Preston Pysh (02:44):

So what do you think the driving factor for that peaking, this bounce that we’re seeing right now? Is it just once the third quarter earnings reports start coming in mixed with a whole bunch of macro factors is what everyone’s going to notice that it starts stalling out again? Is that what you’re thinking, Joe?

Joe Carlasare (03:01):

Well, to me to get the equities, and I’ve long said this, to get the equities to really roll over hard, I think you need to see unemployment really tick up because passive investment plays such a massive role. I mean, people are just buying it reflexively every two weeks or month whenever they get paid. Those dollars hit the bank account and they bid up these things, particularly the SPY and the growth funds in NASDAQ.

Joe Carlasare (03:23):

So to really have a sustained drawdown, you kind of need those passive flows to disappear. And to have the passive flows disappear, you need the employment to rise, particularly you need it to rise among the higher wage earners. So from my standpoint, I think that’s what I’m looking at. I also think that the yields having peaked, and I do think they’ve peaked, that’s my view, that has naturally been a boon to the equity market. As yields continue to trend lower, there’s rebalancing into equities which has stabilized all markets.

Joe Carlasare (03:51):

So the bond market really is the whole ball game. If the bond market is stable, equities can be stable. And obviously during the first part of the year, the big headwind was that the bond market was a total disaster. We had a four standard deviation move and that crushed everything. So for my purpose, as long as you’ve got relative stability in the bond market, you can get a pretty good run here in equities. But again, it is sort of a counter trend move to the deterioration in the real economy.

Jay Gould (04:16):

So what moves the bond? Sorry, Preston. What do you think is moving to bonds from here, Joe?

Joe Carlasare (04:21):

Right now? At the long end, I mean, I think you’ve got really two competing forces. At the short end, it’s being held up by the Fed hiking. The Fed continuing to be aggressive all the way out to the two-year that is driving those yields up, or at least sustaining them a lot higher than they would otherwise be. I think that on the long end, you continue to see the flight to safety trade. I think you see people finding safety in the 10-year, 20-year plus, the TLT type trade. I think that is going to be a force for the rest of the year really.

Joe Carlasare (04:53):

People are positioning for very bad things economically. And that’s what inverted curve shows you, right? It shows you effectively that they think the Fed is hiking too fast, but the long-term economic growth is deteriorating. Therefore, there’s some plight to safety in the long end.

Preston Pysh (05:08):

So Jay, I was popping up a chart here, which I think is explaining exactly what Joe is saying on two fronts. So he’s talking about the negative bond yield curve, which on the bottom of the chart, you can see the 10 minus the two year right now on 8th August is at a -0.45%. We haven’t seen it that low since 2000, was the last time it got that low. And then in the 2007, right at the start of 2007, it got to what looks to be like a point a -0.2 or something like that. So we’re already lower than that. On the-

Joe Carlasare (05:48):

By the way, Preston, did you catch … The same spread in the Canadian bonds, is it’s the most inverted in history, if you actually look it, yeah.

Preston Pysh (05:56):

I didn’t know that.

Joe Carlasare (05:58):

Yeah. It’s the most inverted it’s ever been in the Canadian long bond versus their short end. So that’s an interesting chart. We don’t have that chart unfortunately, but you can look it up. It’s never been as inverted as it is now.

Preston Pysh (06:07):

I might be able to create it while we’re talking here a little bit later. I’ll see if I can make it while we’re talking, and pull it up. The top line here that we’re looking at is the unemployment. And Joe, you said something that I completely agree with moving into the end of this year, which is, I think if we start seeing unemployment come from this 3.5% that we have displayed on this top line, if you start seeing that start tick up, I think you’re going to see the markets get scared as hell.

Jay Gould (06:36):

I agree.

Preston Pysh (06:39):

I mean, just look at this chart when we had this negative spread. I mean, right there at the start of 2007, look at where it was in 2000. And then think about the deepest part of the recession in ’08. It was really kind of the summer of ’09 is when I would personally describe it as the darkest part of that crash. And look at this chart here, when you were like 2009 to maybe the start of 2010 is when you saw the worst unemployment numbers. And we are literally at the complete inverse of that right now, like you saw at the start of 2007.

Jay Gould (07:17):

That’s a great chart.

Preston Pysh (07:19):

You see a lot of people, especially in the political realms, kind of beating their chest and saying we have the best unemployment numbers we’ve had ever. But that indicator has been the canary in the coal mine in the coming 12 months. It’s about to get nasty.

Jay Gould (07:35):

I was trying to find this chart, but I heard a guy in CNBC say a few weeks ago that even though we have the low unemployment, people are working more hours like double jobs and stuff more than ever. And I couldn’t find any data to support what he said. But he just said that on CNBC last week. So it’s like, the wages are low, they’re full employment, but they’re working two jobs. So it’s like, people are struggling. They’re really struggling right now.

Joe Carlasare (08:02):

And you’ve had a structural change because you’ve had a ton of people leave the job force since COVID. Some through natural things like retirement. And some saying, “I don’t want any more of this mess. I’ve got enough money, I’m retiring.” I think that changes when equity prices decline. So it’s more on that, I think people will reenter the workforce if you do see a sustained downturn in equity markets, but that’s the big thing. And Chair Powell has talked about this in a few of the pressers that the labor market looks really different.

Joe Carlasare (08:29):

And I think there are reasons why it can hold out a lot longer structurally because there is demand. A lot of my clients are talking about how they’re always trying to hunt for people that can’t get workers. They can’t get skilled workers in particular. So it may hang on for a little longer than people expect. But yeah, I mean, if that rolls over, forget it, risk assets are going to struggle.

