest man in the world posting an animated bitcoin video that's always fun to see. We have the Morgan Stanley ETF likely to launch soon. And Michael Saylor posting that it is time to put the laser eyes back on. We have a new US Senate bitcoin bill that has been introduced that could do a few things including codifying, codifying the strategic Bitcoin reserve and also create budget neutral bitcoin purchases. We have Lyn Alden and others calling the current geopolitical environment similar to February of 2020 with the Strait of Hormuz. And we have this afternoon the U.S. department of labor proposing a rule that would allow bitcoin investments in 401ks. And we have Square today enabling automatic bitcoin payments. I'll throw it over to you, Jeff. What did I miss? What do you think? Where are we right now?
- [01:38]
B
Yeah, yeah, no, no shortage of things going on. Yeah, absolutely. Classic week of so many headlines hitting the news. I guess I just kind of want to start this off also by saying, my, my, you know, we talk a lot about what's happening on X. X happens to be, you know, the platform where most of this information is disseminated. But I think another interesting thing happening right now is the X algorithm is also going through a transformation. I don't know if you guys have feel, felt it, but it seems like every other day the, the timeline feels a little bit different and I don't know, I can't put my finger on it, but I know it's changing and I know there's somebody controlling it behind the scenes. So it is, it's getting a little bit different every day as well. So just keeping that in the back of my mind. But also, Tim, you mentioned the Federal Reserve target to reduce their balance sheet. And last Thursday, one of the. What is this guy, Stephen Mirren, who's the, a member of the board of governors for the Federal Reserve issued this paper and it's a 56 page paper called a User's Guide to Reducing the Federal Reserve's Balance Sheet. So I've been plugging this into the AI. I've been reading as much information about this and understanding the history behind this paper, understanding that we've got Warsh potentially being appointed into the Fed here in the very near future. I think he's being put in front of the Senate banking committee on April 13. I think that date came out today. So in the next couple of weeks he'll be put in front of the Senate Banking Committee who I believe Powell's last day is either May 1st or May 30th. So that's coming up on the horizon. So we're talking about a, a change in the Federal Reserve System who sets monetary policy and they just come out with a 56 page paper on here's the things that we might potentially do. And curious to get your guys to take it and see if you've had a chance to take a look at it. But a couple of things that were really fascinating to me is like thinking about okay, well why are you reducing your balance sheet? And well, they're reducing the balance sheet because the balance sheet ballooned and got really big after the great financial crisis and Covid with a bunch of asset purchases. And since then there have been multiple attempts to reduce the size of the balance sheet, quantitative tapering and it's resulted in kind of a liquidity and reserve crisis. So that the general theme that I'm getting from this paper is that if we want to reduce the size of the balance sheet, we need to reduce the restrictions on banks and how they hold their reserves. So a general loosening of banks reserve structure effectively and that would allow for quantitative tapering to happen. And so why, why would you do this? I'm trying to wrap my head around this. In my mind I see this as a reduce the size of the balance sheet. Right. Right now I think as of today it is, it has grown to. In 2023 it grew to a peak of 36% of US GDP. Currently it's at 21% of US GDP. Back in 2014 it was only 15% of US GDP. So these are, these are very large numbers. And in thinking about, you know where I think thinking about where we're at, Powell was just at Harvard, he gave a presentation, he said the US national debt is growing substantially faster than the economy and says it's not sustainable. This is the landscape that we're working within and the only thing I could come to here is they need to reduce this, reduce the size of their balance sheet in order to provide capacity for a future potential liquidity crisis. Effectively changing how the banking infrastructure and the Fed kind of work together in terms of monetary policy liquidity and potential tail risk. With the Fed being there for as a backstop and right now with the size of the balance sheet, they're unable to be there as a backstop. I will kick it over to you guys there, see if you had a chance to take a look at it or your thoughts on this.
- [05:49]
C
Yeah, I'll kick it off. So I have a lot of thoughts on this. There, there is, we could do a whole podcast just on, on this conversation right now. But I think it's important to start, I mean to your point, the base layer problem is the US has a debt crisis, we have a debt problem. Right. So treasury, the US treasury has to issue new treasury bonds into the market and there needs to be a buyer of those bonds. Right. The fact that we, we haven't had buyers of those bonds has created the backdrop for why QE has even had to happen in the first place. Right. And so theoretically if you just say okay, well we are going to relax regulations on the banks and the Fed will reduce the balance sheet. The, the banks will increase their balance sheet owning Treasuries. I think that there is an argument that something in that respect realm could, could work. You basically need buyers of Treasuries that aren't, that don't care about necessarily the economic value, but they, they have the capacity. And then by how you push regulations out into the world, you make it economically attractive for them to buy it. Right. Or maybe they, they naturally wouldn't be. And so is there capacity to put more, more risk. Right. Like if, if the treasury if banks, if you reduced regulation so they could buy more Treasuries, almost by definition that would be, you would be making the banks riskier.
- [07:23]
B
Right.
