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- [00:00]
A
Luke, welcome to the Network State podcast. Great to have you here.
- [00:03]
B
It's great to be here. Thanks for having me on blaji.
- [00:05]
A
Yeah. So you know, we have been carry on a fairly long running conversation, a sidebar on the world stage. You know, one of the things as a meta comment, like the group chats are actually good because they are, it's, it's like everybody's busy so you can have like an asynchronous conversation and then you can, you know, hang out in person. Like, you know, sometimes they'll see Kathleen Tyson or some other people from the group and it's always great because you could pick up right where you left off and everybody knows all the same references over the last several months. So anyway, so welcome. Great, great to, great to have you here.
- [00:42]
B
It's great to talk to you. I know we've talked before offline, but it's, it's. I've been looking forward to this.
- [00:46]
A
Awesome. So, okay, so you are, you know, you've got force for the trees. LC do you want to just give your quick bio, you're pretty, you know, big account on Twitter, but just for those are X. You know, I should say nowadays, give, give the, give the Luke on Luke spiel, if you wouldn't mind.
- [01:00]
B
Yeah, sure. I'll give you the elevator pitch. So nearly 30 years in finance. Started out in investment research. Was a partner at two different firms that were pioneers in bottoms up fundamental channel check research. At both of those places, I was one of the founding editors of a weekly piece that basically aggregated the bottoms up fundamental research we were doing into sort of a macro, the thematic piece that became one of the more widely read research pieces on Wall street, heard in the Midwest, and then straight from the source at the two different shops. Hung up my own shingle as FFTT in 2014, doing the same type of work with publicly available information. And what we do is I have what I think is the best job in the world. I get to sit around, read, comprehend, think all day, and aggregate large amounts of publicly available data into. What I'm looking for are developing economic bottlenecks. Because for me, my 30 years in finance have taught me that how a developing economic bottleneck will affect various sectors in the economy is the biggest attribution for investment outperformance. Perfect example, in the housing downturn, it didn't matter if you owned the best home builder. It was only down 90% while all the others went down 95 to 100%. Right? And maybe not home builder, but mortgage broker you get it, right. The most important thing was getting the bottleneck correct in that time. And that's something we try to do. So that's the short version of where I've come from, my background, and what we do today.
- [02:39]
A
So it's funny you say finance in the east coast way, as opposed to finance, which is the west coast ish way of saying it, which is funny.
- [02:49]
B
It continues our thing. Right. It's like almost. Instead of flashing gang signs, we'll just. It's how you say.
- [02:53]
A
Yeah, exactly. That's exactly. It's funny. So, but the. It's interesting you say economic bottlenecks because. So what. What you mean by that? Do you mean. Do you mean macro trends or do you mean a bottleneck in, like, a chemistry sense where there's genuinely a scarcity of some compound or raw material or something in the economy? Explain maybe how you think about that with.
- [03:21]
B
At the risk of being flip, yes. It's a little bit of both. Right.
- [03:25]
A
Right.
- [03:26]
B
I am. When I. When I read and read and read and read, I don't know what I'm looking for. Right. I'm. I've equated myself to being like, you know, a giant catfish at the bottom of the Ohio river, just waiting for stuff to kind of come downstream to me. And sort of the secret sauce in it is when I see something that interests me, it's like a splinter in my brain. And I kind of go, okay. And I don't. Most of the time, I don't know. Sometimes it's like, oh, well, that's important. Other times it's like, that feels like it could be important. I don't know why, I don't know when. And then I put that in what I call my cutting room, which is I set it aside, I save it, and. And as things, especially for the things, I don't know exactly where they fit, but I just have a feeling, almost an intuition that they're important. Possibly for whatever reason, I retain a lot of what I read for long, long periods of time. And so it might be 24 hours later, it might be 24 days later, it might be 24 years later, and it'll be like something else triggers. And I go, oh, that reminds me of this. And this is related to that. And you start sort of putting pieces together in a way that starts to build a mosaic of something that's happening. And I kind of see things in these. These trends where I get really excited because not only am I reading for what is happening, what interests me, but for What I call the dog that doesn't bark. Right. When you're, when for what's not happening or for what people are not reacting to that they should be. And so when I get really excited and when I talk about a bottleneck, what I'm most excited about is when I've got and have read for investing consensus, which is over here.
- [05:17]
A
Right.
- [05:18]
B
And everyone thinks this is going to happen. And I've got this big body of evidence way over here saying this is actually going to happen. Not that, I mean. Yeah, so. And that's, it's the conflict of those two and that's why I say yes, it's both is, it's, it's, it's more sort of, sort of fundamental macro driven but it is almost like a, you know, a chemical reaction of sorts. When you've got in, you know, when you've actually got the people, you know, when you have positioning in assets and flows, physical flows on the wrong side of things and they need to move somewhere else to adjust to what's happening. There's actually, you know, a kinetic movement of positioning of money. And that's what I mean by bottleneck.
- [06:05]
A
Yes. This is interesting. So, you know, one of the things I want to do is I want to go through some, you know, you and I have come from, I mean I think we're somewhat similar in that I also just like digest giant quantities of information. I come at it from maybe a more tech in Asia standpoint and you have a lot of experience on the ground in the Midwest and you've actually seen, you know, the other side of that like the deindustrialization and so and so forth and you see what, you know, has happened with the, the factories and whatnot. But we've come to I think pretty similar conclusions on, on a lot of things. Right. And do you want to give the unified Luke theory of the world? I mean, you know, the money printer subsidizing things. Gold is going to get repriced. You know, financial repression is really already ongoing but it's going to become more like harder to deny. I don't know. Give me, give me the Luke macro.
- [07:03]
B
The Luke macro is really, I think the fundamental case is that post 2008 it became apparent to what we will call the BRICS or the Global South. I'll just say BRICS for ease that the status quo monetary system could no longer work after the US basically got out of it by printing money for a simple reason, which is the Global south in 2008 was only 10 years past the Asian financial crisis, which was essentially they ran out of dollar reserves and once they did they had to devalue and go through a lot of pain and Aust and they never wanted to do that again. And what 2000, the way US got out of 2008 showed them was that ultimately as long as commodities are only priced in dollars and the Americans are always going to print rather than take pain, then as $100 trillion plus of US entitlement promises go cash flow negative and go from off balance sheet to on balance sheet, the Americans are going to print the money for that and that is going to export dollar inflation that shows up in commodities that basically runs down Global South FX reserves and puts them right back to the problem they had in the late 1990s including China. And that was simply a political and economic red line. They weren't going to allow that to happen. And so the reaction to 2008 which was seen in Beijing, Moscow and other places around the Global south as basically a financial attack on Beijing, Moscow, etc. They began not necessarily doing because they wanted to hurt America or hate America per se, but simply out of enlightened self interest, which is if we don't do this, we are going to have another Southeast Asia financial crisis and then we need to start de dollarizing our global commodity markets. And the real, you know, that's what we've been seeing happen as a shift to gold and pricing in outside the dollar, primarily in yuan China, setting up different offshore yuan clearing banks and gold hubs around the world, et cetera. And the other side of that same coin that's part of this unified theory is the actions, the enlightened self interest actions of the the BRICs to basically avoid what is a guaranteed repeat of Southeast Asia crisis the late 90s. The other side of that is it means the price insensitive buyer of Treasuries, global central banks, these tend to be all the creditor countries. The BRICS and Global south stopped buying Treasuries on net while US deficits didn't stop growing, right? And so what you end up with is a Treasury supply situation that starts to look like the famous Lucy and I can't think of her name I Love Lucy episode, right? Where the chocolates just keep coming faster and faster, right? So the US deficits keep coming down the line faster and faster. And you know, you stuff the banks with them, you stuff the US pensions with them, you stuff US retail with them. And the ultimate problem is these brics creditor nations, their central banks are no longer buying treasuries as the reserves. They're buying gold or in the case of China.
