Preston Pysh  1:27  

Alright, I want to start this conversation with a question that I’ve been getting a lot lately. I’m curious if you guys have been hearing the same from some of the folks in your audience. Everyone keeps asking me if we are going to see another liquidity shock as we saw there at the end of the 1Q into the 2Q of 2020. 

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. I’m curious about 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 cause something like that? Why would something like that not happen? I’m curious to hear some thoughts. I’m gonna open it up to the group. 

Something else I want to tell you guys is that I have a bunch of questions. We have 240 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. Luke, if you saw something that Lynn posted or vice versa or Jeff, feel free to just make it a topic. Back to the question: was this a liquidity crunch? Are we going to see more volatility? More spikes like the one that we saw earlier in the year?

Lyn Alden  2:38  

I can jump on it. 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. Of course, this is lost income but the government came in and replaced all that lost income with transfer payments. We’ve had the unemployment benefits, we’ve had the one-time stimulus checks and ever since the end of July, that’s tapered off now because there’s political gridlock. 

They’re currently negotiating a fiscal bill that’s somewhere between $1 trillion and $3 trillion. They have differences and they’re on recess. If they shut off for a pretty good period, we’re going to see more insolvencies because a lot of people are only paying the rent, only paying their mortgage, only doing necessary shopping because of the transfer payments that filled that gap. 

That’s why we haven’t seen some of the traditional recessionary shocks because so far, the median consumer hasn’t fully felt the impact. Whether or not we have come to another big liquidity shock like that in part comes down to fiscal decisions. Then international is another story. 

March had that big global dollar shortage that the Fed provided swap lines for. Those are still open even though they’re being drawn down. Unless something overrides that there is that kind of ongoing liquidity tap available to them if they need it. 

Stig Brodersen  3:53  

You’ve been posting in Shaundalyn showing that the swap lines were dwindling down. Is that an issue or will the Fed just go in then replenish those lines?

Lyn Alden  4:02  

Well, those are maturing essentially. They were loaned out on short-term loans and they paid them back. Most of the loans went to Japan and Europe. It’s not really like say the emerging markets. No country hit the absolute limit of how much they can borrow. They pay them back pretty quickly. They borrowed up to about $450 billion, the recent numbers are down to about $100 billion, just under so they’ve already paid on most of them. 

It’s good news. This means that the foreign dollar shortage currently isn’t that bad. That’s kind of being shown in other indicators like the head spread and other ways to measure global dollar shortages. So far it’s good news. There’s no kind of current signs that another one’s brewing yet.

Stig Brodersen  4:42  

Do you think that internationally there could be an event, say from the European Central Bank (ECB) or another larger entity that would throw the liquidity squeeze back on?

Lyn Alden  4:51  

If you look at Europe, the European Union, it 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. Some of those places like Italy and Spain, they’re potential powder kegs that if there’s a solvency event where it can be systemic. Here in the U.S. as well, we have a similar issue with the states. So many of the states are going to have a tough time coming out of this solvent. 

Unlike the U.S. government, they can’t print money. They’re not monetary sovereign. They can have outright shortages of billing going to pay their bills. That’s actually what’s holding up this curve. Well, part of what’s holding up this current fiscal thing. There are also the voting things but the democrats want more of the aid to go to states which republicans are not in favor of. There’s kind of this political issue playing out between state solvency in the U.S. and then in Europe, it’s country solvency.

Preston Pysh  5:45  

That’s a really interesting dynamic that you’re talking about between Europe and the U.S. where all the countries over in Europe are in different situations from an embeddedness standpoint. What else is interesting is you have some countries over there like the UK that have their currency. They’re kind of separated but intertwined. It’s a different dynamic here in the U.S. 

When you look at Europe versus the U.S. which one has a more favorable advantage when you look at that structure moving forward in this environment that we both know? I don’t want to speak for you but my expectation is we’re going to print a whole lot more. This is only going to accelerate moving forward. Who’s a better position based on that architecture that you’re describing?

Lyn Alden  6:29  

I think it depends on which metric you look at. My base case and it has been for a while is that the U.S. is going to have to print a lot more money than Europe in this crisis. On the other hand, the political challenges in Europe are a little bit worse because in the U.S. we have a 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 are more different systems that they have to contend with. It’s a similar issue but that political issue is potentially harder to do in Europe. 

On the other hand, they’re going into this. They had smaller fiscal deficits. Even some of the troubled countries like Italy had a smaller deficit as a percentage of GDP going into this crisis than the United States had. Germany had a surplus. Those countries as a bloc are going into this with a less extreme in many cases, fiscal situations. Many of them have trade surpluses or current account surpluses and the block as a whole as a current account surplus. There are some of those advantages but their political situation is harder to sort out. I think from there, I’ll leave it to the other two.

Stig Brodersen  7:30  

Jeff seems like you have a find.

Jeff Booth  7:33  

In general, globally we have deficits do matter. As Lyn correctly points out, the overall debt matters to what society has. Globally there is a reset coming. Every single country is playing their currencies now. The fiscal stimulus right now in the U.S. causes labor to be cheap relative to the world. The knock-on effect of that is Europe is going to have to stimulate like crazy to not lower their currency value as Japan and China. You’re racing monetary easing everywhere. I think this is important. 

What COVID did was accelerate this path. It was unstable long before COVID. COVID was just accelerating the power. I believe the U.S. dollar will get stronger before it gets weaker. It might get weaker first and then get stronger because what’s going to happen is other governments will print and turn on the tops as well. 

Preston Pysh  8:35  

Your base case is the dollar is just going to get so strong until it locks itself in a box?

Jeff Booth  8:41  

In the U.S. government. Because *Inaudible* of a strong dollar makes everybody else. They have to print more to *Inaudible*. The printing press is going to be on forever. We will never be able to remember that. To me, all governments and names are constantly going to drive inequality higher and higher.

Stig Brodersen  9:01  

Luke, do you agree with that? 

Luke Gromen  9:03  

I would agree with the point of, as you look at the structure, the existing system in terms of the net international investment positions where the U.S. has a massive negative net international investment position as a percentage of GDP, whereas Japan, Europe, and China are at the opposite end of that spectrum. If you look at the current account, the U.S. is deficit against the other surpluses. Then you look at U.S.’s aggregate debt outstanding relative to the others. 

My view is that these are all symptoms of basically the way the system has worked over the last 50 years. I would say that the end game to me is extremely clear: the U.S. 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 than the U.S. has just had a stretch of, to Baldwin and Jeff’s point, since March we had dollar crunch. Since then, the ensuing 2 months we had the Fed brother balance sheet of $20 trillion annual rates for 2 months or 3 months. 

That seemed to take the froth out of the wind out of the dollar shortage. It’s been interesting to me, if you would have said to me 3 months ago, “Luke, the Treasury is going to run the Treasury General Account up to $8 trillion. The swap lines are going to come down and the Fed’s going to go from $600 billion, I think it was a week at one point, whatever they’re doing now, which is something much less than that, what’s the dollar doing?” I would have guessed that the dollar would have been meaningfully higher and instead the dollars bled down a bit. 

That’s a bit relative to the structure as we understood things coming into this. It’s a bit of a nonsecret tour, in my view. What I’ve been trying to figure out is okay, to Lyn’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 DXY (Dollar Index) itself. I’m wondering, scratching my head a little bit. Where’s it coming from? Is it because we’ve passed the point of maximum pressure? Is it what we’ve done on the regulatory side? which I think is a really big deal with the SLR (Supplementary Leverage Ratio) changes. 

