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You're listening to Teip, I can honestly say out of all the years doing this show, this has to be one of my favorite recordings. We have a cast of macro thinkers that really don't need any kind of introduction. But here they are. Lynne Aldan, Luke Román and Geoff Booth are clearly some of the best economic thinkers in the world right now. This is one of those conversations you need to share with your family and friends if they have questions or concerns as to what's happening in the world right now.


So without further delay, we bring you our macro mastermind discussion for the third quarter of twenty twenty.


You are listening to the investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to the Investors podcast, your host, Preston Pearson is always I'm accompanied by my co-host, Stig Brotherson. And Boy, oh boy, we got quite a mix of all stars here tonight. Talking Macro, Lynn All and Luke Rome and Jeff Booth. Guys, thank you for taking time to synchronize calendars to pull this off.


This is very exciting and we have a ton of questions. So welcome to the Investors podcast. Awesome, thanks for having us. Thanks, Anderson. Thanks. All right, so I want to start this conversation off with a question that I've been getting a lot lately, and I'm kind of curious if you guys have been hearing the same from some of the folks in your audience, but everyone keeps asking me, are we going to see another liquidity shock like we saw there at the end of the first quarter into the second quarter of twenty twenty?


And of course, there's no way to predict something like that or to be able to say it's going to happen in the next quarter or whatever. But I'm kind of curious your thoughts on the likelihood of something like that playing out based on everything that we're seeing in the marketplace right now, what would cost something like that? Why would something like that not happen? I'm just kind of curious to hear some thoughts and I'm going to open it up to the group.


And something else I want to tell you guys is I have a bunch of questions. We had two hundred and forty odd questions that were submitted on Twitter with only a couple hours of notice for this interview. But I want you guys to be able to ask each other questions. So like Luke, if you saw something that Lynn posted or vice versa or Jeff or whatever, feel free to just make it a topic if we do so. With that, back to the question, was this liquidity crunch or are we going to see more volatility, more spikes like the one that we saw earlier in the year?


I can jump on it, so my view is that if there is, it's mainly a political outcome, because I just did a report the other day showing that we've had such a big employment shock happen. And, of course, there's this lost income. But if the governments come in and basically replace all that lost income with transfer payments, we've had the unemployment benefits. We've had the one time stimulus checks and, you know, ever since the end of July, that's basically tapered off now because there's political gridlock.


So they're currently negotiating a fiscal bill that somewhere between one and three trillion dollars and they have differences and they're on recess. And so if that they shut off for pretty good a period of time, we're going to see more insolvencies because a lot of people are only paying the rent, only paying their mortgage, only kind of doing necessary shopping because of the transfer payments that have kind of fill that gap. And that's why we haven't really seen some of the additional recessionary shocks we've seen yet, is because so far the median consumer hasn't fully felt the impact.


Whether or not we have kind of another big liquidity shock like that in part comes down to fiscal decisions and then international is another story. So March had that big global dollar shortage that the Fed provided swap lines for, and those are still open even though they're being drawn down. So something kind of overrides that. There is that kind of ongoing liquidity trap available to them if they need it. You have been posting a Chunlin showing that the swap lines were dwindling down.


Is that an issue with the Fed? Just go in and replenish those lines. Well, those are maturing essentially, so they were loaned out on short term loans and they paid them back, most of the loans went to Japan and Europe. So it's not really like, say, the emerging markets. No country hit the absolute limit of how much they can borrow and they pay them back pretty quickly. So they borrowed up to about 450. Fifty billion.


The recent numbers down to about one hundred billion just under. So they've already paid on most of them. So it's actually it's good news basically means that the foreign dollar shortage currently isn't that bad. And that's kind of being shown in other indicators, too, like, say, the the TED spread and other ways to kind of measure global dollar shortages. So that's actually so far it's good news. There's no kind of current signs that another one's brewing yet.


So do you think that internationally there could be an event, see from the ECB or another larger entity that would throw the liquidity squeeze back on?


If you look at Europe, the European Union, again, it really comes down to political outcomes because you have that kind of age old battle between the northern countries and the southern countries in the European Union. So some of those places like Italy and Spain are potential kind of like powder keg that if there's kind of a solvency event there, it can be really systemic. And then here in the US as well, we kind of have a similar issue with the states.


So many of the states are going to have a tough time coming out of this solvent. And unlike, say, the US government, they can't print money. So they're not monetary sovereign. They can actually have kind of outright shortages of they're going to pay their bills. And that's that's actually holding up this well, part of what's holding up this current kind of fiscal thing. There's also the voting things. But the Democrats say want more of the aid to the states, which Republicans are not in favor of that.


So there's kind of this political issue playing out between state solvency in the US and then in Europe. It's country solvency. Lynn, that's a really interesting dynamic that you're talking about between Europe in the US, where all the countries over in Europe are in different situations from a embeddedness standpoint. And I think what else is interesting is you have some countries over there like the U.K. that have their own currency. And so they're kind of separated but intertwined. And it's a different dynamic here in the US.


When you look at Europe versus the US, which one has a more favorable advantage when you look at that structure moving forward in this environment that we both know or I don't want to speak for you, but my expectation is we're going to bring a whole lot more. And this is only going to accelerate moving forward. Who's better positioned based on that architecture that you're describing? I think it depends on which metric you look at, so my base case, and it has been for a while, is that US is going to have to print a lot more money.


And you're in this crisis. On the other hand, the political challenges in Europe are a little bit worse because in the US we have somewhat unified fiscal situation. For example, the retirement system is essentially out of the state's hands, some of the Medicare and everything, whereas in Europe there's more different systems that they have to contend with. So it's a similar issue. But that kind of political issue is potentially harder to do in Europe. On the other hand, you know, they're going into this.


They had smaller fiscal deficits. Even some of the trouble, like Italy, had a smaller deficit as a percentage of GDP going into this crisis than United States and Germany had a surplus. So those countries as a bloc are going into this with a less extreme, in many cases, a fiscal situation. Many of them have trade surpluses or current account surpluses and the bloc as a whole as a current account surplus. So some of those advantages, but their political situation is harder to sort out.


And I think from there I'll leave it to to the other two. Jeff, it seems like you have a point. I think in general, kind of globally, we have and deficits do matter, as one correctly points out, the overall debt matters to the society and globally. There's just there is a risk that every single country is playing their currencies now. So the fiscal stimulus right now in the US causes essentially labor to be cheap relative to the world.


What is the knock on effect of that is Europe is going to have to stimulate like crazy to lower their currency value, as is Japan, as is China. You're having a race of monetary easing everywhere. And I think this is important or covid did was accelerate this path. It was unstable long before that and call it what it was just accelerating the path. So I think you're going to see I'm actually I believe the US dollar will actually get stronger before it gets weaker and it might get weaker first and then get stronger because of what's happening.


Other governments will and turn on the taps as well. So your base case, is the dollars just going to get so strong until it basically locks itself in a box? Can the US government, because because of a strong dollar, makes everybody else they have to print more today, so the printing press is going to be on forever. We will never be able to remove that to me. All governments and nations is constantly going to drive the inequality higher and higher and higher.


Blook, do you agree with that? I would agree with the point of I think as you look at the structure, the existing system in terms of the net international investment positions where the US has a massive negative net international investment position as a percent of GDP, whereas Japan and Europe, China are at the opposite end of that spectrum. If you look at the current account, the US is deficit against the other surpluses and then you just look at the US aggregate debt outstanding relative to the others.


All of this is sort of my view is that these are all symptoms of basically the way this system has worked over the last 50 years. And so I would say that the end game to me is extremely clear, which is the US is going to have to print more than anybody because of the way this system is set up. At any given point in time, I have less conviction. Who's going to print? More or less. And the US has just had a stretch of time, both when and Jeff's point of since March.


We had that dollar crunch and since then, the ensuing two months, we had the Fed grow their balance sheet of whatever, 20 trillion dollar annual rate for two or three months. And that seemed to sort of take the froth out of the wind, out of the dollar shortage. And it's been interesting to me, if you would have said to me, call it three months ago, look, the Treasury is going to run the Treasury general account up to a trillion eight and the swap lines are going to come down and the Fed's going to go from six hundred billion dollars.


I think it was a week at one point down to whatever they're doing now, which is something much less than that. What's the dollar do? And I would have guessed that the dollar would have been meaningfully higher and instead the dollars kind of bled down a bit. And so that's a bit relative to the the structure as we understood things coming into this. That's a bit of a non sequitur, in my view. And so what I've been trying to figure out is OK, to Lynn's point, before the dollar liquidity problem overseas has been largely mitigated, as evidenced by the swap usage and her point of the TED spread the DCI itself.


And I'm I'm wondering and scratching my head a little bit, where is it coming from? Is it the gist that we've passed the point of maximum pressure? Is it what we've done in the regulatory side, which I think is a really big deal with the large changes or the supplementary leverage ratio changes that the Fed implemented in April, where you basically have created a QE forever with a wave, a wand by making treasuries on banks books equivalent to cash?