- [10:24]
A
So actually, I want to pause you there for a second. So some premises that maybe we both agree on. I'll go kind of one by one, get your thoughts. First, the currency of bricks is gold bricks. Or it's going to be, if it isn't already. Like that's the one that's traded between them, right?
- [10:38]
B
100%. Yep.
- [10:39]
A
Okay. And then number two is gold, physical gold. Like not, not GLD, not all the virtualizations of gold, but like physical gold bricks that you can put in an armored car. That's just going to become more important because it's there when all kinds of abstractions go away. That's like physical that you can touch and feel and it's at record highs, but it's nowhere near where it's going to be. I think we both agree on that.
- [11:07]
B
Agree.
- [11:08]
A
Okay. And you know, an interesting thing, I'm not sure it was. Maybe you and I have both done this calculation. If you actually revalued all of the in, you know, they. It's funny this is being talked about. I don't know if you have a theory on this. I don't, I don't have a strong opinion. Is the golden Fort Knox really? There's.
- [11:24]
B
I think at least some of it, maybe all of it. Maybe more than all of it. I don't have a strong view on it. I think a bunch of guys who have haircuts like mine with big guns say it's there and you know. Yeah.
- [11:34]
A
And for this Ron poll types who say it's not and so on, I am rationally ignorant. I think it might be there, but I also wouldn't be surprised if it was misaccounted for. Like, you saw this jobs report. It's really genuinely a Potemkin American where for years remember how mad they got at David Sachs and a few other people who pointed out that these jobs numbers seem really wishy washy and weird. During the Biden administration, It was like 17, like months straight of like up into the right job numbers. Remember that? Like, of job growth. And then.
- [12:09]
B
Yeah, yeah. Oh, I was going to say too. As you look back to summer of 2022, like I remember saying early in 22, I'm like, they can't tighten because the debt situation will put us into a recession really quick. And they tightened. I was wrong. I immediately pivoted like, okay, well they're tightening. Well, this would be really bad for risk. So that was correct. And then you saw all of these sort of data series that had always foreshadowed recession and employment loss, you know, ism and industrial production and all of these things. And it was chapter in verse through second quarter, third quarter dollars rising. Like you get into a recession. The only thing that didn't move was employment. And and so people are saying, aha, see, there wasn't a recession. Tax receipts. How do you have tax receipts fall as dramatically as they did in 2022, 2023 and not call it a recession?
- [12:56]
A
I should have that graph. That'd be a great graph to show. Can you share that graph?
- [13:00]
B
This is going back to 1947. And so, right. Anytime you get receipts down year over year, about 5%. Like the only time you didn't have a recession down more than 3% on receipts was, sorry, 64 was 2. But that was down only down 2%. Right. Recession, recession.
- [13:21]
A
Wow, what a great chart.
- [13:22]
B
And look at this. We've got receipts in the, you know, down 8% and we're not in a recession. And the only reason we weren't in a recession, if you go back and read at the time, was all the economists were like, well, it's not technically a recession. Even though GDP fell. If you remember they revised GDP decline in 2Q and 3Q 22 away. But initially it was reported as a decline.
- [13:45]
A
So they. Why was it because the jobs numbers had gotten, you know, whether you call it faked, whether you call it massaged, whatever, what have you, I assume, I.
- [13:56]
B
Don'T, I don't know. Like I looked at that. Like you get receipts down 8 now a big chunk of that was withheld. Right. So the, as reported, the reason why receipts fell and employment didn't was because about $500 billion of that decline, 450 billion, was what they call non withheld. Right. So non withheld is just stock based comp. And so as stocks fell in 2022, it's a huge, you know, the stock market is the key marginal driver to consumer spending and therefore US tax receipts. So for me, I don't think the job revision is, you know, it's not necessarily that we didn't have a, that we, that we had a recession there, a job recession. But I think it supports the view that it was much softer in 2022. Everything else was recessionary except jobs, including this. The decline in receipts, which was, like I said, heavily non withheld. It was stock based comp. Drevin.
- [15:06]
A
Very interesting. I mean the, the, the thing that's really Fascinating about this is. There's almost a reflexivity to it of if you can sort of fake enough people into thinking it's not a recession, then they might act if it's not a recession and then they come out of recession. Or at least that was the, I think that was probably what the Biden admin people were thinking. They can just skate by it and so on. But I think what actually happens is they just are hiding the stick of dynamite under more and more pillows and then it blows up in a, you know, I don't know if kicking the can but then it can't be kicked it the duration of can kicking or the distance you kick it, it reduces each time, you know. So okay, that was a great graph. So okay, now your conclusion from that is what that essentially the economy is in much worse shape than it actually looks.
- [16:09]
B
My conclusion from that graph was at the time and continues to be that stocks are the US economy on the margin.
- [16:17]
A
Ah yes.
- [16:19]
B
And you know, if we, if we go back to sharing that. Right. And screen.
- [16:26]
A
So I've got a graph for you also from 2023. Let me show you one which maybe you've seen. Oh actually, actually go, go, go show your screen. Then I'll show you something.
- [16:33]
B
We go to the same chart here and it's, this is now I've overlaid total equity market cap year over year over that same tax receipt number.
- [16:43]
A
Right.
- [16:43]
B
And so I'm going to go 1966 through 1995. Right. And there's, there is in the inflationary 70s there is some rhyming, right. But then when we get into the financialized 80s, let's go 82 to 95. You know, stocks go up, stocks go down, but receipts are just, you know, flat. There's, there's there yeah, they're, they, they continue to chug along no matter what it, you know, call it zero, you know, 5 to 10% year over year. Now in 1995, President Bill Clinton signs tax legislation and in that tax legislation he says we are going to, we're going to make non deductible to the corporation cash compensation over $1 million per year. We basically, we're going to try to fight wealth inequality, right? Executive comp, CEO comps getting too far away from workers. So we're going to make non deductible to the corporation cash comp. And the lobbyists were able to change that to say to exclude stock based comp. And so guess how corporate America started Getting paid post 1995 CEO c suite middleman. They all went to equity. And now this is the same chart, 1995 to present. This is in blue, US federal tax receipts year over year, all in. And red is US Stock market, equity market cap year over year. You tell me where the stock market.
- [18:30]
A
The three big crashes correspond to the downturns in the dot com crash, the 2008 financial crisis, and then the 2022, 2023 correction, there's a decline in the corporate equities liability level and a corresponding decline in current receipts. And the first two of them correspond to a recession, but the third one.
- [18:53]
B
Doesn'T and the third one does. And this is super, super powerful chart because this tells us, you look at this chart and we were hearing Scott Besant say in January and February and Elon Musk and Trump, we're gonna have to take some pain, it's okay. If the stock market falls, we're gonna get the deficit down. And you look at this chart and you go, no, you're not. Anything that drives stocks down is going to blow out the deficit, which given our fiscal position is a huge problem. It's why we have Repeatedly seen since 2018 these periods that are very confusing to most market participants still, which is stocks go down 10, 20% and the 10 year treasury yield comes down like it always has a little bit, and then all of a sudden it starts taking off like a scalded cat. And this is one of the reasons that has happened, the reason tenure yields have gone up in equity downturns after a brief decline since 2018, 2019, certainly 2020 is exactly. This is the US economy is the stock market. The stock market is the US Economy because so much of the marginal shift in marginal amount of consumer spending, consumer spending being 2/3 of GDP, is driven by stocks. You know, we have a chart that shows, you know, we've looked at the IRS data, the annual net capital gains plus taxable IRA distributions alone are 200% of the annual growth in personal consumption expenditures, which is a 17 or 18 trillion dollars line item in the US economy. Like literally the US economy mathematically cannot grow if stocks fall. And so it's enormously powerful because what it tells you is unless they are willing to stand aside and let the treasury market blow up to let rates rise in a recession, in an equity downturn, and let the US go into a debt death spiral, they can't let equities fall for, you know, this chart tells you they'll never let them fall and stay down at 20% for more than a, a week or two, maybe three weeks. Very powerful.