The Fed implemented in April where you have created a QE (Quantitative Easing) forever with a wave of the wand by making treasuries on bank books equivalent to cash. They’re doing several different things but I guess it’s sort of a very wishy-washy answer. I don’t have a very strong opinion on the dollar one way or another right now in the short-run but I do have a very strong opinion that over the next 12 months, the U.S.’s 5 trillion and T-bills (Treasury Bill) are outstanding, those are going to have to get refinanced and I don’t see where the private sector balance sheet capacity is. 

My view is that either the Fed helps with that or the U.S. banking system has *Inaudible* proxy helps with that or that could conceivably, if mismanaged from a political standpoint, like Glenn said, create a bit of a liquidity problem for a brief period.

Preston Pysh  12:11  

I wasn’t approaching it necessarily from the policy failure. Although, I think that’s a very real reason for why that would happen. I guess I was just looking at it from the 3Q here. The companies that are driving the indexes are just the few that are sitting at the top of each of the indexes, everybody else is suffering in a major way. 

When do those earnings calls start to matter? When do all these bankruptcies start to matter in the market? Is that something that you think is a potential for driving a 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?

Lyn Alden  12:56  

I do think that’s something we have to look forward to a quarter by quarter. The reason I bring up policy is because that’s essentially what’s holding them back from insolvency right now. The Federal Reserve can’t fix a solvency event, they can only fix a liquidity event. The fiscal authority has some power to fix a solvency event if they destroy free money and things but it depends on magnitude and timing. That creates, of course, all sorts of consequences downstream: you have a moral hazard, you have currency devaluation, you have cronyism, all sorts of ramifications from that. It’s both consumer and business. There are corporate bailouts. We gave money to things like airlines and others. 

Then we had half a trillion dollars in PPP (Paycheck Protection Program) loans most of which turned into grants. It’s mostly free money. Then you have the $1,200 stimulus checks. Then you have $600 a week in extra federal unemployment benefits on top of the normal state benefits. 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 or an executive and you lost your job that wasn’t replaced but any kind of middle-class people didn’t lose their job but they got a profound dollar check. They’re up to $1,200 or they lost a job. If they’re in kind of the lower half of the income spectrum, they made as much or more than they were making when they were working. 

We have not seen a decrease in personal income. We’ve seen a rebound in retail sales. Of course, a lot of that shifted online. Retail sales are up here today, not down. All-time highs. 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 retail sales are up. 

When it comes down to it, the solvent event is: yes, if we go a couple of quarters and we don’t have another kind of multi-trillion dollar give out that’s when we start to see solvency events or we get another multi-trillion dollar to give out and then we have to look a couple of quarters ahead from there to keep playing that game. 

Jeff Booth  14:53  

That’s the point, no matter what, Luke and I said this too: It’s really clear what’s going to happen. Not in the short-term, it’s going to move all across the world. Currency gets stronger or weaker. It’s really hard to tell in the short-term but in the long-term removal of fiscal stimulus, *Inaudible* 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. Then people will lose face and faith in currencies. One way or another, we’re going to have a repricing event *Inaudible*.

Stig Brodersen  15:31  

If you’re looking at the global aggregated monitor baseline money that’s being entered into the system, that graph does not look linear, it’s parabolic. My question to you is: is this parabolic shift? We’re seeing a one-off or will we continue to be on this slope?

Luke Gromen  15:47  

It’s parabolic. It’s something I talked to someone earlier today and I use an example from your book, Jeff. You have this deflationary push in terms of what I said, “use a 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 increases exponentially this way. Policymakers were having this problem of basically trying to ride two horses with a single rear end in two opposite directions before this happened. 

The COVID crisis, as Jeff noted, simply pulled forward all of these things probably by multiple years in terms of the physical problems around the world. As best we could tell from what we were thinking the problem was going to hit to, it’s here now. The question posed to me was: can the policymakers catch up to the deflation enough, basically prevent the system from the deflationary pressures, from breaking the debt for breaking the system? 

To me, it ties into Lynn’s point of it. It’s a political question. The answer is absolutely theoretically Yes, they can. What they cannot do is do so without destroying the currency relative to real goods and services. That’s the problem they face. When you say is it a parabolic curve or a linear bank, it’s a parabolic curve. It’s going to be in fits and starts. 

The Fed was at $3.7 trillion a year ago on the balance sheet and they’re wherever they are now $6.8 trillion or $6.9 trillion they’re down a little from $7 trillion last time I checked. That’s a down payment. To me what’s happening is you’ve either got to reset the system, reform the system politically. Ultimately, you’re going to see and I use the Fed’s balance sheet as just a proxy but basically, the Fed’s balance sheet is going to have to move in a nonlinear fashion. 

My opinion towards total credit market debt outstanding or fully reserving total credit market debt outstanding: the longer these deflationary pressures continue it’s a question of, “Okay, when do they start dispersing this money? Do we have political processes that hold these up?” That’s much more difficult timing to gauge in terms of just the political process of that. Within those, “What causes that? Is that simply Washington decides to finally get together? Or do we need a city to riot more cities to riot until they decide they want to stop that?” etc.

Jeff Booth  18:14  

You see any governments in the world with a currency reserve being able to politically stop printing? 

Lyn Alden  18:22  

Possibly Russia but there are not many countries. It depends on how long this goes on. Russia came into this with very low debt levels and a lot of currency reserves. Their stimulus has been somewhat smaller so they actually still have positive real yields but they’re not many countries like that and even there is pressure if oil stays pretty low.  

Jeff Booth  18:41  

The irony, I talked about this in the book is: the policy in 2008 essentially pushed oil prices up in real terms and made some of those governments way stronger as a result because if your raw materials or oil is your primary and it doesn’t change in real terms, it moves up. You’re going to have a positive surplus. The irony of some of these work policies as they drive some of the same geopolitical risks around the world that we

Preston Pysh  19:09  

Lyn, how does Russia continue to compete if every other person that’s playing the game is cheating?

Lyn Alden  19:15  

One of the funny things about Russia is their currency by many metrics is undervalued. Ever since there were sanctions on them, they actually had a very weak currency. It’s one of those things if you look at it on paper, it should be stronger. You look at the debt levels, you look at the current account balance; they went into this with a fiscal surplus, low debt levels, positive trade balance, positive current account balance, positive debt international investment position, and positive real yields. 

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, for example, their wheat exports were more competitive than many other countries. They were actually kind of gaining market share in wheat, their arms and energy, and also other commodities like nickel and things like that. If there’s a major currency devaluation, they’re going to have some degree of currency devaluation but because their currency is already quite cheap, they have some advantages there.  

Even compared to say, Saudi Arabia, that has lower oil production costs. Saudi Arabia has a pegged currency. They’re heavily reliant. They don’t do a lot of acts so their fiscal situation’s more reliant on oil, whereas Russia as they have an actual economy there in addition to the oil, so they can withstand some pretty severe shocks for quite a while.

Stig Brodersen  20:33  

When you think about it, it’s pretty ironic that the market 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 paper cuts.

Luke Gromen  20:48  

Very much so and potentially, too. Lyn, you have a great point on Russia. There was a great chart I think on Bloomberg the other day showing that in this last oil price drop you have seen a divergence between Russia’s FX (Foreign Exchange) reserves which have risen the whole time since March and the price of oil. That had never happened going back. I think the chart was at 10-year or 15-year, might have even been a 20-year chart. 

The point is, Putin’s basic transition into a much greater share of gold reserves is now paying off as well because it’s doing what it’s supposed to do. Ironically with oil 4 months ago, having gone negative briefly, FX reserves just hit all-time highs even with the price of oil at 40. 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 played that kind of a trial balloon out there. That’s a great point, Lyn. Yes, Russia is in an enviable position relative to a lot of other people. 

Preston Pysh  21:49  

Do any you guys read into the trade talks with China which were scheduled for August 15? These have gotten delayed. It seems like the narratives are changing. What are some of your thoughts on that? 

