[00:02:40] Joe Carlasare: I am going to be one who is very optimistic that he serves a long sentence. I don’t think they’re just going to hand him, you know, a, a slap on the wrist type thing. So I think he’s going to, rightfully so, be facing serious, serious prison time, and eventually he will plead guilty in a plea bargain.

[00:02:57] Preston Pysh: How in the world do you post the bond amount that he posted and keep it a secret?

[00:03:04] Preston Pysh: How is that, how is that even possible?

[00:03:07] Joe Carlasare: Well, you don’t need to post a full amount of the bond. Right. There’s a bond holder that can, you know, give you the, the, the, the larger amount and they just require sufficient collateral. So, you know, but the collateral was the house.

[00:03:16] Preston Pysh: Yeah, but that’s not sufficient collateral is it?

[00:03:18] Preston Pysh: I mean, they, I saw a number, it was like 10 million on the house or something.

[00:03:22] Joe Carlasare: Four.

[00:03:23] Preston Pysh: Yeah. So, so four, 4 million.

[00:03:24] Joe Carlasare: Right. So, so they’re, you know, they’re putting up that for the bond holder and the bond holders securing the rest of it. So they’re the one really assessing the credit risk. They’re assessing the flight risk and it’s their dime if he runs.

[00:03:36] Preston Pysh: And so how about the, the news that came out, I think it just came out this week where they were requesting that the names aren’t released, that who posted the bond? Like, is that not normal? Is, is that normal?

[00:03:50] Joe Carlasare: I would say it’s not normal.

[00:03:52] Joe Carlasare: It it is, but it’s not unusual either. Right? It’s not the, the normal way of doing things customary normally you get that information.

[00:03:58] Joe Carlasare: But I think because of the folks involved and sensitivities and also, you know, the political impact of this all import of it all, I think it’s very likely that, you know, that they don’t want certain figures to be exposed for, you know, supporting him. So I would say I, you know, we’ve seen it before. Some of our white collar folks have talked, I was talking with them and they said it’s, it’s not something that’s unheard of, so to speak, but it’s not, you’re right, it’s not custom area.

[00:04:20] Joe Carlasare: It’s not normally what would, you know, take place.

[00:04:23] Preston Pysh: So Caroline just sang like a songbird to, I saw she showed up in New York and was out getting coffee. There was like pictures showing up online and it seemed like she was pretty comfortable coming back to the US under, I suspect some type of conditions that allowed her.

[00:04:38] Preston Pysh: So I, I guess, where are my questions going? So like what’s, what’s her deal? .

[00:04:42] Joe Carlasare: Yeah. No, I mean, so listen, there’s anecdotal evidence. It appears that she’s cooperating fully. I will say this. Okay. And I think folks on Twitter that I were reading was reading about, you know, they were really sort of pushing conspiracies about why hasn’t he been indicted yet?

[00:04:55] Joe Carlasare: Why hasn’t he been arrested? Why hasn’t he been extradited to have all of him dead to rights? Right? Everything we know that’s public knowledge shows that he should be dead to rights prosecuted. There’s no doubt. I will tell you though, the way the system’s set up, the way you have to go through certain lengths to and panel a grand jury to present evidence, particularly in the case of financial crimes.

[00:05:14] Joe Carlasare: It takes a long time. Financial crimes prosecutions can last years, right before charges are ever brought just to empanel the grand jury. They move very slowly. They are meticulous. And by the time the DOJ prosecutors actually seek that indictment, they have everything right. They know everything. They’ve talked to everyone, they’ve got every document.

[00:05:32] Joe Carlasare: They’ve, you know, left no stone unturned in a crime of this magnitude with billions of dollars that have been misused, misappropriated. The fact they were able to put this together in, you know, a handful of weeks approaching the holidays. It may not seem like it for people who are not in this world that I’m in with litigation that’s exceedingly fast, that’s moving with all due haste to get it done.

[00:05:53] Joe Carlasare: So they wanted to send a message and they did.

[00:05:57] Steven McClurg: You know, one point here if I might interrupt, and this is you, you brought up Caroline, you realize her dad is a behavioral economist and he actually wrote several papers on her dilemma and I actually pulled up one of the papers. He, he wrote, I want to say it was in the nineties.

[00:06:14] Steven McClurg: I pulled it up a couple weeks ago for some light holiday reading, and that was her playbook. Wow. So I challenge everybody to go out and find that, find that paper that, that he published and, and read through it. And it’s exactly what she did.

[00:06:31] Joe Carlasare: Yeah. And, and keep in mind it’s not just Caroline. There are other folks Yeah.

[00:06:35] Joe Carlasare: At FTX that have cooperated. We’ve seen anecdotal examples of those folks offering assistance to the prosecutors. So my guess is virtually everyone, but SPF F is cooperating at this point.

[00:06:46] Preston Pysh: I mean, even, I mean, when the Enron guy goes in there and says, this is like nothing I’d ever seen before, you know, it is nasty.

[00:06:54] Preston Pysh: I mean, direction via signal. I mean, all, I don’t want to, you know, I’m, I, I know everybody’s pretty well versed on the story at this point, but I was just, I was curious to just kind of hear your, your point of view from a legal standpoint. So you think he’s, they’re going to, they’re going to toast them.

[00:07:09] Steven McClurg: Absolutely he will Plea don’t, this will never be a trial. I put me down as a hard, hard belief in that hard prediction that this will not see a trial. I think this will be a plea. The question is, you know, how long it’s going to take to negotiate with him, given the stakes and given his the effect on him.

[00:07:27] Steven McClurg: He’s going to serve time, he’s going to serve hard time. It’s going to be very difficult for him and his family to go through. I, you know, if we were counseling him, we would try to do whatever you could to gain leverage. Now what that is, to me, that’s the most interesting part. What information does he have in his position, in his posture?