Joe Carlasare (08:47):

And by the way, this is why this construction where you have passive investment, this is why the high beta stuff gets hit much harder, things like bitcoin, because they don’t have the passive flows that the major indices have. Those guys will always get that bid that comes in. The high beta, the arcs, the bitcoins, they’re going to get crushed whenever there’s real liquidity being drained from the system a lot faster than the major indices because they are going to have that passive bid.

Jay Gould (09:13):

I’ve never thought of it that way.

Joe Carlasare (09:15):

Yeah.

Preston Pysh (09:16):

Joe, I want to throw up another chart and get Jeff and Jay, your thoughts on this one. So I was interviewing Joe Consorti last week and this was a chart he shared with me, and him and Nik Bhatia had constructed this. And what he was showing me was on the federal funds, which you can see here is the orange on this compared to the two-year, once they went to parity is when the Fed stopped hiking.

Preston Pysh (09:48):

So when we look at these previous cycles, you can get back to ’99. So you can see how the federal funds was underneath the two-year. Then once the two-year started getting bid and it came to parity with the federal funds, that’s whenever they continued to just hold what they got. And then as the two-year continued to get bid because everyone’s expecting the recession, that’s when they started to ease in reverse course with their tightening.

Preston Pysh (10:14):

And so then we saw it again in the 2006, you can see how they held in the 2007. The two-year starts getting bid. And then looking the 2017 through or not, it’s more like 2018 and the 2019, you saw the exact same thing happening again. Now, look at where we’re at right now and the gap where the two years at 3.2%, the federal funds is at 1.6%. It’s not even halfway there and I’m just throwing it up there because the gap is still massive. And here we are all expecting things to get nasty maybe in the next quarter to two quarters. And the spread there is suggesting that they’re going to keep going strong.

Jay Gould (11:01):

Isn’t the Fed fund at 2.2% to 2.5% right now, or-

Jeff Ross (11:04):

This is a little outdated, I think.

Preston Pysh (11:06):

No, you’re right. That’s a good catch, Jay. This is outdated. I just pulled this tonight.

Jay Gould (11:11):

I’m curious what that looks like.

Preston Pysh (11:13):

The data is not pulling the correct-

Jay Gould (11:15):

I’m just saying, I wonder where the orange is at relative to where the two-year is at. Is it narrowing?

Preston Pysh (11:20):

You’re still a hundred bips off.

Jay Gould (11:23):

Okay. Because I’m looking at the 2018, December 24th, and that’s where it went top ticked in the blue line and then they didn’t catch each other that time. So I’m wondering if there maybe there’s something to that. Maybe the both side of this is maybe we’re getting closer to that, but I don’t know.

Preston Pysh (11:39):

Yeah, let’s just see the update.

Jeff Ross (11:41):

I’ll jump in here quick. Joe Consorti and I were talking about this on a couple Twitter spaces recently. And by the way, Joe is one of my favorite up and coming macro thinkers and bitcoiners.

Preston Pysh (11:53):

He’s awesome.

Jeff Ross (11:54):

If you guys don’t know him or follow him, I would highly recommend it. He’s a great thinker and he’s just a good dude. I agree with the premise of this too. So basically, what people think, they think the Fed moves the markets, but in reality, the markets move the Fed. So the two-year treasury yield basically acts as the cap or the governor for how high the Fed can raise the federal funds rate. So right now what it’s saying, if you look at it and I think the two-year yield actually is up-to-date, even though the Fed funds rate isn’t on that chart for whatever reason.

Jeff Ross (12:22):

It’s basically saying the Fed funds can raise another 50 bips from 2.5 up to 3. They might be able to sneak it up to 3.25, at least today so these things can change. But as of today, they’re allowing the Fed another about 70 basis points of hikes. So either 50 or 75. I think they go 50 at the end of the September meeting. And then we’ll kind of see what happens.

Jeff Ross (12:42):

I do like to always hedge myself with a way out because we don’t know what the CPI is going to show. We’re recording this before we see the July CPI numbers. And then we get the August CPI number still before the Fed raises rates again. So lots can happen, but basically, they’re putting a cap on what the Federal Reserve can do and it holds true. So if they try to go above that, they break the bond market and we’ll start to see serious issues in the credit markets. The stock markets will collapse for sure. So it’ll be very interesting to see how they proceed in the next couple of months.

Preston Pysh (13:16):

Well, to your point, Jeff, the two-year yield made a new high after the June hike, but it didn’t after the July. We never took out that top tick of, I think, a 3.45. So that’s interesting, right? Because you have another big 75 bip hike and you don’t take out the prior high that’s resisting, right? That’s finding that bid there for the two-year.

Jay Gould (13:36):

Preston, can you go back to that chart? I just want to see something real fascinating.

Preston Pysh (13:39):

I was just throwing up Joe’s chart here on the CPI with Jeff, who was talking about where this CPI number could potentially come in here in the coming week and how that might impact what they do as far as raising it. We’ll come back to this chart, Joe. I want you to talk this because you’re the one that sent this to me. Let me pull up the other one.

Jay Gould (14:00):

Yeah. I just wanted to comment on what Jeff said. Joe and I and Jeff Corey, we debate this all the time. Is the market telling the Fed what to do? Is the Fed kind of pushing the market, vice versa? The question what I’d like to see here is overlay when the Fed made comments that were hawkish prior to these moves. This is looking backwards. So I’d like to see the forward because the market buys the future.

Jay Gould (14:24):

And so it’d be awesome. I mean, we’re not going to do that right now, but it would be awesome to see this and just kind of throw a little marker as to when they started to talk down what they were going to do, and give guidance to what they’re going to do, or other Federal reserve governors they’re saying certain things in the market. Because I think that says a lot to what the market ends up doing. I don’t think the market tells the Fed what to do. I think the Fed makes comments and then the market reacts, before they actually make the move because that happens later. We know that, right?