Jeff Booth  22:00  

The big game in China is the geopolitical and the tech industry. China has IP (Intellectual Property) stealing IP code. The big thing is WeChat shutting down, which I agree with. U.S. companies can’t have even access to China but we expect Chinese companies to have even access to the U.S. At the same time, they’re collecting the most important information on all of us into an AI (Artificial Intelligence).

There are some 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 has ever created as much debt to GDP as China. How much is this there? When you look at the manipulation of currencies and the bigger geopolitical risk of artificial intelligence and everything else; no wonder you’re starting to trade barriers you’re trying to shut out industries and I think you can expect a lot more of that.

Stig Brodersen  23:01  

Let’s talk about the Special Drawing Rights. They’re typically referred to as SDRs. SDRs Barton’s national type of monetary reserve currency that was created by the International Monetary Fund. They work as a supplement to the existing money reserves of member countries. Luke, what are your thoughts on the future role of SDRs? What type of role do you think it will play on the global scene?

Luke Gromen  23:31  

I’ve watched gold priced in SDRs and it broke out in SDRs earlier this year, which was a signal that gold was destined to probably set a new high this year in dollar terms before too long. Beyond that, to me, the SDR as a neutral settlement asset or SDR bonds, the odds of that are probably waning simply as a result of the geopolitical situation and tensions that we’re seeing with the U.S. and China. In May you had the U.S. come out with their new views on China or their updated plan. 

If you will, Preston. You, Grant, and I talked about that back in June, where we said we’re in new great power competition with China. I said at the time, one of my best relationships on Wall Street said that the document read like a war scroll. Point being that to get an SDR type of multilateral neutral reserve asset via monetary conference requires some level of cooperation. 

The two biggest stakeholders in the system to be able to sit down and talk about it but it just doesn’t seem like that’s happening right now, seems like there’s more fragmentation going on than any sort of agreement. I don’t know how much of a role the SDR has to play at least in the intermediate term to resolving or being a pivot to execute a reset of something. A reform of the system of some sort.

Lyn Alden  25:03  

I agree with that. Something I’ve been covering and I know Luke covers that even more is more trade happening outside of the dollar system, particularly with energy and other things. The world’s moving in a more multipolar currency direction. Now the question is: what form does that take? For the SDRs one possible form, it’s a packaged multiple currency solution. If you price, say commodities in SDRs and we have SDRs take a larger market share of reserves and international trade but that to Luke’s point requires a lot of coordination which I don’t think is likely. I’ve been looking more at essentially just regional reserve currencies. 

If Europe in price energy more in euros and China as the largest commodity importer, if they can price some of their energy in Yuan then you have three or more major currencies that can price oil and you have a dollar taking a slightly smaller market share of that. That’s a more likely outcome than SDR. Then you have things like gold and other assets that central banks hold on their balance sheet. They don’t have any counterparty risk.

Luke Gromen  26:06  

I think the fact that you’re seeing that as you said, you’ve seen some more oil priced in euro there was an article last week on Bloomberg noting that over half of what China buys from Russia, is being bought in euros not in yuan and not in dollars. Obviously, given that it’s Russia, you can presume a lot of that is energy-related. They thought a lot of it had to do with Rosneath last year switching to invoicing all exports in euros. 

The de facto looks like they share gains since 2013, notably gold has gained share about ex reserves and the amounts in the aggregate are still relatively small but you can see there’s been no growth to a slight decline in dollar FX reserves since in particular 3Q 2014 and de minimis growth and other currencies but a notable trend of growth in central bank gold reserves over that time. I think that’s part and parcel of this. What’s driving that is multi-currency energy pricing in particular.

Preston Pysh  27:04  

Let’s talk gold, which is probably the hottest investment of 2020. This is my concern with gold moving forward: is everyone’s looking at gold as a store of value? Everyone has currency concerns 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? 

You’re in a circle with other parties and everyone’s got a gun? They’re pointing at each other? Right? 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. When I think of that, and I’m not trying to anchor your opinions, why is that opinion that I have wrong? I guess that’s what I’m trying to ask. It just seems So improbable to me.

Jeff Booth  28:02  

Preston, I look at this from a business standpoint, from a macro. Very rarely does a business do what it has to do to change. It protects its status quo. All of the people inside that business are protecting the status quo; why Kodak doesn’t need to invent the digital camera? Did we see more pictures today than anything? They have none of the gains of it. You see this time and time again.  

For that merit, 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 this ever deflationary, what they would have to say is, “We’re going to increase taxes a whole bunch 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; be able to charge taxes for our services”. 

I don’t think there’s any possible *Inaudible* too far past the point of the rescue of the existing system. If you’re going to where Bitcoin is and everything else, I believe that’s why Bitcoin is where it is, a once in a lifetime asset type of value creation of asymmetric *Inaudible* is so improbable that governments come together on any terms that could fix this problem.

Luke Gromen  29:28  

I think teaching I agree, people in the status quo aren’t going to change anything. It’s interesting when you hear the United States accused Russia and China of trying to break or change the rules-based global order. They’re acting outside of the rules-based global order and when I think of gold, I don’t think anybody’s going to voluntarily pay their currency to it at any point. 

What I think it’s important to look at is: we talked about the fiscal situation 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. There may be times when they’re behind but there’s going to be a lot of the monetary creation. 

Then you look at the geological reality of the Russians, Saudis, and Iranians: the raw material producers. We know that oil fields deplete and go 100% watercraft and individual fields do all decline. If you’re Russia, you’re looking at a situation where you’re going to be swapping your oil, your finite oil for rapid, your oil is doing this and the fiat currency quantity your pricing *Inaudible* and the bonds that are yielding zero negative real rates for decades to come in all likelihood and the quantity is doing this. 

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. Where this system is going is; it’ll be pegged to oil. 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 100 barrels amounts, 200 barrels amounts, 500 barrels amounts, 1000 barrels amounts than the fiat currency, than $4 at the current price is, then you’re going to see oil revalue gold. 

This is precisely what we’ve seen since 3Q 2014 when China began reopening the gold window effectively right with the Shanghai Gold Exchange International Board and Russia began selling oil in Yuan terms on the margin. When that announcement was made it took 13 barrels of oil to buy one ounce of gold. 

Today, we’re at 41 and close to 2000. In oil terms and that’s ultimately real money terms, gold and oil have been the only two things that have backed currencies going back 350 years. That’s where 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 FX reserves”. That’s what it’s saying. 

When I look at Kazakhstan as an interesting one, I was looking the other day at uranium prices because I noted that the U.S. production had fallen way off. uranium prices have bounced up a bit recently. You say “well, okay, wow, who’s the biggest producer of uranium in the world?” It’s Kazakhstan. They produce 43% of the world’s uranium. You look at Kazakhstan’s gold reserves. They’ve been rising steadily for 5 years or 6 years or seven years, similar to Russia’s. They’re taking their dollar surpluses in uranium and they’re rolling it into gold. 

Uranium is bidding for gold, oils bidding for gold and when you look at the relative size of the physical gold market relative to the just physical oil alone in annual production terms is 10x the size of the physical gold market. Let alone you layer in uranium, nickel, copper, gas, etc. that’s where I think gold has a role. Not that the U.S. is going to get religion and say, “you know what we’re going to pay gold”, If they’re going to pay gold, it would have to be some extraordinary number: $10,000 now it’s $20,000. 

What 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 the system ironically organically changing back to a version of the pre-71 system with wrinkles. 1946 to 1971, the dollar was the hegemonic currency. The dollar was the reserve but gold was the primary reserve asset. Then in 1971 treasuries became gold, the U.S. government has effectively been emitting gold by emitting debt over the last 50 years.

