A (3:36)

Well look, I think we talked about it last week and the unwind of the carry trade has been looming in the background. It's obviously if you have a scoreboard, I think it's a negative on, on the sheet. We're going to talk about some of the positive things that we're seeing as well. But it's a little bit different than the last correction that we saw which where markets were shocked in August of 24 and that that really hit prices. But I think our thesis is generally that if you look at recent weakness in Bitcoin, particularly around November 20th, 21st, the the world's changed a little bit since then and, and yeah, maybe you still have some of that kind of carry train unwind weakness in the background. But look, if you look at like a poly market right now, there's just about 100% chance now that rates are going to, the Fed's going to decrease rates by 25 basis points back the last time bitcoin puked out. You know we can maybe even try to share a screen here. You know, last time bitcoin puked around the 2021, there's only a 34% chance that the Fed was going to decrease. Now that's probably been priced in the markets already but, but that's positive. All right, I'll stop there. But it is what it is. We still feel long term bullish. We're going to talk about all the good things happening across the board. I mean even Vanguard just came out as we were launching. They're going to start offering crypto ETFs. So it's all slowly happening. I think this is part of my Greater thesis around retail is ebbing and flowing. They're still recovering from 10:10, market makers are still recovering and institutions are still marching forward. Evidence today is, is, is vanguard coming back into, coming into the space.

B (5:20)

Yeah, I guess high level I'd say. Look, I think high beta assets are just under pressure. They've been lagging. You know value stocks are being growth. If you look at the S and P value index, all time highs. Last Friday the S and P is right behind it. The growth index was 8 points lagging. That so it's, it's a bigger issue than digital assets. It's true for uranium, it's true for the Palantirs and the Robin Hoods of the world. This high beta sprint that we've had since April is just giving way to a rotation to value. USD JPY I think is still not a primary driver. Looks like a one and done. You know we've had pullbacks in the USD JPY of similar magnitude including as recently as October 10th. Yeah, like the attractiveness of that carry becomes less as US dollar funding rates go down and Japanese funding costs go higher. That's true on the margin but it's a slow moving thing and people see it coming so it's harder for people to get offsides on it. I think it's really simply that animal spirits are just fatigued and they're pulling back after what's been an incredibly strong kind of performance in, in assets away from digital assets, namely these, you know, other categories of animal spirits.

E (6:47)

I think people have this need to always have a, an answer to, to why something happened is very powerful and you know, oftentimes, you know, after it happened, it doesn't really matter. It's already happened. But that being said, there's been a lot of discussion of what triggered this last move. Things were looking good. I felt extremely confident that the test of 8500 on the 21st was the bottom. I'm not as sure anymore given the violence of today's move. But I was feeling very confident based on pretty much almost every single metric out there from IV to SKU to RSI to fear and greed to, you name it, everything screamed bottom. Now this is not a market that is trading like the bottom is in. So I don't know anymore. The way I see it is it's very asymmetric at the time. What's the way Bitcoin is behaving versus other risk assets? Yeah, granted things like all quantum stocks got crashed last night as well and today. But that being said, the news and what happened on Japan didn't really warrant a. What was it, a drop from 91 to a 6% drop in no time. Some people argue that it wasn't really Japan, but if you zoom in and if you put a chart on, you're going to see that basically the move starts at the exact same time in synchrony with basically the JGBs, the Japanese bonds and the Nikkei, and everything moves at exact same time. And it opens it's basically at 9am Japan, which is 7pm Eastern time. That's the move, that's the trigger. That doesn't explain why bitcoin moves so much more. And then basically crypto collapsed. That's, I think it's what Chris alluded before, is an unfortunate corollary or aftermath of 1010. And yeah, I think that's it. Right now things are looking a little bit better. It's been very interesting, the microstrategy, it's pulled back almost entirely today's move. So again, the way I see it is first was Japan overnight, and second, at the open microstrategy brought the entire crypto complex down. So now things are bouncing and yeah, that's it.

C (9:31)

I think a common thread between a lot of the things that are moving around. If you're looking at bitcoin, if you're looking at alts in the crypto space, if you're looking at quantum stocks, if you're looking at microstrategy is it's all one, the momentum stuff writ large, as ROM was alluding to earlier, because value seems to be be doing comparatively better. But two, it's a lot of the things that people seem to like to, we're going to call it over, lever themselves on. So I wonder how much of this is a core, call it economic flush, like something based on fundamentals, where if people had been unlevered, we'd still have seen this level of violence. And how much of this is people, especially in crypto, just not being able to help themselves with the leverage that produces, you know, market moves. Like this Sunday night, you know, relatively notorious time for large crypto moves on thin liquidity because of leverage. And so when I'm looking at, call it this level of market reaction to what should have been a pretty expected headline in some ways. Sometimes the trigger that I'm looking for is leverage pain points there, which, you know, has interplay throughout all these other things. I mean, Rob, you were earlier talking about the animal spirits component of that. What do you think is going on with like, call it leverage Dynamics in retail.