[00:07:44] Joe Carlasare: Really the heart of cryp, quote unquote, crypto, which I have a lot of problems with, just generally.

[00:07:49] Preston Pysh: You had information, but you had problems even saying that you had problems even saying that Joe .

[00:07:53] Joe Carlasare: Yeah, I do.

[00:07:53] Joe Carlasare: I do. But you know, it’s obvious right now and the things we as Bitcoin as we talk about for years, right?

[00:07:58] Joe Carlasare: It all starts to come to light in the, in the end. But from my standpoint here, if you’re him and you’re trying to play your cards, the best ones you have, What else can you go out there? What can you use with prosecutors to cooperate on? I’m not going to, I’m not in the business of spreading fud, but there are other big players in this industry.

[00:08:15] Joe Carlasare: There are other people that have some mud on their faces, and if there were people that I had to guess had privilege inside information that could expose some of these folks, I would put SPF at the top of that list. So we’ll see to be determined if anything comes from this.

[00:08:30] Preston Pysh: Oh, that’s really interesting.

[00:08:32] Preston Pysh: That’s a really interesting take. I agree with you. He, I mean, he was, he was the ringleader of all the cesspool that existed. And there’s some other, like strong, can, I suspect there’s a, there’s a few other like really strong candidates that are in. , how is Mashinsky is, am I saying his last name correctly?

[00:08:51] Preston Pysh: Yeah, Alex Masinsky. How is he still running around? Because he’s not.

[00:08:56] Steven McClurg: I have no comment. I can, I can’t talk about that one, but , Steven or Jeff, feel free to chime in on that.

[00:09:03] Joe Carlasare: I mean, I’ll, I’ll be really brief here, but it’s what’s really interesting about what everything that you just said and then bringing up Masinsky is it seems like there was one party that was at the center of everything that was going on, right?

[00:09:18] Joe Carlasare: It was, it was, it was Genesis. , right? Oh, wow. Yeah. They had, they had, they, they, they were involved with ftx, with Alameda. I just, I don’t know if this is true, but I read an article that CoinDesk, which is owned by DCG, wrote that said that they called in two and a half billion dollars of their loans that they made to Alameda in q2.

[00:09:42] Joe Carlasare: Wow.

[00:09:43] Steven McClurg: Steven, it’s interesting, you, you said one entity. I thought you were going to go for D CG because you could make the same thing. They, they’ve got tentacles into everything, right?

[00:09:50] Joe Carlasare: They’ve got printers. That’s, yeah, I think that’s all. It’s all the same. It’s all dcg Genesis and

[00:09:56] Preston Pysh: it’s co-mingled. It’s co-mingled, capital

[00:09:59] Jeff Ross: Celsius.

[00:10:01] Joe Carlasare: Was Voyager involved with those guys or not? Yes, absolutely.

[00:10:04] Steven McClurg: No. The three, the three arrows going down, brought down Voyager.

[00:10:08] Joe Carlasare: I mean, my understanding is three arrows owes Genesis 2 billion. Wow.

[00:10:16] Preston Pysh: Yeah, so the biggest turd hasn’t been flushed down the toilet yet, is, is where we’re kind of going with some of this.

[00:10:22] Preston Pysh: So the Winklevoss hosted their letters today, basically pleaing for their yield product. And I think it was like 300,000, 350,000 customers that evidently had yield on Gemini, that school teachers,

[00:10:38] Steven McClurg: Preston school teachers, had yield.

[00:10:40] Preston Pysh: You saw how that was crafted, right? You saw how that was crafted. Very interesting.

[00:10:44] Preston Pysh: And so it seems like Barry’s tactic is, Hey, if I can just kind of hold on as long as possible, and hopefully we get a, a big reversal from central bankers and the market rebids, then maybe I can survive this. Is that really kind of the, the play, if you want to call that a play.

[00:11:00] Steven McClurg: Barry came out in Silver, he came out and said that that’s not true.

[00:11:04] Steven McClurg: We, we didn’t default on the 1.6 billion. We haven’t missed a single payment. You know, he basically rebutting most of what the Winkle by have said out there. I, I don’t know. It’s, it’s hard for me to take that at face value their claims when, you know, they opened up the casino and let the school teachers gamble inside their, you know, earned products and everything else with these unregistered securities on their platforms.

[00:11:24] Steven McClurg: So it seemed like crocodile tears to me. But well, Barry, but who knows?

[00:11:28] Preston Pysh: I mean, but Joe, if I’m going to push back, like, people can’t, people can’t withdraw their funds, right? So, to say that they, that they haven’t missed a payment, right? Like, that’s just total crap.

[00:11:38] Joe Carlasare: Like they, well, why, why can’t they withdraw their funds pressing?

[00:11:41] Preston Pysh: Why can’t they withdraw their funds? PE they can’t withdraw their funds because the WinCo II opened up the earn product on their. . So whose fault is that? Where does the yield come from? I mean, come on. Like where does the earn platform yield come from? And if you would’ve custody funds and not re hypothecated and not lent them out like you know, folks thought you were doing.

[00:12:01] Preston Pysh: You there, one shouldn’t be a problem with withdrawals. The problem is you had this interconnectivity among all these entities, whereas if one domino fell, everything fell and it was, you know, a handful of market makers. You know, my clients are increasingly frustrated about this because they’re, you know, they’re people that are trying to put on trades, they’re trying to make markets, they’re trying to get involved in this.

[00:12:19] Preston Pysh: And to deal with some of these folks in litigation and internally is just a total hassle. Dealing with Genesis is a complete hassle. I’ve been through the ringer with fights with them. They’ll change terms on the fly. They’ll make, you know, statements that they won’t live up to. They’ll change the deal midstream in, in, in renegotiated it.

[00:12:36] Preston Pysh: It’s a mess. The whole industry’s a mess. And you still don’t have legitimate market makers coming in here because they can’t figure out who’s on the other end of the trade. They can’t figure out what the level of leverage is in the system even. I mean, it’s a mess. The whole, whole industry. And, and where is the SEC?