Stig Brodersen  34:11  

Because the whole list of those instruments are now making money and before they didn’t adjust for inflation.

Luke Gromen  34:17  

Real terms, yes. Realistically, there was only about a 10-year span of time where those were good. Where treasuries were money good on a real basis. When they stopped making money on a real basis, oh *Inaudible* oh wait, it didn’t matter because we were the only game in town. Then after a wait, the world started shifting. That’s really where gold has this role which is: we can’t afford positive real rates. The West can’t afford positive real rates more broadly. 

The commodity producers, in that case, are probably looking at it. I know I’m looking at it personally as well. If I’m going to have to buy a 0% yielding bond, I would rather have a 0% yielding bond of infinite duration and finite issuance, which is gold, than a 0% yielding bond of finite duration and infinite issuance. The issuance is going to be infinite. That’s where I think gold has a role. 

Preston Pysh  35:11  

Lyn has a great chart of what you were talking about there as far as the bonds up until 1981, we’ll have to somehow include that in the show notes. Lyn over to you. I want to hear your thoughts because we know Hugh Henry thought of your thoughts there, Luke, over to Lynn. 

Lyn Alden  35:28  

I agree with what both Jeff and Luke said. Just to add to that, I agree with the sentiment that we’re not going to just move orderly onto any sort of gold standard. I don’t think we’re going to see something like that like we saw in the past. Essentially, we can look at this as almost like a fourth printing event. 

That’s how the demographer that coined that term would refer to it as and you don’t see a new system until this current system breaks and gets so bad that somewhere something else comes out of the ashes and they build a new system or there are ways that it can be mitigated like shifting to more of that gold as the central bank asset can change the dynamic a little bit. You can get that more gradual change depending on how bad things get.  

One example of a country using gold, to some extent in India. They issued some sovereign bonds that were essentially gold-backed. It’s a small percentage of their issuance. The incentive to do that is that they get much lower yields on their bonds for a similar 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. If you’re concerned about the rupee, instead of buying a treasury bond yielding nothing, you can lend to India and you can get a lower rate than India’s normal bonds but then instead of being backed by the rupee, it’s backed by gold, essentially. 

You still have the counterparty risk of India that honors that agreement but in exchange for that counterparty risk, you get that yield. There are things like that where they’ve used gold to essentially demonstrate trust. I think you could have it say an extreme environment where a currency breaks so bad and they go to something more physical but that’s more of a tail situation. That’s a breakdown of the system or you can add these more moderate cases where they just want to have, they want to show trust, and they want to get yields lower.

Jeff Booth  37:13  

Lyn, a question for you. What we all agree on is that there has to be effectively infinite money printing globally in every single jurisdiction. Doesn’t that eventually reset the button no matter what and through a revolution because what we’re talking about is a new monetary system that always comes out of the revolution. It’s time to reset everything else. 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 there has to be a day of reckoning coming. 

Lyn Alden  37:55  

Yes, that’s essentially what we saw back in The Great Depression and World War II. Unfortunately, we had the tariff wars evolve into hot wars. 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. Now, that’s starting to break down. 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 a more gradual pace. It could affect some countries more than others. There’s a lot of variability both in the timeline that it plays out, in what form it takes, and how bad it gets between now and that next form. I think there’s a lot of political things that I wouldn’t even try to guess about this number of political variables from geopolitics and domestic politics that can make that path extraordinarily complex.

Jeff Booth  38:48  

I’d love to dig into one another because if we’re talking about 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. The only thing that fixes it say austerity for a long time and probabilities are very low and a government’s claim to do austerity. If they do, it sets up a negative bias in their currency and jobs and everything else versus others who are printing. 

Let’s just assign a very low probability. Say, the sort of probabilities are very high that the printing is going to continue unmitigated. In that world it makes sense. I’m not saying it makes sense from how an economy should look because the government doesn’t create jobs. If the government is 60% or 70% of an economy is used misallocation of capital.  

In that world which we all agree with; 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 (Modern Monetary Theory) for people getting left out, why wouldn’t they get money too? I’m agreeing with MMT, I think it just takes us off the clip faster but I understand the rationale behind people saying MMT.

Luke Gromen  40:08  

I agree. It’s a political question and it ties back Jeff to the points 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 unemployed and machines are doing everything we’re doing. That’s where this could go. 

Jeff Booth  40:29  

Ironically this is making that happen faster.

Luke Gromen  40:32  

Correct. 

Jeff Booth  40:33  

Driving that faster.

Luke Gromen  40:35  

Yes. Then the question becomes: your outcomes are the other 299,999,000 people with 12 guns for every 10 people. Each other or does the government become, do we set up some sort of MMT system? Where 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 ideal to the optimistic situation as you manage a transition through an application of MMT UBI (Universal Basic Income). 

Then we wake up in 5 years to 10 years as a period of natural generational transfer but then also retraining and a nation of shopkeepers again. Possibly where you get some money from the government. You also like to make art, make pottery, and you like to sell that you like to do fitness. There’s a lot of, you go back to this conceptually, that might work. 

To your point, the options on the path are either the technology consolidates all the money in the power and amongst a very small number of people who then can’t go anywhere or they sort of hive off in gated communities or gated resorts while the rest of us have a very bad political situation or the government gets involved at a much greater level in terms of the UBI and MMT that you were referring to is my view of the most likely option. 

Jeff Booth  42:15  

I agree with you about political ox and MMT. I suspect MMT is coming in some sort of form. 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?

Let’s just use an extreme example. I’m going to print a whole bunch of money. I have a reserve currency; everybody else’s 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. 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 and other assets that you’re buying going to be trusted? I think that’s the same reason that nobody’s gonna trust yuan as a currency. That’s actually why we’re way closer to the endgame than people realize because this is happening at lightspeed all around the world.

Stig Brodersen  43:19  

Then if your broker knew to call the Bretton Woods 2.0 system. In that world, you can make the argument that the world couldn’t handle the picked 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 Lyn, I can see you have a point.

Lyn Alden  43:40  

One thing I’m going to add is: a theme I’ve been focusing on is that the past 50 years have been somewhat unusual in terms of global reserve currencies. A lot of people ask, “okay, if the dollar is not going to be the global reserve currency as currently structured, then what currency is going to replace it? Is it going to be the Euro with Yuan?” Of course not. 

They don’t have to stay at the same profit that the dollar has. If you go back before the current system, essentially the neutral reserve settlement was gold. Even though there were global reserve currencies for periods that were trusted in multiple countries because they were the dominant economic power; their paper was accepted. It was gold that provided the background for it. Then we went into the Bretton Woods system, we had the dollar as a paper asset but it was gold. I think Luke mentioned that earlier. 

Then when you transition to the petrodollar system; that’s the unusual period where the dollar itself was the center of the global financial system. After World War II, the U.S. GDP was close to 40% of global GDP. That has steadily declined as Europe and Japan recovered. Then we have the rise of China and other emerging markets. Now, the United States is in the lower 20% of global GDP in dollar terms and it’s even less, it’s in the *Inaudible* if you look at purchasing power parity. 

 Back when it started the petrodollar system the U.S. was the biggest importer of energy. Now, it’s China. We’re at a stage now where there’s no country large enough that their one currency can be 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. 

We’ve seen 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 and Russia broke. In this period, we had Argentina, Turkey, and several EMs. 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 strong. The whole world slows down.  

Going back to the idea of all the countries pointing guns at each other. It’s big, like a huge standoff. There are all these say the dollar, if the dollar were to fall noticeably; on one hand, you want to have to say 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 dollar-denominated debt. If that were to decrease that would relieve some of their pressure. 

