You're listening to te i.p. Hey, everyone, welcome to this Wednesday's release of the podcast, where we're talking about Bitcoin and the macro economy. On today's show, I bring back two guests that need no introduction, Miss Lin Aldan and Luke Groman. These are two of my favorite people to talk to because they have such superior critical thinking skills and knowledge of the global macro landscape. We cover a lot of various topics during this episode. One of the more interesting points in the show is when Lin gets into her opinions on a theorem and Teather.

But those are just a few of the many ideas that we discussed during the show.

So without further delay, here's our chat app and you listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Kristen. All right, so here I am with Lin Wood and Luke Roman. Guys, thank you so much for making time to come on the show. You guys are always so giving with your time, and it's always so much fun to get both of you together. So welcome back to the show.

Thanks for coming, Honor. Always good to be here. Great to see you again.

Yeah, you too. Glad to be back. So the real place I really want to start here with the questions is I'm looking at the landscape of what's taking place and we're seeing that the indices go higher and higher and higher. Right. And we know it's being driven by a couple companies. But when you dig into the midsize small cap companies, they're just getting annihilated right now. This covid coming back at Christmas time. This is beyond destructive when you look at what the real economy is beyond those 10 companies that are driving the indexes.

So where I want to start is really in the commercial real estate space because you just can't drive through any town in America without it just being completely boarded up. So when does this start to matter? What are some of your thoughts on the fallout of this commercial real estate and just mid and small cap businesses in general? So I'm just going to throw it over to either one of you guys to just kind of hear some of your thoughts and where some of this might be going.

I think actually you summarized it well, because I think you've been saying that everything is in a bubble, it's the currency that's in a bubble. And so I think that's one of the ways to look at it. It also depends on we're talking about small companies. It depends on what you're looking at. Exactly, because we've seen, for example, a breakout in the Russell right. So small cap indices are doing well. But of course, if you look at small businesses, restaurants, not the trade areas, those are struggling.

And so I also looked at, for example, I've been talking about the backward square root sine recovery and jobs all of last year pretty much. And with the latest data point we got with the ADP jobs, we saw the first dip in private jobs estimate since the pandemic. And so commercial real estate, it's one of those things where you put in your value investor hat. I think that there are interesting opportunities there. But the whole broad sector, I mean, there's so much change happening all at once.

And it's just things that we're supposed to take kind of 10 years. We covered that a year or two. And so it's really challenging. That's why even as someone that really likes to go into unloved areas, I've been mostly avoiding the commercial real estate sector just because I don't feel like I have an edge in there. And there's just so much disruption I tend to agree with on that. I mean, it's got two things are you've got the cyclical pandemic issues with commercial real estate.

And Ilin did a great job documenting those. And I would say that those are almost living by the leave of the government. So you basically it's an interesting thing for commercial real estate, for the banking system, because if the government doesn't do enough, commercial real estate books for banks are in trouble. The commercial real estate sector is in trouble. What is enough? And that it's a political question ultimately. And to Lynn's point, it does. Broadly speaking, for me, it's tough to have an edge on that.

But then away from the pandemic in the cyclical stuff, you also have the secular trend that was present before of Amazon slash Internet slash e commerce door dash where I saw something a couple of weeks ago of Chipotle. You talking about just basically putting up kitchens and dining areas and just the way that these productivity enhancing tools typically around the Internet or mobile devices are really changing the needs and the sort of the way out of commercial real estate space, heavily on the retail side.

But between those two things, like I said, I agree with Lynn where there's probably some interesting opportunities. I would never say no, but boy, it would have to be a niche space with very attractive cap.

One thing I that is that the company, Brookfield Asset Management of Canada and I don't know if either of you cover that one, but it's a company that I've covered for a number of years, and they're one of the biggest owners of some of the key kind of High-Rise skyscrapers in major cities around the world. So New York, London, different cities around the world. And they've actually been scooping up some of these small properties and kind of doubling down on some of these distressed industries.

And I found that interesting because they actually have a really, really good track record. And the CEO, ever since he's been in place, they just done phenomenal work. And of course, real estate's arguably their core area, but they also have a big renewable energy business and a big infrastructure business. They've always been more interested in their infrastructure business. That's why I've invested like a decade with them. But I just found that the fact that they're they have kind of the guts to go into kind of double down on the real estate side.

I just found that interesting because they're not generally dumb investors, but they, for whatever reason, have the confidence to keep pursuing that area and not really backing out of it. And I guess their advantage is that they're well capitalized. So the reason they do so well is because historically they go in when other people are fleeing and without capital and they have a global mandate. So, for example, back in twenty sixteen, when Brazil was having a horrible time, they went in and bought Brazil assets and they can always refinance things easier.

So they have this really kind of contrarian investing strategy. And so I'm really curious to see if works out for them just because those are the people with an edge and they still seem optimistic. I saw some article recently, and it was it was just so weird that it was like a computer software gaming company that was stepping in, purchased the 90 million dollar mall complex, and they were going to step in and use that space as like a software game and come.

And I'm thinking, wow, that's just so weird to think that that much commercial real estate would be used for something like that. So I wonder if the company that you're referencing, the Brookfield, does kind of not necessarily that it's an arbitrage kind of deal where they already have the person they're going to offload it to in place. But it seems like they have a better understanding of how that type of property is going to be repurposed and what kind of buyer it's going to be and what price point they're going to come in.

But even at 90 million dollars for a mall, I just don't know how you could possibly utilize all that space in that price. Yeah, and Brookfield does cite that when they do want to repurpose it, you know, some of the stuff that they're doing, they basically their view is kind of like really kind of high end ones they want to keep and then other ones they want that aren't economical in their current format. They want to transform into other types of property.

But it's really interesting. I guess they have to go up against zoning laws and things like that. I and ideally, it's almost like you could make a mall and take a little mini town. Right. You could have imagine if you had like, say, a senior living community, you could have like people live there and they go kind of into the shopping. They never have to go outside and they never have to drive to or brave the elements.

Malls have kind of interesting things that they kind of really think outside the box. But as currently structured, you really have an edge to go in that space. It's crazy now on the the earnings as we get into this, I don't know how the fourth quarter is really going to close out, whether the Christmas have you guys heard whether the Christmas sales were on par of what they were expecting? I know everyone was pushed online. I mean, it was probably gangbusters compared to previous years, but I'm looking more to the close out of the first quarter of twenty one.

And I just I don't know what it is, but I just think that the first quarter is just going to be devastating relative to anything we saw in the previous year. And do those earnings start to matter or is this just they're adding so many units and the expectation that they're going to continue to add so many units that we're just going to see the indices continue to go up. Where do you guys stand on some of that? You know, I think it's as intellectually offensive as it is on some level, I think it really is about the government and fiscal versus monetary.

And now that it looks like maybe we've got a blue across all three of both houses and in the White House, you've got Schumer coming out today saying a first order of business is another two grand. I'm not talking about an hour ago that rumblings of that sort of everything the Democrats wanted is what's going to what's going to get put together. When they were put out, when they were doing the stimulus debate, whenever it was two or three months ago, all of this stuff Democrats wanted is going to go in.

And so I really think it's almost a case where because, again, it's sovereign solvency that's being threatened here. And we're in the midst of this great power competition where if they let economics work the very least, it doesn't show well, at the very worst, it's a matter of national security. I just think that there's sort of these this overriding national security need to basically make sure the economy's growing. And so it seems like it's less what our earnings doing and more US economy with Chinese characteristics.

Lynn, what are your thoughts? Analyst consensus expectations are actually for a decent earnings, it's one twenty one, and so whether that'll come to pass or not I think is up for grabs. And I think to Luke's point, a lot of that is a political question. Right. So for some companies, their earnings are not going to be dependent on stimulus or lack thereof of some of the more cyclical ones there is. And we started to see a dip in retail sales in November.

