674: How Hedge Funds Became America's Largest Creditor with Infranomics

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
You've had a dynamic where money has become freer than free.

(00:10):
You talk about a Fed just gone nuts.
All the central banks going nuts.
So it's all acting like safe haven.
I believe that in a world where central bankers are tripping over themselves to devalue their currency,
Bitcoin wins.
In the world of fiat currencies, Bitcoin is the victor.
I mean, that's part of the bull case for Bitcoin.

(00:31):
If you're not paying attention, you probably should be.
Robert, welcome back to the show, sir.
Good to be back.
Good to have you back.
I've been binging your YouTube channel the last two weeks.
Before that, I was checking in once a week,
but I think with all the madness going on in markets right now,

(00:54):
you've been covering everything going on with great detail.
It's astonishing the amount of detail that you can go into
and the amount of data that you're able to surface.
I reached out last week.
I said, hey, we'd love to catch up on the show.
Last time you were on, we talked about silent depression
and sort of the more secular headwinds, if you will, societally,

(01:18):
in terms of the effect that the economy is having on individuals
and society at large in aggregate.
And I think you can definitely touch on that later
because I think things are certainly accelerating
as AI becomes more prominent and people begin to worry about
what the job market is going to look like moving forward.

(01:42):
But I think just to stay timely and topical,
You've been covering a Fed report that was dropped, I believe, over the weekend that highlights the dynamics of the Treasury market are not what they were being reported.
And it all stems from activity going on in the Cayman Islands, particularly around the basis trade.

(02:05):
So what did the Fed just let the markets know?
Yeah, so apparently we had suspected, according to the TIC data, which is released by the Treasury Department, it's basically the official data on who holds a U.S. government debt in general cross-border capital flows.

(02:25):
That tick data had reported that the holders of our debt were Japan at about $1.1 trillion, UK at about $900 billion, China at about $700 billion, and that has been coming down pretty notably.
And then the Cayman Islands as our fourth largest holder at about $400 billion.

(02:46):
but because of this popular hedge fund trade known as the basis trade, the Cayman Islands,
obviously a hotspot for hedge funds domiciled in the Cayman Islands. This has nothing to do with
like the Cayman government. When we're talking about the Cayman Islands, we're talking really
about the fact that there's so many hedge funds based there, domiciled there. The Cayman Islands

(03:11):
actually hold $1.8 trillion of our debt.
And so that makes them by far the largest holder of U.S. government debt.
And before it was being reported that they held what, around $400 billion?
Yeah, $400.
So undercount by $1.4 trillion.

(03:32):
So what I'm trying to understand is why wasn't this reported correctly
before the Fed released this report? And why did the Fed decide to let everybody know?
Well, actually, here's what's going on. Yeah, that second question is one kind of the first
one that popped into my head after I realized the implication of this. My first question is,

(03:55):
well, why now? So it has to do with like how they calculate the repo, because this basis trade is
financed in the repo market, which makes SOFR and what's going on there, I think, pretty important.
But it has to do with just the way the methodology with which they use to measure

(04:15):
various cross-border capital flows. Yeah. And so for anybody who's listening,
you may need a refresher on the basis trade here. What are hedge funds doing when they
engage in this? Yeah. So the basis trade is treasury futures. Let's just use a 10-year
treasury. There's the cash 10-year treasury, which most people are familiar with, but then there is a

(04:40):
futures contract that represents a 10-year treasury. That 10-year treasury futures contract
is obviously a contract for future delivery. But there is this optionality that the seller has
when you sell a 10-year treasury futures contract,
there's optionality there
where you get to actually deliver.

(05:00):
You don't have to deliver a 10-year treasury at the end.
You can deliver six and a half year maturity,
seven year, there's a range.
And so the seller gets to choose
the cheapest option for them.
Maybe at the time, it's a 10 basis point difference
between the seven and the 10.
So they deliver the seven,

(05:21):
even though it's a 10-year treasury contract.
And that kind of optionality or uncertainty premium
is baked into the futures contract.
So it's very small.
It's only about 10 basis points or 0.1%.
So that trades at a premium, the future.
And so what they do is they short the futures contract

(05:43):
and then they buy, they long the underlying US cash treasury.
and the difference as expiration nears treasury futures, you know, kind of roll expire every
three months as you near to expiration, that difference as the arbitrage kind of gets worked

(06:03):
out goes to zero. And so you're basically just pocketing the spread between the futures contract
and the actual 10-year treasury.
And so it's delta neutral
because if bond yields go up,
well, you're covered because you're short
the 10-year futures contract.

(06:24):
Bond yields go down, you're okay
because you're long the cash 10-year treasury.
So it's delta neutral meaning,
and also it's using probably,
I mean, at least what the market considers
to be pristine collateral.
Um, we, you know, have different opinion on that, but, um, but yeah, that, so, so the fact that it is using U S treasuries as the collateral for financing and the repo market makes it, um, less risky.

(06:55):
and of course you're delta neutral.
So it doesn't matter if bond yields go up or go down.
You're just trying to pocket the tiny little difference
between that futures contract
and the actual 10-year treasury
as it approaches expiration.
And you lever it up.
So if it's only 0.1%, that's not worth anything.

(07:18):
That's not worth anyone's time.
So what they do is they lever it up 50 to one
to as high as 100 to one.
And that might sound crazy, but this is well documented on Google.
This has been an issue for years.
This has been a risk that the Fed has known about.
This has been a risk the SEC has been aware of, the CFTC, various organizations.

(07:43):
You can find all sorts of academic papers talking about the risk that this basis trade has.
It's blown up.
2020, it blew up.
It also sort of started to blow up in April during the Liberation Day.
So it's a known risk, and the leverage is well-documented to be pretty insane.
Yeah, and you cited it in one of your videos from the last couple of days,

(08:07):
but the Brookings Institute came out in June and wrote a paper, I believe,
in reaction to the April blowout of this basis trade.
I think a lot of people have been focused on the yen carry trade as well,
And it just seems like wherever you look, there's a ton of hidden leverage in the system.
And again, going back to the original question, why did the Fed feel compelled to release this data, particularly after we had the SOFR spasm last week?

(08:39):
SOFR spread to Fed fund rate spiked to 0.19%, which is pretty high, highest point since 2020, I believe.
um yeah it does make you wonder um the timing of it and of course uh jerome powell came out
and um you know mentioned basically the end of qt uh funding stresses in in the repo market this

(09:05):
was i think wednesday um and then yeah we got um data on so far for wednesday and thursday which
was quite elevated for wednesday and thursday so far the secured overnight funding rate was
actually above the discount window rate, which is the Fed's attempt at setting a ceiling in the
price of money. They actually have a range. They don't set one interest rate. They have this

(09:29):
corridor or this range that they use to set interest rates. And the lower bound being the
reverse repo award rate. That is the Fed's attempt at basically saying no matter how overabundant
dollars get, we will always buy them from you at 4%. And then the discount window rate is the

(09:51):
upper bound. And that is the Fed trying to say, no matter how scarce dollars get, we will always
sell them to you at 4.25. So by doing that, hopefully thinking of it that way makes it a
little bit easier for people to understand. But by maintaining those two different interest rates,
they're able to try to keep SOFR, which is the actual funding rate determined by supply and

(10:18):
demand of dollars within the repo market. They try to keep SOFR within that range by
having those two tools. Yeah. Typically, when you see spasms in these markets,
it means that a liquidity crunch is on the horizon, like you said, Jerome Powell
implicitly seems to believe that may be the case with his comments around the end of quantitative

(10:43):
tightening uh there was regional banks last week had a pretty tough middle of the week with many
um down more than 10 and you saw uh the sort of re-emergence of a theme that that reared its head
a couple months ago with the tricolor auto loan subprime auto loan uh collapse it seems like there's

(11:06):
there's other similar lenders that are out there uh under a lot of stress and you have banks as big
as jp morgan with exposure to them i think jp morgan had to write down 200 million dollars in
credit loss on one of these deals last week and um that's the quite like is there liquidity crunch

(11:26):
well yeah i mean what what so for so the first video i did on liquidity and repo market and so
And I think it was back in like July, because I think that was about the time when they announced they were going to rebuild the Treasury General Account or the TGA.
This is the government's checking account, just like you would like a buffer in your checking account.