B (10:49)

At this company, I think retail investors own a lot of the same positions that are cross correlated even though they appear distinct on the surface. Whether it's digital assets or uranium or quantum stock or like SOFI stock, it's all the same trade. It's all just like high beta. And so when one sells off, they've got to sell the others. And so high beta is just selling off in unison. And the other thing you see out there is like there are quality stocks for the first time in a very, very long time that are attractively priced. You know, quality's been a bubble. Costco had a 50 times PE ratio, now it's 45 times, it's still a bubble. But there are other things out there that are not like S and P global or maybe ice. So if you're an investor, you're looking around, you say, gee, where do I park capital? I think people park in quality assets. That's what you're supposed to buy when they're cheap. So I don't know that you'll get the same reflexive response from animal spirits this time around. Previously those other assets were just priced high, now they're priced low. So why wouldn't people go in that direction? Especially if they're concerns around the strength of the economy, whether that's legitimate or not, people have those concerns. Why wouldn't they just park in that direction?

C (12:04)

Thesis there being ultimately a rotation to, for lack of a better way to phrase it, defensive stocks on a forward basis.

B (12:11)

Quality value. Yeah, defensive stocks and I think even small cap value which would benefit from rate cuts because a lot of these names have a lot of leverage and if they can refinance their debt, they would benefit. So you know, value stocks in general have more debt than growth stocks, so they'll benefit from lower rate cuts. I think it's another reason why that's been outperforming. I expect that would continue to happen in the future like we are positioning in that direction.

C (12:38)

All right, so then I want to ask the follow on question as we sort of take that thesis and move it to other markets. Do you think following that corollary means that we should be expecting better performance out of Bitcoin than alts if we're going to see similar behavior in crypto, or do you think it all just trades correlated.

B (12:56)

Bitcoin should outperform alts, I would expect. I think that's probably an easy view for probably all of us to have here. I don't know if anyone would disagree with that. It's probably an easy view to take. It's an easy view to take.

C (13:05)

I. I always worry when something's an easy view that we're wrong, but. Yeah, fair enough.

B (13:11)

Yeah.

C (13:13)

All right, so let's talk a little bit about one of the drivers for bitcoin then, which is strategy. Oh, go ahead, Chris.

A (13:20)

Yeah, no, I was gonna. I was just gonna jump on strategy. You know, the CEO, you know, Michael Saylor is the executive chairman. People, a lot of people think he's the CEO. He's actually not the CEO. The CEO piped up and said, yeah, if we went to a negative M nav, less than 1. Well, yeah, I could see a situation where we could sell some bitcoin. And I'm paraphrasing, market didn't respond very nicely to that. And like, the other thing about bitcoin that's a little bit curious right now is it's really decoupling from gold. It's acting like that risk asset. Again, not digital gold. I think. I think many of us think in time that's going to fix itself, but it's still being perceived as a risk asset. But honestly, it's a little bit concerning when something which I think is kind of obvious. We talk about DATs all the time in the show. DATs need to have thoughtful treasury operations. They need to be prepared for times when M Nav is less than 1. They should have adequate reserves to be able to manage those situations, ideally not dumping their underlying assets. But. But the market seemed to be acting a little bit asymmetrically to. To that one comment on a podcast or whatever, which is. Which is a little bit unfortunate. But again, I think that's like retail being retail. And I do still think that there's, like I said, like, Vanguard is now saying they're going to buy ETFs for the first time. A pretty big deal. I think they're 11 trillion under under management. So again, I think time fixes a lot of this stuff.

C (14:54)

Yeah, I mean, so to fill out the strategy thing, their current M Nav is slightly positive. Continued price declines will push that lower. They announced they have a 1.44 billion reserve to cover 12ish months of dividends and debt interest. And the CEO Fung Lei said, math says sell, emotion says don't. But math usually wins. Chris, I would say responding to you and especially knowing the amount of retail interest and strategy, I think one of the problems with his comments was not on the fundamentals. I agree with you. Dads should be thinking about treasury management. They should be very careful with debt. And pre funding is not a bad idea from a long term stability standpoint. I think the problem was a narrative violation. Right. Which is to say people viewed Saylor as like the diamond hands, the one guy who would never sell. And now here's the CEO of strategy being like, no, we would totally sell if we had to. Like there are corner cases where for putting that, or at least in their eyes, corner cases where if they're put in that situation, they will be selling bitcoin to fund dividends or debt. Again, I'll remind everybody that stuff's not optional. If you don't pay your debt, you go into default and then your company is going to end up being restructured or forcibly unwound. So from a corporate responsibility standpoint, this is kind of the thing they have to do. Right. It's fundamentally not really optional. It's the same problem. Many DATs are going to face trading at an M NAV discount. But I feel like strategy was perceived as the one that would never do that.

A (16:28)

Yeah, they have an operating business. Go ahead, investors. Alex, go ahead.

E (16:32)

Yeah, the CEO did mention that the level that would require them at the time right now to, to sell bitcoin for dividends with 25k. And that's been absolutely not reported absolutely anywhere. But he did say that so very big against the own goal that he did because of course it's not going to be reported. You said what you didn't have to say.