- [21:01]
A
Well, it's interesting. There's, there's a very, there's a guy, Stephen, randy waldman@interfluidity.com and I'm not sure I can find the post, but essentially he makes a very similar point to you. It might be a year or two years ago and so, and so for. Maybe I could find it if you look for it. But essentially his point was something like the economy is a stock market because so many upper middle class people have their money in index funds that it has become an expectation of the kinds of people that take government jobs, especially senior government jobs, that the market will be going up and that if it's going down too much then it needs to be propped up. And as you're aware, you know, the Plunge Protection Team, you've probably written about it quite a bit, right?
- [22:03]
B
Not in those words, but certainly.
- [22:05]
A
Yeah, yeah. So that's actually, you know, that's actually Greenspan's name for it in the 90s. So that's a term. The Plunge Protection Team is the informal name of taking printed paper from the Fed, printed money from the Fed. And directly or indirectly, sometimes they literally directly buy assets, like they directly bought mortgage backed securities. But often there are times they will indirectly do it through some shell game or they have some bank go and buy the assets so it doesn't look like the direct hand of the Fed or they'll spot a bunch of people to go and do it. And to them these kinds of shell games are extremely meaningful. And if you phrase it even slightly wrong, like if you say, oh, you know, the Fed is issuing debt. No, no, no, it's a Treasury that's issuing debt and not the Fed directly. As if Fed and Treasury aren't really joined at the hip for many purposes. Right. I'm saying, right? They're really 100.
- [23:04]
B
I am. Oh yeah, I get absolutely browbeaten by some people on Twitter because, like, oh, he's a clown. Because technically and like, I think you and I, one of the reasons we get along so well is we're functionalists, right? It's like, like I don't care. Like I want if this happens, then this happens. I don't care how you shell it in between.
- [23:22]
A
That's right. So so much of the system has evolved to be a shell game to defeat, for example, the whole concept that, oh, you can just hold treasuries until maturity and it doesn't matter that they have being devalued so much by these rate hikes. But the whole point was that they're supposed to be the most liquid asset in the world and if you have to hold them matured and you can't sell them, then they've obviously been devalued. So you've given up the liquidity and you've given up one very valuable property of it. And you're saying that oh, it's just fine, it's the same thing as it is and they have to monkey with it and they have to say, oh no, actually we're going to value it on the books for what you bought it for, not what you can sell it for. Okay. Just as one example, you know, anyway.
- [24:04]
B
Yeah, just for the banks. Right? Yeah, that was BTFP in 1. Q23. It was.
- [24:09]
A
Well, exactly.
- [24:10]
B
You banks, you know, I know you're. These are at 70 cents on the dollar in the market, but we're going to, we'll buy them from, swap them out at a hundred dollars, you know, at par. Exactly. So that you are not insolvent or and more importantly, you don't have to sell these into a falling market.
- [24:24]
A
That's right. So essentially all of these shell games, these people have persuaded themselves that they're real and that they just want to avoid the accounting markdown. And it gets more and more complicated because to even understand that they're actually insolvent requires you to just tear through several layers of self and other obfuscation. You know, but, but you know, the. Here, the point being that if you take this Interfluity article and I'll find the exact title of it, but you can probably find it with AI it's something along the lines of because so many upper middle class people have their portfolios in index funds, they expect the government to keep propping that up. They think of the stock market as economy, just as you said. And the way they control that, directly or indirectly is when it goes down too much, the Fed prints and props assets back up. And what that means when the Fed prints, it's not something that people. It's not costless, it is diluting down. If you have, let's say there's a trillion dollars in assets or in just. If it was like Bitcoin, you could actually count how many dollars there are. I know there's m naught and m1 and m2. Again, the obfuscation is there on purpose, in part so that people don't even know what the denominator is.
- [25:44]
B
And they stopped reporting M3 and OH6 by the way.
- [25:47]
A
Yeah, exactly. So this is all this, all these shipping games where they make it.
- [25:50]
B
I would amend it slightly just to say it probably in the short run, tactical sense is probably more treasury and some of that like the treasury markets room exchange, stab fund. But the Fed absolutely is in my opinion fine.
- [26:01]
A
So there's multiple pockets they can do it out of.
- [26:03]
B
Right, of course.
- [26:04]
A
Okay, fine. Exactly.
- [26:05]
B
That's right.
- [26:06]
A
The plunge protection team is a cross agency team. And what do they do with this pocket? So, but the net of it is that the population and really the world is taxed via, let's say to simplify, dollar inflation is global taxation. They issue these dollars, they dilute everybody down who is a dollar holder or a Treasury holder or indirectly a holder of other instruments. And then they use that to prop up the US stock market. And one way I think about it, and maybe you'd like this analogy, I'm not sure actually we discussed this. Have you seen those deep sea vents like, which have like sulfur coming out the deep sea and there's like bacteria. Right. So I think of that as like the Fed, it's like belching the printed paper out and then there's various financiers that are clustered around it. And that's Wall Street. Right. And the, the reason that, that I think is a good analogy is I don't think that the Wall street guys, like why would they be able to make money on net trading? Should be a zero sum activity. Right. Building is positive sum. So why are they able to make money on net Answer. Because the Fed is taxing the world via dollar inflation. And then that in a sense, stolen money is coming up through this sulfurous vent and then they're feeding off of it over here. But that's not actually due to, I mean, I'm not saying that these guys are dumb and so on and so forth. They're not necessarily all bad guys. And so Jim Simons is smarter, you know, whatever. I'm not attacking them for that sake. You know, they're playing the game that's on the field. However, that game just goes like when people talk about a financialized economy. If you have this mental model, dollar inflation is global taxation. The Fed is propping up asset prices. This plume of sulfur, this printed paper is coming up, the bacteria feeding on it. This explains a lot about why the world is the way it is, where everybody who's not in finance or in tech is seeing their real purchasing power erode, at least in the west. And they're getting diluted down every day by this printed money. And they don't understand exactly why, because they're like, I'm making more money than I ever could, than I ever had before, but everything is so expensive. And it's like, you know that saying, like water, water everywhere, but not a drop to drink. The, the, you know. Right. Cold. The poem.
- [28:30]
B
Yep.
- [28:31]
A
Yeah. So printer, printer everywhere, but no money for anything.