They're doing a number of different things, but I guess that's sort of a very wishy washy answer. I don't have a very strong opinion on that one way or another right now in the short run. But I do have a very strong opinion that the over the next call it 12 months, the US has five trillion and T bills outstanding. Those are going to have to get refinanced and I don't see where the private sector balance sheet capacity is. So my view is that either the Fed helps with that or the big US banking system has Fed proxy helps with that.


Or that could conceivably, if mismanage from a political standpoint, like Lyn said, create a bit of a liquidity problem for a brief period of time.


I wasn't approaching it necessarily from the policy failure, although I think that that's obviously a very real reason of why that would happen. I guess I was just looking at it from the third orders here. The companies that are driving the indexes are just the few that are sitting at the top of each of the index as everybody else is suffering in a major way. And so when do those earnings calls start to matter? When does all these bankruptcies start to matter in the market?


Is that something that you think is a potential for driving the liquidity crunch? Or are these companies sitting at the top so massive and so large that it just drowns out the squeals and the cries of all these companies that are failing in the middle and at the bottom? So I do think that's something we have to basically look forward to quarter by quarter. The reason I bring up policy is because that's essentially what's holding them back from insolvency right now, because the Federal Reserve can't fix insolvency event.


They can only fix the liquidity event. The fiscal authority has some power to fix a solvency event if they let this throw free money at things. But it depends on magnitude and timing. And that creates, of course, all sorts of consequences downstream. You have moral hazard, you have currency devaluation, you have cronyism, all sorts of ramifications from that is both consumer and business. So there is corporate bailouts. So we gave money to things like airlines and stuff.


And then we had the half a trillion dollars in loans, most of which turned into grants. And so it's mostly free money. And then you have the twelve hundred dollar stimulus checks and then you have six hundred a week in extra federal unemployment benefits on top of the normal state benefits. So if you look at, for example, personal income is higher now than it was at the start of the year. The average person has more money. Not everyone say you're a doctor and you lost your job or an executive.


You lost your job. That wasn't replaced. But many middle class people, they didn't lose their job, but then they got a check. So they're just they're up to five dollars or they lost their job. And if they're in kind of the lower half of the income spectrum, they actually made as much or more than they were making when they were working. So we have not seen a decrease in personal income and also we've seen a rebound in retail sales.


So, of course, a lot of that shifted. Online retail sales are up here today, not down. So actually all time highs. So we've seen, for example, GDP down, employment down, exports down, imports down kind of across the board. But construction spending is kind of mediocre and then sales are up, retail sales. So basically what it comes down to is the solvency event is, yeah, if we go a couple of quarters and we don't have another kind of multitrillion dollar give out, that's when you start to see solvency events or we get another multitrillion dollar give out and then we have to look a couple of quarters ahead from there and kind of keep playing that game.


That's actually the point, no matter what Luke thinks of this two, it's really clear what's going to happen in the short term. It's going to move all across the world currency, get stronger, weaker. It's really hard to tell in the short term, but in the long term removal of fiscal stimulus, we will have stimulus short everything. There is a repricing event coming on everything. Everything will be repriced, whether it comes through a policy error or whether it comes from continually printing.


And then people will lose face and faith and currencies one way or another. We're going to have a repricing event.


So if you're looking at the global aggregated monetary base, the money that's being entered into the system, that graph does not look linear. It's parabolic. So my question to you is, is this parabolic shift we're seeing a one off or will we continue to be on this slope? It's parabolic, it's something I talked to someone earlier today and I used an example from your book, Jeff. Basically, you have this inflationary push in terms of what I said, using Moore's Law as the proxy for deflationary pressures driven by technology.


You've got that increasing exponentially this way and you've got the debt underlying the currency in the system increasing exponentially this way. And so policymakers, we're having this problem of basically trying to ride two horses with a single rear end in two opposite directions before this happened. And the current crisis, as Jeff noted, simply pulled forward all of these things probably by multiple years in terms of the fiscal problems around the world. As best we could tell from what we were thinking the problem was really going to hit to it's here now.


The question was posed to me was, can the policymakers catch up to the deflation and basically prevent the system from the deflationary pressures, from breaking the debt for breaking the system? And to me, I think it ties in to Lynn's point of it. It's a really a political question. The answer is absolutely. Theoretically, yes, they can. What they, in my view, cannot do is do so without destroying the currency relative to real goods and services.


And that's the problem they face. And so when you say is it a parabolic curve or a linear bank, it's a parabolic curve, but I think it's going to be in fits and starts. So this the Fed was at three point seven trillion a year ago on the balance sheet. And they're whatever they are now, six point eight, six point nine. They're down a little from seven. I think last time I checked. That's a down payment to me.


What's happening with you've either got to reset the system to reform the system politically, but ultimately, what you're going to have to do is I think you're going to see and I use the Fed balance sheet, it is just a proxy. But basically the Fed's balance sheet is going to have to move in a nonlinear fashion, in my opinion, towards total credit market debt outstanding or fully reserving total credit market debt outstanding the longer these deflationary pressures continue. And then it's a question of, OK, well, when do they start dispersing this money?


Do we have political processes that hold these up? And that's much more difficult timing to gauge in terms of just the political process of that. And then within those, what causes that is that simply Washington decides to finally get together or do we need a city to to riot, more cities to riot until they decide they want to stop that, etc.? Do you see any government in the world with a currency reserve being able to politically stop printing? Possibly Russia, but there's not many countries.


It depends how long this goes on. Russia came into this with very low debt levels and a lot of currency reserves and their stimulus has been somewhat smaller. So they actually still have positive real yields. But there are not many countries like that. And even their pressure if oil stays below. The irony I talked about this in the book is the policy in 2008, they essentially pushed oil prices up in real terms and actually made some of those governments way stronger as a result because of pure raw materials.


And oil is your primary and it doesn't change in real terms and it moves up. So you're going to have a positive surplus. So the irony of some of these policies as they drive some of the same geopolitical risks around the world that we see. Lynne, how does Russia continue to compete if every other person that's playing the game is cheating? One of the funny things about Russia is their currency. By many metrics, is undervalued. Ever since the sanctions on them, they actually had a very weak currency.


And it's one of those things. If you looked at it on paper, it should be stronger. If you look at the debt levels, you look at the current account balance. They went into this, say, with a fiscal surplus, low debt levels, positive trade balance, positive current account balance, positive debt, international investment position and positive real yields. So, of course, the oil price crash blew that out. We've since got a partial recovery while the currency is so weak, they were kind of benefiting from that because they're, for example, their wheat exports were more competitive and many other countries.


So they were actually kind of gaining market share in wheat, of all things, and of course, their arms and energy and also other commodities like nickel and things like that. So if there's kind of major currency devaluation, I think they're going to have to some degree of currency devaluation. But because their currency is already quite cheap, they actually kind of have some advantages there that gives them even compared to, say, Saudi Arabia. It definitely has a lower oil production costs.


Saudi Arabia has a currency and also they're heavily reliant their entire life. They don't really do a lot of taxes and everything. So they're their fiscal situation is more reliant on oil, whereas Russia has they have an actual economy there in addition to the oil. So they can actually withstand some pretty severe shocks for quite a while.


When you think about it, it's pretty ironic that the mob is putting a discount on Russian assets because they're concerned that the Russians will nationalize them when the rest of the world is effectively doing the same thing through a million papercuts.


Very much so, and it's interesting to learn you were a great point on Russia. There was a great chart, I think, on Bloomberg the other day showing that in this last oil price down, you have seen a divergence between Russia's eFax reserves, which have risen the whole time since March and the price of oil. And that had never happened. Going back, I think the chart was a 10 or 15, might have even been a 20 year chart.


But the point is, is Putin's basic transition into a much greater share of gold reserves is paying off now as well because it's doing what it's supposed to do. And so, ironically, with oil four months ago, having gone negative briefly, his reserves actually just hit all time highs, even with the price of oil at 40 and him saying, well, maybe we'll just hedge it out here like Mexico, which to me was indicative potentially that there might not be, in his view, a whole lot more upside when he floats that kind of a trial balloon out there.


It's a great point that Russia is an enviable position relative to a lot of other people. So do any of you guys read into the trade talks with China, which were scheduled for August 15th? These have gotten delayed. It seems like the narrative is changing. What are some of your thoughts on that? The big game in China is the geo geopolitical to me, the tech industry, obviously, China is IP stealing IP. And so the big thing, which are the shutting down, which I agree with actually.


So US companies can't have even access to China, but we expect Chinese companies to have even access to to us. At the same time, they're collecting the most important information on all of us into an I enjoy artificial intelligence. So there are some of that that I agree with. But again, coming back to currencies and fair trade, what is the black box of China? No country in the world is ever created as much debt to GDP as China.


How much is this there? So when you look at the manipulation of currencies and then the bigger geopolitical risk of artificial intelligence and everything else, no wonder you're starting to trade barriers to try and shutting out industries. And I think you could expect a lot more of the. Let's talk about the special drawing rights they're typically referred to as Ester's is the to national type of monetary reserve currency that was created by the International Monetary Fund and they work as a supplement to the existing money reserves of member countries.