Preston Pysh (14:51):

I mean, it has to be reciprocal to some extent. I agree with Jeff. I think that the market wags the tail, especially at certain periods of time where you’re at. But at the same time, the Fed is having an impact. As they’re tightening, they’re causing these things and it’s this back and forth or this dance between-

Jay Gould (15:10):

I just did a tweet storm back with John [inaudible 00:15:13] the other day. And he was saying that’s not the case. He’s agreeing with you is what I’m saying. And then I showed him the comments. I put screenshots of CNBC articles and stuff where the Fed made comments before they made moves on the rates. So the rates come later and they come much later, months later. So you’ll start to see the market move before he actually makes.

Jay Gould (15:31):

So it’s cute to look at a chart and say the market move first. Of course, they move first because they heard what the Fed was going to do. So they buy the future. That’s just how you invest, right? Yeah. You have to gamble on the future. So, I don’t know. This is a debate. Who’s your guy, Joe, that you always listen to? Who is it again? It slips my mind.

Joe Carlasare (15:49):

My guy. I think you’re talking about Jeff Snider.

Jay Gould (15:51):

Snider. Yeah, this is all Sniderism. It’s a lot of Sniderism. I mean he’s great. He’s a smart guy, but I think it’s a little cute because if you really want to really tell the tail, you can’t look at the chart. You got to look at what the commentary was in the market that moves the market.

Jeff Ross (16:07):

Yeah, that’s a good point, Jay.

Preston Pysh (16:09):

All right, I’m pulling that CPI at one backup, Joe, can you talk this-

Jay Gould (16:14):

By the way, Bill Auslander, Joe, he really likes Jeff, Joe. He’s been watching his stuff now.

Joe Carlasare (16:20):

Oh, has he? That’s great.

Jay Gould (16:22):

He’s even sending me likes all the time.

Joe Carlasare (16:27):

So this is a chart and I think it’s research affiliates that sources it and they develop the model and incorporated into the model. So you see basically a chart of the potential path for headline CP year-over-year. Now, the reason why this is the focus, is because the Federal Reserve, particularly Chair Powell and his pressers has said repeatedly that what they want to see is the headline number. Obviously, it’s kind of interesting.

Joe Carlasare (16:50):

Well, actually it’s interesting because the research sort of dismisses the headline number somewhat and focuses on some of the other metrics, particularly PCE. That’s their main focus. It’s not CPI. But for whatever purpose, Jerome Powell has come out many times and he said that we want to see is we want to see the headline number year-over-year and on a monthly basis, have a series, a sequence of declines.

Joe Carlasare (17:14):

The problem for us with that is that if you go back and look at the inflation numbers that we had last summer, and this has been referenced by Chair Powell a couple times, we had a dip in inflation during the summer. Some of the months last year were not as hot numbers as people expected. So people said prematurely, that’s it. We’ve sort of slaying the beast of inflation.

Joe Carlasare (17:36):

What we have now, we’re coming into the next four months to be dropped. You’re going to have 0.5%, 0.2% and 0.3% from the 2021 numbers. Now, if you take that and you look at the potential path forward, and this is a model, best case scenario is we stabilize at this level, but you don’t necessarily see a big decline in the month-over-month or the year-over-year numbers for the next several prints.

Joe Carlasare (17:57):

The worst case scenario is that even if we sort of trend lower on the second derivative of the growth rate, you still end up going higher for the rest of the year. So I think that the takeaway from this is that the likely base case based on this model, if it is correct in factoring in the drop months from 2021, is that you’re going to get higher prints through the end of the year.

Joe Carlasare (18:17):

But the Fed has two options. They can either reverse course and go back on what they said just a couple months ago and said, “No, no, just kidding. We don’t really need to see back-to-back months of declines on the headline number.” They can do that, that’s option A. Or option B is really, they say, “We have to stay the course. We’re hiking for a lot longer.”

Joe Carlasare (18:37):

And I think that some of the most recent print and also the most recent remarks from Powell, I think that’s why you saw this move between the December and the March contract for Eurodollar futures, which is another chart we can get to at some point. But for those just looking at this chart, I think the takeaway is that you should expect inflation to, at most likely, either stabilize or head higher for the remainder of the year on the CPI year-over-year numbers.

Jay Gould (19:02):

To your point too, Powell in the last meeting said that he will continue to make decisions meeting by meeting and carefully come through the data. So this is the data. So he’s led himself the option to pivot if he wants to.

Preston Pysh (19:12):

Of course, he is. Jeff?

Jeff Ross (19:14):

If I can throw my nickel in here. So I completely agree with this premise, the only caveat will be if the markets tank seriously leading into this. So if the Fed does something, if something comes out as a surprise, something out of left field and the markets collapse, that will drive down inflation significantly and cause sort of possibly a deflationary type event similar to what we saw towards the end of 2008, 2009 or early 2009.

Jeff Ross (19:40):

So that’s the one caveat to all of this. If that happens, then we could see everything reset much sooner. We could see inflation come under control, although it would be at the expense of markets collapsing. That would mean the S&P 500 is probably down another 20%, 30% or so from here and the NASDAQ even more. So that’s something that I’m considering, but yeah, otherwise, we have sticky high inflation and it’s going to be a tough year. I don’t envy the Fed in their position right now.

Preston Pysh (20:07):

Hey, I want to transition over to something that I’ve been toying with and I want to run it by you, guys, just to hear your opinions on it. I get frustrated when I’m explaining bitcoin to somebody. And the first thing that they do is they’re just like, “Oh, well it’s down whatever percent in the last year. It’s down.” Or in a bull market people, and I’m guilty of this will be like, “It’s up this amount since the last year.” And it’s almost like you’re just picking random points in time.