- [28:34]
B
And that's exactly it. And it's where that get, that's that Cantillon effect. Right, that kind of described where that ultimately when you said that, they start to believe the shell game is, I think, very, very powerful observation because they've believed the shell game in this unipolar world that has existed since the fall of the Soviet Union. So the Soviet Union and sort of this opposing bloc kept them honest for years and years. And so as soon as the USSR collapsed, there was no one left to keep them honest on sort of the amount being belched out for almost 40. Well, sorry, 30, 35 years now. Right. So, yeah, so I guess almost 40 years. So the point being is that what they forgot in this ensuing 35 years is you need to ensure to reinvest into your own infrastructure, physical infrastructure, your own physical manufacturing, defense, industrial base to be able to maintain that level of dominance. Because if for some reason you lose your ability to basically go pound people in the head and nuclear weapons are ultimately that sort of trump card, then all of a sudden you get what we have on that chart that you're showing right there. Right. Which is exactly. Saddam tried this, it didn't work out well. Gaddafi tried a version of this, it didn't work out well. Why? Neither had nukes. Putin started doing it in 08 and China and Xi followed shortly thereafter. And you know, like you said in your conversation with Peter McCormick, like, key parts of the US military are now made in China. It's you. You can't go to war with China to stop them from doing this because they won't sell you the rare earth magnets that you need to make the weapons to point at them. And the lead time on redeveloping those capabilities is decades best, a decade best case.
- [30:26]
A
And yeah, one thing you're saying that I wanted to point out on this chart is the entire concept of the entire world being run on dollars is really kind of like a 80s to post 1990. It's like as the Soviet Union fell, that's why USD just massively expanded like this and gold shrank to such an extent over here. And here is like, you can argue like peak America is like right before the 2008 financial crisis. Then it was kind of skittering along like this and then it's become receding and we don't know the rate at which it's going to do so, but it'll probably hit 50% in the next few years. And. But this is the graph that you're basically referring to when you said it's been essentially a last 30 years phenomenon.
- [31:11]
B
Yep. Yeah. And this is. Goes back to my sort of initial overriding view, which is post 2008, the world started going back to gold because they simply had to. It wasn't an attack on America. And quite honestly, what they're doing with gold will be very good for the parts of America that have been hurt. But that, that implies a lot of inflation. Right. The winners. Yeah. So go ahead.
- [31:35]
A
This is the thing where. So we agree on a lot. I think the thing which I wanted to discuss with you. So you've mentioned, for example, I think it was 1982 or thereabouts. Israel had about a very serious inflation that essentially like wiped out their debts and they were able to reboot and, and get going. Right. Was it, was it 82? Did I get the date wrong?
- [31:54]
B
I want to say it was like 80, 485, something like that.
- [31:57]
A
Fine. Okay. In that ballpark, right?
- [31:59]
B
Yeah, it was like. Yeah, early to mid-80s. Yeah, something like that.
- [32:02]
A
Fine. So shekel just got really inflated, so on. And my view is that that'll be much, much, much worse in the US for the following reasons. A, the shekel wasn't the global reserve currency. B, Israel at the time was not a central hub of the world economy and even today is only 1/50 or what have you, the size of the USA. Right. C, lots of other countries weren't holding like shekels as Treasuries. And so like it was just very much a spoke rather than a hub, you know, so a spoke, you know, in the sense of like a hub and spoke topology, like for a wheel. Right. So a spoke can just go and kind of do what it wants and it fails, doesn't matter. But a hub to fail in that way, basically all kinds of spokes just blow up and so on and so forth. And moreover, and I wanted your. So first tell me if you agree with that or not, that it's much worse for that to happen.
- [32:59]
B
Okay, I agree with that. And I would, I would say, I think that gold chart expl. Is sort of the, the preparation for that. Right. So I think, I think your view of that is correct. And I think ultimately. Right. If you are A dollar asset holder. You see the direction this is going, what do you start doing, right? It's like what you do as a human is like, hey, there's somebody over there with a bunch of nitroglycerin and they're playing with matches and you kind of slowly back away, right? And that, it tells you two things. Number one, that gold chart turning back higher is the world slowly backing away, Number one. And then I think, number two, I think it's, I do think it supports the view that whenever it happens, because it is a hub, not a spoke, that gold going to 50%, 60%, 80%, you know, back to where it was when this whole thing started in late 60s, people think that's going to happen linearly. And I think the fact that it's a hub and not a spoke issue means it's going to happen nonlinear. In other words, we're going to have a period and it's going to be gold. 3600, 3800, 4100 something, 4500 something happens, 14,000 in six months, something like that. And then all of a sudden you can go, okay, well, all of those dollar holders, balance sheets are indifferent, right? They don't care if they owe $10 trillion or $8 trillion in $FX reserves and 1 trillion in gold or $10 trillion in gold and 0.
- [34:32]
A
You know what's funny about this? What's really funny about this is one of the counter arguments I saw when I posted that chart that we just looked at. People are like, that's just due to the price of gold going up and the price of Treasuries going down, as if they were like, oh, you know, rookie mistake. And I'm like, but why is.
- [34:57]
B
That's the whole shooting match. That's the whole thing.
- [35:00]
A
This whole thing. Why is the price going up so much? Well, oh, it's only because, you know, it's actually. Do you see that article the Fed tried to put out last year where they said a small group of countries is buying gold instead of Treasuries? Did you see this thing? Hold on.
- [35:16]
B
I think I did, but remind me. And like the small group of countries is like 45% of global population or something, right?
- [35:22]
A
Yeah, yeah, yeah, yeah, yeah. Exactly.
- [35:25]
B
Other than that, how was the play, Mrs. Lincoln?
- [35:28]
A
Exactly, exactly what I was thinking. Hold on, let me show you this one. This is a, this is a banger. All right, here we go. So the Fed, by the way, this is my tweet. There is like 1.1 million views of their like, because you know how the cutie of the post actually gets most of the views or what have you. Right. So yeah, in taste, most authors note the narratives about declining dollar share and increasing roles for gold holdings by central banks. Inappropriately generalized actions of a small group of countries. Right, And a small group. China, India, Russia and Turkey. Exactly. So it was like very close. It was 37.5% of the world population.
- [36:03]
B
Right. And the world's factory and the world's manufacturing powerhouse and the world's like it outsourcing hub and the most important port in the world and the world's biggest energy and commodity producer. It's like.
- [36:16]
A
Yeah. And what they're doing is they're taking all these small Euro states. And this by the way, is a common thing that I observe is lots of. See a lot of Americans think, okay, there's US and then maybe Europe and they just completely discount Asia and also like, you know, the Middle east. And you know, like they just. Part of the reason for that, I think, is, as I was mentioning on the McCormack episode, you, I think have a more global view than most. Right. But I think most people, many Americans have simply not seen enough media or being physically overseas enough to see like it's real. Right. A lot of, there's a lot of amazing stuff that's happening overseas. And so because of that, when they hear, oh, you know, for example, Trump got all of Europe to go and sit in front of the desk, they're like, well, we're dominating the world. Everything else is a, you know, third world country. And so and so forth. Jim saying, right, there's some, some of that. Maybe, maybe you go ahead. I saw.
- [37:15]
B
Oh yeah, I saw it with Russia. Right. Where, where in 2022. Right. Well, Russia's GDP is less than Italy's or Maine.
- [37:22]
A
Yeah. It's a gas station with nukes kind of thing.
- [37:24]
B
Right. And it's like there, there's a fundamental first principle miscalculation around leverage. And by that I mean Russia is, you know, if you take Russia's oil production, they are roughly 11 to 15% of global oil net exports. If you took 11 to 14% of global oil, next exports off the market, oil would be, I don't know, 4, 5, $600 a barrel. The next day every bond market in.
- [37:51]
A
The west would have crashed. What is the price sensitivity there? I actually don't know what it is.
- [37:55]
B
You know what, someone ran it for me once. It's very inelastic.
- [37:59]
A
You have demand destruction also and so on. So it's complicated, but go ahead.