So, Luke, what are your thoughts on the future role of stars and what type of role do you think, if at all, it will play on the global scene? I've watched the price of the city, I've watched gold stars and it broke out, gold broke out in stars earlier this year, which to me was a signal that gold was destined to probably set new highs this year in dollar terms before too long. Beyond that, to me, the SDR as a neutral settlement asset or SDR bonds, I think the odds of that are probably waning, in my view, simply as a result of the geopolitical situation, the tensions that we're seeing with the US and China in particular.


In May, you had the US come out with their new views on China, are their updated plan, I guess, if you will. Preston, you and I and Grant talked about that back in June where we said we're in a new great power competition with China. And like I said at the time, one of my best relationships on Wall Street said that the document read like a war scroll. So point being that to get an SDR type of multilateral neutral reserve asset via a monetary conference really requires some level of cooperation.


And the two biggest stakeholders in the system certainly to be able to sit down and talk about it. And it just doesn't seem like that's happening right now in terms of seems like there's more fragmentation going on than any sort of agreement. I don't know how much role the SDR has to play, at least in the intermediate term, to resolving or being a pivot to execute a reset of some sort of reform of the system of some sort of. I agree with that and so something I've been covering, and I know Luke covers it even more, is basically more trade happening outside of the dollar system, particularly with energy and other things.


And so the world's moving in a more multipolar currency direction. Now, the question is, what form does that take? So the SDR is one possible for it's basically a packaged multiple currency solution. If you price, say, commodities in stars and we have Esdras take a larger market share of reserves and kind of international trade. But that point, that requires a lot of coordination, which I don't think is likely. So I've been looking more at essentially just regional reserve currencies.


So if European price energy, more in euros and China as the largest commodity importer, if they can price some of their some of their energy and yuan, then you have kind of a three or more major currencies, that kind of price oil and you have kind of dollar take a slightly smaller market share of that. I think that's a more likely outcome than SDR. And then you have things like gold and other assets that central banks can hold on their balance sheet.


They don't have any counterparty risk. And I think the fact that you're seeing that where, like you said, you've seen some more oil prices in Europe, there was an article last week on Bloomberg noting that over half of what China buys from Russia, excuse me, is being bought in euros, actually not in yuan, but not dollars. And you obviously, given that it's Russia, you can presume a lot of that is energy related. And they thought a lot of that had to do with Russia that last year, switching to invoicing all exports in euros.


The de facto, it looks like the share gains since twenty thirteen have been notably gold has gained share about their reserves and the amounts in aggregate are still relatively small. But you can see clearly there's been basically no growth to a slight decline in reserves since in particular 3Q 14 and de minimis growth in other currencies, but notable a notable trend of growth in central bank gold reserves over that time. And I think that's part and parcel to this. What's really driving that is a multi-currency, energy pricing in particular.


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ICOM spelled Belin KNST Blankest Dotcom's billionaires to get twenty five percent of a premium membership and a seven day free trial. Blankest dotcom billionaires. All right, back to the show. So let's talk gold, which is probably the hottest investment of twenty twenty, this is my concern with gold moving forward, is everyone's looking at gold as a store of value. Everyone has currency concern because we've seen massive printing this year. My concern, though, is if people think we're going to return to a gold standard, how does that play out from a game theory standpoint when it's almost like everyone is holding a gun to the other party, like you're in a circle with 10 other parties and everyone's got a gun in there, they're pointing it at each other.


Right. So, like, how do we possibly think that all these countries are going to come back to the drawing board and say, all right, let's stop the madness, everyone's going to be responsible here and we're all going to pay to gold. That's where the SDR argument comes in. They're like for me when I think of that and I'm not trying to anchor your opinions, why is that opinion that I have wrong, I guess is what I'm trying to ask.


Like, it just seems so improbable to me. So, Presson, I look at this from a business standpoint, from a macro, very rarely does a business do what it has to do to change the protects status quo and all of the people inside that business are protecting the status quo. Why? Kodak doesn't mean they invent the digital camera that we see more pictures today than anything. They have none of the gain of it. And you see this time and time again for that very it's highly improbable that the system comes back together through the SDR goal.


Anything else for exactly what you said? Highly improbable, because before the system to come back together like that and accept that where technology is going in ever deflationary, what they would have to say is we're going to increase taxes on pullbacks because we're going to be living in a deflationary world and we won't be able to hide it in inflation. We won't be able to pick people's pockets slowly. We won't be able to have governments as big as they are.


It has to be politically achievable to be able to charge taxes for our services. I don't think there's any possible we're way too far past the point of rescue of the existing system. If you're going to where Bitcoin is and everything else, I believe that that's why Bitcoin is where it is kind of a once in a lifetime asset type of value creation, a very symmetric that is so improbable that governments come together on any terms that can fix this problem.


So I think I agree people in the status quo aren't going to change anything, and so to me, it's interesting then when you hear the United States accuse Russia, accused China of trying to break or change the rules based global order, they're acting outside of the rules based global order. And I think it's when I think of gold, I don't think anybody's going to voluntarily peg their currency to it at any point. But what I think it's important to look at is we talked about that the fiscal situations irrecoverable, particularly after covid.


We don't know the exact path of who's going to win the race, but we think the Americans are going to have to print the most. But there may be times when they're behind, but there's going to be a lot of the monetary creation. And then you look at geological reality of the Russians, of the Saudis, of the Iranians, of the raw material producers. And we know that oil fields deplete and go one hundred percent. Water and individual fields do all declined.


And so if you're Russia, you're looking at a situation where you're going to be swapping your oil, you're finite oil for rapid. Your oil is doing this and the fiat currency quantity you're pricing it in and the bonds that you're zero negative real rates for decades to come in all likelihood. And the quantity is doing this. And so to me, when I think about gold and the role it has to play in the system, I don't think it will be pegged to any fiat currency.


I think where this system is going is it'll be pegged to oil and it will be that Peg will be decided and managed by either the biggest producers and or the biggest users. In other words, if Russia decides that it is a better value for it to sell gold at one hundred barrels an ounce, two hundred barrels an ounce, five hundred barrels an ounce, a thousand barrels an ounce than the fiat currency, then four dollars at the current prices, then you're going to see basically oil revalue gold.


And this is precisely what we've seen since three to 14 when China began reopening the gold window effectively right with the Shanghai Gold Exchange, International Board and Russia began selling oil in Yuan Perm's on the margin when that announcement was made, it took 13 barrels of oil to buy one ounce of gold. Today, we're at forty one and close to two thousand. So in oil terms, and that's ultimately that's real money terms. That's a gold and oil have been the only two things that have backed currencies going back three hundred fifty years.


That's where I think you are seeing in real time the commodity producers of the world saying we are not going to sell our finite resources for that fiat money when Russia buys gold within its eFax reserves. That's what it's saying. When I look at Kazakhstan as an interesting one. I was looking the other day uranium prices because they noted that the US production had fallen way off. And you see uranium prices have bounced up a bit recently. So you say, well, OK, wow, who's the biggest producer of uranium in the world?


And it's Kazakhstan. They produce forty three percent of the world's uranium.


You look at Kazakhstan's gold reserves, they've been rising steadily for five or six, seven years, similar to Russia's. And so you say they're taking their dollar surpluses in uranium and they're rolling it into gold. Uranium is bidding for gold, oil's bidding for gold. And when you look at the relative size of the physical gold market relative to the just oil alone, physical oil alone and annual production terms is ten times the size of the physical gold market. And so let alone you layering uranium, you layer in nickel, you layer in copper, you layer and gas cetera.


Basically, that's where I think gold has a role. Not that there is going to be the US is going to get religion and say, you know what, we're going to pay gold at. And if they were going to pay gold, it would have to be some extraordinary number. Ten thousand dollars an ounce. Twenty thousand dollars. Now, what I think is happening is gold is floating effectively in all currencies and the commodity producers are saying we are not going to store our reserves earned through selling commodities in negative, real rate sovereign debt.


You're seeing basically the system, ironically, is organically changing, basically back to a version of the pre seventy one system with wrinkles, which is three seventy one. So nineteen forty six seventy one dollars was the amount of currency. The dollar was a reserve, but gold was the primary reserve asset and then seventy one treasuries basically became gold.


The US government has effectively been emitting gold by omitting debt over the last fifty years because the holders of those instruments are now making money and before that didn't adjusted for inflation in real terms.


And yeah, realistically, there was really only about a 10 year span of time where those were actually good, where treasuries were money good on a real basis. And when they stop making money on a real basis, 03 to 08, it didn't really matter because we were the only game in town. And then after 08, the world started shifting. And I think that's really where all has this role, which is we can't afford positive real rates. The West can't afford positive real rates more broadly.