C (17:05)

No, there's always. What is the right way to say this? All right, so for anybody who has not like worked with media in the past, one of the things to understand is one of the unfortunate parts about the ecosystem for many news outlets, not all, many is that attention drives advertising revenues. So they sort of start mining for clicks rather than mining for infertainment content. It's like infotainment, if you will. And so with a comment like that, if somebody says, oh yeah, we would sell bitcoin if it hits 25k, they're just going to report the first half of that sentence. Like this is a thing. You've always got to keep your antenna up for financial news writ large.

A (17:49)

I do think that bitcoin debts are harder than other debts. And the reason why is they don't have organically deals. Right. In the case of strategy, they do have an operating company. It does generate revenue. I think it was Matt Hogan, I think he said who Stasis for DATs is not an NAV of one. Right. Because you have a lot of costs associated with running a public company. And then, God willing, you have operating companies and businesses that you invest in using that permanent capital. So there should be a natural state that's either a positive M nav or if you're not doing anything and sitting there, a negative M. Navigation Look, I think ETH has a very compelling real yield. It's organic and that in some ways makes it easier.

B (18:34)

So briefly, I'd say one selling the underlying spot asset. I agree there's a corporate responsibility component to that. However, it does pressure the spot asset, of which the instrument is fundamentally a bet on, and the debt can add beta in that direction. It's just not a good story. It's like saying Santa Claus doesn't exist. This wasn't supposed to happen. It's not part of the story. Tactically, there's an opportunity for bitcoin to run here. I'd say tactically that's highly speculative. It's a very hard call to make. But I would expect once again that rallies are sold. Take a step back. Q. Q. Q. Is up 23%, 22% over the last one year. Bitcoin is up, is down 10% year over year. So people are looking at that and say, geez, there's a 30% spread. People have migrated their trading and investing to equity markets now, and they have a whole universe of assets they can invest in. And the psychology of that investor now has got to be like, wtf? I'm going to go buy. Pick your favorite semiconductor stock or MAX 7 stock. That's why I expect you'll continue to see performance lagging here, despite potential for a tactical bounce.

C (19:56)

I think another component of this, and this is where Japan actually could be a trigger to bring it all the way back to what we started talking about. Positive rate environments and higher rate environments put significantly more pressure on things that are not cash flowing. We're right. Essentially the cost of holding things that are doing absolutely nothing. When you could sit in government debt and earn something and take no price, risk goes sort of monotonically up. Right? It's the reverse of the zero interest rate era, where if you had a discounted cash flow model that shows a positive cash flow anywhere at any point in the future, it's potentially a good investment. Like as rates go up, the reverse is true. And so part of what I think we are still experiencing in the world is various regimes. The US may be like loosening slightly. Other regimes are now having to tighten significantly as people just dealing with the time value of money once again. Which was a thing that we kind of got to ignore from what 08 to like 2020, you know, which was a pretty nice time for that trade. But you know, once you're back to the real world, it reveals to people that leverage has a cost, borrowing has a cost, storing assets has a cost. Right. Like these are not things that just exist independent of the cash flows of other things. And rom in that environment, wouldn't you expect like operating companies with cash flow to outperform?

B (21:20)

Yeah, no, no, I agree. I mean operating operating companies that have free cash flow I think will do well. And again companies with high levels of debt that can now refinance with the prospect of lower rates with a more benign Fed leader coming into view. I think that's an interesting angle. I mean some of the best performing themes out there have been like retailers. By the way, this happens like every time around the holiday, especially around Black Friday. So I wouldn't, you know, just, just be mindful of that. Be mindful of that. But yeah, you know, you know, I think, look, one of the things is this, assets are now in public equity markets so those investors now can look around, they can make other choices. And I think it's going to take time to get through that.

C (22:12)

I was going to say the other thing I've been observing is we've been looking at markets too. Like this was flying around on Twitter recently and I forget who said it, so apologies for not citing it is as institutional investors come in, we're starting to re litigate some of the predictions previous debates around sort of the Internet and like things like fat protocol like versus app layer type stuff. I think there are, what is the right way to say this? I think there is maybe a repricing effect going on within some of these sectors as well. Chris, I want to ask you about this one. Like in the long run, protocol tokens versus apps. Where's your mind?

A (22:54)

We, we relitigate so many things every cycle. We're talking about tether now again. Awesome. Let's have that convers and guess what, guess what, China is now banning crypto again. Oh my God, you're right. Like we like go through the same discussions every single time and it typically has the same outcome. Let's talk about 60 minutes where you're, you're the star there. Austin, you watch it last night?

C (23:23)

I, I, so I was gonna say I did not watch 60 Minutes last night.

A (23:27)

You should have. They had Polymark.

C (23:29)

Polymarking.