- [38:02]
B
It's complicated, but it's especially early on. It's extremely inelastic, number one. But then number two, it's that second derivative of the bond market, right? Like, everyone's like, oh, we survived the 70s. Well, we survived the 70s oil spike because we had already devalued the debt from 110% of GDP in 1946 to 30% by 1970. So, like, blowing up, you know, having oil quadruple overnight, basically, or in six months didn't blow up the bond market because they could raise rates to basically, you know, we still had the inflation, but it prevented that. You couldn't have a debt death spiral in the treasury market in the fundamental asset of the world at 7%, 8%, 10%, 15% fed fund rate. We haven't devalued the debt. So, like, if you tried to take Russian oil off the market, completely off the market, you would spike oil up several hundred dollars a barrel and you would literally blow up the treasury market within hours, if not minutes, which is the fundamental collateral underpinning the entire banking system, the entire Western financial system, the entire Western financialized economy. And so it's that second and third derivative when you're starting from the wrong first principle where you say, well, Russia's not that important. Russia's like, critically important because people, you know, these are the arguments you get from people like, well, where's electricity come from? From a wall and where's food come? Well, it comes from a grocery store. You know, how big is Russia's gdp? Oh, it's smaller than Maine. Like, it's the same, like, level of understanding.
- [39:31]
A
But if you, if you look at it, have you seen the PPP chart, the World Bank PPP chart? They had to grudgingly admit last year that if you look at them purchasing power parity terms, China number one, USA number two, India, number three, Russia, number four.
- [39:47]
B
It's, it's astonishing. Like, literally, the four BRICs are the, for the brick, right?
- [39:52]
A
Brazil, the RIC of BRICs are number one, number three, and number four. And now the administration has managed to put them all at least partially adverse to the US for whatever. You know, you know what it is? I think Democrats just were just like, in my view, irrational about Russia. And I think there could have been a way to avoid a war. And now, unfortunately, a lot of Republicans are, in my view, irrational in India. And the domestic sentiment is pushing a. It's definitely provoked by the, like, India was fine. India was actually one of the few countries in the world that was still very pro American, you know, and now they just managed to push them against the U.S. unfortunately, which is very unfortunate because I, you know, I know I have a lot of friends over there.
- [40:34]
B
He should get the noble push together.
- [40:37]
A
Yeah, exactly. That's right. So, but. And the problem is here, the problem is that the current admin in many ways treats its enemies better than its friends.
- [40:49]
B
So, yeah, it sort of does. And you know, it's fascinating. I read. I've seen that purchasing power parity chart. I would add on two things. First, there was a new Asia Times article this week highlighting. I think it's called the skull chart or something. And what the Trump.
- [41:03]
A
You know, why Trump keeps the Hun Fazee one.
- [41:05]
B
Yeah, yeah, exactly. And it was incredible to me. He lays out that. I don't know if it's the IMF's calculation of PPP GDP, but. But they look at it per capita, and even as much as they begrudgingly admitted it, apparently the PPP per capita GDP of China is still basically on par with Mexico. And he's like, are you crazy? Go to the top 100 cities in China and look at it relative to Mexico City and tell me.
- [41:29]
A
It's obviously the numbers, like, whatever it is, that I don't know exactly how the numbers are being manipulated, related. Because China, as I said, has an interest in sandbagging and America has interest also in.
- [41:40]
B
In numbers for him. Right, Like.
- [41:43]
A
Yeah, right, exactly. So America's just something. China's handbagging. And the combination is China wants to appear weak and America wants to appear strong. And so exactly how China is coming in at like this very low GDP per capita number. If you've been to China, it's obviously a very wealthy society. Like, it's obviously ahead in many ways. Go ahead.
- [42:06]
B
Yeah, I was gonna say, you know, the other thing I'd highlight within that is. And this speaks to the fundamental, A fundamental problem with the strategy vis a vis Russia and China and now, now India, but Russia and China particularly, which is if you go to your average Western, particularly neoliberal economist and talk about PPP gdp, they'll tell you it's bullshit, right? It's a bullshit number. Blah, blah, blah.
- [42:31]
A
Yeah, they always say that. Yeah, exactly.
- [42:33]
B
Always said always. But there's a. There is you. When it stops being bullshit is when the bullets start flying. Because in the end, whether you've got $100, really nifty missile, or you can make 100 just slightly less nifty missiles for that same $100. The guy with the bigger PPP GDP wins going away.
- [42:57]
A
Exactly.
- [42:59]
B
In Russia. And so like, you know, in this negotiation, if you're Russia and China, we literally can't go to work like you, you know, if, if war is the, is politics by other means or the continuation of politics by other means, PPP GDP metrics means this has to stop at either short of conventional war or nuclear war. And Russia and China have to know this.
- [43:22]
A
You know, it's saying like PPP is pew, pew, pew. You know, like the pistol.
- [43:28]
B
Right? Yeah, yeah, yeah, yeah.
- [43:30]
A
Right. So it's a good mnemonic or something. I, you know, two other addendums to what you just said, which are all the people who are complaining about Chinese overproduction. They're like, oh my God, China's dumping its stuff and so on. But what they really mean is China has such insane manufacturing scale that they can crank out very sophisticated kinds of things like electric cars. They're not easy to make, right? Especially not easy to make cheaply and not easily cheaply and at a profit while doing so. You know, positive margin, low cost is very, very, very hard to do. Say they can make all of this stuff at such enormous scale. And this is so called overproduction. Supposedly bad that they're doing it. But imagine, I mean, in like when the US is fighting World War II, everybody complained about American overproduction because America had all the factories because crank out everything and solve everything with just artillery rounds and just, you know, just had this absolutely enormous, you know, could have like an ice cream ship and so on and so forth. As people talked about that time, that's what overproduction means. It means that you imagine complaining about overproduction of war. Exactly as you're saying, right? Or similarly with the tariff thing, it's related to the point on the drones, which is if you're just protecting the American home market, that is an admission that the American product is not price competitive abroad in some neutral market. Right. If, if it's Morocco or Mexico or, or, you know, I don't know, the Middle East. And you've got an American product on the shelf and the Chinese product on the shelf. If the American product is not price competitive, there's. Then that means it's like not price competitive in the physical world. Like you can't crank out enough at a low enough price and high enough quality. And so the home tariff, you know. Anyway, go ahead.
- [45:20]
B
So Josh Wolf testifies to Congress in summer 2023, and I think it's a super illustration of what you just described of if we need the protection, we can't compete on a scale standpoint. Yeah. And right. So he highlighted that the cost of a US nuclear power plant, which takes far longer to build, is still six to seven times more expensive than a Chinese one. Per, per gigawatt. And to me, yeah, that was, that was the whole like, it was a huge admission. Which is a gigawatt in the US is a gigawatt in China. There's no special physics in the US or China. Right, A gigawatt.
- [46:02]
A
Exactly. The cost structure in the U.S. it.
- [46:05]
B
Tells you that the yuan is 90%, the dollar is 90% overvalued versus the yuan. Because if the Chinese in a yuan market can build a gigawatt for one sixth that the Americans can, it tells you that the dollar is 85% overvalued, 83% overvalued against the yuan.
- [46:20]
A
That's right. That's right. And you know, there's another piece of this that it took me a long time to articulate properly or let me give two or three pieces and again, just premises and you shoot at them. You tell me if I'm wrong and you disagree or something. So China's stock market has been flat for a long time. Flat. Ish. Right. Recently Chinese tech stocks have started to run, but overall I would say China saves in factories, not equities. Like, for example, if you had a stock that was increasing, you could sell that stock and take the cash and then go and invest in physical plant and so, and so forth in theory. You know, Amazon did this for a long time. Even though their stock has run quite a bit, they would take their free cash flow and keep reinvesting it. So they have very low profit margins, but they had enormous scale. So that's why the street would keep investing in their scale. Right.