And the commodity producers in that case are probably looking at it. I know I'm looking at it personally this way. If I'm gonna have to buy a zero percent yielding bond, I would rather have a zero percent yielding bond of infinite duration and finite issuance, which is gold, than a zero percent yielding bond of finite duration and infinite issuance. Like we said, the issuance is going to be infinite. And that's why I think we're going has a role.


Lin has a great chart of what you were talking about there as far as the bonds up until eighty one, we'll have to somehow include that in the show notes or something. But Lin, over to you. I want to hear your thoughts because we obviously know a Hugh Hendry thought of your thoughts or look over to Lin.


Agree with what both Jeff and Luke said, and just to add on to that, I agree with the sentiment that basically we're not going to just move orderly on to any sort of a gold standard. I don't think we're going to see something like that like we saw in the past. Essentially, if we can kind of look at this as almost like a fourth printing of it, that's how the demographer that coined that term would refer to it as. And basically, you don't really see a new system until this current system breaks and gets so bad that somewhere something else comes out of the ashes, they build a new system, or there are ways that it can be mitigated, like shifting to more of that kind of gold as the central bank asset can kind of change the dynamic a little bit.


And you can get kind of that more gradual change depending on how bad things get. One example of a country using gold to some extent is India. They issued some sovereign bonds that were essentially gold backed. It's a small percentage of their issuance. And the incentive to doing that is that they get much lower yields on their bonds by doing that for the simple reason that a lot of emerging markets would have dollar denominated debt, they get lower yields because the lender does not have to take that currency risk.


So if you're concerned about the rupee, basically, instead of buying like a Treasury bond, yielding nothing, you can lend to India and you can get kind of a lower rate than India's normal bonds. But then you, instead of being backed by the rupee, it's backed by gold, essentially. And you saw the counterparty risk of India that actually honors that agreement. But in exchange for that counterparty risk, you get that yield. So there are things like that where where they've used gold to essentially demonstrate trust.


So I think you could have at, say, an extreme environment where currency breaks so bad and they go to something more physical like that. But that's more of a tail situation and that's kind of a breakdown of the system. Or you can have these kind of more moderate cases where they just want to have they want to show trust and they want to basically get yields lower. Lynn, question for you. What we were, I think we all agree on, there has to be effectively infinite money printing globally in every single jurisdiction.


Doesn't that eventually the reset button, no matter what happened through revolution?


Because what we're talking about is a new monetary system always comes out of revolution and it's a time to reset everything else. And then everybody gets together because they have to if we all agree that there has to be infinite money printing and the consequences are also infinitely bad across the world and it creates more polarization, more us versus them. If we all agree with that, then don't we? Also, there has to be there's a day of reckoning coming. Yeah, that's always that's essentially what we saw back in the Great Depression, World War Two, unfortunately, so.


So we had the tariff wars and then it evolved into hot wars and then out of the ashes of that, we got the Bretton Woods system and then that started to break down. So we got the petrodollar system. And now that's starting to break down. And then the question is, what's next? I think there's a big spectrum for how messy the next transition can be. It could be utterly devastating or it could be kind of a more gradual pace.


It could affect some countries more than others. I think there's a lot of variability both in the timeline that it plays out in kind of what form it takes and how bad it gets between now and that next form. I think there's a lot of kind of political things that that I wouldn't even try to guess like this number of political variables from geopolitics, domestic politics can make that extraordinarily complex. Because I'd love to dig into one, because if we're talking about, OK, we know where we are, what are some of the probabilities and where does it look like?


I would say that we all agree that the probabilities are very low, that the only thing that fixes this is austerity for a long time and the probabilities are very low and the government's going to do austerity. And if they do, it sets up a negative bias in their own currency and jobs and everything else versus others who are printing. So you could be let's just assign a very low probability to that and say the sort of probabilities are very high, that printing is going to continue unmitigated, unmitigated in that world.


I think it makes sense. I'm not saying it makes sense from how an economy should look because government doesn't create jobs. If the government is 60, 70 percent of an economy is used to misallocation of capital everywhere in that world, which we all agree with, it's going to be the government is going to take more and more share and every government is going to take more and more share to do that. Then it makes sense that MMT poor people getting left out.


Why wouldn't they get money, too? I'm not agreeing with MMT. I think it just takes us off the cliff faster. But I understand the rationale behind people saying MMT. I agree, and it's it's a political question, and it ties back to the point you've made so eloquently in terms of what the technology is doing is left to its own devices. Technology is going to be Jeff Bezos owns the world and the rest of us are all unemploy and machines are doing everything we're doing.


I mean, that's sort of where this could go. But actually, ironically, this is making that happen faster, correct, we driving that faster. Yes, and so then the question becomes, your outcomes are the other two hundred ninety nine million nine hundred ninety nine thousand people with 12 guns for every 10 people each other, or does the government become the. Do we set up some sort of MMP system where the technology really in theory, you can set up a technology centric currency system where this can be managed, this process of allocating.


You can manage a transition idea to the optimistic situation as you manage a transition through an application of MMT UBI. And then we wake up in five to 10 years as a period of of natural generational transfer, but then also retraining and basically a nation of shopkeepers, again, possibly where you get some money from the government. And then you also you like to make art, you like to make pottery, you like to sell that. You like to do fitness.


There's a lot of you go back to this sort of again, conceptually that might work. But I to your point, the options on the path we're on is either the technology consolidates all the money in the power and amongst a very small number of people who then can't really go anywhere or they they sort of hive off in gated communities or gated resorts while the rest of us have a very bad political situation or they're the government gets involved at a much greater level in terms of the UBI and that that you were referring to is is my view of the most likely option.


I guess I agree with you, the political to them, I suspect MMT is coming in some sort of one. I also suspect the Federal Reserve rules will be changed to do direct transfers to people and you could have hyperinflation at some point down the road. But it begs the next question, and this is what a lot of the MMT folks don't address. What gives you the right for a reserve currency and its trust in the reserve currency? If it was just to use an extreme example, I'm going to print a whole bunch of money.


I have a reserve currency. Everybody else is using my currency. And I'm going to trick the world. I'm going to buy the world.


I'm going to buy the entire thing and then default. I think that's a crazy, extreme example. But it shows kind of MMT where if you can't pay for it, how is that legal tender in other assets that you're buying going to be trusted? But I think that's actually the same reason that nobody is going to trust you want as a currency, and I think that's actually why we're way closer to the end game than people realize, because this is happening at light speed all around the world.


And then if you broker a new call, the Bretton Woods two point system in that world, you can make the argument that the world couldn't handle the currency because we would have an accelerated deflationary pressure from technology, which would be a unique situation caused by the exponential growth in computing power.


Back over to you. I can see you have a point. One thing I was going to add is basically a theme I've been focusing on is the past 50 years have actually been somewhat unusual in terms of global reserve currencies. So a lot of people ask, OK, if the dollar's not going to be the global reserve currency as currently structured, then what currency is going to replace? It is going to be the euro yuan like. Of course not.


Right. They don't have this. They have the same props that the dollar has. So but if you go back, say, before the current system, essentially the neutral reserve sentiment was gold. So even though there were global reserve currencies for periods of time that were trusted in multiple countries because they were the dominant economic power, their paper was accepted. It was essentially gold that provided the background for it. And then we went in the Bretton Woods system.


We had the dollar as that kind of paper asset, but really it was gold. I think Luke mentioned that earlier. Then when he transitioned to the petrodollar system, that's the unusual period where the dollar itself was the center of the global financial system. So after World War Two, the US GDP was close to 40 percent of global GDP and that has steadily declined as Europe and Japan recovered. And that may have the rise of China and other emerging markets.


So now the United States is in the lower 20 percent of global GDP in dollar terms, and it's even less it's in the teens if you look at purchasing power parity. And back when it started petrodollar system, the US was the biggest importer of energy. Now it's China. And so essentially we're at a stage now where there's no country large enough that there one fiat currency can be like the one ring to rule them all. There's no country whose money supply is sufficient to serve as the one currency that all like, say, global commodities are priced in.


And we've seen essentially that whenever the dollar gets too strong in this 50 year system, something breaks. In the 80s, Latin American broke. In the late 90s, Southeast Asia broke, Russia broke. And then in this period, we had, of course, Argentina, Turkey and several MS. But then also we've had it each time that happens back at home. We have, for example, flat corporate profits for several years. As that dollar gets really strong, basically, the whole world slows down.


Going back to the idea of like all the countries are like pointing guns at each other, it's is big, like huge standoff. There's all these kind of like like, say, the dollar. If the dollar were to fall noticeably, on one hand, you want to have, say, Europe, like Europe and China wouldn't want to let that happen because they wouldn't want their exports to be less competitive. On the other hand, there are a lot of emerging markets that have a lot of debt.


And if that were to decrease, that would relieve some of their pressure. We have a situation looks more like twenty seventeen, where we had this big kind of global rebound based on a 10 percent weaker dollar. And so Europe would be harmed in some ways because their exports would be, say, less competitive to the US. On the other hand, their economic trade with some emerging markets could strengthen and offset part of that. And so whatever kind of looking at how different currency outcomes play out, the hard part is that there's always, always so many variables that can kind of offset each other and go different directions.