A (23:31)

Yeah. Yeah. So here we are week after week now on 60 Minutes. 60 Minutes has 8 million viewers, plus or minus. I think your episode probably had twice that. But boom, there's Shane Coplin walking on the New York Stock Exchange, talking about his $9 billion company. All the focus on apps in that segment, which is kind of really exciting, and I think many of us believe the last 10 years, a lot of focus on infrastructure, not a ton of apps that worked. But then, bam, polymarket is out there now. Kalshi, whatever we can talk about, all of them want to give them both their due. But it seems like that's a very, very positive spot for the, for the crypto industry. And then, like, I turned to my, my teenage daughter and she's like, I want to do that because I know, I know better than everybody else, right? I, I, I can. I'm gonna like, how do you do this, Dad? I want to do it right. So, you know, being on a Mainstream Avenue, like 60 Minutes, I think is very positive for the crypto space. Again, the slow, methodical move forward that, that I keep seeing here.

B (24:38)

Here's one other element to introduce is like the, the political dynamics, right? So remember just a few weeks ago, we had these elections and there was a blue sweep. Since that blue sweep, you've seen healthcare outperformance, which would benefit from the House being more favorable on, say, aca. You've seen stocks like First Solar outperform, which you'd expect to outperform if Congress goes blue. So we're seeing the inverse of what we saw a year ago, which was the Trump bump. The Trump bump helped support Animal Spirits, Uranium digital assets. So I think markets are starting to discount the probability of a shift in the House. I think it'll be far more competitive the closer we get. By the way, I won't over read into the actual fact of the thing, but I do think that is playing a role in shaping the performance of digital assets right now.

C (25:36)

Yeah, I mean, if we look at sort of the forward path for things like clarity, the odds of that getting through the Senate in December of this year, a rounding error on zero, given the educational lift that has to be done there. And again, for people who are not, like, in D.C. or like, inside the beltway on these things, you've got to remember the average senator has a list of concerns that probably start right up at the top with things like the economy in the United States, immigration, public spending, and keeping the government open. What's going on in Venezuela, like, and you're just going down the list, and somewhere way down here is crypto. Right. It is not top of mind. And the reality is it's not a yes, it's not a no. It's when you talk to some of them about, hey, what's your view on defi? They go, well, what's defi? Right? Like not even in a malicious way, in a hey, we genuinely need to like dig into this to understand the thing. I think the poll there is longer than people think. Like, Chris, do you remember when was the first stablecoin bill introduced in Congress? Was that like six years ago now? It was something like that before it passed, right?

A (26:43)

Yeah, I don't know.

C (26:44)

It was a while. Right. And it was originally like the Waters bill and then McHenry Waters and then it moved over to the set. Like there were iteration after iteration after iteration of that thing. Clarity, like is a more complicated problem earlier in the legislative process. And that brings me to the second point that I think will impact markets, which is it gets late fast for somebody who's only going to be a one term president, right? Like Trump can't serve a third term. Midterms are coming in 2026. If Republicans lose the House, that's game on Trump, right. In terms of legislative priorities without like bipartisanship. And I don't think clarity is going to be the top of the list if they're in that situation. So the other part here that I would be thinking about for people is, as Ram said, the political situation is maybe a little bit different than people would have felt right after the election.

A (27:38)

That's what, you know, time is not on our side. We don't know what the next regime is gonna, is gonna bring. But we do know that we have really amazing proactive, pro innovation regulators right now. Atkins is going to make some kind of a major announcement tomorrow. Fam just put out a piece how she's going to end lawfare. Now this, this stuff is great. It's not enshrined in law and it could pivot and it likely will. But at the same time, you're going to get two and a half, three years of precedent. And that's why the more of the stuff that happens now, something as simple as what's a commodity, what's a security, that's very, very powerful. And so from my perspective, the sooner Selah gets in his seat, the better. And then let's get as much precedent behind us. But these are very positive impacts to the crypto space, particularly when you look at how we were like again today. I think the House, or it was yesterday, published its findings around operation choke point 2.0. They're like, guess what guys, it's real. We all know it's real. We experienced it. The fact that we were able to move forward with so much innovation and building during that bear period is pretty profound. Now, the markets haven't responded yet to, so it's like, I don't know, maybe it's a trailing indicator or something like that, but the conditions are being set very positively.

C (28:55)

Well, I'll close with this thought before we go to our advertisers, which is one of the things that I think sticks out in tech investing overall was Jeff Bezos back in the day after the tech bubble popped, saying, I was in this weird position at Amazon where every day I was watching our fundamentals get better and the price of our stock go down. So Chris, exactly as you're saying, the state of the world and what animal spirits are doing do not have to be aligned back to where Rahm was earlier. And it's something that people should always be thinking about is like markets being like in the short term a voting machine and in the long term away machine. All right, on that thought, we have two advertisers that you need to hear from and then we're going to come back and talk about the Fed.

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C (31:28)

All right, welcome back. Now we're going to talk about something that should in theory be at least a marginally pipeline positive catalyst for markets, which is the December Fed Cut vote. Right now, as we look at voters, the estimates are leaning no. Or Colin Schmidt, Goolsby, Musalam Bar, yes. Our Waller, Williams, Bowman, Myron's probably in a special category of not just yes but yes, cut it to zero. And then we have three that are unclear between Powell, Cook and Jefferson. But I, I would say so I'm going to start with the following framework and I want you guys to challenge this if you think I'm wrong right now. I think we're kind of in a Rorschach test of the market, which is you're seeing data that if people are worried about inflation, they can probably find enough in there to continue to hold that belief and hold to their votes. But if they're worried about unemployment. Right. Or financing conditions, you can probably find enough in there to hold on to that belief. And I think it's kind of a eye of the beholder situation. Do we think anybody changes their votes from last time around?