That's the latest data point that's out St. Louis Fed, for example. I think we're going to see what happens in December because that was really kind of for some of this latest round of stimulus kick in. And so I do think it's really kind of comes down to what sort of fiscal injections are being put out into the economy versus if there's some sort of gridlock that prevents that. And what we saw from the Georgia Senate race, it seems like some of the roadblocks are reduced a little bit.

And so I think basically currency is being debased. The broad money supply is being increased enough that you can see decent earnings in fire terms.

So we saw 20 percent on the M2 last year. Do we see 20 percent in twenty one or is it going to be even higher than that? So it was like something like my latest check up was twenty five percent year over year M2 increase. So a lot of that happened in April and May. That was when the Kahrizak the bulk of that came into the economy a little bit in June. But we've been running at a 13 percent annualized rate since the end of May.

And that was kind of even without kind of another round of stimulus. It's partially going to depend on the Fed increases their purchases. But overall and also is going to depend on, for example, if they get this extra two thousand dollar stimulus checks that go out, so is partly going to depend on that. My base case would be somewhere and close to 15 percent, maybe 12 to 15 percent. But then if you throw like a big infrastructure bill on it or you throw in an extra couple of rounds of stimulus checks, that number goes up.

I'd be shocked if it's below 10 percent, but then it up from there. It's mostly, again, a political decision. Luke, what do you think that makes sense to me? I mean, it's not dug into the numbers as deeply as she has, so I would defer to her on that. But just conceptually, that makes a lot of sense to me. I think it's really very much a political question at this point. You know, Lynn, I like that you're I think you're providing a conservative number there at 15 percent when I'm looking at the chart over the last 10 years.

It's accelerating. It's it's going parabolic. And maybe it's because covid was a kind of an outlier in 20 and maybe it is going to come back down into a more conservative number, 15 percent. But when I'm looking at it, I'm thinking, hey, this is probably going to be in excess of twenty or twenty five percent based on just the trend of the chart. But I mean, as we all know, it's it's just a crapshoot. It's just crazy to look at the rate at which it's accelerating here in the last couple of years.

It's just mind blowing. I like to break it down because it helps also people follow along, because if you kind of lay out the flow chart, right, so instead of saying this is going to be the number, it's like here's the flow chart to get your own number and you can make your own assumptions. And so if you just take out kind of stimulus and you just focus on what is kind of the structural deficit, what is the structural situation, as some policymakers just sit on their hands all year and do nothing that is somewhere in the ballpark of 10 percent and then anything on top of that is additive.

And so that's why I get to that kind of like 12 to 15 baseline number. But then, yeah, if you get a we're going to add three trillion dollar stimulus again. Right. Then suddenly that number starts going up more towards your twenty five percent number. Now, with the current kind of composition we do now have, it looks like a narrow blue sweep, but there still are some centrist Democrats, conservative leaning Democrats. And so those really kind of sweeping MMT like things.

You know, I think unless you were to get another kind of contraction that kind of forces policymakers hands, I don't see some of those really giant things happening in twenty, twenty one. But I think just the current trajectory can easily get you to 12 to 15 percent. And then it kind of like I'd be shocked if it's below 10 percent. I wouldn't really be surprised to see another over 20 percent year based on certain stimulus outcomes. So I love this question, this comes from a really smart account on Twitter, and he goes by Eddie.

He says, Do long term U.S. Treasury holders really just look at CPI to calculate their real rates?

What do you guys respond to that? I think at least a quorum, if not a majority of Treasury buying is being done for collateral needs, for liability matching, for regulatory capital purposes, they have to, for reasons nobody on Wall Street gets paid on a real basis, as far as I know.

In other words, it's everyone gets paid based on nominal returns. And so then it's OK. What's your nominal liability if you're an insurance company or what your regulatory cost to capital if you're a bank. So with SLR, it's effectively zero and sort of all the stuff that goes up is left out or is there's always some reason explained away. And some of that to be clear, there are reasons for why certain things are rising in price more and maybe they should be economically adjusted or smoothed or whatever you want to do.

At the end of the day, I think it's really about doing what you're getting paid to do.

So I agree with that. And basically some of the investors like banks that buy Treasuries, they could do a lot more at that Treasury and basically they'd make more money from it than the mom and pop investor that just buy the Treasury and holds it or a trader this try to squeeze a capital gain out of it based on like a deflationary thesis or something.

Now to that person's question about how they look at inflation. A lot of times real yields, people refer to the inflation break even rate, which is actually dictated by the Treasury market. That's the tips market pricing in what their inflation premium is and that currently for the year just broke over two percent. And so that has a pretty good track record of forecasting official CPI. And so, for example, if you look at earlier this year that had that big dip during the pandemic, the March kind of liquidity event, but that shot up before we started to get kind of official monthly CPI going up.

And so that's been an accurate predictor of CPI pretty much, at least officially reported CPI. Now it's somewhat they're looking out kind of depending on the maturity of looking at five, 10 years or more. I think those are probably undershooting what's going to happen, but that's currently what they're pricing it. And so Liddie, according to the Treasury market themselves, they're pricing themselves with negative yields because if you look at just what the Treasury markets saying, they're saying roughly one percent for the 10 year, but they're pricing in two percent inflation.

So that's the Treasury market. If you look at it in a vacuum, it's kind of schizophrenic. But to Luke's point, there's all sorts of regulatory reasons. There's all sorts of collateralized debt. There's multiple purposes for those treasuries other than people just buying them, holding them and collecting that one percent coupon.

And I think to Luke's point, the fact that you have all these regulatory requirements that force entities into buying the government debt, it's going to continue down this path. It's going to continue to push further and further lower. Right. It's all going to continue to stay in place. The thing that I think is going to be the really interesting dynamic is the rest of this year plays out is what Michael Saylor did with his convertible debt issuance. And this is more for corporate debt, that scenario that played out.

And I mean, he's already doubled. I think he's already doubled the amount, maybe even more than that of that issuance of that six hundred million dollar issuance that he stepped into the market.

And, you know, from my conversation with him, I mean, it was oversubscribed because there's a lot of people that are in the corporate debt market and they like Bitcoin and they're saying, I want access to Bitcoin. But because of all these other regulatory reasons, I can't get access to it in these debt markets, in these corporate debt markets that I have to employ all this pool of money that I'm sitting on. So what are your thoughts on that particular example that was done in such a dramatic and obvious way for the whole world to see or other companies going to start doing something like this?

Is this kind of a textbook template for what we're going to see in the rest of twenty twenty one? In short, I I mean, I would defer to comments that Jeff Boothe has made to when we were all on together, whenever that was in October or whatever, where he said he was having those conversations back then at a board level, he had a tweet recently suggesting the same thing where he is talking to private companies. I think the adoption will probably be like a lot of things, slow but steady.

And it probably will center around those companies that are either private or have ownership structures that are public, companies that have ownership structures that are highly controlled by a few people that sort of get the joke as it relates to Bitcoin, as is the case, I would argue with MicroStrategy, but ultimately, to the extent it keeps gaining momentum, I don't see why you wouldn't do that. And that raises bigger questions about the debt markets as a whole, inflation rates reserve asset questions, et cetera.

But that's a separate question.

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S get the edge on the competition. Go to zip recruiter dotcom investors, zip recruiter. The smartest way to hire. All right. Back to the show. Well, this is the thing that struck me with the whole thing is when you looked at the terms and conditions of the deal, he did it for seventy five bips. Right. And then the convertibility piece was really kind of the other piece to it. And I, I think it was three hundred and ninety five dollars where if the if the stock price got through that price point, then the debt owners are in an advantageous convertibility position.