So, guys, I want to talk about this one question that we had posted there on Twitter, person wrote Federal Reserve in Boston has announced that they're working with MIT to test different ways of making central bank digital currency massively adopted. What are your thoughts? And I think that one of the most popular questions or complaints that I hear when I post anything about Bitcoin people, their immediate response is the government is never going to allow something that's completely decentralized, basically like the Napster of money going to happen without a fight or they're going to create their own tokens and they're going to they're going to push those down the global economy's throat.


And that's going to become what is widely adopted. So I'm kind of curious to hear your thoughts about this effort and the idea of governments being able to step in and to compete with something like Bitcoin. From a mechanical standpoint, I don't really have the background to say, could they do it from a monetary or from a structural, I guess, or top down perspective? What I would say is, is that if they were to do that, that starts to break the system, as it's currently structured, is if you take a step back to really see.


You're cannibalizing yourself is what you're what you're getting at. Luke. Yeah, you've extended this system, you remember back in the 90s, there were things called by bond vigilantes where if the fiscal situation got out of control, people would start to get nervous, they would sell bonds, the interest rates would rise. And there was this market based discipline enforced on the US government. It served a little bit like a gold standard. I mean, if you go back to the famous quote from James Carville in nineteen ninety three saying, you know, I used to think of if there's reincarnation, I'd want to come back as the pope or as a former baseball hitter.


But now I want to come back as the bond market because you can intimidate everybody. And that was when the bond vigilantes enforce some discipline on US deficits back then. Well, you fast forward seven years from that and you had the unregulated expansion of interest rate derivatives. So when you came into year two thousand and I want to say there were, I don't know, 50 trillion in gross notional interest rate derivatives and by twenty eight or two thousand nine, it was five hundred trillion or six hundred.


And basically you had the expansion of this market that derivative markets have basically neutered market signals, market neutral monetary signals. And so the interest rate derivative market neuters the bond vigilantes. The massive expansion of the paper gold market neuters gold market as a as a signal. We saw that happen with Bitcoin and Bitcoin futures are going to come out. And when they did it neutered Bitcoin as a signal for a while in terms of what was happening. And my point is, is that this system has been under stress for a long period of time.


And a big part of the way monetary authorities and banking authorities have extended it is by creating these levered derivatives on top of derivatives. And so if the Fed comes in with their own sort of Pocan, those edifices are going to either have to be either collapse on themselves, massively deflationary or the equity underlying them, so to speak. The Fed tokens are going to have to be created in amounts that are very inflationary. So I don't have any comment on will it be a Fed token or a Bitcoin or gold or however they do it.


But to me, it's a little bit of a six of one half dozen of the other in that, to me could quite possibly be pretty inflationary in terms of just fiat creation. You know, Preston, I wrote about this and the IMF had a working paper where where they said that in the next in the next phase of this, interest rates might need to go down to negative five or negative six. And it's staggering to think about interest rates there.


But because cash can be pulled out of the bank and put under your pillow, they have a lower bound interest rate that they can't go below because people pull out of their systems banks. So so all of this is perfectly predictable on a path towards where we're going. Interest rates have to go lower. More easing and everything else. And this is a way to essentially get people to use something that they can take interest rates lower without them pulling them back.


To me, that's the idea behind it. I think it's totally ill informed. I think they you come back to first principles.


We're talking about technologies. Deflationary period is almost nothing else needs to be said. And some of the Twitter feedback and everything else, we get some tremendous contributions out of Twitter and some of the people around. But at the end of the day, if technology is deflationary and it's advancing everywhere, existing system won't work no matter what. Nothing changes that. It delays it. It causes more pain. There's a whole bunch of misallocation of pricing and everything else misallocation asset pricing across the spread everywhere in the world.


There's a whole bunch of pain for a whole bunch of citizens. Nothing changes that that. I agree, and there are a couple of different angles, because the original question also related to outlawing Bitcoin, for example, if they want to have their own tokens, that's kind of part of the initial question. One thing I highlighted is that there is close to a 40 year period where treasuries didn't pay positive yields in the United States. It was from about basically if you bought and held a 10 year treasury to maturity, there is, you know, if you bought it, say, for the mid 30s to the mid 70s, you just didn't make your purchasing power back.


You got paid back nominally, but you lost purchasing power compared to even compared to official CPI. Almost perfectly overlapping with that period is when gold was legal to own for US citizens because they basically the outlawed one of the released valves that people could have used to escape that issue. And there are a lot of things different back then for gold was was the currency was pegged on gold for a lot of that time. So that that opened up different incentives for them to want to do that.


So there's that kind of historical background then touching on Jeff's comment about their incentives, wanting to do it. So, yes, they have more control if there's no paper currency and no physical kind of commerce that can happen outside of their system. So that's their lower floor for interest rates. But they also have other incentives, for example, if they want to do a stimulus. And so they want to have people spend it rather than save it, for example, if they want, because that's how a lot of the policymakers think they want to keep the the circle going over and over and over again quickly.


And they want to get that velocity up. So one thing they could do if they had a more sophisticated system, they could send out those tokens that expire after, say, three months or six months. And it basically forces spending. They could program them so that they can only be spent, say, within the jurisdiction. They can't kind of escape the country or they can't have that sort of issue. So it gives them finer control. If you go into the darker side, then that even if you look at, say, China, they could shut off people's currency units that have a low social credit score, for example, that you get really Orwellian there.


So there's unfortune a lot of incentives for them to want to have, from their perspective, more power of the currency. Now, bitcoin is tricky for them to band. It's decentralized and it's technically impossible for them to confiscate physically. They can do things like ban the exchanges, ban the apps, things like that. They can make it harder. They can increase the friction so that they can kind of do things like that that make the thing a lot more complicated.


And that, of course, opens up game theory between countries and and kind of which jurisdictions want to be seen as places where people have property rights, essentially. So, Lynn, when you're describing all of those situations for a national token, which I completely agree with everything you just said, but what you were describing was something where it's not a decentralized protocol, it's something that is still very much centralized and very much still inflationary in nature, which, you know, for anybody hearing that, that's a bull argument for Bitcoin, which has a fixed baseline of units.


Exactly, yeah, a lot of people think that it's a threat to Bitcoin if, say, Federal Reserve comes out with a Fed coin. But as you point out, it wouldn't be scared still. It would be like a more complex dollar. Essentially, we still have this kind of gold and bitcoin are scarce compared to fiat currencies that can be expanded infinitely. So they're still from a user perspective, there's still an incentive to want to own those scarce assets rather than buy into that sort of system.


Because part of the question related to what policymakers want to do that and then try to ban the exit points, it kind of depends on whether you look at it from a policymaker perspective, like what do they want to do? And then how do you view it as an investor or citizen perspective? Like how do you want to say protect yourself against what they want to do? What kind of decision do you want to make compared to the different systems that can pop up?


And that builds into Jeff's argument that you mentioned the beginning of the discussion, that this offers them the ability to implement the MMT here in the next couple of two years. Jeff. I'm actually building on Lynn's comment, if you think about where Bitcoin is, it's really hard because of game theory. It's really hard to stop because governments stop it in one government. Others will create an incentive to collect it. Let's just play that out a little bit today.


If I want to move to Portugal, if I invest three hundred and fifty thousand in Portugal, I can get my entire family golden visas. So every country has something like this and they're trying to do is bring in capital, Gob's everything else into into the country. And so that's happens today in different countries, trying to attract the best talent, capital, everything else to drive their economies. So let's say a government bans Bitcoin or something US caravan's, but that's different.


It creates an incentive for other governments to do that. Now, you that as well with in history, you ask, why didn't the people who you could see the writing on the wall, you could see the kind of revolution coming, say, let's use Weimer Republic as a as an example there, because it's probably an illustrator. Why don't the people with money leave? And because most of their assets are priced in that currency, houses, apartment buildings, currency and everything else, and a country can put capital controls on and make it really difficult to get out.


And so a lot of people stay in what they know is going to be really terrible for their families in the future because they they think it's going to go back to the old way. Bitcoin just alone with that allows a release valve that you can move any. And so from a from a game theory, from why it should be in your portfolio, from not just you can move it. It's very hard for governments to stop because of what we do, what we just talked about.


And I would not want to have in a region, even though real estate will probably perform well for a while until it's taxed at a different rate, I wouldn't want to have one hundred percent of my portfolio in real estate in a given region for the very same things we're talking. You know, it's interesting because if they do go to a negative rate like that in the US, challenge for them doing that in the US is my view, is that would effectively and the dollar's reserve status is structured because basically you either need a two tier system, right, where you're going to pay Americans negative five, the Fed funds rate or Americans will be negative five and the Fed funds rate for Japan and Saudi Arabia will be one or something.


And there's precedent for that, I'm told. I've been told that the Saudis and the Japanese at times get a higher yield on their bonds than what you see in the market. There's been times in history that that's been the case. I've never seen that written anywhere. But people in a position to know have intimated that to me. But the point is, is that if you went to a negative rate worldwide, you would have seven trillion dollars in US dollar reserves that would be bidding for gold almost overnight.