B (32:35)

We have NFP coming this Friday. Right. That might shift. We'll see.

C (32:40)

But by and large, I think you're right.

B (32:41)

I think even the FOMC is becoming more politicized for the reasons that you just cited. Right. Moran got the job for having a view. So yeah, I don't think people really shift their views here. One thing I would add to the mix though is that you're right. It's a Rorschach test. Always is. A Rorschach test, by the way, always is right. 88% chance of fed cutting rates according to the futures markets right now. But again, on the political backdrop, the first half in a midterm election year is often weak, often weak performance. There's something to consider. I do think the macroeconomic backdrop is actually good. You're just starting to see the uncertainty, starting to weigh in on how people are pricing assets now. I'll see if I can pull up.

C (33:34)

A chart for them.

E (33:34)

You know, there's a few guys that change their views actually, and that's why we had quite a bit of a repricing about what was it, two, three weeks ago? Two weeks ago. Perfect example is Goolsby Goulds is a guy who is, who is usually very dovish and he got hawkish in the last, basically after the fluency into the shutdown. And usually Williams boats with Powell. So that's why on the 21st, the Friday of the bottom, it was so important because Williams came out and I'm sure very knowingly came out to calm the markets and, and he put very explicitly in that he was in for a cut in December. So right now they have at least seven boats, the way I see it. So it's, it's a, it's, they're gonna cut, which won't make that much of a difference because it's, I think last time I checked was 80 priced in, but it's still good. It's not 100%. And, and for me, what is way more important than that is the, the, the elect the, the nomination of the next chair, which seems is going to be haccid. And it's, it's a, it's a car that Trump wants to use early to put pressure on the Fed. I can't talk about hassle for a long time, so like, I'll pass it on to you guys.

C (35:11)

Yeah, I'll say one of the things I'm always cautious with, with nominations is that's not done until it's done. I agree that's the way the cards are pointing right now. But as we saw with the cftc, it ain't over until somebody's confirmed, so to speak. Good luck, Mike. We're pulling for you. I do agree with you that I think they have the votes for the cut here. What I'm a little bit worried about is the forward path because some of these Fed folks are very data driven. And one of the things we're also going to see is an interruption in data thanks to the length of the government shutdown or at least maybe some irregularity in there. I'm not certain how people will interpret that. I'm curious. Rahm, what do you think?

B (35:55)

Well, I'd love to just double click on Alex, your read of. He sounds like you've got deep consider informed views there. Do you think he can actually move the needle as the head of the.

E (36:07)

Yeah, definitely.

B (36:08)

Go ahead.

E (36:09)

Hassan is a Bisad economist. So the way I see it is we are about to enter. This is extreme. We're about to enter a new era for the Federal Reserve. The first era was when it was founded. The next one came with The Great Depression, then Second World War and the 51 accord with the Treasury. Then comes the modern fed with Volcker 79 to 1881. So that's when he takes over. That's when the modern era of monetary policy begins. And then is the great, the financial crisis. Bernanke. So we have Bernanke Yellen. Powell has been kind of like one regime which is like a sub, subcomponent of the Volcker Greenspan era. This is going to be entirely different because Hasid is a supply side economist. And the other one that has a very high chance is Borsch, which is another cabin, both cabins. He's also supply side economist. And what that means is that these people, they think differently. They're not thinking in terms of okay, if growth goes about 1.8% the speed limit that the Fed takes into account in their, in its, in their models actually, which are commission models. If growth goes above this limit, the current Fed thinks inflation we need to be restricted. HACCP and warsh, they think differently. They think this is growth that is productivity driven. We can withstand more growth without causing inflation. Let's push the envelope. So you get those two guys in and the balance of voting of the Fed changes from Powell. It's like the Fed is around Powell. He's on the dovish side. Ironically people think he's a hawk. He's not, but he's not ultra dovish. I would put him on a scale, on the dovish scale from one to ten. He's a four hasset and war twos. And they determine the chair determines the agenda of the Fed and can do something else that nobody's talking about. And I think they will do it. Either of them, which is basically change the go after the stuff. The people who determine the projections that use the models that the Fed has in their hands. Every FOMC member before voting, before every FOMC they get what is called the teal book. And with the teal book what it has is the projections on where inflation, growth, et cetera, all the macroeconomic variables. Where the staff meeting, the Fed sees the. If the new chair changes the staff director and they change, start tweaking the models and they change the economist and who is building those, those projections. You gonna get more dovish projections that they would influence the rest of the data.