Right. Well the stock is already through the three ninety five and it was oversubscribed by I think one hundred and fifty million dollars. So you have to ask yourself, was seventy five bips way too high of an interest rate for the demand that came out of the deal? Would he still have been oversubscribed at zero percent. And so the deal for me was just kind of like, my God, he could have maybe instead of the strike being at three hundred ninety five dollars, maybe the strike should have been six hundred dollars or something like that.

And then still at seventy five bips, he might have still had it been oversubscribed. Lynn, what are your thoughts on some of that. You see that there's like that Twitter account of like this is like a restaurant chain in Canada and they think they do Middle Eastern food. Yes. And they also have like their balance sheet on Bitcoin and their phones.

Looks awesome, by the way.

It's a it's a little like, you know, it's a restaurant account, but they have their tweets about Bitcoin because that's where they put their reserve asset. And so I think I agree with what Luke said. So one thing I've been saying over the past year, because I've been assigned a couple different podcasts, will more companies go that route? And I was saying that in some cases, microsurgeon square in the public realm are somewhat unique. Right, because MicroStrategy I mean, Michael Saylor's unique and he has unique control over the company.

He has a unique personality. He gets it. And so he can move more decisively than the average publicly traded company, including the average like tech stock, for example, and Square. Of course, Jack Dorsey has had a long bullish view of Bitcoin, but even then, that was a small move for them. And so you'd actually expect almost more out of square. So they're kind of a trivial kind of 50 million Bitcoin allocation was what I would expect kind of as the base case, whereas MicroStrategy was rather kind of surprising a lot of ways.

And so I think that some of those tightly held companies are privately held companies are the ones that can kind of make that move because it comes down to a small number of individuals that have a high conviction and they can say, wow, I like where we are and having cycle for whatever reason they want to go with and they can just go in and bitcoin. Whereas if you get it, most of the larger companies. So it's kind of like career risk, right?

You don't really get rewarded by the person you suggest doing that is not going to get massive rewards. But if it were to go wrong, they're fired next year. And so unless the CEO is just kind of gung ho about it, they can get away with it. But I think some of those companies where there's just not a like a really kind of central leadership structure, they're slower to move on there. But we'll see what happens when more quarterly reports come out and we see kind of MicroStrategy.

Their stock soaring and see what some of what some other companies do in the space. Yeah, I just think it's such a huge example, because he did it in such a large way that it's demonstrative of what, even a much smaller percent if you didn't do with 100 percent of your reserves. Right. And you just did it with five percent or 10 percent. It's such an example. It's just kind of mind blowing what he's doing over there.

And I kind of suspect that it's going to be a much bigger talking point, maybe mid of twenty. Twenty one is the price. You know, our expectations. I think all three of us have pretty high expectations of Bitcoin going higher. And by the time we get into mid-year, it's going to be interesting to see how some of these other companies are treating it at that point. I remember with our previous chat when we had Jeff here to one of the things we all kind of share in common is kind of like it'd be weird not to have at least like a one percent decline position, like it'd be.

It's one of those things. Like if someone goes all in on Bitcoin, they're taking a certain degree of risk. But it's also we're basically saying that it's arguably risky to have no Bitcoin at all. People are basically making the case for why not have zero? And of course, as people have different levels of conviction, they can dial it up from there. And as an example, I mean, one of my model portfolios this past year had a five percent Bitcoin allocation because the purpose of that portfolio is something that a lot of investors can look at.

It's got kind of your classic kind of mix of equities and all these different asset classes. There's some gold in there and basically a five percent Bitcoin position. And that five percent Bitcoin position's been absolutely silly for the returns of that portfolio without taking much risk. And so the same goes true for balance sheets or things like that. It's really easy to justify a tiny position. And we saw that. I mean, a really good example was MassMutual, right?

The one hundred fifty year old insurance company, they came out and bought a hundred million dollars of Bitcoin and it sounds like a lot, but for them that's absolutely tiny. And so that is basically their way of saying we want a non-zero Bitcoin position, we want to have this little hedge, we're going to stick it there. They're probably never going to sell it in the near term. And so I think that sort of kind of trivial position is likely to keep coming up in various places because just the risk reward for having a really tiny Bitcoin position is great.

So I want to talk about the big announcement on Monday, and I'm just going to read this from the acting comptroller of the Currency, Brian Brooks. Our letter removes any legal uncertainty about the authority of banks to connect to block chains as validator nodes and thereby transact stable coin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability and low costs associated with these products. The announcement is basically puts block chain networks on an equal level of global financial networks such as Swift A.H. Fedwire.

I mean, this is massive, right? What are some of your thoughts on on this big announcement? One thing I should point out, as you know, I've been monitoring because I analyze a lot of foreign banks, and so if you looked at, you know, some of the major commodity companies, like the really big ones, like Rio Tinto, Vale, you know, some of these really big BHP, some of the big commodity companies, they all tested some block chain transactions with Chinese firms.

They sold iron ore basically over a block chain. And they did so at these Singapore banks as Singapore fintech companies. As intermediator, I believe we also saw similar things like Spur Bank of Russia tested with Singapore, a block chain based ledger settlement, and then also last month, Singapore's largest bank, DBS Group Holdings, they announced that they're going to you know, they're going to have their own kind of exchange for a handful of the largest digital assets and that they were going to partner with the Singapore Stock Exchange.

This exchange would be only for credit investors and institutional investors. You're also going to provide a solution similar to what is doing like institutional grade custody. They're also going to tokenized offerings. And so basically, from a US perspective, if you see all these other banks around the world that are kind of testing these technologies out and just seeing what works, you don't want your own banking system to just be locked out of that innovation. And so quickly, you're going to be like, you know, the horse buggy against all these other cars.

And so I think it's you know, Bitcoin is they've been talking about game theory over the past year. Right. So that if it starts to get adoption one place, it kind of catches on. And so even places that try to ban it then kind of went back and soften their bans and like, well, you know, you can still innovate. And so they want to provide certain regulations for it, but they don't want to outright ban it.

And so I think that's kind of a similar thing at play here, is that to their credit, they were trying to make sure that their banks don't get kind of regulated out of the competition, the global competition.

Yeah. Now, what are your thoughts on the KYC limitations? I know Jack Dorsey has been very vocal. Brian Armstrong was obviously very vocal from Coinbase. Do you see them rolling that back? Because it almost seems like if you do come out too aggressive, you're just going to have some type of global competitor, just like we saw in Singapore. Is that going to be a driving or a common theme where overregulation is just rolled back six months or a year later?

So I think it depends on the type of regulation, I don't see that many governments rolling back KYC regulations just because they're really kind of like they like to be tight lipped about that. And people often joke that if cash was invented today, it'd be illegal, like it'd be it would never be allowed to exist. And so we somehow went centuries, which is pretty hard to track payments. But in the past 50 years or so, it's it's almost like they don't know how we can imagine a world where we don't track every payment.

And so I'm, of course, in favor of payments, privacy. But I think that's the area where that's kind of the hill that I think a lot of governments are going to try to die on, which is that you can have it, you can trade it, you can do stuff with it. But we we want to be able to track it. If they were to pick kind of one thing to regulate, I think that's certainly in their top one or two.

Look, there was a question, evidently, you said somewhere on Twitter that if Bitcoin becomes global currency, it's Hunger Games in real life. They wanted you to expound on that idea and then they wanted to hear Lin's response to your description of this. So by way of background, I was having a conversation with can't remember who it was, but the gist of it was my point was that you need to separate, you need to have that. My view is that Bitcoin is your store of value, your wealth reserve asset, and that fiat currencies would still have a place.