Preston Pysh (20:43):

And I’ve always tried to say well to pick any four-year period of time because of the four-year halving cycle. Pick any four-year period of time, and what you’re going to find is that you have just tremendous performance in it. But then I started with this contraction that the central bankers are doing recently. I’m thinking why not go back and kind of plot when they were expanding and when they were contracting based off of policy. And then let’s mark each one of those points in time when it was the peak of the contraction and the reverse course, that moment in time to the next time that it was peak contraction so that I can conduct a measurement from that point to this point.

Preston Pysh (21:28):

Almost like if you were going to measure a frequency, you’d take it from the top to the top or you’d take it from the bottom to the bottom, but you would figure out whatever that frequency is in order to figure out how many hertz it is. And that’s how you do it when you’re dealing with signals. So why not try to do that with Fed policy? So I’m going to plop a chart up here for you, guys. Let me see if I can get it.

Preston Pysh (21:52):

And what I did is I took the global central bank balance sheet, the Fed, it was the ECB, it was the Bank of Japan and the Chinese central bank. And I combined all of their balance sheets basically over the last 10 years and I dropped it onto this chart. And you can see, I have two lines and you can kind of see the cycles as they’re playing out. Now, the top line is not adjusted for the broad money supply. The bottom line is adjusted for broad money supply in the denominator.

Preston Pysh (22:32):

And the reason that I did that, and I converted obviously all the central bank’s currencies into dollars, and then I took the dollars and then I adjusted them for broad money supply, and then one that doesn’t have the adjustment, the M2 money supply. The reason I liked this bottom one, this light blue line on the bottom is because I think you can see the tightening and the expansion better and you can see how it’s really not getting worse after it’s been M2 adjusted. This cycle here, when you’re looking at the non-M2 adjusted, it looks just enormous compared to the previous expansions.

Preston Pysh (23:08):

But then when you look at the bottom, it’s pretty similar to the expansion that took place from 2017 through 2020, this most recent one that we’re in. And so the black lines that I have there is just kind of earmarking these expansion and contractions. It’s basically one cycle. That’s one frequency.

Preston Pysh (23:29):

And then what I wanted to do is I wanted to go back and look at bitcoin’s performance during each one of those frequencies and then look at pretty much everything else during each one of those frequencies to see what the relative performance is, because I feel like that is a point in time that everybody could come to an agreement on as a good place to kind snap the chalk line, if you will.

Preston Pysh (23:54):

So this is the methodology. Now, I’m going to show you the performance across just some different baskets. So this is the first and just so you guys know, going back to this one, I’m going to start time now in the period that we’re currently in, and then I’ll go back through each one of these.

Preston Pysh (24:11):

So here’s the one we’re in right now. You can see the black line right over there in the crash, the March crash of 2020. And you can see everything kind of reflate out of that. Now, just so people understand what we’re comparing the performance to. Obviously, bitcoin in there. You got the NASDAQ. You have a bond index. You got gold. You got the Russell 3000. You got a commodities index. You got high yield debt.

Preston Pysh (24:37):

And then the one, the dark red line that you guys can see there is actually just the central banks, the collective balance sheet itself to kind of represent the amount of units being added in and taken out of the system, which was 44% since the bottom of the 2020 COVID. And so when I’m looking at this, bitcoin is still doing the best with a 284% return and the next best was a commodities index of a 101%.

Preston Pysh (25:11):

I’m going to just pause there. What issues do you have with the methodology or just what I’m walking you through?

Jeff Ross (25:20):

I love it personally, if I can jump in. I think it’s great what you’re doing with this, because I think exactly the same thing, Preston. I feel like I’m assuming it’s going to go where we think it’s going to go. That basically when we have periods of liquidity expansion, risk assets absorb that liquidity. And bitcoin still being seen as the world’s most volatile, highest beta risk asset. It absorbs the most liquidity in the good times.

Jeff Ross (25:47):

And then when that contracts, the liquidity gets taken away from bitcoin and from other risk assets. That’s when we see that downdraft. I think of it like an accordion almost, kind of expanding, shrinking, expanding, shrinking. And so you want to own this kind of assets when the central banks are expanding the monetary supply. And when they’re taking it away, you want to avoid them in general.

Preston Pysh (26:06):

Joe looks skeptical.

Joe Carlasare (26:07):

No, I am skeptical because I think … And I like the idea. I think it confuses the causality versus the correlation. And the reason for that is I think it goes back to what QE actually does, which QE traps safe and liquid collateral on the central bank’s balance sheet, thereby depriving the private sector of the credit creation impulse it needs to actually drive real lending, real money printer go BRRR in the economy. What QE really does and why you see this chart respond like this is that QE tampers down volatility.

Joe Carlasare (26:40):

And if you go, that’s why I focus so much on bitcoin assessed in terms of the VIX or volatility in general. When you deprive the market of safe and liquid collateral, when you trap it on a central bank’s balance sheet both in the Fed and in the United States, you do provide a market of last resort for treasuries. It stabilizes the whole system. It pushes people further out on the risk curve. It enables fiscal policymakers to do a ton of stimulus into the system.

Joe Carlasare (27:07):

But really what it’s doing here, what you’re doing is you’re artificially suppressing volatility. And then you see this explosion in risk assets from the suppression of volatility. The system is trying to fix itself in these downturns, in these liquidation events and the contraction of collateral onto the central bank’s balance sheet doesn’t necessarily increase liquidity generally. So you have these metrics that show like global liquidity, which is a long discussion. But suffice to say, I think it’s a correlation. And the causation is really the suppression of volatility.

Joe Carlasare (27:38):

And once you start to drain liquidity from the system in the form of QT or rate hikes or any lack of fiscal stimulus like a fiscal cliff, what you do is you reintroduce that volatility. And in a high volatility environment, stocks sell off, bond sell off, bitcoin sells off. It’s all about the volatility. Volatility and the efforts of QE to suppress volatility is what’s in front of you. That’s what’s the result of that chart.