(11:50):
The government does, too.
It was down to, I think, only 300 billion or so.
So they want to build that back up.
And basically, when that was announced, I started to kind of warn that there would be increase that that in and of itself would cause, you know, a shortage of liquidity, at least compared to what it was before.

(12:12):
the reverse repo was dwindling down. And so, you know, normally the reverse repo,
it's not a primary method of managing liquidity. It's more one of the, I think of it as a shock
absorber or a buffer. And so as that buffer was drawing down, meaning the amount of buffer

(12:33):
for dollar liquidity was getting smaller, kind of all of it was lining up and you were starting to
see some elevation in SOFR spreads, SOFR minus reverse repo or Fed funds, you're starting to see
that kind of back in June, even at the end of June. And it's normal to see at the end of the

(12:54):
month or end of the quarter or tax deadline, which we saw a couple weeks ago, I guess about
about a month ago, it's normal to see SOFR start to kind of blow out. But what has been happening
recently, like over the past couple of days is we've seen SOFR notably above, like I mentioned
before, discount window rate, IORB, Fed funds, reverse repo award rate. And then you couple that

(13:19):
with the credit issues and the fact that credit spreads have started to widen. They're still
near kind of all time tights, almost historically tight credit spreads. But so we're starting from
a pretty stable or decent position. But the fact that credit spreads have started to widen,

(13:40):
you couple that with what's going on with SOFR, then you start to kind of factor in
this basis trade and an unwind of the basis trade threat, I guess you could call it.
And it's all, you know, it's like, we found that we know that SOFR, we know funding stress
in the repo market from SOFR.
We know the reverse repo is empty.

(14:02):
The TGA rebuild is basically done.
So that shouldn't have any further negative impact
on liquidity, but it certainly did.
They removed half a trillion dollars
from the financial system.
That's not nothing, but that is done.
But you have the reverse repo empty,
the TGA rebuild removed 500 billion.

(14:23):
Bank reserves are declining.
They're right around 3 trillion.
last I checked. And so, yeah, you kind of couple it all together and it's like, okay, so the largest
marginal buyer of our debt, foreign at least, is a bunch of hundred to one levered hedge funds in
this basis trade. It's extreme. That basis trade must be financed every night in the repo market.

(14:46):
So you start to get, you know, widening of SOFR spreads that could put funding stress on the basis
trade causing an unwind of the basis trade, which could cause and what an unwind of the
basis trade looks like.
Remember, you're you're long the cash treasury and you're short the future.
So if you are forced to unwind that position, it puts upward pressure on the future and

(15:10):
downward pressure on the bond.
You're forced to do the exact opposite of how you got into the trade.
So it involves selling of the bond which means yield sharply up and then buying buying of the future to close your short And so we seen this before in 2020 You can look at TLT relative to ZB which is the long bond futures contract You can see this

(15:33):
happen, for example, in March of 2020. It also started to happen again in April with Liberation
Day. You get yields sharply higher. Not good for liquidity either. No. And on top of this,
last week we had the um standing repo facility tapped for the first first time since covid i

(15:55):
believe and it was not that yeah not the first time but what happened was if you think of the
reverse repo which is that uh storage tank for kind of excess liquidity you can think of you take
the reverse repo and you subtract out how much standing repo has been is being used that spread

(16:16):
kind of gives you an idea are we in an abundant liquidity regime or a scarce liquidity regime
it's kind of how i think about it so um you know previously we've been in an abundant uh liquidity
regime where the reverse repo has been as high as two and a half trillion dollars uh and that
storage tank of that shock absorber has been full of cash of dollars um and what we had recently was

(16:41):
standing repo has been hit i think it was hit back in um i want to say august might have been june
there have been a couple brief moments in the past year or so where it's been hit but what we had
recently was uh that standing repo which again is the opposite of the reverse repo the standing
repo or srf that is for when there is a shortage of liquidity and hedge funds need emergency dollars

(17:07):
That staining repo got tapped.
And you take that spread, the difference between the reverse repo and the staining repo, that went negative for the first time going all the way back to March of 2020.
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Now, as you're explaining all this, too,
and you have the government shutdown in the backdrop of all this, too,
it was the Fed release of this Cayman data, sort of like a signal,
like, hey, politicians, we've got a pretty massive exposure

(19:19):
to this carry trade by predominantly American hedge funds domiciled
in the Cayman Islands.
It may be time to turn the government back on so that we can solve this crisis if it doesn't merge.
It could be a lot worse if it was a debt ceiling debacle like we had earlier.

(19:42):
That, I think, would be significantly worse.
That's probably coming.
We go through those debt ceiling debacles all the time, it seems.
It's like a constant thing in American politics.
So whether it's a government shutdown or debt ceiling debate, there's always that kind of embedded stress that it seems like it happens every year or so.

(20:05):
yeah well and then i was talking i just recorded with luke roman another variable in the backdrop
here is this i want to call i don't know if it's an attack or it seems like china the brics countries
many others are noticing what's going on with the u.s treasury market and not only the treasury

(20:26):
market itself but the u.s government which is backing this market and they're saying i don't
know if you're a good counterparty, if we're going to be buying your debt. And so we've seen
massive transition towards this gold settlement network, which is many people are surmising what's
happened with China registering its gold on warrant at the Shanghai Gold Exchange. That

(20:49):
chart became popular about a month or two ago, but I saw Jim Bianco updated it and seems like
that's only increasing at a rapid pace. It's almost doubled in the last month, the amount of
gold on the war at the Shanghai Gold Exchange.
Yeah, it's vertical.
Yeah, right before we hopped on, I saw that Ethiopia made a deal with China to settle their

(21:10):
trades in Yuan.
What did I say exactly?
Ethiopia and talks with China on converting dollar loans to Yuan loans.
And so it seems like the U.S. Treasury, the Fed are in a very precarious situation where
They're walking a tightrope 200 yards above the earth, trying to make sure that they can manage any liquidity crisis that may be emerging.

(21:36):
And on top of that, they're getting attacked from another angle, which is one of the large superpowers in the world, China, basically opening up a competing settlement network backed by gold and trying to use that as a reserve sort of asset.
And I think Luke said something that I've been thinking about since we recorded last Monday.

(22:00):
It's been a week now.
Posted the episode on Saturday, though.
And it's like foreign governments now officially hold more gold in reserves than U.S. Treasuries.
Is that a signal that the U.S. dollar reserve system has been supplanted?
Yeah, I mean, going back to February, China held about $784 billion.