C (39:33)

So one thing I'll say to counter that though is it's important to remember that the Fed's a pretty fragmented institution, right? Like yes, the chair at the board level can start controlling a lot of These things that's not going to have nearly as big of an influence on regional staff. So like let's take an example of somebody who we referred to changing a vote previously. Goolsbee. Right. If you're President Goolsbee and you are sitting on top of the Chicago Fed, you have a whole staff of people who are answerable to, to you and kind of under your remit who are going to be giving you one set of projections and then the board can be giving you another one. I think something that I always try to caution people about the Fed is we talk about the Fed like this is a unified single entity. But when we say the Fed, we may as well be saying the large banks, which is to say JP Morgan does not agree with B of A, who does not agree with Wells Fargo, who does not agree with Citi. Like if you get any six economists in into a room and ask a question, you get at least eight opinions. Right. And so one of the things that I think will continue to happen is the Fed is very factional. I do think board level changes will be influential, but I'm always cautious about predicting large changes out of them just because kind of ironically for crypto, the Fed is more decentralized than people think in terms of how it is designed.

E (40:54)

Yeah, it's a very personal view. I think they will whip it around and it may not happen. We could also get what I would define as worst case scenario, which is Powell doesn't resign in May and he stays as governor, meaning he keeps voting in the fomc. That would mean Trump doesn't get a second guy in and it would mean whoever is a chair is going to be like a could, could potentially be and possibly be and I think would likely be like a sitting duck. So that, that also what to me that means is that it's very hard for markets to price in a dovish Fed until they get a better sense of if Powell is staying or not is very hard. And we have no idea when he would. If he does announce his resignation, Yellen did, I think it was 18 days after, but it could be 30, it could be 60, could be 90. Or maybe he doesn't do it. You know.

A (42:09)

I think the Fed's actually like continues to over index. They're very concerned about presenting to be apolitical. And that's where I see Powell's heads at. He does not want to be any of his behaviors. He, he wants to maintain this pristine vision of the Fed in a way that he proves to the world that he's not being impacted by, by political anything. And I think it's going to be very interesting to see once we move past him.

C (42:39)

So let's talk about something that will be impacted by interest rate policy next, which is Tether. Chris, I promised you we'd talk about this. So Arthur Hayes has been out warning that USDT could become insolvent if it's gold and bitcoin holdings dropped 30%. He called it a massive interest rate trade. Tether CEO Paolo Ardino hit back, calling it fun bud, noting that they also have 30 billion in equity, 7 billion in excess reserves, and 500 million a month in profit from treasury yields. At current yields, many have argued that Hays overlooks Tether's unreported corporate equity mining Bitcoin other assets, and that it is highly profitable with 10 billion in annual earnings. But I think one of the things that really creates traction in this debate is the opaque capacity around Tether. Like we don't know the entirety of their holdings or what the scale of those are either. While we know the aggregate amount of assets, the aggregate amount of liabilities with some degree of specificity, composition is also a question I would remind people on both sides. So, Chris, we'll start with you. Since you brought it up earlier. What's your take?

A (43:48)

All right, I'm sure you have big thoughts. Start with. I'll start with the story. But by the way, they made $10 billion just through this year. And yes, with the projection of rates, some of that, some of that revenue may come under stress. But they only have like less than 150 people. So this will continue to remain a very profitable company. Mind you one, that, that did just fine since it was started where rates were close to zero. And I'll start by saying, like, I don't know, every cycle has one of these, like times where we go foot on tether, it always comes up. And the one thing that all of us have learned who've been in the crypto space is it's very, very simple. You just gotta survive. And I remember like 2017, 2018, buddy of mine grabbed me, pulled me aside. He's like, hey, you know about this thing, Tether? Like, yeah, what about it? He's just like, dude, they're not back. They're going down. They're gonna take all of crypto down with it. It's gonna be over. It's gonna be done. Fast forward to today. These guys are printing $10 billion, you know, through 2025. So I've learned over the years don't bet against Tether. That said, I was at Lehman Brothers, right, no one ever in a million years thought that Lehman Brothers was going to go down. And then you know, a couple months later, off you go. And we went, we saw what happened there. So look, I think when it comes to Tether's done something very special. They've created utility. You can go, you know, parts of the developing world. USDT is recognized as a dollar, it's accepted as a dollar. And they've built that social consensus and confidence. So it's kind of theirs to lose. That said, given the choice between a regulated asset and an unregulated asset, I would say most folks will probably and crypto is a little different because of the libertarian thing and they don't want to be under control, whatever. But if you're truly looking for a store of value, I think there's going to be preference amongst many institutions for scale around a regulated instrument because it gives them confidence and you know, they can have the comfort to tell their board that it's fine to hold this on Treasury. So again I think institutions are going to come in and prefer the, the, the regulated asset. Well, Tether also has a regulated asset. Bill Hines is running it and, and he's building out what, what he's doing. I, I think it's going to be a very, very vicious space going forward. There's going to be incredible competition. I call it like a yield vampire attack. Dude, I'm going to take your stable coin, I'm going to dump it and you're going to take mine and you're going to see these, these ecosystems evolve where they only take their, their stablecoin, you know, from prediction markets beyond. So look, I am not like staying awake at night wondering what's going to happen to Tether. They have, they're make, they're, they're still printing money. They have plenty of reserves. That could change and the market will remember what happened the last time we had an issue with stable coins. People pulled out of USDC into Tether when Silicon Valley bank had its struggles. So I'm not, I'm not staying awake at night worrying about Tether right now.