- [47:13]
B
So yeah, And I would add to that that the other side of that same coin, and I'll continue, is the world, because the Americans don't make anything the world wants on net save in American stocks as the dollar's reserve currency. And they can't save in Chinese factories with American dollars or Chinese yuan, since obviously have capital control. So what we end up with is often saying, oh well, look at our stock market, to their stock market, we're dominating. And that's not exactly the message in my view. It's an apples to oranges message.
- [47:41]
A
There's another piece of it that again, it took me a while to figure out, which is if you talk about how the US is printing money, somebody who's smart would say, well, China's also printing money. They're printing quite a lot. So why is it bad if they're becoming so strong with it? And my answer to that now, my tentative answer, which I, which I reserve the right to revise, but what I think is actually the case is if you think of inflation as taxation without legislation, you know Milton Friedman's line, right. Where basically by money printing you are effectively seizing a bunch of the assets of the population, in theory, you could actually spend that. Well. And what the Chinese government did is it spent it on roads and bridges and automated ports and gleaming this and gleaming that. And so all of this public infrastructure that increased the Chinese people's productive capacity.
- [48:38]
B
Yeah. And standard of living.
- [48:39]
A
But. Yes, but. And what they also did is they also kept prices down or the, the RMB exchange rate down so that you. Exports could work. Right. So they. The part that I think I hadn't fully conceptualized is inflation is taxation. But taxation could be used in a positive some way because in the US it's, it's just not like the 100 billion is taxed in California. It's all just stolen and it's just all radical, radical waste beyond anybody can imagine. Right, yeah.
- [49:14]
B
And the global war on terror. Right. We spent $8 trillion. And what do we have to show for that? Like nothing less than.
- [49:20]
A
That's right. Even, even this whole build up to fight China is, you know, I could tell from the beginning, honestly, you know, that that, that chart of the supply chain, like the US Military is made in China.
- [49:32]
B
Yep.
- [49:33]
A
The one that we bought. Right.
- [49:34]
B
Yeah, yeah, go. Yeah, go. Yeah, go, Vinny, I think is the source of it.
- [49:37]
A
Exactly. Good memory. Exactly. That's right. So there's a 400 million dollar Pentagon study that basically showed that these famous American weapons, the Tomahawk and the jdam, their supplier, supplier is in Shenzhen or Shanghai or something like that for hundreds of different kinds of companies. Right. So. And of course China has a full database of every part that's going out there. And so know there's a button they can press that says shut off the American economy. Right. Which is why Trump had to blink on this trade war. And he's beaten up lots of other countries, but he keeps extending the 90 day thing with, with China or what have you because he can't cut it off. Right. And now you're seeing Hegseth basically saying in this very. I don't think it's the, the defense strategy being publicly confirmed yet, but that thing you tweeted and the thing I tweeted. Right. You posted, if I'm not mistaken, that Hegseth had told China there's no conflict with them. Yeah.
- [50:30]
B
They're turning away and to refocus on basically rebuilding here. I think it is the biggest development since the fall of the Berlin Wall. From a geolibral.
- [50:40]
A
Absolutely. It is that big. And the stuff about the Department of War and so on and so forth, it's almost like a shouting retreat. Right. Like in the sense of maga. And look, I'm sympathetic to some. I mean, you know, I understand why. Where they are and where they're coming from. So I'm sympathetic in some ways. But they're conflicted because on the one hand, they want America to be great, which is this giant empire that has, you know, all this strength and this, number one and so on. On the other hand, they want it to be just a country again, not an economic zone, which means, like withdrawal from the whole world and everybody else. You go and do your thing, stop exploiting us, and so on and so forth. They don't understand the tension between these two worldviews, which is to say that pullback is actually in some real sense, a weakening of the empire. And then the question is, will Sanders the living persist and. And may. Now, here's a point that maybe you'd agree with maybe when I think it's very difficult for them to do this pullback because the US can't tolerate a decline to like, number two, since its business model is money printing, that requires you to be global. Number one, if you stop, if you pull back from Asia, and now you're just doing the Western Hemisphere, and you may pull back from Europe and just let Russia have that. Okay? Now everybody reassesses where they want. It's no longer a global reserve currency. It only has some historical kind of traction to it. All kinds of people move into gold. There's a repricing thing you. You're talking about the US Loses control. The dollar is no longer the reserve currency. And that means prices explode in the US Upward because the dollar's purchasing power drops, and they could explode upward. As a very rough estimate. This is extremely rough. There's 300 million Americans. How many people worldwide are currently using the dollar? Maybe one to two billion, maybe eight billion at the max. Right. Some billion. Let's say three billion. Okay. And if that shrinks back to just U.S. citizens or even just U.S. citizens, plus some Canadians and so and so forth, that could be like a 90% decline in the tax Base it could. If even if it went from 700 million to 330 million, it'd be a 50% decline in the tax base. It'd be a 50% devaluation of the dollar. Right. That's like a radical. Then on top of that, all these countries will stop sending parts and so on and so forth. So you can see a stacking of tariffs plus rise of bitcoin, rise of gold, plus other countries pulling out effectively of the dollar taxation union. And so I think it's very hard to see a good outcome for that though I also don't see any other possible outcome. Let me know your thoughts.
- [53:20]
B
I agree with your framing of it and I think I agree with your conclusion around. We're at this point where we don't really have a choice. If we continue this business model, we literally cannot produce the weapons we need to enforce this business model. So this business model is de facto dead. It just hasn't been fully marked to market yet. I think your math around the marking to market of it is directionally accurate. And we can debate, you know, various, various whatever it is.
- [53:53]
A
Right.
- [53:53]
B
You know, as you were saying that I'm reminded of a great meme. I've posted it once upon a time. But if you go back in the US economic data, you can go to 1963, right before we took silver out of quarters and dimes and you can go look at what like the, the minimum wage is for, you know, what minimum wages. And I want to say it was like a buck 25 or something like that, you know, in 1963, that's five silver quarters. Well, if you look at the silver melt value of a 1963 quarter today, I want to say it's like five bucks or something, four bucks, six bucks.
- [54:39]
A
Right.
- [54:39]
B
So when you say, okay, well then in real money terms, if we had stayed on a gold standard. Right, just let me go with the gold. Silver. Right. But a real money standard, then minimum wage in the United states should be five quarters, six bucks, 30 bucks, 25 bucks, whatever it is. What is it really? It's like less than half that. And that's the whole grift. That's the whole grift. Post 71 in a meme. And it describes exactly what you're saying.
- [55:12]
A
Which is you should post that. That's a good one. Yeah, yeah.
- [55:14]
B
Right. So it's. And I posted before I could repost it. And it's, it's, it is exactly what's about to happen. And I think ultimately what we are watching from The Trump administration and key economic officials. What we are watching with the brow beating and discreditation of the Fed. I don't think this is my view of it. I could be wrong. I think Wall street is entirely too focused on sort of the, the short term tactical reasons for why Trump wants to do this. Oh, it's, you know, he has bad polls or this isn't going well, or China's beating him. I don't think that's what it is. I mean, I'm sure it's probably a part of it. But I think the real reason they're beating the heck out of the Fed is they need to change this system. They need the Fed to help them basically start this Boulder, this dollar Boulder rolling down the hill in terms of, you know, if continuing on sort of US as empire, where China makes the weapons for the empire to threaten China with is a dead business model, and it is, then we have to move to something else or else if things get really bad. And so like the least worst option is you devalue the dollar, you have the Fed helping.