You spend your fiat, you save in your wealth reserve asset. My view is bitcoin gold, silver. I guess you could throw in there to their point then was, well, bitcoin will become the currency and wealth reserve asset. And my point was that or what I said was if that was the case, if you use Bitcoin as currency, then yeah, you would trigger basically a global Hunger Games. And my point was that effectively, in short, you can either have this sort of delicate, but if you use your wealth reserve asset and you hard cap it, even if the price moves, then you're taking the release valve from being the fiat currency to being human population because effectively their case as well.

If you make the bitcoin the currency, then everybody's got to add value and to earn currency. Otherwise you're not going to. And if you don't add value, then and it is a very libertarian view on their part. I understand where they're coming from. But my point is this. If you did that too quickly, if you went particularly from a timing standpoint, if you moved quickly from a world where you had fiat currency and bitcoin and gold as a wealth reserve asset to simply your wealth reserve asset, as you're also as your medium of exchange, then you're basically shifting the release valve from fiat currency to the population and you're relying on people to be charitable.

You're relying on family connections. In some cases those would come through, in some cases they wouldn't. And that's just at an individual level. Now, if you take it up to a country level, there are countries that are natural current account surpluses. There are countries that are big current account deficit. So from a country standpoint, the way the global currency system has worked over the last 50 years is basically you think about it as a giant banquet and everybody around the table brings something to the banquet.

And the United States is the guy at the head of the table. What he brings to the table is eating. Everybody's cooking, and that's it. And so in a world where Bitcoin become currency, where there's no separation between medium of exchange and store of value, living standards in the United States would collapse pretty quickly. And so without that, that buffer there of fiat currency to sort of take the buffer. And so that was my point, is that effectively in extremis, it would be a case of either you add value or you starve.

And so that's the background of the conversation and and why I said what I said. So I separate that kind of into two phases, and so I kind of take them Michael Saylor, camp of using Bitcoin as really good savings technology. And so I'm not at the point where I'm kind of looking at it as a direct kind of you know, I think Hamit Bills are great. For example, Strike is really kind of doing good work using Bitcoin and lightning as payment rails and things like that.

But I primarily think there's a ton of value in Bitcoin for its true value properties because that total addressable market on its own, the market cap is several trillions, right. So it's far larger than the current market cap and therefore there's a lot of appreciation there. And so my view is, let's get there first and then start to see what comes out from there rather than try to think 10 steps ahead or rather say, OK, here's a roadmap for the next three steps and then we'll reassess when we get to that roadmap.

And so that's how I'm approaching it. Now, I've answered some questions before, for example, on a podcast where they say, for example, if you were on the Bitcoin standard, how would you stimulate, like if you wanted to to stimulate against a pandemic? How would you do it? Because you can't print the money. And I mean, in short, the answer is basically you have to build a tax it out of some other group.

You have to rearrange the stats that you have within the economy. And so in some ways, it's a more honest stimulus, but it's also harder to do. And so how that would work in practice, I think is that's kind of a whole can of worms in and of itself and as far as international trade. So one of the ways it works now is that if a country starts to run, a persistent trade with the United States is an exception, which is something I keep pointing out and I know it looks pointed out, but for most countries, if you start running a persistent trade deficit, generally what happens is you encounter some sort of currency issue during your next recession.

Investors kind of pull out their money and some sort of catalyst happens and then your currency devalued significantly. And it really does reduce your standard of living and makes everything hard. You go through a really kind of serious recession, but then the outcome of that is that your exports get more competitive and it's harder for you to import and therefore it kind of forces you back to an equilibrium and it's somewhat self-correcting. Now, theoretically, if everyone is kind of operating on a hard currency, then instead what would happen is that that country that if their currency devaluing the deflation or forces, they basically would start pricing things super low to be competitive again, at least getting some sass back to that country.

So it's a similar dynamic. There's a whole kind of philosophy of looking at that. And so my my view is I'm taking steps back and is saying I'm focusing on Bitcoin is solving one of the stores of value problem. And I think, you know, I'm looking at less currently as the payments thing other than, for example, things like strike and things like that that can basically make Fiat move a lot quicker. I think another important point to what you were saying there on how would you stimulate in a crisis if you're in this type of environment, your incentive structure has completely changed.

You now have an incentive structure to have a rainy day fund. You have an incentive structure to pack away a bunch of savings because it's continuing to go up in value. It's not depreciating in value. And so, I mean, you just look at this situation we just went through with covid. Everyone has been incentivized through all these inflationary monetary policies to have literally nothing on the books for a rainy day fund in your levered and maxed. And you have 15 days of rainy day funds sitting there to be used.

And I guess that whole dynamic, that entire incentive structure would kind of start moving in, spinning in the opposite direction from what we've seen and where we're at right now. So maybe you don't need to stimulate as much because people are actually having rainy day funds that aren't being devalued at a breakneck pace.

I agree with that point. And due to my work on the long term debt cycle that Ray Dalio popularized, I've been emphasizing that view as well, that part of the reason we got these crazy multitrillion dollar stimulus packages against this pandemic was in some ways less out the pandemic and more about the amount of debt and solvency that built up in the system over the three to four decades, really since like the 70s and 80s, essentially. And so if you were to realign the whole system in towards a more equity based system and less of a debt based system, it is true that in general you'd need far less stimulus and things would be able to be much more targeted for kind of edge cases rather than these big sweeping things, because that is currently how it's structured.

And the equity based system to it does tie into that process cyclicality to somewhat or Hunger Games, to use my perhaps a bit histrionic but directionally accurate, I think view of if the value of the economy is driving the value of the currency to expand. And it's a hard currency with a hard cap. What happens when a pandemic hits and the value of GDP drops 40 percent in your rainy day fund? You might have saved 40 percent of your money, but your economy drops 40 percent.

Now, your rainy day funds nothing. Now what do you do? And it's very much a way to compete, deflate, to compete, deflate, to compete. It's Hunger Games. It's it's who can you know, who can take the most pain. I really like this question here, what signals are you looking at to warn of another potential wave of credit, stress and equity sell off like we saw back in March? What are the canaries in the coal mine that you're looking for that would tell you, hey, this is looking like this might get a little nasty?

For me, it's the dollar, it's Treasury yields, it's relative performance of Treasury auctions in terms of the bid to covers and participation and the size of the tails on them. Those have been sort of the big ones. And then from markets and then politically, it's really around the fiscal side and the monetary side. Are are they going to do enough at any point in time? We can have a crisis and a super spike would be the Fed or the fiscal side not doing enough, basically.

And so then it's really comes down to having to pay attention to what they're doing subjectively or qualitatively relative to some of those other quantitative measures. Yeah, I agree, there's a couple of domestic versus international indicators, so internationally I look at the Treasury Eurodollars just take about that is because that's kind of an indication of shortage. So we saw that back in March, for example. We haven't really seen it since. And of course, we've had a weaker dollar environment because there has been more about liquidity available in the United States and looking at all sorts of things.

I mean, there's I have like a like a heat map that I make every couple of months and kind of look at it more regularly, which is a monitor year over year changes and a bunch of different economic indicators. And so it's kind of watched the health of that map. And I look for areas of weakness or areas of strength. And so, for example, we saw over the past several months, we've seen pretty strong retail sales because that's where a lot of the stimulus is keeping consumers solvent.

But you're seeing kind of weakness in jobs, for example, that's been really been the weak area. And I view them.