(22:23):
now, just in the past, what, seven months or so, or I guess it's five months, I'm looking at July
data. So just in five months from February to now, that's down to 730 billion. So a reduction of,
what was that, 50, 54 billion? That's significant. And then you couple it with what you mentioned
about Shanghai and what China is doing with gold. I think it's interesting because it kind of is

(22:49):
what the U.S. needs. To go back to the discussion we had the first time on the silent depression
and some of the structural issues, it's actually, in my opinion, going to help that situation as
countries move away from the U.S. Treasury and into something like gold, something neutral like

(23:11):
gold. I think that it'll actually improve a lot of the issues that we have talked about with
a 4% of GDP current account deficit. And of course, the resulting capital inflows that
disproportionately benefit those that have capital, those that have financial assets that are buoyed by
about a trillion dollars of forced mandatory structural capital inflows into financial markets

(23:39):
in the US. I added up from the BEA, the current account data, I added up from I think it was 2011
or 2012 up through 2024, if you look at foreign purchases of real estate, those get recorded under
FDI, foreign direct investment. And then you add in the estimated portfolio investment into REITs

(24:01):
and MBS, mortgage-backed securities. You add that all together. And going back to 2011, 2012,
I can't remember exactly which year it was, foreigners have purchased about 700,000 single
family homes worth of real estate. That's significant. And that's that, you know, these
are price insensitive buyers, they are buying to balance that current account deficit. So

(24:26):
the same thing is true, of course, with equities, we know foreigners, that's one of their favorite
places to recycle dollars into. And of course, treasuries that kept yields very low artificially
low. And so, yeah, it a move away from that recycling of the trillion dollars that we

(24:46):
send out to the rest of the world in the form of our current account deficit, that trillion dollars
is being recycled into dollar denominated assets, less and less. And it's not happening. You know,
it's not we're not talking about overnight changes of like 50%. This is around the margin.
and it would take years, if not decades for this to fully play out. But if those foreign countries

(25:14):
start to, you know, instead of buying equities or treasuries or US real estate with those dollars,
that trillion dollars we are running in our current account deficit every year,
if instead of dollar denominated assets like those, they start to buy gold, that'll bid up
the price of gold in dollar terms. And so gold can, and this is something Lou Groman's been

(25:37):
super out front on, you know, going back like two years, maybe even more, that gold as there's a
shift away from the US Treasury or other dollar denominated assets into some neutral reserve
asset that freely floats in all currencies like gold, what you could get is a revaluation of some

(25:59):
of these currency crosses. Because again, China's not running a trillion dollar current account
deficit with anyone. They run a massive current account surplus. I think it's like 5% of GDP.
So there is no country right on the other side from China going, well, yeah, you know,
we used to recycle these into, I don't know, Yuan denominated bonds, government bonds,

(26:23):
but now we're going to buy gold. So you don't have that, the gold price in Yuan terms,
at least from foreigners being bid up in yuan terms. There's no offsetting kind of bid in yuan
terms. Now, domestically, of course, we know they buy gold, but just kind of generally speaking,
this is one of those kind of subtle forces that over a decade or two would eventually lead to a

(26:47):
higher gold price in dollar terms and a lower gold. Gold will still get bid up in yuan for sure,
but to a lesser degree.
And so then what you have,
you cancel out the two denominators
because they're constant gold to gold,
cancel out the denominator.
You basically just set a new exchange rate.
And this is something Luke has been talking about

(27:09):
for a long time now,
the need for a revaluation specifically
of the dollar-yuan cross rate.
There's of course other currency issues.
The dollar structurally overvalued.
In fact, on a purchasing power parity basis in 2024, the dollar with the Dixie at like 105 was more overvalued than it was 1984, 1985, when the Dixie was 163.

(27:37):
And of course, the Plaza Accord was just about, you know, a couple months later, we were even more overvalued on a purchasing power parity basis in 2024 than we were back then when the Dixie was 162 or three.
And of course, the Plaza Accord happened right after and we know what happened to the dollar.
So I still think that whether it's kind of a gradual revaluation, like you mentioned,

(28:03):
you know, kind of the adoption of gold, it's happening more rapidly than I think
some of us thought it would. I expected it to happen around the margin, but kind of more
gradually, the degree, the rapidity, the velocity with which it's happening is kind of surprising to
me. But whether it happens gradually in the mechanism I just described, where you get a

(28:27):
weaker, you know, a devaluation of the dollar versus gold to a greater degree than devaluation
of yuan gold, then that could take 10, 20 years. But eventually you get a new exchange rate where
the dollar is weaker versus the yuan. And of course, you know, China has made it pretty clear

(28:47):
in various statements they've been making for five, six, seven years, top CCP officials,
that they are trying to number one, internationalize the yuan, and number two,
reorient their economy much more in a US model toward domestic consumption rather than this
subsidized overcapacity export dumping sort of approach that they've taken where it's just

(29:12):
gain market share at any cost. There's a recognition in China, just like there's a
recognition here in the US, with the current administration, at least, that our structure
of debt-fueled overconsumption and insane twin deficits, that that has kind of run its course
and the pendulum has gone too far in that direction.

(29:35):
Just on the other end, China has recognized that their model has gone too far.
And you don't get public statements by top CCP officials like that unless it has the
blessing of, over there, you disappear if you say something.
Over here, we get to have leaks and all this kind of public comments about stuff.

(30:00):
Over there, not so much. So the fact that they have been pretty vocal about that, I think there's a recognition that both of our economic models kind of went to their logical conclusion.
And we've seen peak globalization, in my opinion. I think that's pretty clear. I don't think it's controversial anymore.
and that there's likely to be a meeting in the middle,

(30:23):
whether that happens by Mar-a-Lago Accord or the mechanism you mentioned
where it's kind of a gradual gold adoption in place of the U.S. Treasury.
I think either of them have the same end effect,
which is a weaker dollar, stronger yuan.
Yeah and it very interesting to try to think through which happens I mean I looking at the price of gold right now It approaching So it cooling off a little bit after the run that went on last week and the week before

(30:58):
but that could certainly accelerate again. I think that's one question on many people's minds,
like, is this a blow off top? Is gold about to correct? But I do think we are
in uncharted territory in the sense that I think this bid seems very different than
anything I've seen in my life. Not that there's been many material bids under gold outside of like,

(31:23):
what was it, 2011 and 2012. Obviously, the last two years, last year has been very good. But it
seems like somebody's buying hand over fist or multiple people are buying hand over fist,
sort of seeing the writing on the wall. And then you pair this with the sort of geopolitical
saber rattling between the US and China over the last two weeks, specifically with rare

(31:45):
earth metals? And are we just getting a sort of show between Trump and G where they both recognize
like, hey, we need to get to the table, but there's some showmanship or is the showmanship actually
public sort of exertion of, hey, who has the leverage at the end of the day? And after my
conversation with Luke, he would say that China has all the leverage, particularly if you believe

(32:11):
that we need to go into this hyper-industrialized reshoring era of the United States?
I don't understand how anyone could argue that China's not the one with the leverage. I mean,
we lost effectively a proxy war to a country with one twelfth of our GDP because we have so

(32:31):
completely hollowed out our industrial base that we can't even make the shells and artillery and
and Patriot missiles needed for our own military to defend our own people.
We rely on China for 65% of active pharmaceutical ingredients.
So the actual drug that goes into the medication, those APIs, about 65% come from China.

(32:58):
You kind of go down the list, right?
China has everything that is actually needed.
What do we have?
We have a bunch of derivatives traders.
we got a bunch of meme coin traders we got um you know high frequency trading firms that build the
best high frequency trading algorithms we got the most deep and liquid treasury debt market in the

(33:19):
world sovereign debt market in the world but like you compare those two china's got commodities
they've got the chips they have the active pharmaceutical ingredients they got the rare
earth. You go down the list of what they have versus what we have. And I don't know, the deepest,
most liquid capital market in the world doesn't seem very important when you're talking about,

(33:42):
you know, what, when you get down to it, look, maybe in 1990 peace dividend sort of world,
that matters and that has value. But, you know, in a world that is, like you mentioned,
more polarized with higher tensions geopolitically, more multipolarity. I think that it matters much

(34:04):
less how deep your sovereign debt market is, how liquid your sovereign debt market is,
and matters much more who has the commodities. Now, we necessarily have energy, which that I
think is one of the areas of leverage that we do have over China. They are so utterly reliant on

(34:25):
imports, energy imports, much more so than we are. We have abundant oil, natural gas, and energy
resources here in America. And I think that this administration accurately identified that as being
one of the strong suits, one of our pros, one of our benefits here. But at the end of the day,

(34:48):
I don't think that the most liquid capital market in the world is really that important,
especially when you're talking about a world that looks a lot different than the world we might be
used to uh in the kind of peace dividend era um but maybe i'm crazy i don't know no i mean i i've
been i've had luke on belagi had uh somebody who's been over in china advising western companies how

(35:15):
to do business in china for 30 years on the show and that's one of the main piece of feedback is
like uh these guys are just like pro china like uh i'm not just to make it super clear i am
extremely patriotic i love america more than anything i i i could not be i do not want to

(35:36):
live in china i would i would rather i don't know i'd probably rather die than live in china
is not out of a pro china there's such this like knee-jerk reaction nowadays to when it came to
the war in Eastern Europe is the same thing. And with China, I see that sometimes too.
There's such this like effort to pigeonhole just because you make a criticism about your country.