We have a situation that looks more like 2017 where we had this big global rebound based on a 10% weaker dollar. 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. Whenever looking at how different currency outcomes play out, the hard part is that there are always so many variables. They can kind of offset each other and go in different directions.

Preston Pysh  46:34  

Guys, I want to talk about this one question that we had posted there on Twitter. The person wrote: “The 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?” 

One of the most popular questions or complaints that I hear when I post anything about Bitcoin is that people’s immediate response is: the government is now ever gonna 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 tokens. They’re going to push those down the global economies throat and that’s going to become what is widely adopted. I’m curious to hear your thoughts about this effort and the idea of governments being able to step in and compete with something like Bitcoin.

Luke Gromen  47:24  

From a mechanical standpoint I don’t have the background to say could they do it. From a monetary or from a structural or top-down perspective what I would say is that if they were to do that; that starts to break the system as it’s currently structured as if you take a step back to see

Preston Pysh  47:46  

Your cannibalizing yourself is what you’re getting at, Luke?

Luke Gromen  47:50  

Yes, you’ve extended this system. If you remember back in the 90s, there were things called 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. There was this market-based discipline enforced on the U.S. government. It’s served a little bit like a gold standard.  

If you go back to the famous quote from James Carville in 1993 saying, “I used to think that if there’s reincarnation, I’d want to come back as the Pope or as a 400 baseball hitter. But now I want to come back as the bond market because you can intimidate everybody”. That was when the bond vigilantes were enforcing discipline on us deficits back then.  

You fast-forward 7 years from that and you had the unregulated expansion of interest rate derivatives. You came in the year 2000 and I want to say there were, $50 trillion in gross notional interest rate derivatives and by 2008 or 2009 it was $500 trillion or $600 trillion. You had the expansion of these derivative markets. Market neutered monetary signals. The interest rate derivative market neuters bond vigilantes. The massive expansion of the paper gold market neuters the gold market as a signal. 

We saw that happen with Bitcoin and Bitcoin futures going to come out and when they did it neutered Bitcoin as a signal for a while in terms of what was happening. My point is that this system has been under stress for a long period 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. If the Fed comes in with their token, those edifices are going to either collapse on themselves massively deflationary or the equity underlying them so to speak, that Fed tokens are going to have to be created in very inflationary amounts. 

I don’t have any Comment on will it be a Fed token or a Bitcoin or gold or however they do it. To me, it’s a little bit of six of one-half dozen or the other and that could quite possibly be pretty inflationary in terms of just fiat creation. 

Jeff Booth  50:16  

Preston, I wrote about this and the IMF had a working paper where they said that in the next phase of this, interest rates might need to go down to -5 or -6. It’s staggering to think about interest rates there 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 it out of their systems. 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. 

This is a way to essentially get people to use something that they can take interest rates lower without them pulling out of the bank. To me, that’s the idea behind it. I think it’s ill-informed. They need to come back to the first principles we’re talking about. Technology’s deflationary period. It’s almost nothing else that needs to be said. Some of the Twitter feedback, everything else, we get some tremendous contributions out on Twitter and some of the people around. 

At the end of the day, if the technology is deflationary and it’s advancing everywhere, the existing system won’t work no matter what. Nothing changes. 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 but nothing changes at that. 

Lyn Alden  51:47  

I agree. There are a couple of different angles because the original question is also related to outlawing a Bitcoin for example, if they want to have their tokens. That’s part of the initial question. One thing I have highlighted is that there is close to a 40-year period where treasuries didn’t pay positive yields in the United States. It was basically bought and held a 10-year Treasury to maturity. 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 official CPI (Consumer Price Index). 

Almost perfectly overlapping with that period is when gold was illegal to own for U.S. citizens because they outlawed one of the relief valves that people could have used to escape that issue. There are a lot of things different back then, the currency was pegged on gold for a lot of that time. That opened up different incentives for them to want to do that. There’s that kind of historical background. 

Touching on Jeff’s comment about their incentives wanting to do it. Yes, they have more control if there’s no paper currency and no physical kind of commerce that can happen outside of their system. That’s their lower floor for interest rates but they also have other incentives. For example, if they want to do a stimulus so that they want to have people spend it rather than saving it because that’s how a lot of the policymakers think they want to keep the circle going over and over and over again quickly. They want to get that velocity up. 

One thing they could do if they had a more sophisticated system is that they could send out those tokens that expire after 3 months or 6 months for suspending. They could program them so that they can only be spent within the jurisdiction. They can’t escape the country or they can’t have that sort of issue. It gives them finer control. If you go into the darker side than that, if you look at China, they could shut off people’s currency units that have a low social credit score, for example, that you get Orwellian there. 

There’s *Inaudible* 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 ban. It’s decentralized and it’s technically impossible for them to confiscate. Physically, they can do things like banning the exchanges, ban the apps, things like that. They can make it harder. They can increase the friction so that they can do things like that that makes the thing a lot more complicated. That, of course, opens up game theory between countries and which jurisdictions want to be seen as places where people have property rights.

Preston Pysh  54:12  

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 that’s not a decentralized protocol. It’s something that is still very much centralized and still inflationary. Which for anybody hearing that that’s a bull argument for Bitcoin which has a fixed baseline of units. 

Lyn Alden  54:39  

Exactly. Yes. A lot of people think that it’s a threat to Bitcoin if say the Federal Reserve comes out with a Fed coin but as you point out, it wouldn’t be scarce still. It would just be like a more complex dollar. We still have this kind of gold and Bitcoin are scarce compared to fiat currencies that can be expanded infinitely. 

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 would policymakers want to do that and then try to ban the exit points. It depends on whether you look at it from a policymaker perspective: what do they want to do? and how you view it as an investor or citizen perspective: how do you want to protect yourself against what they want to do? What kind of decisions do you want to make compared to the different systems that can pop up?

Stig Brodersen  55:25  

That builds into Jeff’s argument that you mentioned at the beginning of the discussion that this forced them the ability to implement the MMT here in the next 2 years. Jeff?

Jeff Booth  55:36  

I’m building on Lyn’s comment. If you think about where Bitcoin is, it’s really hard because of game theory. It’s really hard to stop because if 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 $350,000 in Portugal, I can get my entire family golden visa. Every country has something like this. What they’re trying to do is bring in capital jobs and everything else into the country. What’s happening today in different countries trying to attract the best talent, capital, everything else to drive their economies. 

Let’s say a government bans Bitcoin or something U.S. pair event that bans Bitcoin, it creates an incentive for other governments to do that. Now you pair that as well with, in history, you ask, why didn’t people who you could see the writing on the wall, you could see the kind of revolution coming; let’s use the Weimar Republic, as an example there because it’s probably an illustrator. Why don’t the people with money left because most of their assets are priced in that currency, houses, apartment buildings, currency, and everything else?  A country can put capital controls on and make it difficult to get out. 

A lot of people stay in what they know is terribly terrible for their families in the future because 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 in. From game theory from why it should be in your portfolio. From that, not just you can move it, it’s very hard for governments to stop because of what we do, what we just talked about. I would not want to live 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 100% of my portfolio in real estate in a given region for the very same things we’re talking about. 

Luke Gromen  57:42  

It’s interesting because if they do go to a negative rate like that in the U.S., the challenge for them doing that in the U.S. is that would effectively end the dollar reserve status as structured. After all, you either need a two-tier system right where you’re going to pay Americans -5. Fed funds rate for Americans will be -5 and the Fed funds rate for Japan and Saudi Arabia will be 1 or something. There’s precedent for that.  

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 have 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 that if you went to a negative rate worldwide, you would have $7 trillion in U.S. dollar FX reserves that would be bidding for gold almost overnight. That’s a tiny market. Some would go into bitcoin, but ultimately, that would complete that reset in a very fast manner. There’s probably some positives to that but that’s a challenge for executing that globally.