It goes back to that control systems analysis that I do as it pertains to the economy, that basically if you start to get some of the breaking point, that's when you start to get the higher likelihood of policy response because something will break in a similar way. It depends how extreme you want to get if you have a mild case I think a lot of people can relate to because, of course, Mark, 20, 20 was kind of extreme. But if you just look back in the end of twenty eighteen, when the Fed said, hey, we're on autopilot and we're going to keep tightening the balance sheet, we're going to let yields do what they're going to do and that the 10 year yield got over three percent and just the markets suddenly had a freak out.

S&P 500 dropped 20 percent a couple of months, but then under the surface it was bigger. And so a lot of people thought that people freaked out and kind of reversed course because of the equity market. There's also the fact that if you look at the credit market, there were no high yield bonds issued for like six weeks. It just froze. And so the market to stop pricing that that is, of course, a shorter timeline for disaster than a 20 percent equity decline.

And so basically, if you get one of those events, there's a very, very high probability of a policy response in a similar way that we saw back in late 2013 and again in a similar way that we saw back in March. And so and I think Luke's been really accurate at predicting those along the way, basically saying that if you get kind of these pullbacks, that's what their policies are going to be pretty much going to have to be.

And I've been using a similar analysis that shows basically that they don't really have a ton of choice. I think the equity market can have pretty big declines potentially before this an issue. But some of those other things that generally go along with an equity decline, like the credit market freezing up, those are the things that are really kind of breaking points. And, of course, the Treasury market going illiquid like it did in March. The shortest breaking point of all, that's the one where they have an emergency meeting on a weekend and respond to Monday morning.

All right, so these next two questions are tripto specific. So these are more oriented towards you. Luke, if you have an opinion on these ones, please chime in. But I want to talk about Teather specifically people suggesting that Teather is what's pumping the Bitcoin price. And I want to capture Linn's opinion on that. And then I also want to capture your opinion on a theorem, because I saw Lin, you recently had a post on that.

So let's tackle the Teather flood first. What is your opinion on 10 Lin?

I can ask a couple of times. I usually refer people to Nick Carter on that subject because he's done a lot of analysis. And as an example, people often cite that Griffin and Cham's study that argue that Teather was correlated with Bitcoin and could be driving it. But people often don't reference the fact that there were two more studies soon after it showed the opposite conclusion. And so I have one of them here. One of them is a business Attridge and Alliance and another one from Wang Jun Wei.

And so these were comparable studies at the third one, I believe, had a larger sample period, and they basically just found no correlation. There's all sorts of things like basically a lot of people argue that there's just no flights going in and there's printing units and that's jacked up the Bitcoin price. And one thing that, for example, Netcare did on his podcast is he interviewed people that actually converted Fiat to Teather. And they were saying, yeah, I was there.

I was one of the whales kind of putting Fiat in and getting Teather out and using it. And so a lot of people just look at that tether creation is driving Bitcoin, but there are Bitcoin exchanges or crypto exchanges that use Teather as their unit of account. So when people want to buy Bitcoin, they convert it to Teather and then they go and buy Bitcoin. And so that kind of correlation is questionable at best. I don't really consider myself too much of that, Foud, but I do think that I wouldn't be surprised one day to wake up and see that one of these stable coins is kind of under attack at some point or some sort of revelation came out and then that becomes insolvent.

And it certainly result in high volatility for a variety of assets that day. I'd be more worried about the coins when that happens that I would be about Bitcoin. And Nick Carter's argued, for example, that Bitcoin could see a spike in a similar way that the dollar sees a spike if you get a liquidity shock, that that's basically the go to asset in that space. But I don't really have a strong view on that. I just I don't really view tether as driving Bitcoin in the long term.

But I wouldn't be surprised if something were to blow up. I wouldn't be surprised the upside or downside Bitcoin volatility that week.

One of the things it back in twenty seventeen, this was a huge talking point. Everyone was and let me tell you that bull run where we were at in late twenty seventeen was percentage wise, way higher of a run than what we've seen to date on this bull run. And I'm telling you on Twitter, everyone was going berserk, saying Teather is the reason that this is getting pumped. It's Teather, it's Teather, it's Teather. And then the price contracted eighty percent from that high.

You know, it went up at Kice twenty thousand and then there was an 80 percent contraction. And having lived through that entire experience, Teather didn't blow up after it contracted eighty percent. And you would think that if there really was some shenanigans happening there with whether they're actually taking Fiat and holding it into some type of treasury for how much tethers on the market in those types of scenarios, in my experience, is when you're running some type of scheme like that, when the price contracts 80 percent, it blows up and we didn't see anything of the sort.

So just like you, I don't know what the ground truth is because it doesn't appear that there is an auditable treasury of Fiat that's back behind these tokens. But from what I've seen since twenty, seventeen and all these articles that you're also referencing to me, it seems like it's more of a talking point and somebody just throwing up a risk without it fully being vetted or being validated as being a truth. Just more of a rumor.

Yeah, I agree. Let's take a quick break and hear from today's sponsor.

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All right, back to the show. How about your thoughts on a theory and because I'm not going to lie, I was a fan of your post the other day. So it's complicated because if you look at Bitcoin, Bitcoin is a finished product, right? So they're still doing updates and security updates and things over time. But essentially what Bitcoin is at its heart has not changed in a decade. And so it continues ossify around what is whereas the Ethereum, it kind of infinitely valuable.

It's changing at a far more rapid pace than Bitcoin. Some people consider that a good thing. Other people consider the bad thing. But for example, they're going to change their entire protocol from proof of work to proof of stake. And so in doing that, for example, to back up for a second, basically running all the decentralized applications. But there's a lot of issues with that. So, for example, they rely on kind of this node infrastructure providers that almost act like the Amazon Web services.

And so these, quote unquote, decentralized applications are often just referring to these these big third party enterprises that are that are actually doing a lot of the backend work for them. And so they kind of end up being a far more expensive version of the Amazon Web services. And of course, they're still getting some aspects of decentralization. They're not really hardened against, say, a state actor coming in and saying, you can't do any of this, we're going to stop all this and really have that kind of infrastructure to build a kind of go down into survival mode and operating the way they are now.

They are trying to address that. But then that radically changes the protocol. And so, for example, with Ethereum, they've had issues with throughput. Right. So you need other tokens to run all those smart contracts. And they're actually having issues with transaction fees because there's only so much scaling. And they kind of like Bitcoin. They've been trying to look into Austine solution to try to increase that throughput. But their ultimate solution is to move towards Ethereum 2.0, which is actually delayed, because if you look at how complicated it is, extraordinarily complicated.

And so it involves rolling out the beacon chain, which is going to be like another chain running in parallel. They did that December and then they're going to they're basically going to split the theorem into like sixty four shards, they call it. So it's like these kind of like sixty four parallel chains. Then they're going to start moving from proof of work to proof of stake's. If you have thirty two others, you can become a validator and you can start validating transactions on one of the charts and so on.

Like Bitcoin where every node can see the entire system with that new system, each validator only focuses on the shard that it's on and the beacon chain kind of coordinates how that works across the board. And so the idea is to make those nodes would be smaller and people could run them, but they're only kind of partial nodes. And so it's just basically an extraordinarily complex system. And at some point they want to build that whole thing in parallel and then they want to take the existing Ethereum block chain and kind of merge it into one of the shards and becomes one of the shards on that.

So that's that's a theory in 2.0. And so, therefore, any sort of pricing model you had over the past five years is out the window because now you're looking at a totally different system. And then the way that the issuance is going to work is that instead of a fixed issuance schedule, they're going to have you get you get certain kind of rewards as a validator for validating the network. But then also anyone doing smart contracts, they burn other by basically to fuel smart contracts.