(36:01):
I think it was Mark Twain that said that there's no deeper patriotic duty than criticizing your
own country. That's kind of how I look at it. It's not that I'm saying these things because
I hate America or that I love China. Couldn't be further from the truth. It's more that I want to
see America return to the strength that we all know it has potential for.

(36:25):
Yeah. And the reason I bring it up is because I agree with you. I think there's people that are
just denying objective reality when you look at it, like you go through the yes, we do have
liquid capital markets and get high frequency traders and a great services economy at the end
of the day. But if you do believe that we're moving into a more multipolar world, globalization

(36:46):
has seen its peak and we're going towards a more de-globalized world and you're
trying to look at the objective facts it's like yeah the the leverage is going to be
yeah how many how many lawyers do we need we need less we need probably like 10 percent of the amount
of lawyers that exist because i mean that gets to a whole another can of worms is like the problems
they create by writing more laws and regulations and permitting requirements whatever it may be but

(37:11):
But I digress.
When it comes to China, people saying you're on patriot,
never bet against the United States.
I completely agree with that.
But I think before we even place chips on the table to make a bet,
it's like, all right, let's acknowledge objective reality
and try to figure out the best solution based off of that objective reality.

(37:33):
You can't put your head in the sand and just say,
oh, don't worry about China.
Nothing's going to happen.
I think the last two weeks have proven that they do have leverage
as it pertains to rare earths specifically.
And that's one thing through these conversations
that I've been trying to sort of tease out
is like what is like ideally in my mind,
it's like China and the United States, Trump, Xi,

(37:54):
however you want to frame it, get to the table and get a deal done.
And I think China just wants to be recognized
as a legitimate economic power and political power on the planet.
They don't want the U.S. meddling in things in Southeast Asia
and observing objective reality and with that in mind saying,
hey, we may need to make some concessions in terms of swallowing some pride

(38:18):
and saying, hey, China, yeah, we agree.
You guys are doing some pretty miraculous stuff,
and let's try to work together and not get into some kinetic war
because in 2025, kinetic war or even economic war is not good.
The leverage in the system is too high,
And it's a tinderbox for a calamity.

(38:40):
I want to see the routes where we figure out how to work together and just increase the quality of life for all humans.
Yeah, same goes with Russia, in my opinion.
You know, my ideal world is global cooperation, not globalization, not this neoliberal approach that both parties had taken for decades, right?

(39:03):
Not that, but peace.
I think, well, hopefully most people at least our age are of that mindset.
There is certainly a camp that does not wish for peace.
You know, it's always yearning for conflict with, you know, some new country every week.

(39:23):
It's a new country.
But I would like to see tensions with Russia and China decreased.
But, you know, I think that we have to be honest about the shortcomings that the U.S. economy, that U.S. society, all again, it kind of goes back to our prior conversation, like all of those criticisms, when I bring up deaths of despair and the suicide rate and all those various statistics, it's because I think the first step is admitting what the problem is.

(39:55):
most people don't even talk about that stuff. Although I will say that in the past, I don't know,
six months, nine months, there's been a growing discourse, a growing conversation when it comes
to the kind of silent depression stuff. Someone told me the other day, they're like, what do you
call it? That's not so, it's not very silent anymore. And I said, well, when I started talking

(40:16):
about it was, you know, but I think that that's a first step is recognizing the areas. Look, I think
that like, you know, uh, the average American would, if they were polled, um, be able to tell
you, especially average young American would be able to tell you, yeah, like, I don't know what
world you live in. Right. If you, if you have $5 million in your 401k, you got two or three homes

(40:40):
that are up, you know, 800% and all the equity, you know, all the wealth created there. Yeah.
Like the boomers are doing great. Of course, they're not going to see any of these issues.
Um, so there's a, there's a large amount of, uh, generational gap there as well.
But I think that the first step is to, and I think to some degree, it's going to take

(41:01):
some of the younger people starting to come into power politically.
Um, and you already kind of see that, um, already on both sides, I would argue to some
degree, you're already seeing a bit more representation from the, the younger crowd,
the millennials and, uh, and to some degree the zoomers. And I think that that that's important

(41:23):
because there's a huge generational component to it too. Boomers seem to live like every time,
you know, I, I, I see one of these kind of head in the sand type type speeches or comments or,
or whatever. It's, it's always a boomer that is living in like 1960s America in their head,
1970s America. And it's not that way. Uh, I think that the picture would be a lot different if you,

(41:48):
spoke to especially younger people.
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Now, with that in mind, obviously Trump has surrounded himself with something like J.D. Vance, most importantly, as his vice president millennial.
He seems to get what's going on, at least domestically.

(43:33):
I think he stood up against H-1B visas and really standing up for the American worker.
specifically with that in mind,
like in terms of domestic policy to fix these problems,
how would you grade Trump's performance so far?
Not as good as I was hoping.

(43:54):
A little disappointed.
Could have been a lot worse, you know, I'll say that.
But yeah, there's a lot of talk on a number of things
that we haven't exactly seen follow through on it's still early like the one thing i'll say
you know i is it's still he's still got some time i'm not gonna you know totally condemn

(44:19):
uh the performance because we still have time like you mentioned jd vance uh has been pretty
vocal on some pretty important issues uh like the h1b um so you know i'm cautiously optimistic
but unfortunately i think that due to the fiscal dynamic and due to what's going on

(44:40):
kind of economically i think that we're gonna get into a situation where for example that k-shaped
economy probably actually gets worse um we know trump wants negative real rates we spoke about
that in the prior conversation uh that's not gonna be good to fixing the k-shaped economy ironically
the back, you know, kind of go back to early April and Liberation Day chaos,

(45:05):
stock market is plummeting. Who was on CNN and kind of CNBC and these various kind of,
you know, normie mainstream media outlets. It was a bunch of rich boomers that were upset,
that were crying the hardest. That stock market decline. Now we know Trump capitulated,
mainly due to what was going on in the treasury market, not necessarily the stock market, but

(45:28):
We know we ended up capitulating, but, you know, something like that, I was starting to get pretty optimistic.
Okay, Besson, all of the talk about Main Street, you know, it's their time to win.
I was starting to get a little optimistic there in that first week of April because, you know, you talk to the average 25-year-old about their stock portfolio.

(45:48):
They got like, you know, $200.
They're living paycheck to paycheck.
They're working three jobs.
It's not exactly like they have millions of dollars in some stock portfolio.
And if you look, the top 10% of income earners own 92% of US equities.
So the bottom 80 90 they weren really affected The average holding in a 401k is like which is maybe a year worth of expenses It nothing It basically a rounding error

(46:26):
So yeah, I think that the bottom 90%, it was starting to look like, okay, they're willing
to break things. They're willing to, because really what that would have been was a wealth
redistribution, which is funny, given the kind of like political implications of that.
That's really what it was. You want to fix the K shaped economy, okay, you have to be able to

(46:50):
tolerate a significant equity market decline. The problem is that, as again, Luke has been out front
on this, I've done my own, I've done my own fact checking of it, and found it to be correct, which
is the government can't afford the stock market to decline in a meaningful, you know, prolonged
sort of way, or it so utterly hurts the wealth.