- [07:24]
C
Like you constrain them and now you unconstrained them. I think there's a pretty big problem for that. So you're talking to someone in myself that would be like a massive libertarian minded person anti regulation. But it's important to look at the timeline of events here since the great financial crisis. When the great financial crisis happened, the reason that these regulations were put in place was because they killed a lot of the small banks and they created these two big default banks through the regulations, through the bailouts, through the, the deals that allowed, you know, certain banks to acquire some of the larger failing banks and kind of create these mega, mega banks, right? And then the deal was that because we allowed these massive, too big to fail banks happen, we're going to constrain the heck out of these things, right? So, so if you unconstrain them, there's a massive crony capitalism problem in that, right, where you, you basically through non economic regulations help these banks grow way larger than they would otherwise and constrain them and then you take off the constraints. That's just a, a, a big problem, right? I mean, why does Bitcoin even exist? Right? Chancellor, on the, on the brink of the second bell out, right? Like, like this, this is the problem that we're talking about. And, and so I, I think that there's a, a chance that that could have problems going through all of the different financial markets. I believe that to relax the regulations on the bank would need an act of Congress. It's not just something that Warsh could come in and say, all right, banks, you're deregulated. A lot of these regulations like Dodd Frank, they were acts of Congress. And so you know, the question is like could, could Congress, that really can't pass anything, pass a massive bill to deregulate the banks? I'm a little bit skeptical of that. I haven't heard, heard, heard any chatter and, and if you guys have, you know, there's so much going on, I, if you guys have heard something, let me know. I haven't heard any legitimate chatter of Congress taking up a major bill to substantially reduce bank regulations. But even if I take all those things aside, the US treasury is still churning out debt at record levels. The economy doesn't look good. We'll probably at some point talk about this potential. You know, is it February 2020 with the straighter Hormuz and oil being constrained? Is it, is it not? But I'm pretty bearish that there is an ability to create the amount of buying demand for US treasuries that we're going to need over the next 10 years. And so if that's the case, I don't think the Fed will be able to achieve its mission of substantially reducing the balance sheet. Do I think that it's possible that try? I do, I do think it's possible that they try. I don't think that they'll succeed.
- [10:37]
B
I think the, this 56 page paper is laying out, here's the things that we could potentially do. It's like the a la carte menu of all of the options to potentially loosely change the Incentive structure associated with the regulatory framework. Yeah, I don't think it's necessarily trying to deregulate the banks, but it's changing some of the liquidity intensity framework within it. So, yeah, fascinating, fascinating paper. We'll share it after this so people can go plug it into their AI and take a look at it. But it's just a totally fascinating document.
- [11:13]
D
What's interesting, when it overlaps with our space, right. When people look at what we're doing with structuring products around Bitcoin, right. It's always called financial engineering. When you look at this, what they're effectively doing is engineering demand. What levers can they pull that make the asset attractive to hold? And so it means they can do lots of things. And it really is going to depend on how desperate I think that this situation actually becomes as to which levers they're going to hold. But I mean, it's going to be things like playing with the liquidity coverage ratios, playing with the capital rules, changing the weightings on corporate treasuries relative to U.S. treasuries to make them just more appealing. So while they're not necessarily forcing buyers, they're giving them the economic incentive to become structural buyers. The problem is how much of that demand can you create as this problem spirals out of control? These are all band aids that are being put in place over time and it's not solving the core problem yet. And now they're getting stuck in a hard place where they're even backing off from the lowering of interest rates, which seems inevitable at this point, that it's going to have to happen. But things in the macro environment keep hitting us that would normally in normal circumstances cause them to actually look to increase the rates. So they're really stuck in this weird position right now where they've got to choose between the debt and stimulus and really managing the long term problem here. And I don't, I don't know how they're going to pull their way out of this. And it seems like right now we're just going to be in a holding period. Right. I think Jerome's term runs up on the 15th of May, I think is the actual date for that one. So he's going to be rolling off. You got Warsh, who's going to go through his confirmation hearings. You know, you'd mentioned on one of our prior podcast, Matt, that that might be the most interesting confirmation hearing to listen to, to see what his posturing actually is going into this, because he's going to be under Tremendous pressure on day one because there's a fuse lit on this and he's got to pull the right levers at the right time here to try to fly this plane through the storm. And it's a very, very difficult task. And we obviously know what direction Trump wants this to go. But it's going to be very interesting to hear his posturing during that confirmation hearing. It's going to tell us a lot about what we've got coming here over the next six to 12 months.
- [13:39]
C
Yeah, it totally does. And what's interesting is looking at the forward curves right now, what they're pricing in with regards to Fed action. So if you actually were to rewind, two weeks ago, the markets were predicting Fed cuts. The markets today are predicting actually a Fed hike. And so the forward curve has completely reversed itself. I would agree with Rick Reeder's statement that Tim mentioned at the beginning of the podcast that the Fed should be cutting. I would also have said the Fed should have been cutting over the last year and, and they, they haven't. And I think there's obviously been a lot of criticism over, over Powell and the Fed isn't if they should have been cutting or if they should not have been cutting, but if they should have been cutting before and they didn't. With inflation likely spiking right now, it's probably harder for them absent someone new like Wash coming in to actually reverse course and start cutting today, absent something breaking a little bit more. Right. We're, we're starting to see in truflation, which is a leading indicator of, of the CPI inflation starting to spike. And now you could debate the persistency of these things, but you have a, on one hand you have inflation spiking, on the other hand you have a very weak job market. These types of scenarios, right. When you have inflation in a weak economy stagflation scenarios, if you look historically, they pretty much always end up with the Fed taking the side of easing. Right. Which should not be surprising. This concept that we like qe, we like the drugs to stimulate the economy, that, that'll be the route we go here. But then it gets into this next layer. Well, the Fed reducing the size of its balance sheet. I actually think the most likely scenario in my mind would be that they actually do implement some of this a la carte menu and they also do not reduce the size of the balance sheet. That, that almost that it, that it kind of becomes a version of the new qe. Right. That instead of, instead of the Fed stepping in and being that that demand source that you start to reduce regulations around the edges. But it's just really hard for me in this scenario that we're in this, I think, very difficult geopolitical scenario for the Fed and for the treasury to think that they could pull off the impossible and reduce the size of the balance sheet. I mean, it's easy to be a skeptic, and obviously in business, I'm a big optimist. But think about the start of the Trump presidency. Doge came in, it was going to reduce the size of the fiscal, you know, balance sheet and, you know, save trillions of dollars, and it fell apart. And was it one month or two months? I can't, I can't remember. But it was very quickly that, that Doge was no longer a thing.