And that's a market that's tiny. Some would go into bitcoin, perhaps, but ultimately that would complete that reset in a very in a very fast manner. And there's probably some positives to that. But that's, I think, a challenge for executing that globally. In the past, as an example of that kind of two level system, was actually the gold standard in the US. So like the gold standard was canceled for US citizens, like their convertibility of gold.


But it was still for a long time held for foreign for international settlement. And then it was eventually they got even off of that after basically the foreigners started to call the bluff essentially and say we actually actually want the gold. We're not going to keep trusting. The system is actually precedent for that kind of two phase approach. And yeah, that go back on Jeff's point power of Bitcoin essentially, is that you can there is a news item. Just recently, a Chinese woman was stopped in the airport trying to bring gold into the US.


I think it was and it wasn't even that much was like she had, you know, a few dozen gold coins. And it's easy to stop that now, whereas Bitcoin, you can just you can memorize 12 words and just go across the border with nothing. And then and that's a really powerful technology that does circumvent a lot of the issues that makes it hard for policymakers to deal with.


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All right, back to the show question for you.


I think you were ahead of this a long and a long way and putting your reserves and your and your company into Bitcoin and talking about the reasons you did. And it was just this might be interesting since the MicroStrategy thing. I'm chairman of numerous boards and also chairman of two different audit committee boards. And in both of those boards, both of the audit committee boards. And this is a very real conversation right now. Really? So there's a lot of people on Twitter asking me that, and I don't I don't have access like you do, Jeff, so let's first explain what's going on.


So you're talking about MicroStrategy, the ticker's Ms. PR, Michael Saylor, an MIT grad. This company has a market cap of one point three billion dollars, has five hundred million dollars in equity. And Michael had a huge amount of voting rights for this company and went out and took two hundred and fifty million dollars in denominated all of it into Bitcoin and just slapped it right on the balance sheet of the company. So literally half of the equity for the entire company is Bitcoin.


And so you're saying that in boardrooms of major multibillion dollar companies, this is becoming a talking point? This is a document that is more than just talking points. So and I think this plays into your thesis and a whole bunch of it. So if you just go with what we all know, with what everybody knows and can feel, governments are forced to stay here. Right. And force to devalue currencies and that's going to continue on. Then people sitting on those currencies are looking for hedges against that.


And that's why gold's moving. That's why Bitcoin is holding up. But it is a very real conversation and boardrooms in the last week, I've had to audit committee meetings about it. That CEO, if you look at the press release, he specifically cited all these macro factors as as part of his reason to want to move into Bitcoin. He cited the massive fiscal stimulus, the debt monetization, the QE that was happening with the currency, and cited that as his specific reason for wanting to shift into the first.


They described it as alternative assets and then they revealed that the alternative asset is really pursuing its bitcoin. And so, you know, it wasn't just like he had no reason for it. It was specifically because he was worried about having so much cash, because as you point out, it's I think it's up to one point four billion now. Market cap, they've and like you said now. Oh, yeah. Let's look at the other day. They're up to like five hundred million, five hundred and some million dollars in cash, not even just equity, like actual cash.


They had no debt, tons of cash. This company, like they've been having some growth issues lately, but their biggest asset is they have a huge amount of cash relative to their to their market capitalization and just all this. So the last thing they want is for that to be devalued. And so he just took half of it and put it into something that he viewed as kind of hedging against that. And I think what's what's crazy for people that maybe don't play around with really big numbers like the ones we're talking about.


So you're talking about a company that took two hundred and fifty million dollars and bought Bitcoin with it. But when you look at a company like Apple and you look at their balance sheet and they're there, last year closeout was around one hundred billion dollars in cash and cash equivalents. Two hundred and fifty million dollars is a total pittance when you compare it to the ability to drop any amount percentage wise of one hundred billion dollars. And what that's going to do and I mean, that's just one of many, many companies that have big positions on their balance sheet with marketable securities that they could just change one percent, five percent, whatever it might be.


I think the biggest thing that surprised me about this MicroStrategy thing was my expectation for companies to start putting Bitcoin on their balance sheet is a marketable security, was that it was going to be a one or five percent allocation, 10 percent at most, not literally. The entire cash equivalents were turned into Bitcoin.


Like it was just crazy that that was the first thing that we've seen. So, Jeff, you're thinking that when we start seeing the third quarter reports coming out that this is going to be more of a maybe common thing than what we're seeing today? I think it just it's just on the continuum. I would have bet against what MicroStrategy did is it's bigger piece on an audit committee. I wouldn't say, OK, go do it.


All right. So I would be. But as that happens, it forces other things. It's just a knock on effect that drives the network effect of Bitcoin and it also drives more instability into the other system. You've got all these investing podcast, everyone there is pretty much saying a lot of the same stuff, and it's stuff that comes out of the finance industry where you have a bunch of people that are managing other people's money. And so when you're managing other people's money, the name of the game is you don't want to have too much volatility in your portfolio at the expense of upside.


You just want to have just enough upside that maybe you're outperforming the index. But if you start going above that, you have too much volatility and you potentially lose clients. Right? That's the name of the game for finance. That's what all these investing podcasts and people that are doing this, they manage other people's money. But what if you're already have a net worth of one hundred million dollars or you have a net worth of five hundred million dollars or a billion dollars like Michael Saylor?


Volatility does not scare him at all. At all if he thinks he's right and he wants to, because guess what? He has another company that's worth three billion dollars. So if he makes a mistake on this one. So what? I can handle the volatility. Right? Like I'm not managing somebody else's money. So how many other private companies are out there that a person owns and they have the ability to put a lot of marketable securities on it and they can handle the volatility because they have free cash flows and they're not going to they're not going to blow up and lose all their client, their index of clients, because they're managing other people's money.


One, think about two, if you're a billionaire, there's only two ways you lose in this life. You can't spend a billion dollars. There's two ways you lose. It was war slash revolution and you lose hyper inflation, rapid hyper inflation. That's those are the only way you ain't ever going to eat again or you ain't ever going to eat good again for every meal. And so what you're describing checks those boxes. You don't have to have a lot into a bitcoin or a gold, but a bitcoin in practical terms, what we're talking about here, where you just you take that risk off the table.


You have a hedge that out now and you're starting to see that. And to your point, when you don't have the career risk to be different, why wouldn't you? Yeah. Given what we're seeing. Michael Saylor has no concern of losing clients. The business is still going to pump out a bottom line. Now, if he's wrong, yeah, he might not have the ability to navigate storms in the future with that specific company. But like, I guess my point of saying this is I think there's a lot more Michael Sailors' out there than people realize.


I agree with that statement. Yeah.


That that he's not managing somebody else's money. He has created value in the marketplace and he's sitting on a couple hundred million dollars and he's got another billion dollar companies. I think it's more common than people realize. So if you just kind of go back to the structural how bad the system works today, so let's just take interest rates where they are negative, real interest rates, or what is that actually telling the market participants, your CEO, what does that say?


Do not have cash on your balance sheet no matter what? Yeah, lever up. Lever up. Because you can because you'll pay it back with worthless money worth worthless. But don't put it in capital.


Don't put it in proper capital for a rainy day, for a rainy day. Don't put in Gapo put it somewhere else or buy back your stock. Yeah. Yeah. Buy back your stock.


Aren't you thing like you created.


You've created a structural imbalance in the system forever. Right? Because once it once the Fed then says, oh no, all those jobs go away. If we don't save the save the company and they have no cash and they have to make it right because of the political political cost, not to embed that into the system. And you get more of it the next time. That's actually what we're saying. Two thousand eight to out. You just get more of it.


There is nothing that's going to change on the existing system. It's going to get worse and worse on that path if that's the case. And globally, not just in the US, the US actually might be stronger than the whole bunch of regions globally. That's going to happen. And that means that Michael Saylor and others who are saying, OK, there is an exit path here from this. I'm sure a lot of people in finance are looking at MicroStrategy and the thinking that's just a one off.


But let's continue with this thought experiment where the MicroStrategy story is not unique. Q3 comes out and one of the biggest companies in the S&P, five hundred called an Apple comes out and have converted one percent of their cash into Bitcoin. What does that do to the narrative, to Bitcoin? And will we see any fundamental change in the financial industry?


I think you're seeing it in gold. Sam Zell. Right. There's a guy who's gotten the big things really right more consistently than Sam Zell. I mean, that can't be that many. He's been brilliant. And earlier this year, I'm buying physical gold for the first time in my career. Now, he says it's a supply demand dynamic that he's primarily focused on. But I think part of that, I refuse to believe that that's the only reason he's buying gold.


I just think he's buying. I think that is the politically acceptable narrative for a Sam Zell to get on CNBC and say why I'm buying gold. You can't stand up there and say the things that that look. Warren Buffett, Warren Buffett, whole career.