Lyn Alden  58:49  

In the past, an example of that kind of 2 level system was the gold standard in the US. The gold standard was canceled for U.S. citizens like they’re converted to gold but it was still for a long time held for foreign international settlements. Then eventually they got even off of that after the foreigners started to call the bluff and say we want the gold we’re not going to keep trusting the system is precedent for that kind of 2 phase approach. 

Yes, that goes back on Jeff’s point, the power of Bitcoin is that you can, there is a news item just recently where a Chinese woman was stopped at an airport trying to bring gold into the U.S. It wasn’t even that much. She had a few dozen gold coins. It’s easy to stop that now whereas in Bitcoin you can really just memorize 12 words and just go across the border with nothing. That’s a really powerful technology that does circumvent a lot of the issues that make it hard for policymakers to deal with.

Jeff Booth  59:47  

Preston for you, I think you were ahead of this along the way. Putting your reserves and your company into bitcoin and talking about the reasons you did, 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 work; this is a very real conversation right now.

Preston Pysh  1:00:17  

There’s a lot of people on Twitter asking me that and I don’t have access like you do, Jeff. Let’s first explain what’s going on. You’re talking about MicroStrategy. The ticker is MSTR (MicroStrategy), Michael Saylor, an MIT grad. This company has a market cap of $1.3 billion, has $500 million in equity. Michael had a huge amount of voting rights for this company and went out and took $250 million and denominated all of it into bitcoin and just slapped it right on the balance sheet of the company. Half of the equity for the entire company is Bitcoin. 

You’re saying that in boardrooms of major multibillion-dollar companies this is becoming a talking point?

Jeff Booth  1:01:03  

This is a talking point. It is more than just a talking point. I think this plays into your thesis and a whole bunch of it. If you just go with what we all know, what everybody knows and can feel. Governments are forced to stay here, right enforcer devalued currencies and is going to continue, then people sitting on those currencies are looking for hedges against them. That’s why gold is moving. That’s why bitcoin is moving. It is a very real conversation in boardrooms.  In the last week. I’ve had two thoughts committee meetings about it.  

Lyn Alden  1:01:39  

That CEO, if you look at the press release, he specifically cited all these macro factors as part of his reason to want to move into bitcoin. He cited the massive fiscal stimulus, the debt monetization, that QE that was happening with the currency as his specific reason for wanting to shift into, first they described it as alternative assets and then they revealed that the alternative asset is pursuing Bitcoin. 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 pointed out it’s up to $1.4 billion now market cap.

Preston Pysh  1:02:14  

I liked how you said it now. 

Lyn Alden  1:02:17  

Oh, yes because I was looking at the other day, they’re up to around $500 million-plus in cash. Not even just equity, it’s actual cash. They have no debt, tons of cash. This company like they’ve been having some growth issues lately but the biggest asset is they have a huge amount of cash relative to their market capitalization and just all this. 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. 

Preston Pysh  1:02:45  

I think what’s crazy for people that don’t play around with really big numbers like the ones we’re talking about: a company that took $250 million and bought Bitcoin with it. When you look at a company like Apple and you look at their balance sheet and their last year closeout was around $100 billion in cash and cash equivalents, $250 million is a total pittance when you compare to the ability to drop any amount percentage-wise of $100 billion. What that’s going to do and I mean that’s just one of many companies that have big positions on their balance sheet with marketable securities that they could just change 1% or 5% whatever it might be. 

The biggest thing that surprised me about this MicroStrategy thing was my expectation for companies to start putting Bitcoin on their balance sheet as marketable security was that it was going to be a 1% or 5% allocation 10% at most, not the entire cash equivalents were turned into Bitcoin. It was just crazy that that was the first thing that we’ve seen. Jeff, you’re thinking that when we start seeing the 3Q reports coming out that this is going to be more of a maybe common thing than what we’re seeing today?

Jeff Booth  1:03:58  

I think it is just on the continuum. Well, I would have bet against what MicroStrategy did is bigger, like a piece on an audit committee, I wouldn’t say, “okay, go do it all”. However, 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.

Preston Pysh  1:04:23  

You got all these investing podcasts. Everyone, there is pretty much saying a lot of the same stuff and its stuff that comes out of the finance industry where you have a bunch of people that are managing other people’s money. 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 finance game. That’s what all these investing podcasts and people that are doing this they manage other people’s money. What if you already have a net worth of $100 million or you have a net worth of $500 million 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 $3 billion. If he makes a mistake on this one, so what? I can handle the volatility. I’m not managing somebody else’s money. 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? They can handle the volatility because they have free cash flows and they’re not going to blow up and lose all their index of clients because they’re managing other people’s money.

Luke Gromen  1:05:40  

Think about it too, if you’re a billionaire there are only two ways you lose in this life. You can’t spend a billion dollars. There are two ways you lose: you lose the war slash revolution and you lose rapid hyperinflation. That’s it. Those are the only way you ain’t ever going to eat again or you ain’t ever going to eat well again for every meal. What you’re describing checks those boxes. You don’t have to have a lot into a Bitcoin or gold but a Bitcoin in practical terms, what we’re talking about here is where you just take that risk off the table. You have hedged that out now and you’re starting to see that. To your point, when you don’t have the career risk to be different. Why wouldn’t you?

Preston Pysh  1:06:19  

Yes.

Luke Gromen  1:06:19  

Given what we’re seeing.

Preston Pysh  1:06:21  

Michael Saylor has no concern about losing clients. The business is still going to pump out a bottom line. Now, if he’s wrong, yes, he might not have the ability to navigate storms in the future with that specific company. I guess my point of saying this is I think there’s a lot more Michael Saylors out there than people realize.

Luke Gromen  1:06:41  

I agree with that statement.

Preston Pysh  1:06:42  

Yes. That he’s not managing somebody else’s money. He has created value in the marketplace and he’s sitting on a couple $100 million and he’s got other billion-dollar companies. I think it’s more common than people realize.

Jeff Booth  1:06:54  

Preston if you just kind of go back to this structure, “how bad the system works today”. Let’s just say the interest rates where they are negative real interest rates. What is that telling the market participants? You’re a CEO, what does that say? Do not have cash on your balance sheet no matter what? 

Preston Pysh  1:07:12  

Yes. 

Jeff Booth  1:07:13  

Lever up, lever up because you can.

Preston Pysh  1:07:15  

Because you’ll pay it back with worthless money.

Jeff Booth  1:07:17  

With the board’s worthless money?

Luke Gromen  1:07:19  

But don’t put it in capital, don’t put it in proper

Jeff Booth  1:07:24  

For a rainy day, don’t put in capital. Put it somewhere else or buy back your stock.

Preston Pysh  1:07:29  

Yes, buy back your stock.

Jeff Booth  1:07:32  

You’ve created a structural imbalance in the system forever because once the Fed then says, “oh, no, all those jobs go away, if we don’t save the company, and they have no cash”. They have to make it right because of the political cost not to, you embed that into the system and you get more of it the next time. That’s actually what we’re saying 2008 to now. 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 U.S. actually might be stronger than the whole bunch of regions. Globally that’s not going to happen. That means that Michael Saylor and others who are are saying, “okay, there is an exit out here from this”.

Stig Brodersen  1:08:21  

I’m sure a lot of people in finance are looking at MicroStrategy and they’re thinking that’s just a one-off. 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 500 *Inaudible* Apple comes out and has converted 1% of their cash into Bitcoin. What does that do to the narrative of Bitcoin? Will we see any fundamental change in the financial industry?