- [16:42]
B
Right?
- [16:42]
C
Or it's still a thing, but it's not really like a thing when it comes to actually materially reducing the Fed's balance sheet. Then you look at some of Besent's goals when he came in and like his 333 plan, and just, we're not, we're not seeing a scenario where these economic goals that were put in place are being achieved. And I just don't think that the Fed will be any different in that regard. But, but like I said, maybe they do take some of those menus to try to find some, some buyers of Treasuries. I'm, I just could not be more firmly in the camp of nothing stops this train. I think that's, you know, until we see the treasury and the US Government stop spending, I just don't think that we have a way to do anything that's materially positive like that.
- [17:37]
D
And we haven't even mentioned AI yet in the conversation and the impact that that might have on things like job numbers and economic growth here. AI is a deflationary technology, and so we're going to have to see what that impact is. And when you really look at how it ramped up, I would say it's been six months max.
- [17:59]
B
Right.
- [17:59]
D
That's not a large sample size to gather the data from. But if you just look at what's been happening in the markets, every time AI comes out with a new layer of innovation, you can see how drastic that impact is. And trying to work that into a model that they've got to work with is going to be incredibly difficult, because I don't even think anybody in the tech space probably saw how fast this was going to get ingrained. And now you see it impacting the layoffs that are happening with a lot of companies as they're getting leaner and you're going to have to. Right. That's part of the problem is when you see other companies doing that, when you see them reducing their overhead and getting lean and enabling themselves with these types of tools. You saw it with block. When you see it that drastically to compete you have to take the same actions. Right. It's one of these things that self reinforces across these industries where AI shows up and starts disrupting. And so the impact that that may have on the economy, that that may have on the job numbers over time could be far more drastic than we're anticipating.
- [19:04]
B
Now.
- [19:04]
D
Those numbers will probably get massaged here for a while to lessen any impacts that are being seen. But it's a non zero impact and it's something that is very hard to forecast because the pace of innovation is on a hypergrowth trajectory right now. It's moving fast. Yeah.
- [19:21]
C
I actually have a question for this group. It's something I've been thinking about quite a bit and it's about startups actually. So we obviously work for a bitcoin company that's focused on scarcity where I think we're all pretty much max bullish on our equity and the ability to amplify bitcoin exposure and what bitcoin might do. But imagine if you were to work for like a normal company that's trying to get cash flows and they came to any of you and they said hey, has nothing to do with bitcoin. It's not, it's an AI company. And we said hey, we want you to come here, we're going to pay you a significantly below market rate salary. We're going to give you a lot of equity that you know you'll vest over the next 10 years. Would you want that equity? But you have any confidence that this equity is going to be worth Anything in 10 years? I don't care how. Let's say the idea is a great agentic AI business, super innovative. I mean how could you have any confidence that you're actually worth. No one will want it. Right. And so the startup economy, and I think this is, you know, AI is deflationary, we all agree on that. But how is it going to reprice valuations in businesses, especially new businesses, this new business economy, I think the valuations are just going to go down to almost nothing. Like basically the valuation will probably be some version of what's this company worth in the next five years and assume it's worth or three years and assume it's worth nothing more than that. And that's what the company's worth will goodbye. The idea of companies trading at 100 or 200 times revenue in the early days. Right. Which is what we've seen over the past five years. Now it's just a. What can you do to right now which if that re rates, I mean also very difficult environment for capital markets and I think that's. I don't see how that's not the most likely outcome.
- [21:24]
D
Yeah, I mean it's going to certainly have a drastic impact on bringing talent into those markets because it used to always be that was your moonshot opportunity. Right. You go get equity early on in the process before the products have really been built. They're raising the capital from the VCs and B firms, you know, based on a vision, not an actual product. But now if your product has anything to do with software. Right. If you're building a tool that's based on software, which was a huge portion of the market, those valuations have to absolutely collapse. The terms you're going to get on any capital you raise are going to be very much lower and highly restrictive and you're not going to get the same Runway that you used to get. You've got competitors popping up all over the place. But even if you look out at more established companies that might have weakness in their revenue composition from anything technology based, it could potentially result in a RE rate of like PE ratings, like what is the right PE ratio in the age of disruption where those future cash flows are anything but certain anymore. Now all of a sudden you've got these, you know, 50, 100 times PE companies that are out there and you look at what happened in the last six months to se several well established names out there in the market and you start to rethink those valuations. Because you've got to do a different type of analysis now than you used to do. Right. All analysis used to kind of rest on the idea that the future is going to be more or less the same as it is today. And I would say that while we've had constant innovation for the last two decades, it doesn't look anything like what we've seen in the last three years. That pace has accelerated in a massive way and it's now hitting industries that nobody thought it was going to hit. The only thing that you could do before that you thought was going to be completely future proofed was software engineer learn how to code. It was a big push for a while and then it was. Well, now it's all the white collar jobs. It's the one you have to go to school for, right? It's attorneys, it's accountants, it's all of these. And now you're seeing these tools pop
- [23:31]
C
up around there, right?