- [56:31]
A
The issue with this though is there's so many graphs I can post and I'm sure you've seen a bunch of them on the level of polarization in the U.S. and it's not just, it is of course blue versus red, but it's also women versus men. It's young versus old because of the Social Security issue, Medicare, Medicaid. It is unfortunately for, for some, like white, non white. It is, you know, American citizen versus foreigner. It is also in a sense American versus other countries, you know, and so and so forth, right. And, and on and on and on. The thing is just riven by, you know, I'm starting to see people even fighting over religion in a way that I actually hadn't seen before in my life. Like actual real fights between Catholics and Protestants, for example, on my feed I was like, this is like pre 19. This is something I just never seen in your in my lifetime, like passionate kinds of arguments on this kind of thing, right? And it didn't look like they were joking around either, which was, which is new to me, you know. And so from my standpoint, the only thing that is keeping this fragile, like just take Democrat, Republican, Democrats. There's that study that shows only 4% of Democrats are married to Republican. Obviously Democrats don't vote for Republicans now with blue sky. They don't even socialize with Republicans. The one thing they still do, and only barely is they still trade with Republicans because of dollars. So it's like, you know, to reverse the maga, saying it actually is an economic zone, not a country because it's a binational thing where Blue American and Red American are as different as North Korean and South Korean. Like they don't agree on whether men and women exist. Right. Like fundamental, you know, that's just like one huge obvious, you know, visceral example. Right. But such huge gaps are like North Korea and South Korea where they have a fundamentally different conception of how the economy works, the world works, what should be legal, what should be illegal. Totally, totally, totally different. And they're getting more different. And you know, some people say wokeness has been beaten because it's been beaten on X, which is true. But that's like saying, you know, like communism beaten. Yes. After the Soviet Union fell, not everyone had to be communist, but North Korea and Cuba continued being communist actually. Right. And that's a good example. That's a good way of thinking about like Blue America. A big chunk of us continue to be in communist. What's my point? My point is I don't think you can just retire the dollar and then ship a new script. Like what happens? Let's say that happens. Okay, what happens the next day? First, Blue America and Red America would not be able to agree on a currency union.
- [59:11]
B
After that, number one, I reject the premise a little bit in that I don't think that anything's going to happen to the dollar. So like you go to Latin America, right? They've, you know, they've added zeros forever and they still use the same currency. It's just, you know, how many zeros does it have today? So I think the dollar will remain. Now what do I think is a distinct possibility is let's continue with the USSR example, right? I've got friends from Ukraine who emigrated from Ukraine after the USSR fell and they told me this great story. They said, look, my family was the richest family in the village. My father was a doctor. We had enough in our bank to buy five cars and so we were rich. And they closed the banks on a Friday and then two weeks later they opened them back up. And the money that on that Friday when it closed, bought five cars, bought a month of grocery, same currency, same register, like it just the real purchasing power was taken away like that, you know. And when I say, well what, you know what, you know, her husband was like, yeah, oh yeah. I was saving to buy a motorcycle, close the banks, reopen the banks. I buy a carton of cigarettes with the money I had saved up to buy a motorcycle. How do people holding gold and silver do? Right? They're like, oh, everyone who held gold and silver is fine. And like your purchasing power is maintained. Right. Presumably, you know, Bitcoin, I think would. Would do be more than fine, but I think that's a much more likely rep. Some version of that right. Of bank holiday, close it down, reopen up and you know, you've got. However they deal with it on the other side of it. You could do a wealth tax, you can do capital controls. The whole world's gonna be different on the other side of it. But I think it's still gonna be dollars. I think it's still gonna be dollars. And then I can see your political, your political. That thing. Things get tricky from a political standpoint, right? Do we fight or do we do after 9 11, where it's like, oh my God, we're all gonna starve if we don't friggin. You know, you know, you know, I.
- [61:12]
A
But I think Covid showed that like you, you know, the disaster doesn't make Americans come together anymore. It just pulls them apart and they just fight more. Right?
- [61:21]
B
It's fair. It's fair. It would. You would have to be. You would have to have a great leader because I think you're. To your point, the time, you know, the time of when 911 happened, think about totally different era. I tell my boys, all right, my boys are in their early 20s, late late teens. And I tell them, you cannot fathom how amazing America was, how unified it was. 85 to like 2000, like 2001, 2002 even. It was, it was frigging amazing. And yeah, yeah, we're not there now. We are absolutely not there. We can't agree on facts. We can't agree on pseudo facts. We can't agree on science. We can't. We like, we can't agree on anything. And to your point, it makes it very dangerous. I fully concede it makes it. It would make it very dangerous.
- [62:03]
A
Let me make a second point which is orthogonal to the first, but adds to it, which is if you were picking a tech stack from scratch today, okay, forget about the political, just technological. Because of how the dollar was started when it was started. And when I say the dollar, it's like, ach, it's swift. It's a suite of technology. It's Fedwire and so on and so forth. That tech stack was, when it was started, cutting edge, leading edge. But because it was all set up pre Internet, other countries now that have kind of got all this stuff only going post Internet. Like you know, China has very sophisticated with WeChat and AliPay and so and so forth. India has UPI, you know, pog seguro in, in South America. And you know there's, there's very, there's very sophisticated Internet native payment systems, obviously cryptocurrency. But also all of the fintech companies, right. Like 18 years ago, in 2008, 17 years ago, they're weren't that many people around the world who knew how to stand up a new currency to run payment rails to do fintech crypto. That, that was actually a relatively rare skill set. There were like you know, a few hundred thousand people with a Bloomberg terminal. Now that is a very widespread skill set. I can do that. I mean, you know, you know I launched USDC at Coinbase. Right. It's the number seven, you know, asset. Right. That by the way, that's a counterargument some people will give. They'll say well dollars will continue to get adopted because stablecoins are going to grow. And I actually do agree with that. So the timing on all this is tbd. It could be that everything dies against the dollar and then the dollar collapse against bitcoin and gold. Just like all local newspapers died against NYT and Wall Street Journal and Washington Post and then they died against social media and Amazon.
- [63:46]
B
That might be the right model. I think that might be the right model. Right, yeah, yeah.
- [63:49]
A
So that's possible. Which will be a lot of instability in its own. Right, Right. But the. So anyway, so the technological point, I think if you have the dollar no longer being stable, it's so easy for people to set up an Internet based thing. Whether it's a cryptocurrency or a fintech or a cryptocurrency backed fintech. Like a lot of stripes, new products, Coinbase, new products are kind of in that line of thing. Right. Then no one would adopt the dollar again after it was delegitimized or partially de dollarized. Like you wouldn't choose it from, you'd only use a dollar as an incumbent technology. You would pick it from scratch if everybody was picking. Again, let me pause there.
- [64:31]
B
Yeah, it's a fascinating point because there was a. You can call up on China's scope a speech given by General Kiao Liang of the People's Liberation army. And this is the same guy who when he was a colonel wrote unrestricted warfare in 1999, which was a book that I believe still never been published in English. Kind of laying out, hey, we gotta go against the Americans all these different ways and in unconventional ways. So by 2015, he's now a general and he gives a speech to senior CCP party members. One of the things and the name of the speech is the US uses its dollar to dominate the world. And it gives a Chinese version of events of us going off the gold standard and weaponizing the dollar through various cycles over the ensuing 50 years, 45 years.
- [65:20]
A
What article is this?
- [65:22]
B
It's called US uses its dollar to dominate the World. It's on Chinascope. It was published in April 2015.
- [65:30]
A
Interesting.