(47:12):
The wealth effect starts going into reverse, and you start to negatively impact, you start
to impair the capital gains tax revenue, blow out the deficit.
As Luke says, the equity market de facto backs the U.S.
Treasury market.
So, you know, they were never probably going to tolerate a significant equity market decline.

(47:34):
But that was one of those areas where I was like, okay, maybe they are willing to break things.
But then as soon as treasury yields started to go vertical, two days later, it was capitulation.
So I think that that's really the governing factor there is the treasury market, not necessarily the equity market.
Yeah.
And this is something I've been saying the last couple of months, too, is I think based off of the scenario or the reality that you just described that the government cannot afford this.

(48:05):
So it looks like we're going the route of melt up, probably melt up equity markets, incredible debasement.
Like individuals need to really take it upon themselves to protect themselves with assets like Bitcoin.
And I've been pointing at Square's release of the Bitcoin functionality in their point of sale terminals.

(48:27):
It's like, all right, this is you're not going to go fix this at the polling booth.
You need to take advantage of this tool that Square has afforded you as a as a small business owner and begin saving some of your revenue, your cash flows in Bitcoin over time.
Because it seems clear to me that melt up is is the way forward.
And I think the gold price is screaming that as a leading indicator right now.

(48:50):
Yeah. And just to like make it really clear, even a bunch of TradFi people don't really get this.
They look at gold as just a thing. Like they don't, they don't really actually understand what,
what you're actually looking at, which you have to think of gold as an FX pair, right? So dollar

(49:11):
yen, dollar euro, it's the same thing. It's dollar gold or gold dollar is how people normally look at
which is how many dollars does it take to get one ounce of gold, the gold price denominated in
dollars. But you take the inverse of that gold chart, which is just going vertical, I take the
inverse of that. And that is the dollar denominated in gold terms. Gold has been money for thousands

(49:37):
of years that has its flaws for sure. All the properties I think Bitcoin objectively does better
each of them. But that being said, gold has been money for hundreds of thousands of years.
JP Morgan said, gold is money, everything else is just credit. I think there's some truth to that,
even in today's day and age. So what is that really telling you? Well, what it's telling you,

(50:00):
the way that the gold price gets bid up in dollars is that more people are willing to sell
dollars to buy gold, then are doing the opposite, which is selling gold to buy dollars. That's
really what it's telling you. So what that reflects now that you have, you know, now that
once you understand that way of looking at it, that lens to view it through, it's a pretty damning

(50:25):
indictment of not only the dollar, but the but of course, kind of the institutions that back the
dollar. And it's not just the dollar. I mean, that's gold is getting bit up in every currency,
but, um, you know, historically the dollar served as some sort of kind of safe Haven,
uh, uh, asset. And we're not really seeing that too much. I do think that short to medium term,

(50:49):
the dollar could show some strength here, uh, just kind of generally speaking, but
we've been seeing the yen, the euro and the Swiss franc replacing the dollar in terms of when it
comes to those risk off sort of moments, what is getting bid. And this is true going all the way
back. I noticed in January, February, I'd wake up, I wake up early here on the West Coast, I'd wake

(51:12):
up and see equities would be down, yields would be up a little bit, and the dollar would be down.
So bonds down, stocks down, dollar down.
And I started looking at, okay, well, what's up?
And it was gold, euro, yen, and Swiss franc.
And that theme is holding true, which, look, I don't think that you have to replace the

(51:35):
dollar with the yen or the euro.
I think that we're moving into a world that is much more, you mentioned multipolarity earlier.
I think that's accurate.
And I think that we should look at kind of global FX reserves and current, you know, not one global reserve currency, but multiple diversification of the sovereign holdings away from, you know, 65%.

(52:02):
I think it was at the peak in terms of dollar denominated assets, mainly U.S. treasuries.
And much more to, you know, maybe we hold 10, 15% in U.S. treasuries and 10% in yen.
And right, I think that sort of world with gold, and eventually, I think Bitcoin, given enough time, that sort of world, right, because people always push back so hard on like nothing can replace the dollar. And it's like, well, gold kind of is number one. Number two, nothing has to be the global reserve currency. There can be multiple reserve currencies.

(52:37):
You could imagine a world where dollar, euro, yen, and the yuan are all 25% or call it 15%
and then maybe the rest gold, something like that, which would take some time to get to.
It's not going to happen overnight, but I think that that's much more where it's going.
But I think once people need to really kind of abstract out what the gold, how to think

(53:01):
of what the move in gold is actually signifying, because once you get it, it's...
red alert, you know, what's going on in the gold market.
And also it should be noted that the breakout, like this is gold has been breaking out.
It's not just in this current administration that started before.
So.
Yeah.
And that begs the question, like how, how underexposed are not only governments, but

(53:30):
institutions?
I don't mean how many of these hedge funds in the Caymans just trying to leech off this,
of this basis trade underexposed gold? I think there was a Bank of America report that came out
a few weeks ago that something like 4% of hedge funds have any material exposure to gold. And
is there like a whole class of institutional capital that's just completely missing this wave

(53:53):
when their fiduciary responsibility is supposed to see it before it comes and benefit from it when
it actually does manifest? Yeah, I mean, I think institutions are, at least in the West, probably
I've seen similar similar reports I think institutions in the west firms in the west are
under underexposed but you know also individuals like you had made the comment before about the

(54:18):
debasement and kind of the the run it hot sort of approach and like how badly that's going to
crush we're talking about the k-shaped economy getting worse what I really worry about is the
average American getting crushed by a run at hot sort of regime by negative real rates. We know
Trump thinks that since our discussion, we had mentioned negative real rates, how Trump thought

(54:42):
that the Fed funds should be, I think back then it was like 1% or something, which would represent
at the time a negative 200 basis point real rate. Well, now you have Stephen Myron, who Trump picked
to be the chairman of the Council of Economic Advisors.
And now on the Federal Reserve, he came out,
this was like a month and a half, two months ago.

(55:03):
And he said, I believe the neutral interest rate is 2%,
which is notably below where we are now.
And I thought, oh, well, that's interesting.
But then like a week or two later,
he comes out and says, no, the neutral interest rate is 0.5%,
which is just insane to me when you have inflation at 3%,
like solidly at 3%.

(55:24):
and assets at all time highs, you know, it, I think that they're trying to tell you where,
which direction they want to go and look like it's not necessarily that they have a ton of
optionality or choice in the matter. You know, this has kind of been starting to get
baked in the cake as Luke says years ago. So it's not that they're choosing to do this. Right.

(55:50):
and and i i wouldn't it it's unfortunately just where we are and just kind of what you have to do
uh absent a productivity miracle we're not going to cut spending because you cut spending
i've done the math and if you cut spending if you balance the budget it would result in a gdp
contraction worse than 2008 and the gfc um so you can't can't just bounce the budget especially

(56:15):
given what's going on kind of with the dollars reserve status and what that might do to other
assets. Of course, in mid-90s to late 90s, we ran a surplus and that caused all sorts of problems
in say the equity market. And then that got kicked to the housing bubble, which by the way,
even the economist on the Wikipedia article for 2008 and the causes of 2008, even the economist,

(56:42):
which is a fairly pro-globalism sort of outlet, even they admitted that the 5% or 6% trade deficit
as a share of GDP in the early 2000s led to the 2008 GFC, the bubble, to the housing bubble.
So even they're admitting that. So you have all these other issues with balancing the fiscal

(57:02):
budget. But yeah, you would plunge the US into a recession that would be catastrophic. It would be
a margin call on the debt. So you can't do that. Like what other option outside of a productivity
miracle, which could also bring about mass unemployment, right? And all these other issues,
like they don't really have a good option here. Unfortunately, run it hot, devalue the debt in

(57:28):
real terms against scarce assets like gold and Bitcoin. And that's kind of the only option that
they that they really have negative real rates to try to get the interest expense, which is
one of the largest outlays, try to get that under control of negative real real rates,
but that's going to be stimulatory, it's going to be inflationary, that'll make the

(57:49):
K shaped economy worse, they'll fuel the asset bubble even more. So yeah, it's unfortunate,
because I don't really think that they have much of a good option outside of a run at hot. And they
started telling us back in what, May or June, that they were, I mean, it was Scott Besant,
David Sachs, and Elon Musk, all within a week of each other, all came out back in, I think it was

(58:11):
May, and said, yep, like, can't cut, can't cut. That's not how we're going to get out of this. We
got to grow our way out of the debt. They all mentioned that nominal growth has to be above
the cost of the debt. And unfortunately, that's just kind of where we are. That's what we did
after World War II.
And inflation was 18%, 19% at the peak coming out of that.