- [23:32]
D
And I can ingest all the case law that's ever been put out there in existence. And so one just the enablement tools, right? It's not even necessarily that it means that attorneys or CPAs are going to be out of jobs, but those organizations are going to be much leaner and you're going to get fee compression in there because they're going to have AI tools, which means you need less associates digging through case law and looking for examples and writing up all these briefs. And so it's just changes the way those industries operate and that's a massive transition and it impacts everyone right now that's going through universities. How do you pick? If someone came to me right now and was like, what field should I go into? Go learn how to do something manual. Because the blue collar jobs that everyone thought was going to get disrupted by robots, those are going to be worth a fortune. You go out there, nobody knows how to do anything anymore. Everyone took a technology slant to their careers and abandoned knowing how to do anything. Go try to get a general contractor to come to your house. It might be three months before you can get one to show up. And so it's completely reshaping what the future looks like for people. And you've got to start planning for that. It's one of the things that makes me so bullish on products like we're issuing these fixed income products that offer these really attractive yields that are built on a balance sheet, built around scarcity. It makes me really bullish on that because I think it's so necessary moving into the future because there's so much uncertainty. You have to have a foundation that can carry your life for a while. If you get disrupted. Everyone used to talk about, well, you need six months. Well, do you need six months if your entire industry got wiped out overnight, like, where do you go find a job in your industry? If that whole industry got disrupted, it changes the entire hiring process. You know, Jeff, your wife used to work in recruiting, right? This changes the entire landscape of how you would recruit and what you're looking for. So we're hitting one of these inflection point where you have to really retool yourself and reassess what capabilities you're focused on, because it might not be enough to just Go show that you have a degree in some subject matter anymore. Right now we had the saying early on where we said we're long meritocracy and short credentialism. That's the age we're moving into. You're going to have to be somebody that knows how to do something and that's what's going to create value for you in this future economy. It's a massive shift we're watching unfold in front of us.
- [25:53]
B
100%. Yeah. My, my wife, we used to work in recruiting and we've had this conversation several times. You know, she, she worked in biotech recruiting, which is very like equity heavy. They tend to pay these people very, very low salaries, just enough to get by. But the, the promise is the equity that sits there. And now you're seeing these biotech companies in this industry being turned upside down with AI and, and a lot of these companies that used to have 200 people, 500, 700 people, you now need 50, 60. Right. We're talking about like lab equipment with pipettes and people, you know, sitting there just doing a lot of manual stuff and going back and forth. And some of the. There will be winners. There will be winners that have the ability to adapt and pivot into AI. Yeah, I think that will exist, but I think a lot of them will struggle because they're saddled with the structure that they've had for a decade. And it's really difficult to lay off 75% of your people and pivot over to AI and still expect everybody to want to work with you and work forward and plow through that whole environment. So there's a lot going on on that front. And I agree with everything you said, Ben. Also thinking about the private equity market, a lot of these private equity businesses have been purchased over the last 10, 15 years and they have 10 year holding periods on them. Okay, well how, how many of those are going to be successful and who's going to want to buy them? On the other end, is that equity worth anything? And, and what happens when all these people that have plowed into private equity need to get out? What does that look like? I, I don't know. That's fascinating topic as well, but kind of getting to this multiple compression idea which you were mentioning on Ben. This has been a core thesis of mine since I became interested in really strategy back in like 2021. I was trying to wrap my head around what is this company worth? And I had to rethink my entire framework of like, well, what is what Is anything worth, what is an equity worth? Why do people hold equities? What's the point of an equity? And kind of really coming down to this core idea, like what I buy equity because everybody before me has bought equity. And I buy the S P500 because I don't want to pick the best stock. Like that was my prior thinking. Now moving forward it's like, okay, well what do I, what do I actually own in holding this equity? And what's the point of it? Like do I want to store my value for a future point in time? Okay, then I've got to think about what is the risk associated with storing my value in any one of these particular equities. And you brought up multiples. The S&P 500 has a composite PE ratio of 25. That that means the people are paying $25 for a dollar of earnings for the entire S&P 500. Historically over time the S&P 500 hit a low in 2010 on, on PE ratios around like I think around 10 or 13, 10 to 13. So about below half of where it is today. Thinking about price to book ratios now, this is a multiple on the value of the assets that hold on held on the balance sheet. The price to book ratio for the entire S&P 500 is 5.4x. So that means the equity market is paying 5.4 times the assets held on the balance sheet to hold that particular equity. Again, we've talked a lot about this cash flow disruption in cash flow into the future. If there's volatility in that figure, it comes down to how much, how much capital do you have on your balance sheet to withstand that volatility in the cash flow. And right now that, that price to book value of 5.4x is actually an all time high. It's all time high. Back on this chart that I'm looking at here, back to 2001 in the bottom of the financial crisis, kind of 2009, the price to book value for the S&P 500 was around 1.5. Just to put that into perspective. So it's, it's gone literally straight up and to the right since then. Now at a 5.4x price to book value. Now strategy's gotten a lot of crap for in our company too. Like M Nav, you know, what is your M navigation? M Navs are unsupportable above one. I was like, well that's just a price to book ratio. It's the market cap relative to the assets held on the balance sheet. And these assets actually give us power, gives us an ability to create a product, structure and design a product and grow into the future. And yeah, it's just a different way of thinking about the equity market and storing your value in a company that holds a store of value on its balance sheet that should be able to withstand disruption in AI, artificial intelligence and cash flow disruption into the future. Having a strong balance sheet is important.