Luke Gromen  1:08:51  

I think you’re seeing it in gold. Sam Zell. There’s a guy who’s gotten the big things right more consistently than Sam Zell? I mean, that can’t be that man, he’s been brilliant. Earlier this year, I was 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. Part of that I refuse to believe that’s the only reason he’s buying gold. That is the politically acceptable narrative for Sam Zell to get on CNBC and say why I’m buying gold. 

You can’t stand up there and say the things that Luke Gromen says. Warren Buffett’s whole career; “I hate gold. I hate gold. I hate gold. I hate gold. I hate gold”, now he owns gold and it was interesting. We highlighted this last annual meeting. He did the annual letter. We highlighted 2 things (1) He made a 90-second discussion where I said, “it sounds like he might be considering buying gold” (2) He did this highlight two meetings ago, “I bought my first security in 1942 when I was 10 years old and Gold’s done nothing and stocks have done great”. That’s why gold is stupid. 

You look at the chart you go, “all right, tell me about how gold did versus stocks from the time you were born in 1932 to 1942” because ultimately, I agree most of the time gold, bitcoin *Inaudible* Don’t care. For short stretches of the economic cycle. They’re all you want to own. The fact of the matter was *Inaudible* said, “Look, he’s been a little disingenuous from 1932 to 42”. 1942 happened to be the all-time generational low in stocks and the battle of coral seed stock to bottom then in a way they never went back.

Preston Pysh  1:10:50  

He would counter your argument by saying, “well, that’s why I bought a gold company and not gold.” That’s what he would say. 

Luke Gromen  1:10:58  

Because they’re raising 7 and no one else did. That’s all. 

Preston Pysh  1:11:02  

Lyn, you had something you wanted to say? I want to hear what Lynn has here. 

Lyn Alden  1:11:06  

On that point, I was looking at the Buffet purchase because that was about $500 million. On his balance sheet that’s a small thing. 

Preston Pysh  1:11:13  

It’s nothing. Yes. 

Lyn Alden  1:11:14  

It’s also interesting because he spent $10 billion getting our energy pipeline in recent months as well. He’s got a little bit of a hard asset theme going on there. It’d be curious to see what he does for the rest of the year or next year. Going on the earlier point. I was holding the thing that Bitcoin is currently; the whole market capitalization is less than 1/10 of a percent of global assets. It’s *Inaudible* percent of global assets. 

You’re going back to the point: why would every kind of multimillionaire not want to have 1% in Bitcoin? For example, Which is overweight Bitcoins because you’re 20x overweight compared to it’s kind of a market-cap-weighted asset percentage. It’s such an asymmetric bet at this point. That’s one of my bullish thesis on Bitcoin, especially at this phase. *Inaudible* is that there are so many strong reasons to have at least a small bet, non-zero Bitcoin position compared to the reasons to have 0 Bitcoin. 

Going back to that point where there are certain periods where you only want to own gold, you only want to own kind of scarce assets. Especially with Bitcoin because it’s so asymmetric. You don’t even have to make that all-in bet. You can put even a small percentage of the portfolio in it and still benefit in some way. If that plays out. If it doesn’t, then you didn’t risk a lot of capital. I think that’s something we could see going forward.

Preston Pysh  1:12:36  

I think it’s gonna be interesting when you look at: what are the Warren Buffett types of the world buying through this? What are the top 5 to 10 tech companies buying through this? Because I expect that 6 months from now: Apple, Amazon, and Google are going to have Bitcoin on their balance sheet. 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. I suspect it’s going to be a really interesting dynamic as the way the market perceives that. Are we going with these companies that are eating the market cap of the entire world or are we going to go back and do things the old way? It’s gonna be interesting to see how it plays out. Jeff feels like you have something you want to add there. 

Jeff Booth  1:13:32  

I hadn’t thought about who does it first but I think that 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 go first.

Preston Pysh  1:13:46  

I remember Facebook did the Instagram deal. As a hardcore value investor at that point, I remember looking at him like these prices they’re paying for is nuts. This makes no sense whatsoever because I didn’t understand why the network effect was so powerful in that platform but Mark Zuckerberg and others at Facebook clearly understood that. The same thing with the Youtube Deal, the amount that Google paid for that, I was just like, “this just doesn’t make any sense”. 

They have no earnings. 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 to use that to their strategic advantage. That was a huge learning curve for me as an investor to understand that value proposition that hadn’t occurred in the past. I can see the same thing when you’re talking about decentralized protocols and replacing money. I see the same thing taking place but that’s me. You had something else there, Jeff?

Jeff Booth  1:14:47  

That’s actually what makes you so valuable in this space because you started. You were a value investor and you had enough learning to not be 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 tell others 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? They collect more information than you. They have the weights, dimensions of every product they sell, they have the to-from information, and you have none of that. You’re sitting on top of the stack and Amazon is collecting the information of all the building of logistics networks with this information because they can virtually bin pack products and everything else and see flows of goods”. 

I said, “as they do that, they become more valuable than you because now they know they have a better advertising vehicle too”. You have to be able to connect the dots kind of orthogonally and say, “well, where is this going from a data perspective to do it?”. Very few people caught in one narrow-sense can do that. In an old industry to get to that creates its value differently.

Luke Gromen  1:16:07  

It’ll be interesting too to know where the views are, what the government’s reaction will be. Now you’re getting into a little bit of a delicate area of your Apple. If you’re Amazon, if you have these massive government contracts and you start taking this cash and 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 did not mind your monopoly position, Mr. Amazon and Mr. Google but now we’re going to have to start spending some money.” It’ll be interesting to see for two reasons. Number one, will they do that because under where we had been, the odds of that happening if they went too far with moving away from dollars into bitcoin that would be a likelihood. Knowing where we are and knowing that you need a reset. You need a catalyst. Knowing that Warren Buffett is buying gold is a consummate insider. 

You go back. Salomon Brothers needed a bailout. They called Warren Buffett long-term capital God. When they blew-up, Buffett got shown the book. Goldman, Bank of America. Buffett owned a bunch of silver in the late 90s. He got talked to it and said, “Listen, this is not how this is going to go”. 

My point is that if these tech companies start doing this and there’s 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’ll be. If there’s not that reaction it could mark a starting gun for, “okay, let’s just get out of the currency and be quite inflationary in terms of our signal”.

Preston Pysh  1:17:53  

Lynn’s comment about the tokenization and putting restrictions on the tokens as to how they could be utilized in the marketplace; if you start seeing what you were describing there, Luke, where these big companies are then taking some of their revenues and they’re starting to drop them into crypto exchanges and buying Bitcoin and putting it on their balance sheet. 

If this dollar or euro token or whatever could come with restrictions that would prevent it from putting it onto any type of crypto exchange, therefore, leaving the ecosystem or being transmuted into some other type of token. My concern with that happening is they just don’t have enough time left on their side to develop something complex. 

Look at the challenges that they’re having over on aetherium 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 complexities because we’re 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 standing up a contractor to design something like that and then releasing it and working but that’s just me brainstorming while I’m spewing ideas out. Go ahead, Lyn.

Lyn Alden  1:19:06  

I agree. Actually during the stimulus early this year when they were drafting that initial bill, they had that Fed coin idea pop up in one of the drafts. They were looking at a wallet distribution mechanism because one of the initial questions was how to get checks to so many people so quickly especially because some of the most people that needed the most are in some cases unbanked. 

It gets to the people that don’t need it first and it gets to the people that needed it the most last. That’s how the checks went out. In one of their drafts, they floated an idea but they ended up pulling that away in a later draft and I speculate that the technology is not placed for it yet. Even if they wanted to do it, they just couldn’t. They had to get that rolled out so quickly that they couldn’t move forward with a more technological plan. 

Preston Pysh  1:19:49  

Alright, 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 give a hand-off to their site, their book, or whatever it might be. Luke, go ahead.