- [65:32]
B
And so one thing as it relates to what you said there that I think is very powerful is towards the end of the speech, he says the Americans made a mistake by thinking that China's their enemy. We're not their enemy. The enemy of America and the American dollar are the technological platforms that the Americans are leading the world and pushing out. He said, what is the dollar? The dollar is a currency. When we start to settle trade without the dollar payment rails, will the dollar currency hegemony still exist? This is the question the Americans should be thinking about now. He said this 10 years ago. And then he cited the 2014 payment statistics, all done without dollar rails on Alipay at the end of 14 on Taobao and whatever other Chinese consumer websites, and they were already doing staggering levels of consumer volumes outside the dollar in non dollar rails. And he's warning America, like, hey, you guys are rushing headlong to push these technologies that are literally undermining the branch. You're cutting off the branch that you're sitting on as it relates to the dollar. And so when I hear you say what you laid out, it's exactly what he warned about 10 years ago. And I think we're watching it in real time. And I think not only is it gaining critical mass by virtue of China's mass and global usage of things like Alipay and WeChat, but also with US policy, where after you weaponize the dollar enough times, to me, I think when the history books of the last 15, 20, 25 years are written, I think the kicking Iran out of Swift in 2012 will go down as one of the great strategic mistakes in history. It was like, it was like being Alabama playing a team. You're already up 70 to nothing and running a trick play that you need to use against LSU in a close game and getting it on film. So the whole world, Russia, China, everybody watched that and went, oh my God, they can hyperinflate us overnight. Within A year the Chinese were saying we're done buying Treasuries and then began.
- [67:50]
A
Exactly. That was peak Treasuries and it started falling. They're holding Treasuries. I am surprised they haven't liquidated more than they have because they still hold whatever 100 billion of them. But maybe, I don't know, maybe it doesn't matter. It's only 100 billion.
- [68:06]
B
I think they have on net the thing we never see. Right. Think about it. That's simply an asset stock side of a balance sheet. Right. We don't know if those are pledged as collateral against.
- [68:16]
A
That's. That's right. You're right. They could have virtually sold it already. And that's how I would do it.
- [68:21]
B
If I was them. Because look, if you sell them outright, you're going to get a knock on the door from the American embassy and it's just an asset. Right?
- [68:27]
A
Yeah.
- [68:28]
B
Collateral. They love you. Hey, great. I'll take Piraeus. I'll take that oil field. I'll take that copper mine. I'll take all that Gore. And the, and the why again, it's kind of like same way of, of, of, you know, the Chinese want to understate their strength. The Americans want to overstate it. Like the American banks are happy to take this dollar collateral and the Chinese.
- [68:46]
A
Got to be a clever point. Very clever point. So that, because thing is the reason I always thought that this is a table that you and I are referring to. It's a treasury table of like countries and their treasury holdings. And one of the weird things about that is it has like Cayman Islands and Belgium and these really small countries supposedly have a lot of Treasuries and, and what's actually going on there is there's some funny business with like banks in those countries that hold Treasuries on behalf of somebody else. And obviously Treasuries are especially the 10 year. It's a, it's collateral that is pledged and repled over and over again and all kinds of fancy things around the world. And so of course you're right that China can get liquidity on its Treasuries without actually selling them. They just pledge them and you can then chart of that.
- [69:32]
B
Yeah, as I would argue, I have a chart.
- [69:34]
A
Let me see. And that's all just private paper. They don't have to disclose any of that, right?
- [69:40]
B
No. And you can see it with GDP to FX reserves. Right. So like us, you know, that's it.
- [69:45]
A
That's, that's, yeah, that's very clever. I mean, maybe obvious, maybe somebody else discussed about it. It's the first time I had heard that particular argument. It's very good point. You know, I want to kind of give one more tech lens on this to what you said, which is the dollar is a database is a natural view of like crypto and blockchain people. Because that's what a blockchain is. A blockchain is a, a new kind of database. Right. And in a sense I think of, you know, the Fed and then the, you know, Royal bank of Canada and. Or never, basically the Fed, the Bank of Canada, bank of England, I forget all the official names are the Bundesbank of Germany and so on. All of those central banks and then all the banks underneath them and all of those people under those, there's like four layers of Fed. All of the US colonies basically, right, including bank of Japan, then all the banks that are licensed by those central banks and then all of the citizens under them. Right. That sort of four layer structure that is what I think of as the Fed's video game. Right? Because they control all the points, they can freeze, they can seize, they can, they can rewind a transaction. They have root access over everything in this database, right. So and they, they use this against Russia. And actually there's this book called Treasury's War by W. Great book by Wanzerate. Right. He was actually a smart guy. I think he, I think he actually worked at Coinbase at one point. So he basically pointed out that, you know, because the US had control and so much of the world's value flowed through his database that the US had root control over, they could freeze and seize and use it for anti terrorists and that fine, okay, what's happened is you have two contenders, let's call them Crypto and China, that a larger one is kind of inside the empire and one is outside the empire, right. That our databases that the Fed does not have root access over. So it cannot freeze and seize things on the Bitcoin blockchain and other blockchains. Not too easily at least. And it cannot freeze and seize things in, you know, the Digital Yuan or on the Russian ruble or the Indian Ironr or, you know, AED or SGD or other currencies. Some of these are a soft peg to the dollar, some of these are hard pegged, like HKD and ADR pegged the dollar, but they could remove the peg if they needed to and they could go to gold because they run their own ledger, right? So the database aspect of this, you can, the Big thing about is these two economies, which I called the Internet economy, the crypto economy and the Chinese economy or the BRICS economy. Right. Those are growing and then squeezing in the Fed's video game over here. Let me know your thoughts on that. It's just another lens on the whole thing.
- [72:33]
B
Yeah, no, I think that's, I think that makes sense and I think it's enforced by, particularly on the BRICS side. And the leverage is the physical world, right? It is. You know, we are leveraging manufacturing dominance, we are leveraging energy, we are leveraging the real politic of we have nukes and the United States has never attacked a nuclear power country.
- [73:00]
A
Right.
- [73:01]
B
And then, and then the population side, right. You have a high, you know, enormous, highly educated, highly motivated and rapidly moving up in terms of living standards per capita. Right. Consumption. They have the physical world backfill. So as they squeeze.
- [73:23]
A
Right.
- [73:23]
B
What do we hear so much? Well, they can't live without our consumers. Well, you know, 15 years ago, 20 years ago, 100% 10 years ago. Yeah. Now, you know, it's gotten to the point we can see it in sort of where the pain has been with post Liberation Day. Treasury market blew up in seven days, seven trading days. And, and Trump was getting warned by major US retail CEOs like there are going to be empty shelves for Christmas if you don't stop this back in April. I hear he was warned. And so, yeah, they are backfilling.
- [73:58]
A
The entire thing is so crazy. Like you saw the manufacturing jobs print of you know, how many. Anyway, go ahead. You're saying. Sorry, go ahead.
- [74:04]
B
Yeah, no, so I think it's this physical world is, is bad. They're leveraging that against that sort of those, those other two video games, if you will. Squeezing the Fed's video game. I think that's, I think it's, it's a model I hadn't heard before, but that makes sense to me.
- [74:16]
A
Cool. Awesome. All right, sir. Well, I think we covered a lot. Anything that you want to say, you have, you know, people should go and check out your substack or no.
- [74:27]
B
Yeah, if. Yeah, they're interested. Yeah. Interested in learning more about our research. Fft-llc.com different institutional and mass market products. And as, as you know, I've got a fairly active feed on exit at Luke Groman, but so yeah, I appreciate it.
- [74:42]
A
Cool. This is great. Awesome. Thank you, sir.
- [74:44]
B
Likewise.
- [74:44]
A
Talk soon.
- [74:45]
B
Really enjoyed it. Thank you very much.