- [31:00]
D
Here's the next layer of the problems that comes in. Say you're an investor and traditionally in the past used to look at what you needed. You either needed capital appreciation or you needed income, right? If you were younger, you were focused more on capital appreciation, you'd allocate your portfolio in that direction. That meant you were holding more equities. As you got older, you were shifting more towards where you were going to need those assets. You need the income that comes out of those assets to fund your life. Now you're in this incredibly strange spot where inflation's looking like, well, debasement is looking like it's going to accelerate, right? We're hitting this point with the debt where it looks like easing is going to have to come into the market. Debasement is going to start happening. If you look at an average rate of return on the S&P 500, we'll just call it 10% for round number figures. Assume you got 10% a year in your equities portfolio and people that were holding a fixed income portion of their portfolio, maybe they're getting four to five blended. So that used to be what you were looking at in your composition, but the risk profile is changing now. So now the risk you're taking in the equities market isn't even greatly outpacing what's happening on the debasement side of the US dollar. So that's causing an issue. And then because debasement's so rapid, it's devaluing the cash flows you're getting out of the fixed income side of your portfolio. And so I was thinking about that earlier today as it related to the digital credit products. And we always focus on the yield and the fixed income side of things. But I think that the risk adjusted returns are really starting to change. The risk equation is changing. You talk about this all the time, Jeff, where when you look at these products that are being issued out into the market and you're seeing the yields that they're giving you, the base stated yield, not even accounting for the tax treatment from the return of capital and the tax deferred nature of these is higher than the average S&P 500 returns. So the products are yielding more than what you were traditionally trying to get out of your equity portfolio, but they're providing you fixed income. And that fixed income is outpacing what's happening in monetary debasement. Right. It's been on average, what, 6.7% monetary debasement out there. So, you know, for us, we're a little over or a little under doubling of what monetary debasement is. So you're keeping pace with debasement, plus you're earning excess.
- [33:33]
B
Right.
- [33:34]
D
So there's actual value coming to you. And it just really struck me that these are products that are so broadly applicable because it's not just for fixed income investors. Right. If I can step out, you know, we look at it as stripping volatility off of Bitcoin. Right. And giving people a low volatility instrument. There's volatility in the equities markets right now, tons of it. And there's going to be a lot of people that don't want that ride. Right. The world's becoming more and more uncertain. You've got these wars, you've got all these commodities spiking. Gas is getting more expensive. Housing still hasn't come down, so that's more expensive. Rents haven't come down that much yet, although you're starting to see signs of that, which is showing some weakness out there in the real estate market, everything is uncertain, which breeds volatility, which breeds fluctuation in your portfolios. Now pair that with the conversation we just had about disruption, happen, happening, and your future has now become uncertain. You don't know what the impact of all of this is going to be on your own portfolio. And it starts to beg the question of do these instruments just become broadly applicable? Because it's meeting the needs of both the equity investors from a desired return perspective and the fixed income investors, while providing that fixed income underpinning for the scenario where you're out of a job for a long time, you've still got cash flow coming in, but it's coming in at a much higher rate than you're going to get on any of these other products and you're going to get on your bank account. Like the market, the addressable market for these is expanding with the uncertainty in the world. And I think that's one thing that doesn't really get talked about enough even by us. Right. I was just sitting there thinking about, and I kept framing it in fixed income and I finally had the realization going, this isn't just applicable to fixed income. Yes, it's incredibly attractive as a fixed income product, but it's providing better returns than equities. So why would it not be applicable to that portion of the portfolio as well? If you could strip the volatility out and still get the equity returns, why would that not be attractive to investors? And I think the answer is going to be it will be. They just don't know they exist yet. And that's part of the job that we're focusing on right now.