Luke Gromen  1:20:03  

You can check out what we’re doing fftt-llc.com and learn more about what we’re up to; different research product offerings, etc.

Preston Pysh  1:20:11  

Jeff?

Jeff Booth  1:20:12  

Just follow @JeffBooth on Twitter. The book is called, “The Price of Tomorrow”. 

Luke Gromen  1:20:18  

It’s excellent by the way, I thoroughly enjoyed it. 

Preston Pysh  1:20:20  

It’s amazing. 

Lyn Alden  1:20:22  

I’m at lynalden.com. I have a free newsletter people can look into. I write articles and a lot of investment focus.

Preston Pysh  1:20:29  

Lyn, I was in an interview last week and the person made the comment to me that Lyn Alden is the macro analyst of 2020 and I said, “I completely agree with you”. You are crushing it this year. 

Lyn Alden  1:20:43  

I appreciate it. 

Preston Pysh  1:20:44  

She’s embarrassed. She’s red in the face.

Lyn Alden  1:20:47  

Now here I’ll bounce it off. Last year, for example. Luke did an interview on Real Vision that I saw at the time that accelerated my timeframe for seeing certain things play out. I have to give some of the credit back to Luke because so early in that year, I was analyzing the deficit situation ballooning out. In my base case was that we’re going to run into an issue in the next recession. This whole vertical balance sheet thing that was all my radar. 

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

It was part of Luke’s research that the day that happened as soon as they got the spike, I already knew what was happening. There’s so much confusion in the market but because I had Luke accelerate my timeline and he kind of pointed in certain directions to look into and I looked into it. I found that some of his interviews are very useful. 

Preston Pysh  1:21:54  

I know exactly which interview you’re talking about. It was stellar. 

Luke Gromen  1:21:58  

Thank you.

Preston Pysh  1:21:59  

All right, guys. Now, we’re all embarrassed. We’ll pat each other on the back. Hey, guys, I appreciate your time. This was a lot of fun and I hope to do this again maybe next quarter or whenever.

Jeff Booth  1:22:13  

Anytime.

Luke Gromen  1:22:14  

Anytime.

Stig Brodersen  1:22:16  

Alright, guys, this part of the time in the show we play a question from the audience, and for this week’s episode, we picked a question from Jennifer. Here we go. 

Jennifer  1:22:25  

Hi, Preston and Stig. 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? What is the likelihood of a strategy like this succeeding? Thanks.

Stig Brodersen  1:23:00  

Let’s talk about this scenario that you put up here considering an economy with a 0% inflation. The government would be selling long-term bonds for say, $1,000 to the private sector. To attract people, the government would have to offer interest rates of, say, 1% a year. The government would then have to pay the full amount back of the bond which is $1,000 plus the annual interest payment of these bonds which would be an additional $10. In this scenario, with a 0% inflation, the investor would collect $10 in profit and thereby also increases purchasing power. 

Going back to what you said: what if we include inflation into the equation? What if the government ensured higher inflation? Let’s consider the situation where inflation was 10%. That would be to the disadvantage of the investor who normally would be able to buy for $10 more but the goods and services he could buy for $1,000 before inflation would now be priced at $1,100 because you had that 10% inflation. 

In that case with higher inflation that would be advantageous for the government. The reason for that is that because of the inflation the government will get higher tax revenues as wages and prices increase too, it will be roughly 10%. They will gain 9% and the investor will lose 9%. 

In theory, this seems to be a perfect solution at least for the government. We’ve seen this implemented in the UK after World War II and we also saw that happening in the U.S. in the 1970s. There is, however, a lot of negative effects on 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 the government. 

For the U.S. it might mean that they will lose the privilege of being the global reserve currency, which would make deleveraging extremely painful. We also see that high inflation has throughout history repeatedly led to social unrest among the population because they do lose trust in the system. 

To your other point about inflation with our currency war: it’s 2 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 your currency by adding a higher supply. It’s hard to have one without the other. That’s what you’re seeing playing out right now. You’ll be seeing for quite some time. Your question might then be and that was not your question, I’ve already started rambling here but your question might be: so how do we solve it? What’s the best way? 

The cheeky answer is not to get there in the first place. Whenever you have 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. Whenever you have a democracy, you both have the implicit risk and a sense of having people in power, or people who want to be in power are promising to spend more money than they have then had the next generation pay for it. 

The optimal way would be to deleverage having a higher nominal growth rate than the nominal 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. There’s no easy answer right now to deliver it 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 would have to pay for it which is a political decision and that makes it difficult.

Preston Pysh  1:27:01  

So Jennifer, what a great question. It fits perfectly for the episode that we just recorded and for people that might have listened to the conversation we just had with this all-star cast of folks.

It can get a little overwhelming. It can sound like a bunch of just crazy terminology. Then none of it makes a lot of sense because we’re talking about a lot of different concepts and kind of mixing them all. I can understand the simplicity in your question but the answer to it is extremely complex as Stig found himself as he’s there explaining his response to you. It gets technical really fast.

This would be 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 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 at the heart of almost all of this. You have to have elected officials that greatly guard against 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 leverage the power of the currency in their favor and they can adjust interest rates in their favor to allow that to occur. Then the further that they go down that path of adjusting this the hard money versus the currency which is what they’re printing and putting into the population; the more that they adjust that the more it’s hard to go back to sound money. From the 1940s up until the 1980s we had sound money or at least the population believed we had sound money because we had a gold standard. 

Then in 1971, we came off the gold standard. Then you had interest rates sky-high because what we are effectively doing where we were adjusting what’s called the money multiplier. We were adjusting based on how much gold was sitting in reserves versus how much currency was in the system. That 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 1971 when they were forced to come off the gold standard because they had manipulated the money multiplier so much. 

When you do that for so many decades you create a vacuum of interest of foreign money to flow into this country. That’s why you saw interest rates going sky high and then you saw them early peeking out into the early 1980s. Well, the only way than to correct that was to start adjusting interest rates lower and lower. We’re now at this point where interest rates are 0. We don’t have sound money, we don’t have anything. 

It’s not backed by anything and you have this tendency of elected officials to spend more than we take in. When you have those 3 variables that play, the only way that a country can kind of offset that is through the debasement of the currency. 

Who is the entity? Who’s the party that eventually gets, who’s on the losing proposition of that deal? 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, he provided his very simple example of a $1,000 bond. If inflation’s 10% and the thing is only yielding 1% you just lost 9% of your buying power on an annual basis. Then when you start analyzing that over, let’s just say it’s a 30-year bond that is compounding a loss and buying power of 9%. That example is very detrimental over the long haul because it becomes exponential. 

Most people can only think in linear terms because exponentials are very difficult to understand. After all, our daily lives are not in linear terms or they’re in very linear terms but not in exponential terms. When you compound something like that over a decade or more the impact is dramatic to what it does to society. That’s what in my opinion we see playing out. A lot of what we were discussing in this episode revolves around these fundamental ideas that Stig and I just talked about here at the end of the show. 

It can get very nuanced. We start talking about UBI (Universal Basic Income) versus QE (Quantitative Easing) and how the Fed’s inserting the money. You’re talking about a very complex system that can have many different outcomes but I think the 1 key driving factor that we’re facing today is the incentive structures that used to be favorable are now actually inverting themselves. You’re finding that a lot of the incentive structures that exist right now are not supportive of a conducive economy that works for everybody. It’s only working for a few. That’s where it’s getting very concerning. 

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 TIP 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 its statistical volatility range. It’s a ton of value and you’re 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. 

For asking such a great question you get a free subscription to the website. If anyone else wants to ask a question go to asktheinvestors.com. If your question gets played you get a free subscription to the TIP finance. 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.

Outro 1:33:19  

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