[00:12:51] Preston Pysh: You know, they’ll, they’ll go after Ken Kardashian, but they’ve been asleep at the Switch, you know, for months. , I mean, if there’s one takeaway from this whole cycle, it is the abysmal failure of Chair Gensler to do. Right. And, and I, I’m, I’m very critical of him at this point because this is all on him as far as I see.

[00:13:08] Preston Pysh: He was meeting with SPF regularly. He was meeting with a lot of these folks, and no red flags came up. You couldn’t figure out anything in your diligence with all your powers as a regulatory agency for the United States of America. I mean, come on. It is, it’s, it’s, everybody should be upset about this.

[00:13:23] Joe Carlasare: Did you guys agree? Like we, we all knew that, that Jim and I was working with Genesis on the earn product, right? So that wasn’t a big, that wasn’t a secret at all. I mean, that was in the documents. We all knew that they were, they were posting your funds to Genesis. Genesis was lending it. They were creating a two-sided market, which what they said they were.

[00:13:43] Joe Carlasare: And, and to, look, I hear what you’re saying on Gemini in the week, July, but to defend them a little bit with you, you look at Genesis, they’re a registered broker dealer under finra. They are lending money, they’re borrowing money, they’re making a market, and that’s. I mean, this wasn’t anything out of the ordinary in, in traditional finance, right.

[00:14:04] Joe Carlasare: The earned product wasn’t paying crazy yields like some of these other platforms were. They were pretty, they were pretty reasonable yields for, for the market they were making. So it wasn’t like they were, it wasn’t like a massive casino like, you know, like block five and, and FTX and Celsius was, it was a little bit more reasonable when they were working with a thinner registered broker dealer.

[00:14:24] Joe Carlasare: So, you know, yeah, they should probably shut, have done a little bit better due diligence on who they’re, who, who they were lending out to. But, but at the same time, at, at the crux of it, you got this, this registered entity that, you know, the thinner should be looking into.

[00:14:37] Preston Pysh: What are your guys’ thoughts on finance?

[00:14:40] Preston Pysh: because there’s a lot of flood being spread around on, I guess I shouldn’t be calling it fud because I have no idea what’s true or not true. When people are looking at what has happened and they’re looking at the actions of CZ online, his behavior is markedly different than what it was prior to the FTX failure.

[00:15:04] Preston Pysh: So it’s, it seems like there’s something off. I’m curious if you guys have any opinions and if not, and if you’re not comfortable saying anything, that’s fine too, but we can move on to the broader markets.

[00:15:14] Steven McClurg: But the only thing I will say is this entirely reinforces the arguments that have been made repeatedly in the orders denying the.

[00:15:24] Steven McClurg: Etf, the spot ETF by the SEC, which is that these offshore exchanges particularly the leveraged derivative exchanges, the Bitm maxes, the Bibis, their black boxes, we can’t see into them. We don’t know what their balance sheets looks like. They’re not willing to share it. Even the public stuff that gets out is questionable, whether it’s authentic or reliable.

[00:15:43] Steven McClurg: So they’re black boxes. And to Steven’s point, just a moment ago, well, you know, when you’re saying, well, we did our diligence, we were registered, we went and we contracted with these folks. In many ways, it doesn’t matter because of the interconnective nature of this market, it’s too small and there aren’t, there aren’t big entities to come and it that you can really ever properly assess the rich of the risk and leverage in the system.

[00:16:06] Steven McClurg: There’s no way to do it. We, we found through public documents now that some of which have been leaked is that, for example, the FTX balance sheet, the Alaa balance sheet, these things were propped up with tokens that they literally created out of thin air. Literally created out of thin air. So, so when you’re saying, well, you know, we did our diligence as Gem Gemini.

[00:16:25] Steven McClurg: I mean, I don’t know how they could have done their diligence. Yeah. I dunno how it’s possible. Yeah. Because you can never get to where, where’s the root of all this? It’s just a house of cards built on a house of cards. It’s complete opposite of what Bitcoin’s supposed to be by the way.

[00:16:37] Joe Carlasare: Well, and look, I, I’ll, I’ll, what All I’ll say on it is really simple, you know?

[00:16:41] Joe Carlasare: And, and I’ll, I’ll address Binance directly too. I was having a conversation with one of my, my former, former colleagues from Stratify, who’s, who’s still there, and we were talking about risk management. And one of the biggest parts of risk management, and this is, and this is a lot of people, a lot of people in crypto don’t get this part right.

[00:16:59] Joe Carlasare: A a lot of the hedge fund managers and, and people that are managing money here, they, you know, they were, they were a trader at Goldman or a trader at somewhere else, and they’re like, oh, yeah, I know how to trade. Well, that’s great, but, but portfolio management’s a lot more than just trading. It’s, it’s risk management.

[00:17:14] Joe Carlasare: And, and the biggest part of risk management, believe it or not, is counterpart risk. Yes. Amen. Counter risk matters more than anything. It’s like you can’t even, you can’t even move forward until you’ve assessed your counterparty risk. And so we’ve avoided Celsius, lofi, ftx, Voyager, all because. When we ask for certain things, like, Hey, where does your yield come from?

[00:17:40] Joe Carlasare: We couldn’t get answers. Or, you know, another thing that you, you do in traditional finance when you’re, when you’re analyzing a counterparty, is you ask for their balance sheet, right? You want to know their assets and liabilities. Well, there’s a lot of people that won’t give that to you. So that was actually a big part of ftx.

[00:17:57] Joe Carlasare: We, we tried to, we actually tried for six months to onboard with ftx. Okay? Now, granted, there was a couple of things that they asked for us that were weird, but there were, the one thing that they would never supply us was, was proof of funds. And we just were like, well, we can’t onboard until we get that.