You have an inflation mechanism and you have a deflation mechanism. And depending which one wins out, any given year will depend on, in part based on how many validators there are, how much Ruperts happening, things like that. And so there's not a clear connection between even let's say first you have to have an idea of how well the Ethereum there was going to do for any sort of applications they want to do, then there's not a clear signal that would translate into a specific token price.

Right, because the fees can adjust based on throughput and all sorts of stuff. And the whole point of Ethereum 2.0 is to have a ton of throughput, meaning you shouldn't need a lot of Ethereum to run these smart contracts. And then the question is, what is the theory become worth? And of course, you know, people that like Ethereum, they want to become validators. So they have an incentive to gather theory. And that's kind of a and you're actually gonna to lock it up for like two years while they do this whole kind of rollout.

So I wouldn't be surprised to see a theory and price do pretty well. But just unlike Bitcoin that I think you can have pretty firm price targets on, I think you can do some good Onchi analysis and kind of come up with the fundamental view. And it's really kind of a finished product, a theorem. It's far more of a speculation. There's just so many moving parts there. And I don't view it as kind of hardened against kind of, you know, as decentralized as Bitcoin is against, for example, state attacks or things like that.

So I don't personally invest in a theory. You know, at the end of the day, from an engineering standpoint, I know that's how you're looking at things, because that's your first love is engineering, as is mine. I mean, it looks like an open heart surgery from an engineering standpoint. And it looks extremely complex what they're trying to do. The the one piece that I got a lot of concerns with and this is the thing that you were addressing, which is the nodes the size of the full nodes that need to be run in the fact that a state actor could step in depending on where those are hosted.

And I'm not necessarily concerned about the size today. I'm worried about the size in 15 or 20 years from now, because the size of all these smart contracts all being run on a base layer like this, you have to keep it decentralized, but you have to keep it decentralized into perpetuity. And that's where it comes off the rails for me, is in 15, 20 years from now, what is the size of a node, a full node?

And they're going to get into a terminology thing. I found online that they like to change the terminology of, quote unquote, full node to fit their narrative in their interest. And I'm just not buying it. The other thing that I think is really important is there's no and a lot of people in the Bitcoin community call it no go up technology, which is the four year having event. Right. Combined with the two week difficulty adjustment to keep the supply schedule intact so that the stock, the flow just keeps ramping up every four years.

That's the number go up technology. In theory, you don't have anything of the sort. And so effectively, I look at it as an a more a fish that's just effectively sucking off of the movement of the stock to flow in Bitcoin. And you're seeing a portfolio allocation percentage wise that's coming off of that Bitcoin number go up, technology being dropped into a theory. At least that's how I view it. And it seems like you're nodding your head and you agree.

Yeah, I mean, from an engineering perspective, I prefer Bitcoin design, I really like modular components, right? So things that are kind of built to be hardened. And so the fact that Bitcoin as a really simple base layer and then you can scale with things like lightning and liquid, some custodial, things like that, it is a variety of kind of it depends on how much kind of trust you want to have in your particular layer. But, you know, there's trust second layers and then there's trust that second layers.

I think that design makes a lot more sense. And I think it's really well designed for the beginning. Whereas Theorem, I think is proponents of it like how ambitious it is because they're trying to put so much right on the base layer. But I'm also concerned with how that turns out. And so I've kind of used analogy of the Concord, right. So 50 years ago, we invented this commercial jet that can go like Mach two and you can get to London, to New York in three hours.

But it never really was used very much because it's just the it was so complex because once your pilot basic, once you go above Mach one, everything changes. It's all different now. And so to get that to work in a in a kind of an economical way was extraordinarily difficult. And so basically, you know, from like a cool factor, if I look into some of the details, what they're doing with their 2.0, I'm like, OK, it's really neat.

It's cool. But I don't know how to price that. I don't know how to kind of I don't really know how to view that as money. I'm concerned about the decentralization aspects of it. And so it's kind of like I'll see when I believe it gets it through and, you know, let's see what happens. But I think the risk reward is usually strong and Bitcoin's favor at the current time. It's a solution looking for a problem. Yeah, hey, look, this question, I like this one because this isn't something I've really talked about too much.

But I know Kyle Bass has been very vocal about this. And the simple question is, is China's economy a mirage? I remember asking a friend of mine that question, who is in Hong Kong for 20 years fluent speaker, said, is it a bubble? This is probably 10 years ago, is it? Yeah, it's a bubble. The question is, when's it going to burst and what is it? And it all gets into a relative question, right?

I mean, it's it's like if you asked a fish to describe his environment, the very last thing it would list would be the water. So we've got a bubble, currency bubble, sovereign debt markets. I mean, the way I've always looked at China's economy is when you look at some of the things that Kyle describes in terms of the loan growth, the banking system loans relative to GDP, they look precarious. With that said, I just get the sense they look at things differently, which is to say in the world in which we live and have lived for the last 10 years, 20 years, 50 years, if I'm China, would I rather have twenty thousand kilometres of high speed rail or whatever they've got, some of which currently goes to lightly populated city centers, shall we say?

Or would I rather have the equivalent amount in Treasury bonds that the US has to price at a negative real rate in order to keep the wheels on the car? And I think if you take a look at what China has done, I think a lot of what they have done has been based on this view that basically an understanding of money at a very fundamental level, that here in the West, here in the US, we're almost like the Roman Catholic Church or the geocentric model of the solar system saying, well, at the center of the world and everything's revolving around it and the Chinese are going to go on.

We've been to this movie before. We've seen this movie several times in our history. What send us a commodities. We'll build a whole bunch of cities because the cities are going to create employment as we build them. It's going to be a better store of value. It's going to create jobs as we maintain them. It's there's a whole just they're coming at it from a completely different angle. What's interesting to me is when I read the book, The Raving of Zürich Memoirs of Felic Summary, there's a chapter and I've actually put the highlight of the quote on Twitter before this is 1913.

Felix Summary said that the Europeans, the height of their economic power for different major empires, they all looked at the Chinese with curiosity, with their infatuation with gold and silver. They weighed it. They weighed their current. That's how they got that. When they did a transaction, they would weigh the currency relative to what they were selling. And the Europeans look at that at the height of their power with great curiosity. And somebody said we thought they were two generations behind us.

And it turns out they were a generation of hands. And so it's been interesting to me is my view all along has been the Chinese. Is it a bubble? I guess. But I think it's a differentiated view of money and that we would rather have the stuff, because if you look at the obligations of the issuer of the currency, they're going to have to create a lot more currency units. And so we fast forward a generation. And what do we find?

We find the US talking about things like MMT. We find the US running an economic model that is starting to look very much like a Chinese economic model, centrally planned. And and so I hear what Kyl saying, but I just think it's all a relative game and I think they've been coming at it differently. And I would argue that our economic model is shifting more towards theirs rather than out of necessity, more than theirs toward ours. Yeah, I think that's really well said, Lynn, did you have any other comments on that one?

Not particularly, I mean, I think it depends on what aspect you're looking at, so, for example, China has had a very large corporate debt bubble and we just measured as corporate debt to GDP, for example. Now, because a lot of that debt is denominated their own currency and because they have a lot of kind of top level control, they have a lot of levers to pull to kind of smooth that over over time. And then the fact that they're sovereign entities is rather unleveraged.

So they have a lot of assets around the world. They have foreign exchange reserves know. So they have a lot of leeway to kind of manage those issues. And so it has been a sight to behold because they've been kind of an expert at deflating bubbles gradually, like they say, you can't deflate a Ponzi, but they have a decent track record of deflating these policies and then building up the next one. And so, for example, people refer to the ghost cities and then a couple of years later, they're not cities anymore.