I hate cold. I hate cold. I hate God. I hate I hate God. Now, he in school and something it was interesting, we highlighted this last annual meeting he did in the annual letter, we highlighted two things. Number one, he made a, I don't know, a 90 second discussion where I said it sounds like he might be considering buying gold, number one. But number two, was he did this highlight one of the things he did?


I think the two meetings ago was I bought my first security in nineteen forty two when I was 10 years old. And gold's done nothing and stocks have done great. And that's why gold is stupid. And you look at the chart, you go, all right, tell me about how gold did versus stocks from the time you were born in nineteen thirty two to nineteen forty two. Because ultimately I agree most of the time gold bitcoin that they're useful.


I don't care.


But for short stretches of the economic cycle, they're all you want to own like it. And the fact of the matter was this point, I said look, he's being a little disingenuous from nineteen thirty two to forty to nineteen forty two happened to be the all time generally low in stocks and the battle of Coral Sea stocks bottomed in a way they never went back, so. You would counter your argument with saying, well, that's why I bought a gold company and not gold, but regardless.


Right? That's what he would say, because they're raising dividend. No one else. Sasol. Well, then you had something you wanted to say, I want to hear what Lynn has here. Well, on that point, I was looking at the Buffett purchase because, I mean, that was about five hundred million dollars. So on his balance sheet, that's a small business. But it's also interesting because he spent like 10 billion dollars getting our energy pipeline in recent months as well.


So he's actually got a little bit of a hard asset theme going on there. It would be curious to see what he does the rest of the year and next year going on the earlier point, which is kind of holding the thing that Bitcoin is currently the whole market capitalization is less than one tenth of a percent of global assets. Like it's not even it's like it's like one tenth of a percent of global assets. And you're going back to the point where why would every kind of multimillionaire I want to have one percent in Bitcoin, for example, which is definitely overweight Bitcoin, because you're you're 20 times overweight.


It compared to it's just going to market cap weighted asset percentage. But basically it's such like an asymmetric bet at this point that that's one of my kind of bullish thesis on Bitcoin, especially at this isn't having cycle, is that there's so kind of so many strong reasons to have at least a small bit like a non-zero Bitcoin position compared to the reasons to have zero Bitcoin. And just going back on that point where there are certain periods of time where you only want to own gold, you only want to own kind of these scarce assets, and especially with Bitcoin, because it's so asymmetric, you don't even have to make that all in bit, all in bet.


It's just kind of like you can really put even a small percentage of a portfolio in it and still benefit in some way if that plays out. And if it doesn't, then you didn't really risk a lot of capital. And so I think that's kind of a something we could be could see going forward. I think it's going to be interesting when you look at what are the Warren Buffett types of the world buying through this, and then what are the top five to 10 tech companies buying through this?


Right. Because my expectation is that in six months from now, the Apples, you know, the Amazons, the Googles, they're going to have Bitcoin on their balance sheet. And I'm kind of curious what that exposure is going to be compared to call it gold, whereas the Berkshire Hathaway's and some of the older capital allocators are gravitating to what they know and what they understand. And I kind of suspect that that's going to be a real interesting dynamic as the way the market perceives that.


Are we going with these companies that are literally eating the market cap of the entire world, or are we going to go back and do things the old way? And it's going to be interesting to see how it plays out. Jeff, you look like you have something you want to add there. I just I haven't thought about who does it first, but I think Preston makes a lot of sense. Technology companies that understand network effects understand how to construct where value comes from.


It makes a lot of sense that they would do first. I remember Facebook did the Instagram deal and as a value as a hard core value investor at that point, I just remember looking at him like these prices they're paying for. This is is totally nuts. This makes no sense whatsoever because I didn't understand why the network effect was so powerful in that platform. But I'll tell you, Mark Zuckerberg and others have Facebook clearly understood that same thing with the YouTube deal, the amount that Google paid for that.


And I was just like, this just doesn't make any sense. They have no earnings. Like, I'm sure they can bring it in, but even if they would, it would take so long. What I wasn't accounting for is how they're piecing the data together in order to use that to their strategic advantage. Right. And I think that that was a huge learning curve for me as an investor to understand that value proposition that just hadn't really occurred in the past.


So I see the same thing with when you're talking about decentralized protocols and replacing money, I see the same exact thing taking place. But, you know, that's me. You had something else. Jeff. Yeah, I just would say that's actually what makes you so valuable in this space, right, because you actually started you were a value investor and you knew you had enough learning, not being stuck in one mindset to look deeper at what was creating the value.


And because you went through that, you're so valuable in this whole community to be able to do that, because that is what you just talked about. Early on, I had a conversation with a very senior executive at Google on why Amazon was worth so much.


And I said, Are you kidding? I said, they collect more information than you. They have the they have the weights dimensions of every product they sell. They have the two from information and you have none of that. So you're sitting on top of the stack. And Amazon is collecting the information of all the building a logistics network with this information because they can virtually impact products and everything else and see flows of goods. And I said as they do that, they become more valuable than you because because now they know they have a better advertising vehicle, too.


But you have to be able to connect the dots kind of orthogonal way and say, OK, where is this going from a data perspective to do it? And very few people caught in one narrow sense can do that in an old industry that creates its value differently, can do that. I think it it'll be interesting to see is where the views are, what the government's reaction will be, because ultimately now you're getting into a little bit of a delicate area.


If you're Apple, if you're Amazon, if you have these massive government contracts and you start taking this cash and basically stop putting this in the Treasury market and you start putting some of it into Bitcoin, too much of it. People have been known to get taps on the shoulder. The regulators will show up and say, you know what, we hadn't minded your monopoly position, Mr. Amazon and Mr. Google, but now you're going to have to start spending some money.


So it'll be interesting to see for two reasons. Number one, will they do that? Because under where we had been, I would think that the odds of that happening, if they went too far with moving away from dollars into Bitcoin, I think that would be a likelihood.


Knowing where we are and knowing that you need a reset, you need a catalyst knowing that a Warren Buffett is buying gold, a consummate insider. I mean, you go back. Salomon Brothers needed a bailout. They called Warren Buffett long term capital guy. And then when they blew up, Buffett got show in the book Goldman Bank of America. So Buffett owned a bunch of silver in the late 90s and was was I think he I think he got talked to and said, listen, this is not sort of how this is going to go.


So my point is, is that if these tech companies start doing this and there is no reaction from the government in terms of these, of course, they won't be connected to what we're investigating your monopoly position because you're buying Bitcoin. But that's what it will be if there's not that reaction, it could mark a starting gun for, OK, let's just get out of the currency and be quite inflationary in terms of our signal. Lynn's comment about the tokenization and basically putting restrictions on the tokens as to how they could be utilized in the marketplace, if you start seeing what you were describing there, look where these big companies are then taking some of their their revenues or whatever, and they're starting to drop them into crypto exchanges and buying Bitcoin and putting it on their balance sheet.


If these tokens that the dollar token or the euro token or whatever could come with restrictions, that would prevent it from putting it on to any type of crypto exchange and therefore leaving the ecosystem or being transmuted into some other type of of token. I think my concern with that happening is they just don't have enough time left on their side to develop something that complex. I mean, look at the look at the challenges that they're having over on the on a theory I'm right now as far as the complexity.


I just don't know how you're going to get a state token to stand up that can perform with all of those complexity because we're really talking about smart contracts on a state token. We're having enough trouble doing that in the free and open market, let alone a state actor, basically standing up a contractor to design something like that and then releasing it and actually working. But that's me just I guess, brainstorming while I'm spewing ideas out. Go ahead, Lynn.


I agree, they actually during the stimulus early this year when they were kind of drafting that initial bill, they had that kind of effect coin idea in one of the drafts. They were looking at kind of like a wallet distribution mechanism, because one of the initial questions was how to get checks so many people so quickly, especially because some of the most people that need it the most are in some cases, unbanked. Right. So it's actually it gets to the people that don't need it first and it gets to the people that need it the most.


That's kind of how the checks went out. And so they actually kind of in one of their drafts, they floated an idea, but they aren't pulling that away in a later draft. And I speculate that they the technology is not a place for it yet. So if they wanted to do it, they just couldn't they had to get that rolled out so quickly that they couldn't kind of move forward with that kind of more technological plan. All right, guys, I want to respect your time.


This was amazing. I thoroughly enjoyed this conversation. I want to go around the horn and let everyone kind of give a hand off to their site, their book, whatever it might be. So lookahead. You can check out what we're doing, f t dash, L.L.C. dotcom and learn more about what we're up to, different product offerings, et cetera. Just follow it on Twitter. The book is called The Price of March Tomorrow, and it's excellent, by the way.


It is. Enjoyed it. It's amazing. I met Linda on Dotcom. I have a free newsletter people can look into and I write articles and a lot of investment focus. Lynn, I was in an interview last week and the person made the comment to me that Lynn Aldan is the macro analyst of 20/20 and I said, I completely agree with you. You are crushing it this year. I appreciate it. She's embarrassed, she's she's right in the face, no, here, I'll bounce it off.