B (46:49)

I don't think the insolvency is relevant. You know, the banks were largely insolvent in October 2008. It was a great time to go buy the banks. The banks were installed in the US and they're in the latam banking crisis in the late 80s. It was a great time to go by the banks then there's good Arguments using Tether's public attestations that they may have been insolvent. In October 2022, 40% of their assets were in rate sensitive names and spreads widened everywhere, everywhere. So all of those assets would have been trading below par. So you could have argued that they would have broke the buck if they had transparency, but it didn't matter. If you had a chance to buy equity in Tether at that time would have been the best investment you could have made. The bigger issue for Tether is that with the rates are coming down, they're going to generate less free cash flow. So a dovish Fed hurts the earnings power for Tether. I'm less interested in owning Tether as equity now. I would wait for an IPO to happen and then I'd look to maybe pick this up at the bottom of an easing cycle. And essentially Tether is now this rates play. When you expect rates to go up, you should go buy Tether.

C (47:59)

Simplifying a bit but I mean as I look at that thing too, the other part to look at Ramen, your comments about banks start leading this way is the liability side of the balance sheet. Like I'm going to remind people, if you think about Tether, you probably need to think of it as sort of three segments to their liability stack. One is demand deposits, right? Which is to say can I go demand redemption of this thing right now and feasibly have that happen. Number two, I would suggest I'm going to call this money that doesn't feasible feasibly have other dollar options which is like okay, if I redeem my tether, what am I doing with it? If you don't have good banking access, if you don't have like some degree of ability to receive funds, you're not going to be redeeming out of Tether. But if you want to hold dollars, you're going to hold it. So if you're like in a third world country without good id, can't easily onboard engaged in gray market activities, evading your own country's capital controls. Like all of these people, people are stuck in that trade. And then the final part is a decent amount of tether is probably just straight up bricked. Like somewhere between billions and 10 billion is like lost on chain. That's like Chris intending to send money to Alex and sending it to the wrong wallet. Now it's gone forever. Like protocols that got hacked and the funds are frozen and like, you know, like one thing after another. And all of these numbers are maybe small individually, but when you've been operating since. Since 2014 and there's been a lot of bleed onto things. They have a lot of, like, I'm going to call it equity capital trapped at the bottom of the stack. So the other part, I would say is as you look at Tether and think about speculativeness, you've got to understand not every penny of that is redeemable at this point. So I think people really misunderstand the stack.

B (49:43)

You're right on the mark. You can't get a bank run on Tether. Fundamentally, it is a bank. It's acting like a bank bank. It borrows and it funds asset. But how do you get a bank run? It's. It's difficult to even find a bank that powers Tether and it's very difficult. People spend years trying to find which bank enables Heather to get an offer. From Tether's point of view, that's a feature, not a bug.

C (50:04)

No, I agree with that also. Cancer Fitzgerald. No, I'm just giving people a hard time here. But I. I think it's one of those things where if I'm worried about the future path of Tether, it's not insufficient assets. It's what Chris said earlier, which is as you breach into more institutional spaces, somebody starts asking the question, hey, yeah, where does the yield go? Right. Which is something Tether doesn't have a great answer to. Like, if I'm a corporate treasurer at a company like Apple or PayPal, I'm not using Tether because I'm like, I get paid for my money. Like, you're trying to get me to pay you to use my own money. And I can just dump this in Fidelity's government money market fund, bro. Right. And so it, it becomes, when you're dealing with the Global south and people who did not have access to dollars, getting out of something like the boulevard into dollars is the trade. Like, they don't care about the interest rate. Right. But when you're talking about, like institutional payments, Chris can tell you they're pretty bitchy about interest rates and they're vicious. Yeah, I think it's not well understood.

A (51:09)

You have a regulated asset. The issue that you have is everyone's on the same playing field. And so that interest, if there's a way to get it, if you're that institution you're going to get and it gets squeezed to zero and your profitability in the context of rates coming down gets squeezed. And so the only way you survive is through mail. You see it over and over again. Regulation forces consolidation and Scale because margins get so compressed. So it's going to be a really interesting battle that's going to happen places with trap liquidity where maybe hey, you come into my arcade, you got to use my token. That's fine. Maybe like certain, I don't know, prediction markets or something but the big boys are going to be squeezed and they're going to be big.

C (51:53)

I mean the hard part about the prediction market thing is even like say one of Kalshi or like Poly market starts paying people the interest on the stable coins there, the other one doesn't. Well now one of these is positive carry to put your money on, right? Like it just takes one.

A (52:10)

Yeah, look I, I think that I'm surprised if they're not already pocketing that interest. If you run an exchange and make money from fees, interest and maybe data, I think over indexing on the data but like should be capturing interest and fees, they're waiving fees, they're one like switch away or deal with circle to be materially profitable.