Preston Pysh (28:03):

Joe, what do you think of Lyn’s argument that instead of getting caught up in the Jeff Snider argument, which is QE doesn’t induce money printing which I think is partially correct. But Lyn’s point is when you got the treasury and you have the Fed acting together as a team, you’re going to see broad money supply expand, which is the real printing.

Preston Pysh (28:29):

So going back to this slide here, this bottom one, in my opinion, is accounting for both of those. It’s accounting for where the blue line is not. This blue line is just showing you the balance sheet and it’s not accounting for the broad money supply adjustment, which you are seeing in the lower chart.

Joe Carlasare (28:56):

So Lyn’s exactly right when it comes to fiscal stimulus. We all agree that the government’s spending money that is solid money printer go BRRR, and that’s cash being injected directly into the economy. And it’s spent on things like bitcoin. It’s spent on things like commodities and drives up the price of everything.

Joe Carlasare (29:11):

The problem I have, or at least the question I have about how this is presented, is that if a bank absorbs a bunch of treasuries, the central bank rather absorbs a bunch of treasuries, puts it on their balance sheet, those banks now have a ton of bank reserves. But those bank reserves can’t get into the real economy. They can’t even get into risk assets unless they decide to lend or unless the government spends a bunch of money. And to the extent that QE enables the federal government to spend a lot of money, that’s a totally legitimate point and Lyn’s exactly right. I don’t dispute that. It’s kind of like the enabling for the policymakers.

Joe Carlasare (29:47):

But then what happens when the fiscal stimulus dries up? That’s the story of 2022. Now the rubber meets the road and you see people having less cash to go around. So you’re counting it twice. If a bank is just buying up your treasury bonds and it’s sitting on the Federal Reserve’s balance sheet without any accompanying fiscal stimulus, I think Lyn’s comment to me on Twitter was like, “That’s just meh.”

Joe Carlasare (30:08):

So that chart you’re showing is like, okay, unless there’s accompanying fiscal impulse, you’re not going to get the rapid acceleration. And there’s actually times you can see that on the chart. If the Congress is not spending money, you could lay it over actual fiscal outlays from the federal government. You’re going to see these periods where you’re not seeing the rip.

Joe Carlasare (30:27):

So you can see how there’s the variation, right? What’s the big difference with that last black bar there, Preston? The big difference is we pump, we finally realize, “Hey, if we give people $2 trillion in direct stimulus and PPP, look what’s going to happen, it’s going to rip.”

Joe Carlasare (30:41):

So if you’re explaining bitcoin to folks, to me, I look at it as a necessary inevitable conclusion that we move towards UBI. I think it’s already done. It’s just a question of how long before we have to move to that. And then I think bitcoin’s price is going to appreciate probably beyond all our wildest bullish dreams on this call. But I think that comes, and I think it comes predominantly outside of the United States and eventually in the US.

Preston Pysh (31:05):

So I agree with everything you just said, I’m just trying to, where do you choose to snap the chalk line when you’re conducting a measurement of performance of bitcoin versus every other opportunity you have in the marketplace? How do you say, “Right here to right here is a true level of performance,” if I’m comparing it to the S&P 500 or the NASDAQ, or you name it, anything on the planet? How do we decide where it starts and where it ends in order to say, “This is a true measure of the gain in the frequency”?

Joe Carlasare (31:45):

Yeah. I mean, it’s similar how they do equities. It’s kind of arbitrary to some extent, year-over-year sort of. Jay and I have talked about the CAGR of bitcoin. I don’t think it’s a necessary metric to break it down to exact specific points. You have to take the years where you get outsized growth and the years where you get the contractions and take it all together and say, “Look, on a long-term basis, this still has a ton of runway ahead of it, just relative to all these other assets which are much more mature.”

Preston Pysh (32:15):

But how do you offset for the first four years of bitcoin, which was growth beyond comprehension? Do you think that that should be included in how a person-

Joe Carlasare (32:26):

Probably not.

Preston Pysh (32:26):

… should be looking? Yeah. So I’m trying to say, “Okay. Here’s …” And I think that those early years where it was so fresh, so new, there were so few participants that it’s really hard to even remotely compare that performance to what we’ve seen in the last, call it five years, especially once we got over a hundred billion in market cap. Now you’re comparing something. I mean, just look at this chart right here. Since the March 2020, that was when they stepped in and they released the floodgates. So what’s bitcoin’s performance versus every other major index since that period of time?

Preston Pysh (33:05):

And what I’m seeing is that it’s a 284% return. Commodities were a 101%. What’s our blue … NASDAQ is 80% and I’m saying, okay, so if you want to tell me that the cherry pickers are going to step in and they’re going to say, “Well, since October, it’s down 60%.” And I’m like, “Yeah, but I haven’t been in it since October. I’ve been in it since back then.” And in my mind, I’m crushing it relative to all these other things.

Joe Carlasare (33:38):

It’s too short term though. One year here, what we typically do is you don’t look at 2009 from the start point, you look at 2013 on, and it’s still beating everything, right? I look at it’s a secular growth trend. I’m an early stage growth investor in technology stocks and private companies, and I don’t look at things of what they’re going to do in one or two or five years. I look at what’s the market size that they’re in, what’s the growth and how are they going to gain that growth over time?

Joe Carlasare (34:02):

Same thing with bitcoin, right? It’s the true scarce asset on the planet. It’s the only true scarce asset on the planet. And everything else, including the stock market, they’re creating more IPOs. There’s more inventory, there’s more supply. They do splits, et cetera, and add … I should say they add more shares constantly. I don’t see anything else there that is here. So you have to just say, “Do you believe over time, there’ll be increasingly more people that adopt and buy and own and hold bitcoin?” And there has been. So rather than looking at the price action, there’s other things you look at to try to convince people that this growth story will continue.