- [35:46]
C
Yeah, one of the things that was going through my mind while you were saying that Ben was portfolio construction. And you know, this, this group of people on this call, you probably will struggle to find a group that want amplified Bitcoin exposure more than, than this podcast. But the reality is that everyone's individual financial picture and ability to harvest and, and work through and have the proper duration of massive volatility is different. And so it kind of gets me back to when I went into Bitcoin and so when I went into Bitcoin at CalPERS and, and obviously, and for those that know me at all and, and the interesting thing about CalPERS is it's basically a job that you can't get fired from. Like, you, you don't, you don't get paid a market rate. You get paid substantially under market rate. And your career can kind of go two paths. One or three paths. One is your average and you just stay there and you do your job your whole career. The second is that you fail. And if you fail, you basically get given a super easy job and they put you in the corner and you don't really have much to do, but you're not fired or you succeed and you managed a bunch of money and you have a great track record and you go make a ton of money elsewhere. Those are kind of like the three career path potentials at CalPERS. But when you think about that, if you basically have a job that's effectively like tenure and you can't get fired, then you can take a ton of risk in your portfolio. Like, like, there's no limit to your risk because you have the ultimate secure job. Right? Like, and so if my, if my portfolio goes to zero, we'll theoretically have a pension even though it's underfunded. And I have a job that I could keep working as long as I want into my, my life. Like, my, like, it's kind of like a balanced life to have a ton of risk in your portfolio. Which is why when I end up going into bitcoin. I was like, I can go all in. Like if this doesn't work out, I have effectively like a pension and a job and I was performing, I was like I'm good. So I could take a ton of risk. Now the, the reality for a lot of people today is that with AI the risk of a lot of people's careers is shooting up through the roof. And, and there is some truth to, you know, different companies are going to adopt this at different speeds. It's difficult to, you know, reduce staff. But people have to start looking at your career risk might be higher now. And so then your portfolio maybe for, for a lot of people and may need to be reduced. The risk may need to be reduced for, for you and, and then if it does need to be reduced, what's the best way to prepare yourself for this future in a risk reduced portfolio? I think digital credit's the best answer out there. It's has substantially less volatility than, than equities and also a higher return. And I think that that answer is likely going to be the right answer for a large part of the portfolios of many people. Right. And it could even be some people that might prefer the amplified bitcoin story. Like, like, you know, I think this podcast is about honesty. Like people have to ask themselves that question honestly of what is my whole life situation look like? And I agree with your point Ben is that for a lot of people the six month of reserve kind of mindset for their own personal balance sheet might be too aggressive in the AI environment for certain people. And they might need to think about how do I survive longer if my career was upended and new jobs are difficult to find. That might be the reality for some people. And then you add on top of that kind of the demolishment of growth equities as a story. I kind of actually look to one of the periods of time that I think that part is somewhat similar to would the post.com bubble crashed to 2008 2009. And so in that period you saw the S P500 during the great financial crisis and tech stocks get wiped out right before the great financial crisis the S P had recovered all of its losses so basically got to a new all time high right before falling again. The tech stocks were still over 50% off their high at the grade of started the great financial crisis. They. They never recovered. So that that period, that, that call it 7 year ish period from the great financial crisis or from the tech bubble crash to Create financial crisis was a period where hard commodity stocks, you know, oil grocers, Costco, like, they all did good and tech stocks really struggled. And I think we could be in a scenario where that could be true again, as people are, you know, people's careers are at risk. And that scenario is a difficult scenario. Right. And I think people have to assess, should, should assess their portfolios honestly and earnestly now and not wait for something to happen. Right. Where especially with. Because of the amount of that growth stocks represent in broad market indexes like the s and P500, that could be a different difficult scenario if you don't get ahead of it.
- [41:05]
B
And historically, digital credit never existed. So if you were to de risk your portfolio, you'd be holding cash, you'd be sitting there getting debased in the forehead. You'd be getting debased over time to have a reserve. And now this is a reserve to protect your capital for medium, moderate duration, something that's never really existed. There's never been a great moderate duration instrument with decent liquidity and high yield. So it's completely reframing that how you could construct a portfolio. And I think that's why Saylor's hammering pretty heavily on the Sharpe ratio of these instruments and focused on driving that Sharpe ratio higher. Because you look at their relative risk return compared to every other asset, it's like literally on a new playing field. It's, it's not even on the same frontier. It's like it shouldn't exist. It's out on a new frontier because it's backed by a strong, scarce capital asset.
- [42:07]
C
Yeah.
- [42:08]
D
Part of the risk that comes in also when you work for like a public corporation is you have to look at the incentive structure that's built into those. So you look at a use case of a company like Block that got what, 40% of their workforce basically overnight and the stock went crazy.
- [42:27]
C
Right.
- [42:28]
D
The markets rewarded that action. Well, that's the testing ground for other corporations to assess how the market would respond if they were to take similar actions. So it starts to open those doors where companies see, oh, the market likes this. We may have gotten bloated from our hiring during times like Covid and all these other eras where money was flowing through freely and they had the ability to expand their workforce. And now they're looking for the opportunities to shed those costs.
- [42:58]
B
Right.
- [42:58]
D
Because it's becoming harder and harder to generate more revenue, be more profitable. And so they got to look at other things. And one of the big ones is workforce reduction. That's what starts to pop up all the time. So when you see a company like Block do it on a large scale and their stock was up what, 15% the next day or 20%, it was a really big move. You start to see that that's a market accepted activity and it means other executives will certainly look at it. So it does just increase that risk of your own personal position, your own personal stability. And the worst thing you can do is ignore that as a potential outcome and not plan for it. I think that's the problem a lot of people run into is you get into the mindset of that can't happen to me or that won't happen to me. And nobody who it did happen to thought it was going to happen to them either. Right. You've got to be proactive in building your own foundation, building your base, deploying it appropriately, making sure that you build a resilient personal balance sheet that's going to allow you to ride through those storms. So that portfolio construction activity, while overlooked by the vast majority of people.
- [44:06]
A
Right.
- [44:06]
D
We forget that. You know. Yes. We're in a very small group here talking about amplified Bitcoin, digital credit. Just the investor base, the investor community is small relative to the overall population. So there's not a lot of planning, which is why you start hearing those stats creep up about, you know, a lot of people not being able to be in a position to handle a 500 or $1,000 emergency. So you have to take control over that. Be very intentional with how you structure your safety net to make sure that if something does show up at your doorstep, you're ready to weather it.