(58:35):
Yeah, I know we touched on this last time we were on,
but the productivity miracle, it's right around the corner.
Have you seen everything going on with AI?
All these data centers being built up,
there's not enough supply of GPUs
to feed the insatiable hunger for tokens in the world.
Do you believe that there is any hope of an AI productivity miracle actually materializing?

(59:00):
I mean, I can say for myself that it has notably improved my productivity.
I use it in a very particular kind of way.
And it has significant limitations, right?
But it's kind of constantly improving and tends to be getting better.
For example, you can tell it to write a PineScript code for TradingView.

(59:22):
and it just spits out like I could never do that.
I'm not coder.
I have no idea.
So things like that, you know, and it's very quick to certainly boost my productivity when
it comes to say the YouTube video research or, you know, preparing charts.
It certainly helped me how much and how quickly the real productivity gains actually appear

(59:47):
is totally different story.
So like I've looked for good high quality data on that very issue and not really been able to find a ton of data, which is kind of surprising.
I did put out that post job openings to the S&P kind of as a joke.
It ended up going like giga viral.

(01:00:08):
It was kind of a joke, but, you know, there's probably some amount of I was hoping to spark some amount of conversation because I do think that there is some amount.
just from what it's doing personally for my productivity, I believe that there's got to be
some amount of productivity gains coming from AI. Productivity for Q2 did come in significantly

(01:00:31):
higher than expected by a lot. I think it came in at 3.3 and the expectation was like 2.6.
So it did come in notably hot. Q3, I haven't seen yet, government shutdown. So yeah, I would imagine
that there's some amount of productivity coming,
but then you start creating other problems, right?

(01:00:53):
Which is, okay, say it is gonna be as transformative
as some people say, okay, well, now you might be talking
about an unemployment rate of 20%.
Well, how do you fund that?
And so, yeah, I think that that's why,
and I think Luke's correct on this,
the productivity miracle option

(01:01:15):
has to come at just the right pace
and it has to come at just the right intensity. Otherwise, it actually makes the situation worse.
Because we know government's so inefficient, like for example, Medicare outlays as a share of tax
receipts. When back in the early 70s, it was like 2%. Now it's like 24, 25, 26%. So we know how

(01:01:38):
inefficient, and it's the same with Social Security as well. The,
These government programs are incredibly inefficient allocators of capital and the number of administrators and the bureaucracy and all of that.
So it's not like a one-to-one, right?
There's probably for every dollar in unemployment benefits that someone actually makes, there's probably another 50 cents that's getting paid to government bureaucrats along the way.

(01:02:05):
You know, so, yeah, I think that the problem is if it comes, if it does come, if the productivity miracle does come and it is transformative, it'll cause significant dislocations in the labor market.
Those people have mortgages and car loans and they go to the local Starbucks to buy coffee and whatever.
And so AI being extremely deflationary, I've kind of understood this concept.

(01:02:31):
I've been talking about it for a year and a half.
I don't really know how it ends up resolving, but immediately I thought, well, okay, if AI is as transformative and revolutionary as people say, okay, well, that's massively deflationary.
And then I was like, okay, but the government debt to GDP is 125%.

(01:02:52):
Now, private household debt, they have de-levered after 2008.
but but on the sovereign side we are so highly levered seven percent pro cyclical deficit 22
percent uh of tax revenue is going to interest you know kind of go down the list so okay if it's
super deflationary we're in this highly levered debt-based monetary system like i kept telling

(01:03:16):
people guys like this is the story is how those two end up resolving and the only conclusion that
I've been able to come to. I keep pointing it out and never really knowing how it ends up resolving.
The only thing I can kind of rely on, I guess, or bet on is that they will have to overcome
the deflation from AI and robotics by printing even more money, right? So I think that's kind of

(01:03:44):
where I've landed. I don't really see another option because it's incompatible with a highly
levered debt-based system and my you know maybe someone can reach out and tell me another solution
but the only one i can think of is they print even more money to offset the deflation yeah i mean
that's what they've done already for the last five decades i'm sure you saw but the the new head of

(01:04:07):
product at x nikita beer or whatever his name is was um tweeting basically making fun of bitcoiners
and gold bugs saying, all the Bitcoiners and gold bugs are expecting hyperinflation when AI
is going to be extremely deflationary. It's like, well, all tech is deflationary if applied the
right way or most tech. People wouldn't end up picking because I quote tweeted with all tech.

(01:04:29):
But we've seen incredible deflation driven by technology advancements over the last
five decades and the cost of living has gone up consistently. Quality of life for the bottom 90%
has gone down consistently despite incredible leaps and bounds and advancements in technology
that have led to overall deflation in that sector. But it is not enough to combat the money printer

(01:04:56):
they need to print to keep it up. So despite all this tech deflation, until we pair that tech
deflation with a reserve currency that is a sound money, Bitcoin is what I think it ultimately will
be, you're not going to reap the benefits societally of that tech deflation.
Yeah, or until you've de-levered the sovereign balance sheet.

(01:05:17):
If we could get debt to GDP back down to 50%, 60%, maybe even 70%, then it's a bit of a
different story.
The problem is the leverage is so high that a recession or a bout of deflation, sustained
deflation, basically acts as a margin call on the debt.
uh the in in in the past three recessions if you take an average tax revenue in a recession falls

(01:05:42):
by about 25 percent spending goes up by about 15 percent oh and gdp the denominator and the deficit
as a share gdp is falling so you end up talking about like a five trillion dollar deficit in just
a normal recession um and so yeah it's uh it's a tough situation they're trying to thread a needle

(01:06:04):
here and i don't know if it's gonna work um maybe there's some secret technology they have that
they've known about uh that could help but i mean absent something like that i think that
it's just gonna be even more inflation to offset the deflationary forces um unfortunately

(01:06:25):
yeah well i guess to tie bitcoin into this obviously gold's been running i think bitcoin
as a solution for individuals, institutions, governments alike
to a certain extent to protect yourself
as it seems obvious that we're going to have these extreme bouts
of inflation moving forward as the government needs to inject liquidity

(01:06:48):
into the system to make sure that doesn't completely implode.
But I think that's one question that's been on many people's minds,
particularly Bitcoiners over the last month, is why do something?
Why aren't you doing it? Gold's running tall time highs. It's sucking the air out of the room and Bitcoin where it is.
In the halving cycle, if you believe in halving cycles, signals that the price should be running a lot hotter.