Joe Carlasare (34:33):

And you can look at the number of addresses. You can look at all those types of metrics, the hash rate, et cetera. And I don’t think the price action over a one-year period is very helpful for anybody. If they’re a trader, it is. But if you want to be an investor and hold this for the long term, you can’t look at price action over a one or two-year period relative to every other asset. To me that just makes … I don’t ever go there with people.

Joe Carlasare (34:53):

Because you started this discussion a few minutes ago saying how do you convince people that you’re talking to about bitcoin. I don’t ever go on price action in the short term relative to other assets. It doesn’t make sense. So I look at what’s the big picture, what’s the long term, what’s the 5 and the 10-year plan, and that’s the way I speak about it.

Preston Pysh (35:10):

Yeah, I guess it almost always starts off with a debate about the performance and it always starts with what the price action was over whatever defined frame of reference they pop out. And you’re just like, “All right, but anyway, let me show you the … So if you buy into the expansion and the contraction of the broad money supply based off of the balance sheets or whatever, whether you buy into that or not, I’m just going to show you a couple more periods. So this is the period we’re in right now. Here’s the period previous to the one we’re in right now based off of the initial chart that I showed you, guys. Here’s the period before that, and here’s the period before that,” which this one’s really interesting because the broad-

Jay Gould (36:00):

What are these? Sorry, these are one-year periods? Is that what this is?

Preston Pysh (36:04):

No, no, no. It’s going back to this. Can you see this chart right here?

Jay Gould (36:07):

Yeah.

Preston Pysh (36:08):

So each of those dark black vertical lines-

Jay Gould (36:13):

Got the periods, I got it.

Preston Pysh (36:13):

I’m saying that light blue is the credit cycle, the mini-

Jay Gould (36:17):

Did you start from the ’13? Do you have a ’13 to the present?

Preston Pysh (36:20):

Yeah. So here’s the ’13 to … Here’s, I’m sorry, nope, Nope. That’s not right.

Joe Carlasare (36:27):

And the black bars, Preston, just so I got this right. The black bars go from the beginning of the expansion to the beginning of the tightening? Is that right?

Preston Pysh (36:36):

It goes from tightening to tightening.

Jeff Ross (36:39):

It’s bottom to bottom.

Preston Pysh (36:41):

It’s bottom to bottom. Yeah.

Jay Gould (36:43):

What I meant to say is, I guess you don’t have it, but I meant ’13 to ’22. Do you have that chart?

Preston Pysh (36:48):

No, I don’t have ’13. I mean, you know what that looks like. It’s not even in the same … It’s like a-

Jay Gould (36:57):

You have to show people that because it’s like, take a number to get into the asset and you can hold. And if you’re freaked out over the one or two-year performance, you’re not going to worry about that. And you can lay into it if it’s performing well. And if not, you just hold onto it. That’s the way I speak about it.

Preston Pysh (37:11):

So I’m what I’m trying to identify, Jay, by doing it like this, I’m trying to look at, am I in the current environment outperforming? In this current credit cycle that we’re in, which I would argue started, the bottom of it was March 2020. They stepped in. They flood the system with a bunch of printing. Some of it turned into printing. Some of it didn’t, however you want to go down that argument. But I think it’s pretty clear that some of that printing has entered the system.

Preston Pysh (37:43):

So how has bitcoin performed since March of 2020 versus everything else? And then once it becomes really obvious and I think we’re going to have an obvious event where they’ve reversed course. They’re now flooding the system again with what Joe said, more UBI, you name it. They’re going to have to go down this direction. That’s going to be the moment in time when it’s really obvious because things are breaking that you snap the chalk line to end the March 2020 credit cycle.

Preston Pysh (38:12):

And then I want to look at that exact moment. I want to see how bitcoin performed to all these other major indexes, because if it did not perform, if it didn’t outperform, well then what did outperform because that’s the thing I really want to keep a close eye on in the next cycle. What was it? Because I can tell you right now-

Jay Gould (38:32):

Well it shows you here the second in line is what, growth stocks? It’s QQQs?

Preston Pysh (38:34):

This is the cycle we’re in right now.

Jay Gould (38:38):

Yeah, in what screen?

Preston Pysh (38:38):

And the dark green is an index GNR, which is a commodity index. It did 101% and bitcoin is at-

Jay Gould (38:47):

But not energy commodity, sorry. And then what was the last one? It looks like the second to that … The second to that is Q’s, right? The second is Q’s?

Preston Pysh (38:56):

Negative 20%, which was the yellow, is TLT, which is a bond index. And that’s been worse.

Jeff Ross (39:04):

Long-dated bonds.

Preston Pysh (39:05):

Yeah.

Jay Gould (39:06):

Yeah. I think.

Preston Pysh (39:07):

Interestingly high yield bonds, HYG, it has had a 9%.

Jay Gould (39:14):

Isn’t the blue color the second one right below GNR?

Preston Pysh (39:20):

Yeah. That’s the NASDAQ, 80%.

Jay Gould (39:22):

That’s what I’m saying. That’s the second best performing other-

Preston Pysh (39:25):

Second best. Yes. I’m sorry.

Jay Gould (39:27):

So growth is always, it’s going to go to growth typically, right? They’re going to jump in for the next bull run.

Preston Pysh (39:34):

I think it’s important if based on this methodology, if you buy into this methodology, it’s not over yet. Our expectation is in the coming 6 to 12 months, that this thing is going to keep tightening. We’re going to see more pain in the broader economy. So if bitcoin sells off massively, it could maybe not outperform that commodities index. I don’t know. I suspect it will.

Jay Gould (40:03):

Can you flip to the previous cycles? Just go back … While you’re talking, I started to interrupt you. I just want to hear, I want to see rather what I looked like.

Preston Pysh (40:11):

Which one did you want to see, Jay?