It's like, no, they were just five years in advance and they kind of overbuilt then those kind of got populated. And so it really comes down to political philosophy. So, for example, if you look at China and India, China has managed to industrialize faster. And India in part because they were able to use some of their central planning to do things. But of course, that brings up all sorts of privacy issues, human rights issues.

And so I think Luke's point, it's all relative game. And so, for example, I think one of the biggest bubbles is persistent US trade deficit. That's a bubble, its building for 50 years, essentially without being allowed to normalize in a way that many other countries are able to normalize their trade balances. And so I think that there are a number of bubbles around the world and China's corporate sector debt is one of them. So it's among the many that I think are our problem rather than if I were, I don't really view as like the single worst bubble.

I think there are a lot of really big bubbles.

I would actually say it's a great point on the trade deficit where I would actually argue that that's exactly what the Chinese have been doing, is saying, OK, well, that's the bubble and sort of the mirror image on the other side of the account is, OK, well, then here's how we hedge that, because whenever that bubble bursts, if we store our wealth on paper, it will be a flaming pile of paper. And so we're going to take the dollars and put them into things that hurt when we drop it on our foot.

All right, so this is the last one we're going to go around the horn, what is a question that you're chewing on right now that you just are struggling to answer for yourself or something that you've just been thinking a lot about and you don't necessarily know the outcome, but you want to propose the question to the group? And we'll start with you, Luke. The question I have been thinking about is, would US policy makers be willing to burn down the system to try to defend the dollar?

So you're seeing basically a jailbreak, your I mean, and it started six, seven years. Central banks stop buying treasuries on a net basis. And then you saw Russia and China in particular are moving to gold instead of treasuries and basically putting their money into anything but treasuries. And now you're seeing, I would argue, a jailbreak of maybe a jailbreaks. A bit of a strong term price performance is influencing maybe that term. But US citizens, global citizens, global corporations starting to move into Bitcoin away from dollars.

It's an indictment. You know, when you look at makers right now, something that was just an insane headline to me this week, you had Nancy Pelosi and you also had Mitch McConnell, both of their houses were vandalized. And I think what was written, I don't know which house had this written on it, but one of the two of their houses had give me my money spray painted on their front door. Right. And the picture of that for me was just such a mind blowing moment of even if policymakers want to defend the dollar at this point because they know that that's what's best from a national standpoint, is the population in a position where they're going to allow their elected officials to act in that manner?

I don't think they will, and I think today, in particular, as we got into what was happening this afternoon and tonight, where you have members of Congress cowering in the Capitol, I don't think that they would try. But when I see Hank Paulson's op ed in The Wall Street Journal a month ago, when I see Kevin Warsh, his op ed in The Wall Street Journal yesterday, when I see Larry Summers talk about that, people shouldn't get their two thousand bucks.

To me, it just raises this question of are they actually starting to think about that? This is something that they could try or that they should try or that it might actually work because the answer is no, they shouldn't try it. No, it's not going to work. It's going to be like trying to give themselves a root canal with a shotgun is how it's going to go. But that doesn't mean they can't try. And I don't think it would last for very long.

But that's something I've been thinking about, is basically the story of nineteen seventy one up until just recently was about subjugating the US middle and working classes in order to support the dollar and the dollar system. And my view is post covid we move to a shift to subjugating the dollar to support the US middle and working classes. And there seems to be noises amongst certain influential policymakers or former policymakers that maybe we need to go back to supporting the dollar and subjugating the middle working classes.

I don't think that's a good idea. But if they tried to do it, everybody's off sides, myself included, personally. Lynn, any thoughts on Luke's question? No, I have a similar outlook, and so I think that there will be attempts where they try, but then the feedback loop of either votes or some of these populist uprisings kind of answers that question in a similar way that the Fed tried to keep normalizing things until late twenty eighteen.

And they got punched in the face. They were like, oh, we're just kidding. We're going to reverse now. And so I think we saw it kind of this summer where, you know, some politicians like I don't think we need any checks. And then, like, you know, we actually saw the interesting dynamic that wasn't cleanly across party lines because the Democrats were like, OK, we passed this three trillion dollar thing in the summer.

You know, that the Heroes Act, I believe it was called. And then Republicans are like, our starting position is nothing. Or maybe we'll give, like, you know, six hundred billion and maybe some small business aid and tax cuts and things like that. And so you had these really kind of really wide starting points and then they narrowed more and more. They kind of started coalescing around one point nine trillion, which, you know, trillion here trying to add up to something big.

But that never really took off. Then, of course, we had the elections and then during this past thing, they were really kind of coming to an agreement. And then Trump comes out and says, I want to send checks. And so the Republicans were in an interesting position where the Democrats wanted the bigger checks, their own president, their own party wanted the bigger checks, but they didn't want the bigger checks. And so you almost have like that three way battle going on because it's no longer cleanly along party lines.

Instead of left versus right, you have establishment left, establishment right and a populist left, populist right. You have a bunch of different quadrants here that are kind of competing. And so I think my question along similar lines is what is the Fed's pain point for Treasury yields? And so what we're seeing lately, for example, is that inflation expectations are rising. They just got above two percent. We just had the 10 year go above one percent.

And so actually real yields are staying pretty static. They're hovering around negative one percent. And that's also put some downward pressure on gold over the past several months. And so what I'm kind of watching is what are the Fed statements and meeting minutes talking about in regard to the yield curve control or increasing purchases in the long end of the curve, which they actually did talk about in the latest FOMC minutes as a potential option? Because I don't know exactly where their pain point is, and I think that's pretty important for certain asset classes.

And so that's something I'm watching closely. You know, if used as a reference point in the nineteen forties, they had two point five percent as their pain point. And so in the nineteen forties you had three major spikes of inflation, two of which went in well into the double digits, and they held the short end of the curve at near zero in the long end of the curve at 2.5 percent. So I've been using roughly two percent as my estimated pain point because their inflation target is two percent or above.

I don't think they want 10 years gone above two percent, maybe less. But I don't have a strong conviction within one hundred to one hundred fifty basis point range of where their pain point is. And I think there are different Fed officials that have different pain points. So some of them wanted to yield curve control yesterday and other ones are talking about tapering purchases. So I don't know exactly where that pain point is, but that's kind of the big questions I'm watching is kind of language from the Fed around shaping the long end of the curve.

And I don't think that what the new administration if and I think the expectation is that Dubai is going to become the new insertion point for liquidity or at least is going to be used more aggressively than it has historically, if that's true. I think it only adds more pressure to that yield curve control that you're talking about. Right. I'm curious. Do you agree with that, Len? Yeah.

Generally, the more stimulus there is, especially stimulus that targets the working middle class. Yeah. The more kind of velocity you can potentially get, especially when you're talking about like a post lockdown scenario. So then that could push up official inflation expectations. And basically, if left unchecked at the Fed says, no, we're only going to buy this amount, but yields are going to do what they're going to do. So they said, OK, we're taking this excess supply off the market, but the remaining supply, the market's going to price it.

I think you could move into an event that looks a lot like late 2013 where suddenly the markets wait. The Fed is really not going to buy more. And then there's a big sell off and probably growth stocks take the bigger hit because that's like you look at twenty eighteen, it was the Nasdaq stocks that were getting killed. I mean, Apple is down like thirty seven percent, whereas like value stocks are still holding up. And so I do think that if they were to just let that run, you know, the Fed might just test what the pain point is.

They might say, OK, we're going to keep adjusting things gradually and they're going to let the pain point kind of sort itself out. So rather than say we're going to say ahead of time what the pain point is, they might just watch what happens. And when they find the pain point, they say, OK, we're just kidding. We're going to go ahead, you know, up our purchases to some extent or increase duration of average, duration of purchases, whatever the case may be.