- [44:37]
A
Hey Matt, I'm listening to this and these themes, the workforce reduction, the geopolitical uncertainty, your comment about, and Ben built on it, about individuals maybe considering having a larger personal cash reserve. Your question earlier, if I remember it correctly, was how much confidence would I have in being a part of or being an employee, being part of the team and having equity in an AI focused company. Was that correct?
- [45:13]
B
Yeah.
- [45:14]
C
One that had nothing to do with Bitcoin.
- [45:15]
A
Nothing to do with Bitcoin. So I guess what I'm thinking is what kind of optionality do I have? And if it's equity only or bitcoin only, or you take bitcoin off the table and it's cash only, I guess my mind goes to Berkshire. They have over $370 billion on the balance sheet. And if the, the quote that you hear all the time, if you paraphrase it, be fearful when others are greedy and hold that cash until the fear arrives. I guess the question I might have for you guys is if it wasn't Bitcoin and it wasn't AI, meaning not equity, what company would you want to be on the team of? I guess my answer, you know, would it be an Ethereum treasury company? That's obviously a joke. But would it be, I guess for me maybe I would choose Berkshire just because of all the optionality of that cash. If it can't be bitcoin, when you're looking at workforce reduction, maybe I would just sit there and say, okay, wait till the workforce reductions play out. And the bottom of what I, you know, maybe not time the bottom, but see how this geopolitical uncertainty goes and go from there.
- [46:22]
C
I would feel pretty comfortable with equity of call it the things that are more hard in nature, hard assets in nature, construction, consumer staples, just the things that people need that yeah, at some point maybe the robotics come in and disrupt everything, but the things that as much as you want to hammer the silicone with AI are just not going to, going to go away. And so, you know, even though oil companies have had a, had a good run, I think that they're a place that spits off a lot of profits. Things that would be designed, that would be needed in a mass rollout of data centers across the country. There's going to be a lot of different inputs that would be needed. Things that people would, would never get rid of.
- [47:16]
B
Right.
- [47:16]
C
People are always going to need food. Those companies I think are likely to do fine over the next several years, in my view. Will they be growth like returns? No. Do I think they'll outperform digital credit? No. Would I be worried that their equity is going to go, you know, be one shotted and go to zero? I'm sure there'll be a couple examples, but generally speaking, no, I think they would be okay companies.
- [47:48]
D
Yeah, I think it's one of those where you have to look around your own life and go what goods and services can't I live without? Right. What's crucial to my day to day living? And then those are the companies that tend to be resilient during these times because they're not things that you can shut off and you know, that's, that gets highlighted during these periods. Right. You look out there at a lot of these companies and even within companies, technology is a luxury item for a lot of them. You know, it's these, these bolt ons, these deeper analytics tools, it's all these data tools that they're Plugging it, right. Like technology, products become a luxury and if they have to cut, if it's not crucial to revenue coming in the door, they cut it. And so you want to look for goods you can't live without companies that are producing those. And then you want to get as close to the revenue generating roles as possible.
- [48:41]
B
Right.
- [48:41]
D
If you're part of the organization that's responsible for revenue coming in. Right. You're a revenue generating organization. That's where the security tends to be right within jobs. If you slide to the back office where there's things that can be cut or could be done without, that's where you start to see weakness out there for a period of time. While I was in the consulting world, I was in the outsourcing world. And so I saw a lot of these, was on a lot of these projects to look at where things were getting cut. So it's. But the other answer is five years from now it can look entirely different than it looks today. And I expect it to. So right, right now we're in the weird place where there's not a good answer. Because the answer is I don't know.
- [49:26]
C
Right.
- [49:26]
D
Like that is the answer. Yes, you do have the goods, you do have the services, you do have all the material suppliers and that kind of stuff that are pretty resilient during these times. And if things get really bad, right. It's the alcohol companies that do good. Although a lot of people have stopped drinking, it sounds like. So you know, that's, that's not going quite as well anymore either. But it used to always be the, that was the one. You could ride through a recession, you know, those would be resilient in a recession. But yeah, it's, it's an interesting world out there as things get disrupted and really does change. If I was out there doing a job search, it would change how I was looking at the role I was going to land in.
- [50:01]
B
Yeah, my mind goes to risk taking, the insurance world. I mean uncertainty is everywhere. There's always people that are looking to offset and reduce their uncertainty, which is kind of effectively what we're doing in providing a low volatility product to the market related to Bitcoin. Very similar to an insurance company structuring a volatility product for somebody's life. You buying car insurance? Well, one, because you have to. Two, to reduce the volatility of a catastrophic event where you crash your car and it's totaled or you know, you have to pay med bills of somebody in a car crash or you know, Your, your house burns down when you're gone or anything like that and that, like that, that stuff doesn't go away. Those risks will forever be there and the weather keeps happening whether you like it or not. I mean, just look at it. I mean, Hawaii just got hit by damn near hurricane and there's flooding everywhere. People are, you know, displaced all over the place. You've got hail running through the Midwest. Tornadoes, they happen regardless of whatever else is going on in the world. So that, that physical connection and the concept of risk taking I think is always going to be there. I mean that's, that's equities market, that's credit, that's insurance, that's banking. Like the whole world is kind of designed around that risk taking and risk shedding.