[00:18:15] Joe Carlasare: Well, everybody else works with us, so either do it or not. And we’re like, okay, well, is there, you know, and we, we tried, we legitimately tried and couldn’t get there. So, so we avoided all of that mess because of that. You know, just, just really simple process and really simple questions. And if you don’t give what you need and you can’t evaluate your risk, you can’t take a risk.

[00:18:34] Joe Carlasare: Plain it simple. Amen. Steven, evaluate your risk. You can’t, you can’t take a risk. Same thing with Kevin, even that, that, that’s such a great point that people should play that on loop because it’s so, so critical for people to understand these markets. Yeah. And and this is the thing, the Binance, sorry, Preston.

[00:18:49] Preston Pysh: Oh no, I wasn’t, I was just going to say for people, just, just pause and really comprehend what, what he’s saying because in the face of all of that, you and everybody else that was looking at ftx, what they’re seeing is endorsements from Tom Brady umpires at World Series wearing their logos, s sports stadiums named after them.

[00:19:11] Preston Pysh: And at a point you start to think you are the crazy person because here’s this rocket ship, what appears to be a rocket ship and everybody else is getting it, but not me because I’m, I’m using these really core principles of counterparty risk. Let me see your balance sheet. The really simple stuff. and in the moment when the market is raging, everybody’s, you know, clobbering it, you start to ask yourself if you’re the crazy person.

[00:19:39] Preston Pysh: But once that trend reverses, these core fundamental things will keep you in the game when everybody else is, I mean, in this case, getting locked up in prison. Right? That’s right. Keep going, Steven, sorry to interrupt

[00:19:52] Joe Carlasare: you. Well, and and I’ll say, I’ll, I’ll say on that Preston, by the way, I did think I was crazy.

[00:19:57] Joe Carlasare: Yeah, I believe it. I did think I was the crazy guy. I’m like, yeah. I mean, I had one of my traders literally every day complain, saying, why aren’t we on onboard with FTX yet? Yeah. And I say, well, they, they just haven’t given us everything we asked for. Well, we’re missing out. We’re missing, we’re missing this trade.

[00:20:15] Joe Carlasare: And only they can do it. We can only do it there. And, you know, and and I, I kept saying, well, I can’t approve this until, until we do. And, and luckily we also have a really good head of operations who I worked with for years. He was. Had a fun operations at Guggenheim before, you know, before as well. And he’s also very firm on those types of things.

[00:20:35] Joe Carlasare: And luckily, he, he had my back, right? Yeah. And it was two of us, not just, not just one guy that was saying, no, I can’t, can’t, can’t do it because of this. Right? And yeah, so, so luckily he had two people that were crazy in the room and everybody was calling us, you know, crazy boomers that move too slow that, that, that, that don’t, that don’t understand crypto, you know what I mean?

[00:20:57] Joe Carlasare: Yeah. And, and, and, and, and we held out. So yeah, number one, I did think I was crazy. And number two, I’m, I’m going to, I’m going to say this right now, I did not predict that there was fraud. Yeah. I just knew that I couldn’t get what I needed. That’s it. I had no idea when, when the fraud happened, I was like, whoa. I had no idea that that was going to be the answer.

[00:21:19] Joe Carlasare: I thought I was crazy. I thought that they were killing it, and I thought that they were going to, they were going to rule them all one, one ring to rule them all right. And I was shocked to find out that there was, there was fraud involved. But then looking back, I’m like, well, I should have.

[00:21:31] Preston Pysh: No, the i, the ultimate irony, , the ultimate irony for me is the organization that broke the story is CoinDesk Barry owns Coin Desk.

[00:21:46] Preston Pysh: Right. It blows up ftx and then like Rick Ricochets back right in his face. It’s the, the irony is just totally crazy to me.

[00:21:58] Joe Carlasare: Yeah. Yeah. And then my final thing I’m going to say is, because you asked the question about buying Nance, right? Yeah, yeah, yeah. Sorry. You know, I had to say all that to lead up to this , I don’t know what’s under the hood of Binance.

[00:22:10] Joe Carlasare: So we don’t use all Yeah, I’m not saying there’s anything wrong with them. Yeah. We just dunno what’s there.

[00:22:15] Preston Pysh: Same principle, same exact principle. .

[00:22:18] Joe Carlasare: Yeah. And by the way, haven’t really tried, don’t really care . So just, just not use them.

[00:22:24] Steven McClurg: I have, you’re not going to have a whole lot of luck issuing subpoenas to them.

[00:22:28] Joe Carlasare: So, you guys are

[00:22:30] Preston Pysh: something else. All right. That was awesome. Let’s go ahead and talk about traditional markets. So Jeff, let’s get you into the mix here. I’m going to pull up some charts here. Describe for the folks that are just listening. Jeff, we’re going to go ahead and get some slides up here. Okay. I think I’ve got them shared.

[00:22:51] Preston Pysh: That’s the tenure treasury. I think you wanted to start off with this one here. Is that correct, Jeff?

[00:22:56] Jeff Ross: Sure. This is a cool chart and I have to give props to Dylan LeClair, who shared this with me. This is a lot of people have been talking about, it’s, it’s gained some popularity lately. Net liquidity, right?

[00:23:07] Jeff Ross: So, so people are talking about liquidity expansion, liquidity, contraction. What does that all mean? And. One way to look at it is, is factoring a, a couple things, right? So, so when the Fed is withdrawing liquidity, doing tightening, right? So they’re letting bonds roll off their books, and then you take that and you subtract it from the treasury general account, how high that is.

[00:23:31] Jeff Ross: That also subtracts liquidity from the system in a way. And then third is the overnight reverse repo market. Our, our institutional, like our banks, big banks, are they parking money there or are they putting that into risk assets or not? And this is a cool chart because what it’s showing is if you take that net liquidity and then you sort of morph it onto the s and p 500, it gives you some bands kind of upper and lower ranges of what the s and p 500.