(01:07:13):
People are very disappointed. How does Bitcoin play out into all this?
What is your short, medium, long term view on Bitcoin and where it fits into this bigger picture that we've been describing?
yeah short term is hard um that short term is really hard medium to long term though i'm very
bullish uh i look at it i my conviction in bitcoin is so significant um that i like it i like

(01:07:43):
uh pullbacks i i like when it is not ripping higher because when it's ripping higher again
going to the prior conversation about gold, like my wages or my earnings are getting devalued when
gold and Bitcoin are ripping higher. So I actually like when it's not ripping higher, I would like to
accumulate more. Because yeah, inevitably, I know how this all ends up resolving. And look, it could

(01:08:12):
take longer than we think, you know, it could, it keeps feeling like, okay, well, we're nearing this
event horizon or maybe even past it why doesn it feel like we are Gold I would say indicates that we probably are The way gold is the price action on gold I mean it was up like 3 on Friday um or Thursday I think it was had this like 3

(01:08:37):
monster date.
Like you don't see that in gold, especially routinely day after day after day.
It's, uh, every single day it's like up a percent or more.
So I think gold is kind of signaling that we're nearing an, uh, an event horizon.
I think that Bitcoin has too much of a NASDAQ, high beta, you know, aspect to it, unfortunately.

(01:09:02):
So, you know, there's been a bit of kind of volatility recently, short term at least, in spying QQQ.
So I think that that's probably not helping with Bitcoin, although today both were up when we started to record.
And then you had the cascading crypto liquidation thing that happened a week or two ago.

(01:09:24):
And there's probably some amount of residual, you know, deleveraging or, you know, going on there.
But medium to long term, like I'm grateful for this pullback.
I wish it would pull back more.
I want it back in 70k, 80k.
Because yeah, it's like, if you have enough conviction, you should be wanting, you should be enjoying pullbacks.

(01:09:47):
You should be wanting it to pull back because you're looking out into the future.
And again, you have high conviction of that medium to long-term view.
So that's kind of how I look at it.
The longer that it is not going parabolic, the more time I have to accumulate.
Because inevitably, you know, whether it takes a month or a year or 10 years, like it's going much higher, in my opinion.

(01:10:11):
Yeah.
And it is hilarious to people pointing at gold's performance this year,
particularly and saying, oh, Bitcoin's not catching up.
It's like if you zoom out at the five-year chart,
Bitcoin's up like 900%, gold's up like 130%.
Yeah, since the ETF, it's up like, what, 250% since the ETF was announced?
So, yeah.

(01:10:32):
That was just two years ago or so.
Yeah, I think it is a signal of the high-velocity trash economy.
people that are in Bitcoin and they, I think they have visions of things they want to buy and things
they want to do. Um, and sometimes let those visions. And I think, I think that illustrates
the problem, right? Which is like, if, if you look at Bitcoin as just a number go up sort of

(01:10:56):
phenomenon or asset, uh, if you're just purely looking at it from that lens and you have a low
time, low time preference, you have that kind of like fiat mindset of, I want Bitcoin price to go
up so I can sell my Bitcoin for dollars. I think that that is a different camp than a lot of

(01:11:16):
Bitcoiners who don't view it that way and view it as the denominator of choice.
I use gold and Bitcoin as denominators for a lot of things. And again, plot average hourly wage,
anyone with a trading view, plot average hourly wage divided by Bitcoin. Your wages are getting
devalued when Bitcoin goes up. Like once you start to realize that, I think that you start to kind of

(01:11:41):
see things in a different, uh, in a different lens, I guess. Yeah. The, um, what was I going to say?
The, uh, not only the devaluing, but the, um, uh, I lost my thought there when, uh,
talking about the speed at which this happened. Oh, that's what I was going to ask. Like,

(01:12:03):
And then it's one thing we talk about a lot at 1031 is like there's an order of operations to Bitcoin's ultimate success.
And I think, again, going back to the square point of sale system, a lot of people are are excited that you'll be able to pay in Bitcoin and merchants will be able to accept Bitcoin, which is interesting.
But the merchant adoption meme has been around since 2013.

(01:12:27):
Roger Ver was out basically trying to convince everybody to accept Bitcoin.
And if I'm being honest with myself, I feel like that part of the stack that they just released at Square will probably most likely be the least used out of all of it.
But the tool to be able to sweep cash flows immediately into Bitcoin and hold that on the balance sheet is probably going to be the most used feature and the most valuable feature, not only for those individuals, but for Bitcoin more broadly.

(01:12:56):
And I do think there has been a degree of complacency in the broader Bitcoin sphere.
People just focus on number, go up, number, go up.
It's like, well, we need to increase the utility of the tools around the Bitcoin stack to make it easier for people to adopt.
And so I think people should be focused on that, like where can we begin to fit Bitcoin into these different nooks and crannies and get people exposure to it more easily.

(01:13:26):
I would say even outside, I would agree, but then I don't also, even on the like number go up part, I had someone who sits on a board of a publicly traded company, ask me about, this person knows I'm, I've been following Bitcoin for a while and I'm into it.
asked me about it a couple days ago.

(01:13:46):
And I said, well, you know, what makes you bring it up now?
They're a boomer and older and kind of was always very avoidant or, you know, dismissive
of Bitcoin.
You know, what made you, why are you asking?
And she said, well, our accountant asked us if we had any Bitcoin holdings.
This is a publicly traded company.

(01:14:07):
So, you know, I think that there's an element for, of course, we know it individually.
as a pretty amazing savings technology individually.
But even as you gain adoption of it,
just psychologically,
once it becomes more of a valid,
once people start looking at it

(01:14:28):
more as a valid form of savings technology,
which is the primary method I look at it as,
I think even that is a step in the right direction for Bitcoin
because then those people adopt it.
And then maybe they can start to play
with a lightning wallet or whatever, right? So I think the primary funnel for most people,

(01:14:49):
whether it be corporations, whether it be sovereigns even, or whether it be individuals,
is the savings technology. It preserves your purchasing power because in dollar terms,
it goes up in price. But then that, once you're exposed to it, once you've used it,
once you've bought some Bitcoin, once you've sent it to a wallet, maybe you have a cold

(01:15:11):
you know a cold card or old and self custody And once you understand the concept of like you know holding your own keys once you start to like kind of play with it and go down the rabbit hole
I think that it leads to all of the other benefits, all of the kind of more peripheral
sort of benefits that, you know, whether it be like, as a means of transaction,

(01:15:35):
and that sort of thing. So I think it, I think the primary funnel will continue to be
the number go up component.
But that's only because the denominator is melting, unfortunately.
Yeah.
And then in terms of not the converse,
but the other side of the coin,
the number go up is distributed peer-to-peer cash

(01:15:57):
that nobody can control.
I think governments are doing their best to fund people
towards the point of recognition like,
oh, maybe this makes sense for this reason,
particularly in the UK,
where they're launching digital IDs and speech laws.
And I think come from number, go up,
and then Trojan horse, peer-to-peer digital cash

(01:16:18):
that can't be censored by despotic governments.
They're doing the job.
The governments are doing the job behind the scenes
to make sure people understand that they need that as well
when the time's right.
It's not a pretty-looking landscape out there politically,
not just in the UK.
and you know i i worry sometimes about three years from now what will the u.s look like

(01:16:41):
um you know we might have bought a little bit of time i mean some some people um would argue that
you know some of what we're seeing even now is leaning in the kind of technocratic or you know
techno dystopia right with certain companies and stuff so you know you can make the arguments even

(01:17:01):
happening now here in the US. But at the very least, you know, if you reject that argument,
at the very least, it could happen here in, say, three years. So right now, it's the UK. But I think
that that could make its way over here, unfortunately, with the rise of populism. And
look, if like, if the average American, the average blue collar American that's been on the lower leg

(01:17:25):
of the K that has watched, you know, the capital class just get obscenely rich and so on and so
forth. If that lower leg of the K that elected president Trump, if they don't feel like he has
adequately fought for main street, as Besson always says, it could get pretty crazy. I think
people dismiss a AOC presidency, but I think that they'd be wise to, to rethink that. Um,

(01:17:52):
because I think that populism is not just going to be on the right.
We're seeing a rise in populism.
I think if you look at like New York, I think New York's going to be.
Luckily, it looks like we're going to have a case study in left-leaning populism in New York.
Hopefully they can blow that.