C (52:30)

Yeah, I agree. All right, so speaking of one light switch, there was a CME outage recently, 10 hours at the main data center in Illinois that halted futures trading across U.S. equity, bond and commodities markets. The cause was apparently a cooling system failure pushing server temps to 120°F. As is always the case, the backup systems didn't kick in fast enough, probably hadn't been tested. It disrupted prices globally. It's a single point of failure. Guys, is there any technology that we could think of that might fix some of these issues that we could engage with? I look, I asked that sarcastically but I want to say this as a point for people as like a bargain structure person. Any system with a single point of failure, it's a matter of time until you have the failure.

B (53:24)

Well, all these companies have big disaster recoveries recovery policies in the wake of 2001. Every bank, everyone on this panel knows that. But I guess it didn't work, right? Like did the regulation actually deliver what it's supposed to go do or it seems like it did not.

C (53:44)

How, yeah, how many of those do you think actually work? I don't think.

B (53:48)

I think it's policies and procedures that collect dust. It's someone's job to read it and then reality happens and you know, I think they're less robust.

A (54:00)

I saw a ton of that. I think it's actually part of a bigger issue. And like if you go back to the global financial crisis I mentioned earlier is at Lehman derivatives back then and see me as Obviously in the derivative space, unregulated largely. And they were disaster because there's interconnectedness and counterparty risk everywhere. And so literally the Fed called and they're like hey banks, they got us all in a room and they're like, you got to figure this out. And the problem back then is we didn't have technology. And so the solution was, all right, we're going to centralize, we're going to hyper centralize it, we're going to put all this capital into it, it's called clearinghouses. And we're going to make sure that we're going to watch it and we're just going to call more and more capital and that's it. It's going to be this humongous point of failure. And we did that for $700 trillion worth of derivatives. Notional. It was humongous. We don't have any technology. Given the choice today, if we were to have that conversation, I would probably say it's not the best model, right? Because if I had technology that would distribute that risk, make that risk resilient. Much better system than having a freaking air conditioner blow up and take down one of the most important druid's markets in the world for 10 hours that people need. Thank God, Honestly, it was over the Thanksgiving holiday. Could you imagine if it happened during a stress or payrolls or something like that? It would be disa. It would, it's, it's awful, it's inexcusable. And so yeah, that's why we, we need to continue to get regulators focused on principles not enforcing compliance for compliance sake. Forcing intermediaries saying hey, like hey, we had this new tech, like why are we forcing this is, this is what I do every time I go to the Global Markets Advisory Committee and you just saw SIFMA published another piece today that we should all read, talk, talking about how hey, don't move so fast with this tokens. It's going to blow everything up. That's the whole point guys. The point is that we, there is a cheaper, better, more efficient way. And then institutions have to figure out am I with, am I going to be trying to solve problems or am I going to protect my moat? We all know how that story ends.

C (56:12)

The SIFMA thing I think is particularly interesting and the timing, it's like guys, didn't the CME just break apart here you are saying don't innovate better systems, right? Like what, what are we doing here? I mean look, I wrote a paper on equity market structure With V about some of the path dependency of history. Chris, to pile on your point, which is I will remind everybody that the current system of like a centralized depository to hold all the shares was a hack because originally they were like, well every TA should be robust cost on a standalone basis and things should be able to move between them. And that's too hard when you're calling everybody on the phone like for the fast version of communication. But now we live in a world where actually the market structure, everybody agreed at the start would have been better if achievable is completely achievable. And we have people saying no, no, no, we do it this way, we should keep. I guess it feels very two faced to me when people are saying oh we're the much safer way and yet all their systems are breaking constantly.

E (57:18)

You know, talking about systems is kind of ironic that for many years the SEC didn't want to approve an ETF for Bitcoin because most of the volume was basically taking place offshore. Right? And that meant basically Binance. And we got the ETF approved and a year and almost two years later, 22 months later, we get basically Binance crashing and literally making the entire industry collapse. At least short term.

C (58:00)

But the tokens of the ETFs were fine though I, I will also say, yeah, to some, to some extent I think that's a little bit of the SEC lighting the house on fire and then saying that it's a fire hazard. Right? Like why was all of the trading offshore? Because they kept trying to blow up all the U.S. exchanges and drive U.S. business out.

A (58:20)

Well, it's sad. And like, let's be honest, a lot of that active activity and it's a round peg in a square hole. We just can't. It's been very difficult to apply supply perps on an intermediate market structure on shore. I mean I testified in Congress in this a couple years back and it's just been very, very difficult. So yeah, we, this is what happens. You force it offshore to an unregulated market and then 10, 10, half and everyone's like it's crypto's fault. Maybe, maybe not.

E (58:48)

Yeah, good point.

C (58:50)

And I was going to say, and then later on after we've decided crypto's at fault, the CME has an air conditioning problem and nobody can trust trade regular way futures. I was going to say the punchline here people is multiply like redundant systems. Because I will also remind everybody to what Alex just said, which is a really good point. It is Binance that broke, right? Like it was still possible to operate things elsewhere. If you had multiply redundant systems, nothing was stopping you from trading on chain. It was the centralized exchange that broke. All right, so on that note, we're at time we have to let everybody go home. So thank you for joining us for this episode of Bits of Bips. We'll be back in one week to discuss more about how the worlds of crypto and macro are colliding. Until then, keep your air conditioning running, please. Thank you, everybody.