So last year, for example, Luke did an interview on Real Vision that I that I saw at the time that kind of accelerated my own time frame for seeing certain things play out. So I have to give some of the credit back to Luke because so earlier in that year, I was kind of analyzing the deficit situation, kind of ballooning out. So and my base case was that we're going to run into an issue in the next recession. So this this whole vertical balance sheet, thing like that, that was all my radar.


The thing that wasn't on my radar was that we'd actually run into that issue before the recession. So, Luke, months before the repo spike, pointing out that the Fed by the end of the year, the Fed's going to have to control either the they're going to have to give up control of either the quantity of money or the price of money. And so we saw that play out with the repo spike and then the subsequent first, they had a gradual balance sheet expansion, then the sharp balance sheet expansion.


And so it was part of Luke's research that literally the day that happened, as soon as they got the spike, I knew I already knew what was happening. There's so much confusion in the market. But because I had looked kind of accelerated my timeline and kind of he kind of pointed in certain directions to look into and I looked into it. And so I found that some of his interviews very useful. I know exactly which interview you're talking about, it was stellar.


All right, guys, now we're all embarrassed, we all patted each other on the back. All right.


Well, hey, guys, really appreciate your time. This was a lot of fun, and I really hope to do this again, maybe next quarter or whenever. Any time, any time. All right, guys, so this time the show will play question from the audience and for this week's episode, we picked a question from Jennifer. Here we go. Hi, Preston and Steg. This is Jennifer from Vancouver, Canada. I have to start my question off with a thank you for all the time and effort you put into the podcast.


I can't quantify how much I've learned from you and your guests, and I look forward to each episode. My question is probably unsurprisingly related to the high amount of national debt levels across the world. I've read and heard that the only way out of this situation without a currency crisis is to inflate away the debt. Can you explain what this means and what is the likelihood of a strategy like this succeeding? Thanks.


So, Jordan, let's talk about the scenario that you put up here, considering an economy with a zero percent inflation. The government would be selling long term bonds for, say, a thousand dollars to the private sector and to attract people, the government would have to offer interest rates, say, one percent a year. The government would then have to pay the full amount back of the bond, which is a thousand dollars plus the annual interest payment of these bonds, which would be an additional 10 dollars.


So in this scenario, with a zero percent inflation, the investor would collect ten dollars in profit and thereby also increase his purchasing power. Going back to what you said there. What if we include inflation into the equation?


What if the government ensured a higher inflation now? So let's consider the situation where inflation was 10 percent. So that would be to the disadvantage of the investor who normally would be able to buy for ten dollars more. But the goods and services he could buy for a thousand dollars before inflation, that would now be priced at one thousand one hundred because you had that 10 percent inflation. So in that case, with higher inflation, that would be advantageous for the government.


And the reason for that is that because the inflation, the government would get higher tax revenues as wages and prices increase, too, it will be roughly 10 percent. So they gain nine percent and the investor would lose nine percent.


So in theory, this seems to be a perfect solution, at least for the government. Right. And we've seen this implemented in the U.K. after the Second World War. And we also saw that happening in the US in the 1970s. There is, however, a lot of negative effects to this, if that is the route you want to pursue. First of all, if investors expect this to happen, there will require a higher yield on their bonds, which means higher interest payments.


It can also ultimately mean that investors lose trust in the currency and in the government and for the US, it might mean that they would lose the privilege as being the global reserve currency, which would make a deleveraging extremely painful.


And we also see that high inflation has repeatedly, throughout history, led to social unrest among the population because they do lose trust in the system.


And then to your other point about inflation, with our currency war, it's really two sides of the same coin. Interest rates are determined by supply and demand.


So if you print a lot more money causing inflation and consciously depreciating currency by adding higher supply. It's really hard to have one without the other, and that's what you're seeing playing out right now and you'll be seeing for quite some time.


So your question might then be and that was not the question, but I've already started rambling here. But your question might be, so how do we solve it? What's the best way? And the cheeky answer is really not to get there in the first place whenever you have a democracy. And I just love this quote by Churchill, whenever he referred to it as the worst form of government, except for all the other forms that have been tried.


But whenever you have a democracy, you both have the implicit risk and the sense of of having people in power or people who wants to be in power, spending more money, promising to spend more money that they have and then have the next generation pay for it.


But really, the optimal way would be to deleverage having a higher nominal growth rate than the normal interest rate you pay.


It's hard to do because the more debt you have, the harder it gets for the government to implement that. And there's really no easy answer right now to deleverage at the outrageous level that we're seeing. In theory, it's easy because you can just monetize the debt, but in practice it is extremely hard because someone or some groups will have to pay for it, which is a political decision, and that makes it really, really difficult.


So, Jennifer, what a great question. And it fits perfect for the episode that we just recorded. And I think for people that might have listened to the conversation we just had with this all star cast of of folks, it can get a little overwhelming. It can it can sound like a bunch of just really crazy terminology. And then it's just none of it really makes a lot of sense because we're talking about a lot of different concepts and kind of mixing them all together.


So I can understand the simplicity in your question. But the answer to it is extremely complex is Stig found himself as he's there explaining his response to you. It gets really technical really fast. This would be my my best attempt of trying to make it as simple as possible, the part that Stig was talking about there at the end as far as about the people that are elected and how they have to guard against the incentive that they have to vote themselves money into their district.


Is it the heart of almost all of this? OK, you have to have elected officials that greatly guard against that that tendency in that urge and that incentive structure to do so. Because what happens in the long run is a country becomes further in debt. They can adjust or they can they can leverage the power of the currency in their favor and they can adjust interest rates in their favor to allow that to occur, and then the further that they go down that path of adjusting this, the money, the the hard money versus the currency, which is what they're printing and putting into the into the population, the more that they adjust that, the more it's hard to go back to sound money.


And so, you know, from the nineteen forties up into the nineteen eighties, we had sound money or at least the population believed we had sound money because we had a gold standard and that in seventy one we came off the gold standard and then you had interest rates sky high. Because what we are effectively doing where we were, we were adjusting what's called the money multiplier. We were adjusting based on how much gold was sitting in, uh, in reserves.


Right. Versus how much currency was in the system. They kept adjusting how much reserves had to be sitting there and how much currency was added into the system. They did this since Bretton Woods up until seventy one when they were forced to come off the gold standard because they had manipulated the money multiplier so much once. When when you do that for so many decades, you create a vacuum of interest of foreign money to flow into this country. And that's why you saw interest rates going sky high and then you saw them really peaking out into the early 1980s.


Well, the only way to then correct that was to then start adjusting interest rates lower and lower and lower. So now we're now at this point where interest rates are at zero. We don't have sound money. We don't have anything. It's not backed by anything. Right. And you have this tendency of elected officials to spend more than we take in. And I think that when you have those three variables at play, the only way that a country can kind of offset that is through the debasement of the currency.


And so who who is the who's the entity who's the party that eventually gets who's on the losing proposition of that deal? And for me, at least, it's the people that own the debt. If you own bonds, if you own those as an investment and they continue to print at a pace that outstrips going back to Stig's example that he provided his very simple example of a thousand dollar bond if interest if inflation's 10 percent and the thing's only yielding one percent, you you just lost nine percent of your buying power on an annual basis.


And then when you start analyzing that over, like let's just say it's a 30 year bond, that compounding of a loss and buying power of nine percent. And that example is very detrimental over the long haul because it becomes exponential. Most people can only think in linear terms because exponential is are very difficult to understand, because our daily lives are not in linear term or they're in very linear terms, not in exponential terms. But when you compound something like that over a decade or more, the impact is dramatic to what it does to society.


And that's that's what in my opinion, we we see playing out. So a lot of what we were discussing in this episode revolves around these fundamental ideas that stick and I just talked about here at the end of the show. And it can get very nuance. It can get into, you know, we start talking about UBI versus universal basic income versus QE and how the Fed's inserting the money and all these things are. You're talking about a very complex system that can have many different outcomes.


But I think the one key driving factor that we're facing today is the incentive structures that used to be favorable are now actually inverting themselves. And you're finding that a lot of the incentive structures that exist right now are not supportive for a conducive economy that works for everybody. It's only working for a few. And that's where it's getting very concerning. So outstanding question for asking such a great question. What we're going to do is we're going to give you free access to our Tippee finance tool.


This allows you to do intrinsic value calculations. It has a momentum tool in there to help you understand when something's outside of it. Statistical volatility range. I think it's a ton of value. And I think you're really going to enjoy the tool. If anybody else wants to check it out, you can just go to Google, type in tip finance or go to our website and click on the finance tab. And, you know, for asking such a great question, you get a free subscription to the website.


If anyone else wants to ask a question, get it played on the show, go to ask the investors dot com. And if your question gets played, you get free subscription to type finance. And so with that, that's all we had for everybody. Today we look forward to seeing everybody again next week. Everyone have a safe and healthy week ahead. Thank you for listening to Te IP to access our show notes, courses or forums, go to the Investors podcast Dotcom.


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