[00:24:00] Jeff Ross: Should technically do if the markets happen to move in terms of liquidity or net liquidity. So that’s what this chart is showing, and it’s pretty interesting, as you guys can see. It starts it, it, we can go back further, but it, it’s, it gets more accurate basically after covid, so after the 2020 crash and then, and then lots of interesting things started happening after that.

[00:24:20] Jeff Ross: Basically what it shows is there was a surge in liquidity, right? So, so what we think of as quantitative easing in general basically ramped and it. In the fourth quarter of 2021, and then you’ll, you’ll notice an abrupt peak and, and a descent from there. And it’s been descending ever since then, un until we get to kind of October of 2022, where it ramped up a little bit and which also happens to coincide when we had a nice little bear market rally and then heading into the end of the year and into the beginning of 2023, it’s kind of taken a, a dive back lower again.

[00:24:53] Jeff Ross: So that’s just one thing that I like to look at personally. When people talk about, you know, are we in a liquidity expansion environment? Are we in a contraction environment? If so, how will risk assets respond? Historically, I think most people have come to realize that risk assets don’t do well. When liquidity is being sucked out of the system, they tend to do really well.

[00:25:13] Jeff Ross: And, and, and I don’t consider Bitcoin to be a risk asset, but it responds like a risk asset, especially in its early days that what that we’re in, in the price discovery phase. It tends to mop up liquidity when it’s available. And what this chart shows me, at least for now, is that liquidity is still being withdrawn from the system at a rapid pace.

[00:25:31] Jeff Ross: So I would not expect risk assets to do very well unless something changes. So I’ll throw that out there for you guys.

[00:25:36] Joe Carlasare: Let go ahead.

[00:25:37] Steven McClurg: Yeah, Jeff, so just so I understand this, this is measuring le liquidity being drained from the system as of the roll off and maturity of bonds on the Fed balance sheet. Is that, is that the pri, the math, that’s the method liquidity.

[00:25:51] Jeff Ross: So that’s the primary one minus the overnight reverse repo market, minus the treasury general account. Does that make sense?

[00:25:59] Steven McClurg: Yes. Yes. Okay. And, and you, you’ve got three, three bands here. You’ve got the upper band, which I don’t think the s and p got above. 5,000. Right. Ever. But uh, but apparently that would’ve been one of the fair mark, fair values based on liquidity system at that time.

[00:26:14] Jeff Ross: Exactly. So the, so the upper green band is kind of the upper fair value that it could reach based on liquidity. The, the, the red band is the lower boundary and then the black line is the actual price of the s and p 500. Lynn Alden talks about this in her, her newsletters. She has a similar chart where she actually does it on the actual sites, the Fed site, the Fred Site, Darius, Dell speaks of it as well.

[00:26:36] Jeff Ross: I don’t know, anybody else have any thoughts on this? I, this to me is, is I think super, super interesting and it, and it kind of goes along with the saying, especially I think Preston, the last time we were on, you were showing those charts going way back and showing the expansion of liquidity and the, with, you know, the contraction of liquidity.

[00:26:51] Jeff Ross: And then you, you put that up with the stock market and then you also put it up with Bitcoin and it almost perfectly coincides. So, you know, correlation is not causation, but man, it sure makes a compelling case for it.

[00:27:03] Preston Pysh: I personally like it for, if you’re a short-term person, It kind of shows you the vol ranges.

[00:27:09] Preston Pysh: So like if it starts getting up into the upper band, you could probably expect maybe a, a pullback or that the vol, the volatility’s kind of reaching, it’s, it’s local max or men, it seems to kind of follow that. But I’d, I’d have to dig into the calculation more to really have much confidence in, in that idea.

[00:27:28] Preston Pysh: But it seems like it could be useful for something like that.

[00:27:30] Joe Carlasare: I mean, look, you know, S&P is at, you know, 38, 58, I, I, I absolutely love looking at liquidity in markets. When I’m looking at what, what risk assets, risk assets will likely do. I mean, it looks like, looks like this is kind of pricing the s and p possibly going at 3,500.

[00:27:46] Joe Carlasare: I’m a little bit more bearish on this and, and, and I, I kind of get there a different way, but it’s the same concept. I, I look at the bond market because it’s the only thing I know how to do to, to, to get, to see what s and p prices are. And the way that I, the way that I kind of get there, I look at where rates are going.

[00:28:06] Joe Carlasare: and specifically look at the high yield bond market, right? So if, if we think, if, if we believe kashkar and, and believe that the Fed will raise rates at least another a hundred basis points this year, which I think is entirely possible, if not too light, then you’re, you’re probably looking at high yield bond rates for, you know, on the five year somewhere around, you know, call it 9%, which means that, you know, probably double digit default rates because companies can’t afford their debt service at that level.

[00:28:44] Joe Carlasare: And they won’t be able to really refinance and afford that debt service. The way the high yield bonds work, our, our issuers work is that they, they, they typically issue five year, five year debt. And then after four years, they’re already starting to, to refinance it because they’re not like the, the bigger corporations, they can just pay it off if, if, if it matures, they have to act early and they’re, and they’re usually acting in a one year when you’re out.

[00:29:08] Preston Pysh: So when they try to roll it, so when they try to roll it, that’s when you really start to see it. And that is, is that the point you’re getting at with that, Steven?

[00:29:15] Joe Carlasare: Yeah. That, yeah, that’s exactly right. And for all these companies that are, that are having to essentially roll an issue, new debt this year, yeah.

[00:29:21] Joe Carlasare: They’re, they’re not going to be able to afford the the debt service. So based on where we’re looking at potential high yield bond defaults, I, I see the s and p going as low as 3,100. Wow, because an s and p is correlated to the high yield bond market.