Jay Gould (40:12):

Well, you have the current trend and then just go back to the other cycles just one by one. Just give me like three seconds.

Preston Pysh (40:17):

This was the previous cycle ending in the 2020 meltdown.

Jay Gould (40:22):

Yeah. And you can see on this chart, the Q’s were number two to bitcoin.

Preston Pysh (40:27):

That’s correct with the 42%.

Jay Gould (40:29):

And then you really can’t tell the rest. I guess number three was the bond?

Jeff Ross (40:32):

Small-cap stocks.

Jay Gould (40:33):

Is it small caps?

Preston Pysh (40:35):

No, the next one down was TLT, which is your long-term bonds.

Jeff Ross (40:41):

You’re talking the next best performer?

Preston Pysh (40:43):

Yeah, which should make sense considering I think everybody on this panel would agree, that was the peak performance of the bond market, right? When March of 2020 happened, I think we could all agree that that moment might have been the highest prices you’re going to see in TLT.

Joe Carlasare (41:06):

You mean forever?

Preston Pysh (41:07):

Maybe. It depends what are these CPI numbers going to do and how high are they going to be before they step back in, right?

Jay Gould (41:16):

Go one cycle back with [inaudible 00:41:18]. Go one more back, I want to see.

Preston Pysh (41:19):

And Joe-

Joe Carlasare (41:20):

I think the 10-year goes negative next year. So that’s my goal.

Preston Pysh (41:25):

Joe, I think you could be right. I’m not saying that was the bot or the top in price terms. In yield terms, hey, I’m open to that idea that it could get bid like that. I’m totally open to that idea. Now, do I think it’s the most probable? I don’t know. I think it’s maybe a coin toss.

Preston Pysh (41:43):

But you know what? I’m throwing this out here, because I’ve been building these and I’ve been personally thinking about it. I haven’t posted it on Twitter and I’m just trying to think through a methodology that I can personally conduct analysis and be still objective in my thinking as to true performance.

Joe Carlasare (42:06):

Well, let me steal a minute. Sorry, Preston, go ahead.

Preston Pysh (42:10):

Part of the problem is where do you snap the chalk line to between periods to be objective with yourself? Go ahead, Joe.

Joe Carlasare (42:20):

So go pull up the 2017 chart, and we’re all familiar with it. So let’s talk about liquidity and let’s talk about tightening. Bitcoin had an incredible run as we all know. I think as somebody who came into bitcoin in 2015, that was really the huge major bull run that I remember, extensively was the 2017 bull run. And then through virtually all of 2016 and going into the top, the Fed was hiking. The Fed was hiking, tightening credit conditions. You had QT starting, I think, in the Q3 or Q4 of 2017, continuing through Q18.

Joe Carlasare (43:07):

But the question I have for you is how do you explain to somebody if you’re saying that, “Well, it really is the central bank intervention and the central bank’s monetary policy that’s driving this”? How do you explain to somebody that you see this rip in the bitcoin price throughout 2017 as they’re hiking and in the latter half of 2017 draining liquidity through the system in the form of QT?

Jay Gould (43:28):

But Joe, they were hiking from 2015 on. They started that in 2015.

Joe Carlasare (43:31):

Yeah. That’s my point. Look how great bitcoin did and the hiking cycle, guys. I’m just asking.

Jeff Ross (43:36):

That’s not what his chart is showing. The chart is showing expansion of M2, right?

Preston Pysh (43:41):

My argument there, Joe, and I’m not trying the reverse engineer a counter argument. I would just say that based on the sheer size of bitcoin back then, you’re dealing with something that, is it being driven by central banks or is it just being driven by … You got an extra thousand people in there buying it. And because it was so small at that point relative to now, it could just move the market price.

Joe Carlasare (44:08):

I still think it’s that small. I think you see a few pieces on the macroeconomic chess board move, confiscatory policies. You can see a whole host of different things from emerging markets that can make bitcoin absolutely rip. Even with QT, even with hiking interest rates, it’s a still tiny market. It’s smaller than single companies in the S&P 500.

Preston Pysh (44:29):

Yeah, for sure. Let me see here. Sorry, I got lost in the slides here. I wanted to pull up, and this is kind of useful because I’m showing up … Right now, I’m displaying the NASDAQ. And you can see a little bit of this momentum that we’ve been talking about from the start of 2022. You can see … And just so people know, I have some different momentum tools kind of displayed here on my chart.

Preston Pysh (45:02):

And for people that are maybe not familiar with these momentum tools, so I personally like an ATR, which is an average true range. And I also like moving averages and this is kind of both of them. And when they’re both red or they’re both green, for me, that’s kind of an indicator that for a long term trend, that’s what I think is how I base my opinions on whether something is in a positive trend or a negative trend.

Preston Pysh (45:27):

So when I look at this and whenever I really started turning bearish on the broader markets, I was looking at things like QQQ and the SPY and other indexes that help me form the opinion. I think credit is tightening. It’s going to be a rough environment moving forward. And as long as neither one of these break or start turning green, I’m saying I don’t think a pivot is in place.

Preston Pysh (45:53):

So with respect to QQQ, and here I’ll zoom in on where we’re at right now. And you can see similar to what Joe was saying, we’re kind of at this crossroads where maybe it can bid a little bit more, but it’s probably starting to get exhausted. I would agree with that simply because I think you still have this really strong, negative spread between CPI and treasury yields. And until that starts to get closer to parity with each other, either through a swift sell-off like Jeff said, coming down to where the yields are at, or they keep raising the rates to get them closer to the CPI, I think that this is going to continue to be in a negative trend.

Jeff Ross (46:40):

A nice chart. I like it. I just wanted to throw out my 2 cents a little bit regarding where we are in the markets. And I think for all of us, we all know when we see the Fed raising rates, we’re in our rate hike cycle and we see the yield curve inverted like it is, we know that a recession is inevitable, and sometime in the future but it doesn’t mean it’s imminent necessarily.