(01:18:17):
What's the word I'm looking for?
They can mess that city up, too.
a certain extent in a quick enough amount of time that people are able to point out and say,
look, this is what ASC wants to do to the country. Let's not go down this route.
But I mean, look, going back to 2016, this is not like a new phenomenon. I remember
back in 2016 in the Rust Belt, they would go, you know, CNN, MSNBC, they would go and interview

(01:18:44):
just average people, just average blue collar, middle of the road, you know, just average people.
and they say, who are you voting for? Who is it between? And they would say, well, kind of,
I like this Trump guy, but I also like Bernie. And it like just completely broke their head.
These, these kind of, you know, partisan type, uh, uh, that live in Manhattan or live in Washington,

(01:19:06):
DC, like it just completely broke their head that you could be between Trump and Bernie.
Um, but I think that going back to that, that was a signpost and that was back in 2016. So
I think it's only going to kind of accelerate from here, unfortunately. Because populism,
look, going back to what we were talking about debasement and that whole conversation,

(01:19:28):
populism, the last time the US had populism really was 1965 through 1982. In dollar terms,
denominated in dollars, S&P 500 basically went sideways. In gold terms, the S&P 500 lost 90%
of its value. We didn't have Bitcoin back then, but in gold terms, S&P 500 lost 90% of its value.

(01:19:51):
Populism is not good for financial assets. It's not good if you care about inflation.
And so, you know, that'll eventually that'll come into conflict, of course, with the bond market,
which we kind of have an idea how they're going to resolve that conflict with QE or yield curve
control or something. But populism is a period in time where you want to own scarce bearer assets.

(01:20:20):
And I think that, you know, Bitcoin is the best because gold can always be confiscated. They could
kick down your door and, you know, you have to physically hold it or it's held in a brokerage
account. So it's not really your goal. Number one, it's not real gold. Number two, it's not actually
yours. So yeah, I think, you know, memorize 12 or 24 words, you know, makes it makes it the best

(01:20:42):
asset to own in a period of time of increasing geopolitical tension, a period of time of
increasing political polarization, ideological polarization, even racial division here in America.
And of course, you know, the economic side of it as well. I think that it's pretty much the only

(01:21:03):
thing when people ask me, they're like, you watch this stuff all the time. This is all you do all
day. Like, what should I do? You know, I got 10,000 or 20,000 or whatever. And like, I've thought
about it a lot. And at least for myself, the only option I keep coming back to is like the only
thing that I'm really that I have high conviction in is Bitcoin and to some degree gold. Although

(01:21:27):
the parabolic run in gold makes me wary of recommending that. I was buying some in 22 and 23.
But, you know, after the run that gold's had, it's like, it's kind of hard to recommend gold.
And then so the only thing that you're left with is Bitcoin, because we know cash,
cash had been good, right? Money market fund, you get four and a half percent. That's cool.

(01:21:50):
But like that is a melting ice cube more and more with what they're doing with the federal funds
rate So like that was kind of the last straightforward thing outside of Bitcoin So now it kind of like it getting to a point where for me at least the only thing that makes sense is Bitcoin I not going to buy the S 500 at a

(01:22:11):
price to earnings of 3,000, whatever it is, price to sales at 3.3 times. I will say that's not to
say the S&P or the NASDAQ stocks, equities can't go up. I looked at the price to sales of the
Lebanese stock market during their currency collapse, people were making such a big deal

(01:22:33):
about the price to sales ratio of S&P at 3.3 times. That is so historically overvalued.
And so I looked in Lebanon and it reached 62 price to sales. So, you know, like it's not to
say that the equities can't go up in dollar terms, but what you really need to, what people
really need to start doing, and I've been trying to bang this drum, is start changing the denominator.

(01:22:55):
whether you like gold whether you like bitcoin gold is good because it's been around a long time
so if you're a macro nerd like me trying to evaluate data you have more price history uh but
you know use bitcoin as a denominator denominate stocks in bitcoin whatever you're thinking about
investing in housing right denominate the average sales price in bitcoin it's it looks a lot different

(01:23:17):
than in u.s dollars yeah i mean just two points there like to your point on populism not being
good going back to 65 to 82 to your point if you if you price everything in bitcoin going back to
2016 when populism really became um as big of a thing as it is here in the united states today

(01:23:37):
like s&p is probably down 95 99 um going back there in bitcoin terms and gold obviously uh luke
and many others were sharing that chart a few weeks ago if you price ndx s&p um real estate
prices in gold and Bitcoin, they're down
significantly. So this could be
a conversation we're having where
we're in the middle of the

(01:24:00):
debasement of the populism, whatever it may be.
People
look back retrospectively 50 years from
now and be like, oh yeah, they were in the middle
of it as it was happening.
And then to your point on gold too,
China just discovered a
mine with 83 and a half
billion. Yeah, the world's largest
gold mine.

(01:24:20):
Yeah, and
supply of gold is not nearly as inelastic as bitcoin bitcoin is perfectly inelastic no matter
how much demand for bitcoin there there ever is at any given point in time you're not gonna be able
to create more of it and um china just found the largest gold reserve in history that that's a
consequence of a higher gold price yeah right is you find more gold it'll unlock supply whether it

(01:24:44):
be through people willing to sell their gold to buy fiat currency or whether it be through new
supply. So that's a consequence to the higher gold price. Like you mentioned with Bitcoin,
Bitcoin could go to $10 million per Bitcoin tomorrow. And there's no, now sellers could
be encouraged, right? Long-term holders that go, okay, well that I'll sell 10 million, but

(01:25:06):
there is no new Bitcoin supply wise that can come in. So that's one of the reasons that's
so much better. I think one of the many reasons, but
fascinating times thank you for uh taking some time out of your monday morning early monday
morning to rip it um this is great and uh i really value uh your consistency it was worth

(01:25:29):
talking before we hit record uh it's admirable how consistent you are with the analysis and
uh it's been a great infronomics has been a great channel for me to check in once a day and just
see what you're thinking what you're looking at and trying to get a better well-rounded
view of what's going on in the world of finance. I appreciate that. Yeah, I just, again, I, you know,

(01:25:51):
my prime goal is to help kind of the average person that I know everyone, not very many people
can watch all of my videos, because I do release one every day. But hopefully, you know, those that
you might find interesting, take a look. Because yeah, my only hope is to explain some of these
very complicated macroeconomic concepts and phenomena to people, normal people that don't

(01:26:16):
have the time to nerd out to the degree that I have. Because you shouldn't have to, you shouldn't
have to be so obsessively devoted to, you know, I'm crazy. So shouldn't have to be crazy to
understand how your money works, how your economic system works, how the global trading system and
global capital flow shouldn't have to shouldn't require that much energy. So that's kind of the

(01:26:39):
first, I think the first step is for the average American to understand the problem. Because once
you understand the problem, then it makes a solution, I think, pretty straightforward.
So yeah, that that that's the prime goal. If that sounds interesting, you could go check it out.

(01:26:59):
Passion, it's the word I don't think it's crazy. I think you're extremely passionate about this.
yeah yeah i always like puzzles from when i was a kid i was a nerd i didn't play with the kids i
played i did puzzles puzzle books and stuff and like when i when i kind of came to markets it was
like well this is basically the world's biggest puzzle with the most high stakes so it's kind of

(01:27:20):
i look at it fun puzzle to solve yeah um for me it is at least yeah yeah well hopefully we do this
again let's catch up uh beginning of next year maybe let's see uh see how everything's playing
out in the world of bitcoin gold debasement polarization de-globalization all the buzzwords

(01:27:41):
it's uh interesting time to be alive and appreciate you joining us today yeah thanks for having me on
all right peace love freaks thank you for listening to this episode of tftc if you've made it this far
I imagine you got some value out of the episode.
If so, please share it far and wide with your friends and family.
We're looking to get the word out there.

(01:28:03):
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(01:28:23):
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