[00:29:38] Preston Pysh: And so when we look at the chart, so I, I have the government bond yield curve pulled up, and I would imagine that the yield, the yield that you’re seeing in the high yield sector that you’re talking about would kind of have a parallel movement to what we’re seeing.

[00:29:51] Preston Pysh: And so I have it highlighted here. I don’t know if you guys can see where I have the line drawn. It’s showing like January of 2022 is where we watched the yield curve really kind of break what was a traditional kind of trend. And it started selling off like crazy and it’s just been in a rip ever since.

[00:30:08] Preston Pysh: And so we’re coming up, or we’re basically at the one year anniversary of this move, this aggressive move . And you’re saying that as they try to roll that, that debt, we’re now at the one year mark and you kind of expect that to really start to play out here in the coming quarter, two quarters.

[00:30:26] Joe Carlasare: What do you think, Steven?

[00:30:28] Steven McClurg: Yeah, prob probably, probably closer to Q2 and q3. And, and here’s the problem with the current yield curve, right? So, so right now, you know, just, you know, five year treasuries are at 3 87, oops. Okay. Oops, sorry guys. So usually in, in, in typical markets, if a, if a company can’t afford the, the, the debt service on five year debt, they just go down the curve and they issue, you know, two or three year debt or, or floating rate main loans.

[00:30:56] Joe Carlasare: Mm-hmm. Mm-hmm. The problem is, is that two years at four 30, it’s higher. It’s higher. Yeah. Look here, right? Yeah. Or, or if you’re like, okay, well maybe I’ll just issue six month, six month paper, commercial paper 4 75. Wow. Wow. So, so you, so you’re forced into the five year, but a lot of issuers don’t want to give five year paper to companies that are potentially failing either.

[00:31:20] Joe Carlasare: So I, I, I think there’s going to be a lot of problems in the high end bond marketing.

[00:31:24] Preston Pysh: Now explain to people why they just couldn’t roll into a, into a 10 year or something with a longer duration.

[00:31:30] Joe Carlasare: No, no issuer or no or no. Bond buyer wants to give a high yield bond company, which, you know, don’t even know if the business is going to be viable for 10 years.

[00:31:41] Joe Carlasare: Yeah. To pay off the debt. Yeah. Based on their burn

[00:31:44] Preston Pysh: rate of, of, you know, or total lack of earnings and whatever they have on their balance sheet, they’re expected to go negative on their balance sheet in six months or a year or

[00:31:53] Joe Carlasare: whatever. Yeah. Yeah. Gotcha. Yeah, I mean, typical investment grade bond issuers, you know, like some of the big banks you know of are manufacturing companies.

[00:32:01] Joe Carlasare: Apple, I mean, they can issue 10 or 30 or even 30 or debt all day long. Yeah. But I mean, if you’re like toys or us, I mean, who’s going to give you 10 year debt? Yeah. Steven, what, how do you think some of the high yield proxies, like, you know, things like HYG are in the same basic band they’ve been in since June?

[00:32:19] Joe Carlasare: You know, we really haven’t seen them sell off hard. I mean, HYG, let’s see, I’ll try 70 right here. 74th, 60. It’s the same was back in June. Some of these bond ETFs.

[00:32:30] Joe Carlasare: Yeah. It, it usually has, it, it, it, it all has to do with duration, right? Risk on bonds are, are basically what, what, what that means is if rates start going up, if you’re in higher duration bonds, longer duration bonds, then, then your price changes more dramatically, right?

[00:32:50] Joe Carlasare: Right. So, so things like US treasuries or investment grade bonds is not what you want to be in. You want to be in lower duration bonds because the price movements are less drastic. So, so people are scrambling to hold lower duration bonds and, and the way that you get lower duration is e either have a shorter maturity or a higher yield.

[00:33:11] Joe Carlasare: Mm-hmm. , which essentially is high yield bond is, is high yield debt. Right. So, so, so people are moving into that for price protection. But once that price protection is taken out and that duration risk lowers, then that’s when people are going to start moving back into. Longer duration, higher grade products.

[00:33:30] Preston Pysh: I’m going to send a quickly pull up, and this is, you know, we were looking at yields earlier. I’m showing prices here and this is an ET tf, this is the iShares high yield corporate bond et t f, which is ticker HYG. I’m just going to pull this up so people can see the, the chart. I think this is it. There we go.

[00:33:50] Preston Pysh: And you can kind of see where high yield bonds are at from a price standpoint, right?

[00:33:57] Steven McClurg: Yeah, that’s right. And, and, and for those just listening in in the podcast, it, it’s in the same range. It was basically in June where most of the damage is done in the first part of the year in terms of the selloff.

[00:34:09] Preston Pysh: I, I got a question for you Steven.

[00:34:12] Preston Pysh: So, you know, I made a chart with Lynn where we were tracking the global M two cause everybody pulls up the US M two. But when you combine it and you’re looking at it from a global perspective, it’s really interesting how it’s slightly different and. We’ve seen, and I, let me pull up the chart here so that I can kind of show people what I’m talking about.

[00:34:32] Preston Pysh: But when we’re looking at the global M two, you’ve seen this enormous bounce since, what is it? No, the The start of November of this past year. Here, let me click on the right thing. Share. Sorry. . Okay, so here’s the chart and you can see how much M two global M two is added into the global economy post covid.

[00:34:59] Preston Pysh: I mean, it’s just ripped. They then decide that they’re going to get serious. They’re tightening Glo. The US is tightening M two Europe’s sitting on their hands doing nothing. Japan’s, and we can talk about that , but then outta nowhere, it seemed like outta nowhere in early November, the global M two just went on another rip again.

[00:35:22] Preston Pysh: And I, you know, I’ve been told this is due to the dollar devaluing during this same period of time. So if we go back, sorry, I got the high yield one pulled up here. Let’s go DX y. When we look at the, at the DX y, you can see here in October, and there you go. The start of November, the D X Y starts selling off aggressively.