- [51:28]
C
I feel like we've gone more bearish than we typically do in, in a podcast today. And, and I want to start with a bearish sentence, but I actually want to turn it into what I think is an appropriate bullish sentiment just because I feel, I feel like we're bulls and optimists by, by nature here. And that's, that's what we, that's what obviously we, we believe over the long term. And so one of the things, Tim, that you mentioned was some pretty smart people calling potentially right now in some ways from a markets perspective, a similar environment to February 2020. And so for those that don't remember, that was right before the markets crashed. The markets were at an all time high and people started to see things maybe, you know, were risky. And definitely some of those same smart people that I'm talking about, like the Lynn Alden of the world podcasts that I've listened to historically, like macro voices, I mean they were calling out, they're like markets, I don't normally say this, but they look like they're about to crash. That's what a lot of very smart people were saying in February 2020. And they nailed it. They were, they were right. And so it's possible that, I mean, I would definitely not an expert on the straighter form use as much as I wish I would, but most people don't know. But the thought that if it is closed for another couple months, could cause substantial pain to markets, I think makes all the sense in the world. And you're seeing some very smart people call that out as possible. And so my point to everybody is that as a long term investor, one mindset would be, oh my gosh, the markets are about to crash, sell it all, get the cash. I think that's the incorrect mindset. The correct mindset in my view, if you looked at February 2020, is look where everything was. Look where Bitcoin was six months and 12 months later it was substantially higher. Bitcoin went in February 2020 from 10,000 to 4,000. It rebounded extremely quickly and you never saw Bitcoin below 10,000 ever again. Okay. And so I think the right mindset is, and I think this is true is that. And I'm going to be a little bit conservative versus what I actually think would be my base case. I think you have less than 12 months to buy Bitcoin under 75,000. I don't know if the bottom's now. I don't know if we go to 50k. I don't know if we go to 40k. It really just doesn't matter. If you believed that you had less than a year to buy an asset under a certain price and a price that you would probably never see again in your life, what would be the right mindset? The right mindset would be, I'm going to use this time that I have to buy every single bitcoin I possibly can. I'm not going to wait for March 2020 and get the pico bottom. You would just be looking to buy whenever you possibly had the chance to buy. And I think that's the right mindset here, whether it ends up being February 2020 or not. Because even the people that are calling that are saying there's a high degree of risk around that relative to macro geopolitical decisions that none of us have any. You know, we're not in these rooms. Right. The, the range of outcomes are high. But I think ultimately where we're going here is, is, is higher prices as, as we work through this, even if we are in February 2020 right now. And I think that's the right mindset that, that people should have. Right. We're not, you shouldn't be trying to time a one or two month market move those. Those are recipes to get burned. I think now is the time you want to be allocating.
- [55:16]
D
Couldn't agree more. Yeah. I mean when you just look at all the setups that are out there, you look at all the actions that you think are going to be taken here in the near to moderate term, it all points to one thing which is creating another risk on environment. And I think that you're right. That's where we're going. And everybody, you know, there seems to be, there's always a desire to time things and it's the worst thing people can do because you're waiting for the bottom, the bottom arrives, you should have allocated, it bounces up, you go, oh, I missed it. You allocate, it goes lower, right? I mean you get chopped out of your positions all day long. So if it's a core portion of your portfolio, your direction should just be long allocation. Just accumulate and be willing to sit on your hands and not get discontent as the market moves day to day. Because that's what's going to happen. Things are going to whips off, they move all over the place. That's what volatility is, it's price moving all over the place. But if you have a thesis and that thesis is long and you start to see setups like we're seeing now, what happens in the near term doesn't matter to where things are going. So you allocate, you accumulate the asset that you have confidence in and you sit on your hands and you wait. And that is the best way for most people to manage a portfolio. Don't try to time it, don't try to trade it. It's not something that's going to be easily predictable because if you haven't noticed, headlines are anything but predictable just throughout the week alone. So we don't know what's coming but it seems like everything is setting up for bullish moves in bitcoin. And I agree with you, I do think it's over the next 12 months that we start moving back towards those all time highs, if not break them.
- [57:05]
B
Yeah, absolutely. And you just like the, the conversation at the very beginning I, I thought was structurally bullish as well. You've got this changing Fed regime, you know, thinking about loosening reserves on the bank, on, on the banks, the Fed reducing their balance sheet, providing capacity for a future potential crisis if they needed to do quantitative easing, talking about reducing rates in order to do all of this stuff. And going back to your example, February 2020 the price of Bitcoin is $10,000. Yes. It dropped down to what about $5,000 in March? March 15th peak Covid. But within, from February to August it took six months to go back to an all time high. From February, February was 10,000, dropped to 5,000. In August it was back at new all time at 11,000 with within the next six months Bitcoin tripled. So before a year. So from February to February bitcoin actually tripled, went from 10,000 to 30,000 despite there being a little slap the bottom before it went up to the top and then 60,000.
- [58:12]
C
Right after that.
- [58:13]
B
Yeah, it doubled again. 30 to 60. Doubled again.
- [58:19]
D
You got to remember, one person's bear case is another person's bull case. It just depends on what your investment is. You know, if you're bearish on their ability to control the debt and control the balance sheet, then you should be bullish. Bullish fixed supply.
- [58:34]
B
Bingo. Bullish scarcity.
- [58:37]
A
Bullish scarcity. Well, thank you, everyone, for listening and watching to episode 53 of the Hurdle Rate. Bitcoin AI and the new QE for Matt Cole, Jeff Walton and Ben Workman. I'm Tim Kotsman, and we will see you back here next week with another edition of the Hurdle Rate.