Jeff Ross (47:04):

And so this rally that we’ve been seeing since mid-June, it’s possible that this rally actually has legs and that this thing can go on actually for several quarters, which is kind of interesting. And so based on this chart you’re showing here, Preston, it looks like it may be coming up against a wall. It’s also coming up against the 200-day moving average pretty soon as well for the NASDAQ and the S&P 500.

Jeff Ross (47:26):

It has reclaimed pretty solidly the 100-day moving average, which is another strong momentum indicator that a lot of people use. So personally, I’m kind of 50-50 on where it goes from here. I think that we may … While I think we’re on borrowed time for risk assets, and that includes Bitcoin as well for the time being, I think that they can go higher. It’s just a matter of how much and for how long.

Jeff Ross (47:51):

And so based on the stuff that I’m looking at, I think things might get ugly again kind of heading into the first half of 2023. Based on GDP kind of metrics, I’m looking at year-over year-comparisons. It’s looking like we could see some even more deeply negative GDP numbers at that point. So to me, it would make sense that we kind of have this sort of impressive rally that most people don’t believe heading all the way up until say mid-November, which happens to be right around the midterms or so.

Jeff Ross (48:18):

And then as the markets look ahead, usually about six weeks, that’s kind of the metric I like to use. One to two months is kind where you start to see regime changes before the next quarter. At that point, things could get kind of ugly again.

Jeff Ross (48:31):

So personally, I just love the chart. But I wouldn’t be surprised if this actually broke through your upper line here after a couple tries and then went higher for the time being. So I don’t know if that made any sense, but I’m actually kind of bullish at the moment.

Joe Carlasare (48:45):

It looks like that’s going to flip right there and going to flip green, right?

Preston Pysh (48:48):

Yeah. So on your moving average, and so this goes by this slingshot if you’re on TradingView and you’re looking that up, that looks like that’s getting ready to go. For me personally, both of them, so the ATR is that red line and it’s showing at about a 336 on the QQQ index for the NASDAQ is when that would also turn green.

Preston Pysh (49:10):

So I use two of them just so that they can kind of both, and normally they flip at the exact same time. So this is kind of odd that on the moving average side, it’s getting ready to flip green while the other is still pretty red for the most part. What is that? About … Public math, don’t ever do public math. It’s about 7%. I would guess it’s about 7% more from where it’s at right now on QQQ, something like that.

Preston Pysh (49:39):

Let me stop sharing that before other people do the math. Now everyone’s going to be laughing because it’s probably not even close to that. Hey, Joe, you sent over a bunch of … Is there anything else you guys wanted to cover on that one? Joe, did you have some charts that you wanted me to pull up from your bank that you sent over?

Joe Carlasare (49:54):

Yeah. So let’s talk about this margin debt chart, if we can. I wanted to hear Jeff’s take on it. I know what I think about it, but he commented privately about how he was shocked by that one. So maybe we could pull up that one.

Preston Pysh (50:14):

Okay. There you go.

Joe Carlasare (50:15):

Okay. So for those describing, just listening and not seeing the image here, I’ve got a chart of yearly change in margin debt. We’re putting in numbers here in terms of the yearly change. I think it’s the biggest drawdown we’ve had in, I don’t know what, more than 20 years in terms of the yearly change. So that’s interesting. I know, Jeff, what do you think of this?

Jeff Ross (50:42):

Well, yeah. I mean, obviously this adds credence too if you’re feeling bullish at the moment, if you’re at kind of all-time lows from a year-over-year change. Now obviously, this is just a reaction to what happened a year earlier. So it was all-time high as a year earlier. And now we’re kind of at all-time lows. That’s generally a great sign. That generally means that margin is kind of being eroded away out of the market, that people aren’t levered up to their noses to be more politically correct on what I talk about.

Jeff Ross (51:07):

That’s a good sign. That means that people are kind of scared right now. Confidence is low. That’s usually that sows the seeds for the next bull run kind of thing. Now it’s interesting you look at this. At this chart, you would think, man, are we at the start of the next major bull market? And are we not going to have any kind of serious drawdown? I personally don’t think so because of what I see, because of what the yield curve is saying and the Federal Reserve is raising rates.

Jeff Ross (51:34):

We’re going to have a recession, basically guaranteed at some point, somewhere down the road, maybe a year, maybe a year and a half, maybe even two years. I think it comes a little sooner because I just think things move a little bit faster now. And the Fed is raising rates more quickly. So I think it comes more quickly like probably the first half of 2023. And risk assets, equities markets, bitcoin, they tend to react very poorly during recessionary type conditions.

Jeff Ross (51:58):

So I still think we’re going to have a pretty serious drawdown before that’s over. But you look at this chart and for me, this makes me optimistic at least for the next several months.

Joe Carlasare (52:09):

Well, the one that makes me even more optimistic, if you could pull up, Preston, is the margin debt has a percentage of the S&P market cap, which to me this is a really bullish chart. I mean, you don’t see the sort of bubbly market cap margin ratio that you saw in 2008. I mean, look how far declined we are. In fact, the margin seemed to come down and bottom around the same level as it did prior to the pandemic there in late 2019, which is fascinating as well.

Joe Carlasare (52:40):

Yeah, I mean, look. You’re at 2,000 levels of margin debt in terms of percentage, so still relatively elevated. It’s not like it’s down to the 90s levels or 2,000 levels. But I mean, this does not show you the sort of bubble exposure to equities that you had in 2008, at least with margin debt.

Preston Pysh (53:00):

Hey, if you’re still listening, we pick up the rest of this conversation in the next part, which is just right there in your podcast app. So just go ahead and scroll down there and click on part two, and it picks right up where we just left off.

Outro (53:12):

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