[00:35:47] Joe Carlasare: How did they do, how did the US do this?

[00:35:51] Preston Pysh: How did they weaken the dollar so much? Because whenever I’m looking around and I’m looking at the disaster that’s happening in Europe, I’m looking at the disaster that’s happening in Japan and how much debasement they’re having to do in order to offset the energy issues that they both locally have.

[00:36:09] Preston Pysh: I just, I just don’t understand how the dollar could be selling off in that, in the face of that environment, you would think that the dollar would be getting bid in the face of those other fiat currencies. So how did they do this?

[00:36:21] Joe Carlasare: Yeah. Well, what a lot of other central banks around, around the world do is they, they’re constantly trying to peg themselves to the dollar or, or, or if not pegging themselves to the dollar, manipulate their currency versus the dollar.

[00:36:33] Joe Carlasare: And the reason why you do that, people are like, well, why wouldn’t you, why wouldn’t you do the opposite? Right. And, and really if it comes down to, if the dollar is too strong Right. Then here in the US we can’t export. Yeah. Right. If the dollar’s weak, then we can export a lot, you know, and our manufacturing thrives.

[00:36:55] Joe Carlasare: Mm-hmm. so, so essentially what happened was the Fed took action and started aggressively raising rates, which essentially took liquidity outta the system, began to devalue the dollar, but then all the other countries around the world had to very quickly catch up so that their global manufacturing and global exports don’t get weakened.

[00:37:16] Joe Carlasare: So, so they had to start taking action to go in the opposite direction that they were going in. And then, so it’s always a laggard effect. That’s why you see these bounces and, and, and strength and weaknesses. Cause in, in some cases they’re trying to tr they’re trying to gain what the US is going to do and other cases they’re just trying to catch up.

[00:37:34] Joe Carlasare: So, so that’s why you see that, that, that type of volatility.

[00:37:39] Preston Pysh: Do you think, and, and this is just purely gut, I have no idea. I just kind of feel like the dollars sell off that we’ve seen since, call it November, is coming to a close and we’re about to see another rip on the dollar. Do you agree with that or what’s, what’s your point of view on where it goes from now?

[00:37:57] Joe Carlasare: I don’t know. And, and here’s why. We just passed a 1.7 trillion omnibus spending package. So everything that the Fed is doing to fight inflation, the US government. through policy is doing everything they can to create inflation. Hmm. Right. So, I don’t know who’s going to win. Hmm.

[00:38:25] Preston Pysh: I gotta love it. I want to go quickly around the world on some other yield curves. So we had the, we had the US yield curve pulled up. Let me go back to this chart. Here we go. Okay. So here was the US yield curve. We had talked earlier about kind of where it kind of broke a, a year ago when we were talking about the high yield.

[00:38:44] Preston Pysh: Here’s the UK’s yield curve. You can see, unlike our US yield curve, where it’s highly inverted, where your lowest duration is, is kind of producing the highest yields. Over in the uk. You still got the one year at the, at the bottom of the yield curve, producing a 3.17% return, and the 20 year and the 25 year up there, close to 4%.

[00:39:08] Preston Pysh: This thing’s moving out like aggressively moving out. As you guys look at that, do you think this is a reversal? Because it doesn’t look like a reversal to me. It just looks like st like crazy, crazy volatility and it’s still, nothing is demonstrating that this thing has reversed and is starting to bid.

[00:39:27] Preston Pysh: Any thoughts? Nothing.

[00:39:29] Jeff Ross: Joe, I’m dying to know your thoughts on this.

[00:39:31] Joe Carlasare: Yeah, well, they’ve got some unique issues, I think with how their, their bond market is constructed, particularly how they borrow at the long end. So I, I, I would view this as an anomaly. That’s just my takeaway. I think the consistent message from the global bond markets is that the long ends consistently are rejecting the notion that the rates are going to be able to stay high for this for much longer.

[00:39:56] Joe Carlasare: I think that’s the message to the tenure that I, I sent over the, the chart press and that, you know, we’ll, we’ll get to in a little bit that I think this is an anomaly and from a global perspective at least.

[00:40:05] Preston Pysh: Well, yeah, and I know Jeff asked you that the audience might not know this, but Jeff asked you that because Joe, and don’t take, don’t let me take words outta your mouth, but Joe, you’re looking at the US yield curve and you think that we are.

[00:40:17] Preston Pysh: Seeing a, a sell the, the peak selloff is over and that we’re maybe starting to see a bid in US treasuries. Is that your point of view from going into 23?

[00:40:29] Steven McClurg: Yeah. Long end. I mean, you had the window dressing at the, the end of the year, which you typically see because they have to clean up some books. And so you saw a little bit of a selloff, particularly at the long end.

[00:40:38] Steven McClurg: So you got this bounced, but bam. Look at this week, I mean, look at the, the week we’ve had with it. It catch a real bid and yields fall, you know, 10 year plus across the board. So to me that is where you want to be in the face of recession. Obviously I was early to this trade, but I still think it’s the right one moving into next year with the deteriorating economy and very much likely a recession baked in.

[00:41:01] Steven McClurg: The problem we have is that we can still consistently still have this thing that, you know, good news for, for risk assets is bad news. Right? And what I mean by that is that the economy has not deteriorated as rapidly as many thought. You know, many astute market analysts, macro analysts, thought the Fed could hike, you know, a couple times, three times.

[00:41:20] Steven McClurg: They, they’ve been on the fastest hiking cycle in, in modern history and you haven’t seen, quote unquote something break. In fact, we’ve got some spending data, which even adjusted for inflation seems to be flat for the year to get the MasterCard data. That’s another chart I gave to you. You know, you’ve got restaurants spending year over year up by 15%.