OK, so here's my question for you guys that I'm chewing on right now. You see everybody coming out, all these big banks that are saying that their price expectation or what they think the value of Bitcoin is, is basically plan B stock the flow valuation of call it two to three hundred thousand dollars. Everyone in their kid sister is coming in and saying, yeah, I think Bitcoin is worth this amount. Right?

Well, it appears that the stock, the flow valuation has a lot of validity and a lot of correlation. When we look at just the chart that was published well in advance of the having, we look how it's playing out to date. It really appears that that's kind of what's taking place if we continue to see that play out in twenty twenty one and the price does go to one hundred or two hundred thousand dollars, is everyone just going to lose their calculator and not be able to do a discount model for the stock, the floor price of twenty, twenty five.

And where I'm going with this is so I obviously have a large bitcoin position in my portfolio. Everyone's talking about how they're basically going to use the stock, the flow model in order to miss the next big 80 percent drop, and then they're going to somehow step back in and capture the next big stock. The flow move to a million in twenty, twenty five. I just don't buy it. At least that's my position of like how I'm chewing on this problem.

Does it just keep going? Do people start pricing in the twenty twenty five valuation of a million dollars and start discounting it into today's value? Because if you do, you don't sell, you just continue to hold because any price under two hundred thousand is a great price. Right. So I don't know how to answer that. But I'm curious how you guys see whether you even think the stock, the flow is valid, whether you think this is the quote unquote final cycle for Bitcoin and or whatnot.

I'll be quick. I think the stock to flow model has been demonstrably valid in this. I would watch it until it's proven otherwise. The thing I, I have found that I've not I've seen much of the Bitcoin discussion on Finta in particular, but some of the price targets as well, centers on the the technological side are coming at it from a technologist. And the thing I've not seen as many people coming at it from is the other side, which has never been true before, which is the US.

And so if you look at the US's big three expenditures, entitlements, Defense and Treasury slash interest, it's one hundred forty percent of tax receipts. covid basically blew a gaping hole in the US fiscal position. And what I bring this up because if you overlay that with your view of, hey, does it just take off and run the thing I don't see anybody talking about as it relates to this, the typical stock of flow where you have the run up and then it goes back 60, 80 percent.

And it for another is is in none of these prior cycles, has it literally been the case where the US can't make ends meet unless the Fed is filling in the gap?

And my gut tells me that at the very least, that suggests that the stock to flow model dictated pullback will be much less severe than it has been in prior cycles. At best, case just skips over them entirely. But I'm coming at this from a complete nanotechnologist standpoint, so I'll stop there. But personally, that's how I'm thinking about it, that basically you won't get as big of one or you might not get one at all because of what has happened to the fiscal situation.

The backdrop is just that ugly that it's gotten so bad, so fast. Lynn, help me. And if I was going to rephrase, it is like, what in the world do I say on this show after the price goes through? One hundred thousand when people are saying, do I buy? Like, how in the world can you possibly answer that question? I know it's going to be a huge, huge issue for me later in the year.

If this keeps going in the direction I suspect it's going, like, what do you say to somebody? Yeah, I have similar issues, I have clients asking, like, let us know when you think it's a good time to sell. The way I'm approaching it to back up is so I wait long. In April 20, 20, I wrote that big public article in July 20, 20. And so my view at the time was that I had a very high conviction that Bitcoin would do very well through that year in a twenty twenty one based on the 18 months or so after the having event.

Now the part that I had low conviction on is what price target would reach. Basically, it was like north of here by a lot. I looked at recent gains in previous cycles. In general, each cycle had a smaller percent gain, even though it was still outrageous. So with the stock to flow ratio, what I found was that I really like Plan B's charts. The ones that there are color coded. They show how it relates to the having cycle.

I thought those were extraordinarily valuable. I didn't put a lot of emphasis on the specific price targets because that is supply only model, whereas demand is what dictates how far it overshoots, how far it comes down. It's ultimately going to be dictated by supply and demand, but that kind of has an implicit kind of a static demand assumption. And then the fact that it overshoots and that is because demand is somewhat flexible. And so my base case was that it would be a parabolic increase, but that it would be probably smaller than the previous one.

And so far it's above the previous one in terms of the post having where we were kind of, what is it, eight months since the having. We're actually above schedule. And so I don't know if that means we're due for a correction then and then we're up from here and it kind of slows down or if that kind of trend is broken and that this cycle will be bigger percent wise than the previous ones, I don't really have a good answer for that.

I am monitoring things like the market cap to realize cap ratio, basically monitoring a bunch of different kind of chain indicators, sentiment indicators. And basically my view would be to let people know when some of those indicators look a lot like previous tops and that people from there can judge what to do with their own situation. That doesn't mean it's going to crash. It just means historically, this is we're in the danger zone. Now, that can mean different things depending on what happens.

And so my view is that you can have a blow off top and that if you were to get enough of a correction, that kind of shakes people's confidence in it. That's when the narrative shifts, because I think we're in kind of a bubble in a sense, basically with any sort of investment, there's a really kind of big spectrum of information. Right. So whether it's a stock that people know the fundamentals of and they can tell you everything about it versus some of the things that they did a share split.

So the numbers is going to go up, kind of like this low information investor versus high information investor. Same thing with Bitcoin, right? There's people saying that it's only going up because of reasons X, Y, Z, and they're not talking about the supply, just kind of having a narrative or as other people have been showing, like ahead of time, what the rally would do. And it's done almost that. Exactly. And so I think there's a spectrum of information there.

And I think that there are some people that when you get that kind of of top, they can say, oh, it's been a bubble, the narrative. And you could get a lot of that kind of that doubt. Right. So people say maybe it was a bubble craze. I want to sell and you get the momentum to the downside. My base case would be that that would be smaller than the previous percent wise. I do think there would be probably some correction, but I don't know.

I think that the best way to answer for people is that they can make sure that their position size is one, that it doesn't keeps them up at night. I think that's the way to handle it. I don't think that there's, you know, trying to time it perfectly is probably not the right approach. And instead it's saying, what is the position size right for you? Right. There is some hard core Bitcoin ideas that are just never going to sell.

They don't care if ninety five percent their net worth is in Bitcoin. And so that's their answer, because if you're someone else and they put, say, five percent on Bitcoin and now it's 50 percent of their portfolio, they're checking Bitcoin five times a day. Maybe for that person, the answer is, OK, rebalance, go back to your target allocation. I wouldn't really recommend having zero Bitcoin, but I think that there are ways that they can dial back risk, especially when you had a five extra 10x gain at some point and you want to kind of just kind of rebalance some of those into other assets.

I think it really is going to come down to the individual sentiment and individual circumstances of that person. Really well said, both of you guys, that's all I have. I just want to thank you. I mean, I really enjoy these conversations. I forgot we had Jeff here last time. The next time that we do this, I promise I'm having Jeff Booth with us. It's going to be the four of us again. We're going to make this a theme every quarter or whatever.

If you guys are willing to sit down and have that chat, because I really enjoy talking with you, too, and Jeff as well. Sure, it's almost like there's so many subjects, there's so many subjects, but yet real fast give people a hand off. Look, I know you have a book there that's outstanding. And then, Lynn, give a hand off to folks to your site as well. It sure, if people want to learn more about what we're up to, check us out f t dash L.L.C. dot com and check out different products we have there on dot com, also on Twitter at Noncontact.

I have a lot of free articles and newsletters and I also have a low cost premium research service that covers a variety of different asset classes based on where kind of good opportunities are equities to commodities, to bitcoin, whatever the case may be. Guys, we'll have that in the show notes. I highly encourage you to check out both of those just incredible resources and incredible people. Guys, thank you for your time today. This was really a lot of fun.

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