[00:41:38] Steven McClurg: That doesn’t scream economic collapse and things are falling apart. Now obviously the, the risk assets have been ravaged, right? But even as late as I think November, you had, you know, the Dow five or 6% off the all-time high. I mean, the markets have responded extraordinarily well to the fastest hiking cycle in history, and there’s a couple reasons for that we can get into structurally.

[00:42:00] Steven McClurg: Nothing in any chart is telling you impending doom in the next month or two. You know, now, next year, I think it’s going to be awful. Right? I think you’re going to get, but the problem is, I think a lot of investors, they are conditioned to fight the last war, right? They’re conditioned to fight, you know, 2008 or the Covid bus, where things just all fall apart very rapidly within a short span.

[00:42:22] Steven McClurg: And if you go back historically, that’s not typically how recessions play out. Recessions are long, difficult periods, right? In the 2000 recession, March of 2000 is the peak. We do not find the bottom until, I believe, April or March of 2003, right? Somebody might remember this better than I do, but it’s, it’s, it’s a three year process.

[00:42:42] Steven McClurg: And there’s some evidence here that this tank, this thing can take a long time to play out. And that’s not what investors want to hear, probably. But it, it is the reality. We’ve seen it through all 2022 when people were thinking that the, the wheels were going to come off the cart really quickly.

[00:42:58] Joe Carlasare: I don’t know.

[00:42:58] Joe Carlasare: I, I, I do feel like there are a lot of people that are, that are really suffering. I mean, for the last two years there was a group, big group of people that, that didn’t have to work. They were just trading monkey JPEGs, . Now they’re moving into their mom’s basements and they’re having to get job slipping burgers at McDonald’s.

[00:43:15] Joe Carlasare: So that’s, that’s painful. That’s hard. And I think we’re going to see a lot more of that in the, in the, in the coming year.

[00:43:22] Steven McClurg: Definitely agree with you that next year the economic prospects are not rosy by any stretch. I mean, I think you have to at least ba bake in a mild recession. But, you know, the JP Morgan data that we have from checking count balances on a real adjusted basis, adjusted for inflation, still shows elevated balances from where you were pre pandemic.

[00:43:41] Steven McClurg: So, you know, I, I think, yes, I think you’re exactly right. People were pa you know, so many paper millionaires in, in 2020 and 2021, maybe the reality’s setting in now. Maybe they’re finally pulling back and saying, we gotta tighten our belt. But that’s different than. Imminent economic collapse or breakdown of the system.

[00:43:59] Steven McClurg: Right. That’s We’re on a path towards recession.

[00:44:02] Joe Carlasare: Yeah. Absolutely.

[00:44:04] Jeff Ross: Isn’t it interesting though, because I’m sure you guys follow this too, the p m I data looking at manufacturing, I mean, manufacturing is already in a contraction. It’s already hundred percent in a recession, right? But services is still really strong.

[00:44:16] Jeff Ross: You know, the Jolts data basically just says that we never recovered the workers from Covid and that disaster, and we still have the supply side issues that caused inflationary pressures. Right? I mean, just the, why is that .

[00:44:28] Jeff Ross: The, let’s talk about the jolts data, because that’s really key. Why do you think that even with the, the, the, the fastest hiking cycle, the semi checks running out, why haven’t those people returned to the workforce?

[00:44:40] Joe Carlasare: To, to, to Steven’s point about, you know, the, why aren’t they back at McDonald’s flipping burgers?

[00:44:44] Jeff Ross: Well, there’s multiple reasons, right? I mean, so, so there’s big reasons like demographics, right? But that’s, that’s too long term. demographics are bad. So there’s just fewer and fewer people, I think. I think the work, the labor force participation rate, I think peaked in 2000, and it’s been on the decline ever since.

[00:45:00] Jeff Ross: Covid changed everything, right? Covid shut businesses down. It scared the crap out of people for right or for wrong. Some people just refused to come back. Some people can’t come back because of medical conditions, maybe long covid or whatever. I won’t get into that. So there are people who just aren’t coming back to the workforce, and I’ve heard I’ve, and I think Powell for the first time actually brought that up, at least the first time to my knowledge at the last meeting, talking about we have a loss of maybe a couple million, 3 million people.

[00:45:29] Jeff Ross: I’ve seen some estimates as high as five or 6 million people that just aren’t coming back to the workforce that were there pre covid. And they’re not here now. And so that’s all very interesting. And I think that’s why the data looks so weird and so skewed. And then also, and then I, I’d love to hear your guys’ take on this too, but also it seems like the services sector is still trying to recover from Covid.

[00:45:49] Jeff Ross: So they’re desperate for workers. They’re dying for workers, but they’re just not finding them. And then, and then on the other hand, manufacturing is just falling apart. Orders are new. Orders are, are, you know, just non-existent supply. They’re, they’re their supplies basically, their inventory, excuse me, is just super high.

[00:46:04] Jeff Ross: People aren’t buying their stuff. They, they don’t know what to do. So manufacturing is already in a recession. How does this affect the overall economy? That’s the tricky part. This is why it’s so, it’s so difficult to see what’s going to happen. That’s why I’m personally, Confused. Trying to figure out are we going to, are we going to, are we standing on the precipice right now and we’re going to crash and fall off within the next couple of months?

[00:46:23] Jeff Ross: I can see a scenario that says that with the inverted yield curve, with the way the data is going, with the slowing economic cycle, right, with this disinflationary period and a hawkish fed, all of those things just pretend to just terrible times ahead for risk assets in the near future. But then I can see, to your point earlier, Joe and Steve, and you’re kind of alluding to this too, these things take time to work out.

[00:46:43] Jeff Ross: So is this going to last for a year? Two, two more years? Three or four? You know, Michael Burry, I think, thinks it’s going to last many years from now. Four.

[00:46:51] Joe Carlasare: Four years you said? Yeah, sure.

[00:46:52] Jeff Ross: Right. So it’s somewhere. It is somewhere between four months and four years. This recession is going to go on when we bought them, and I don’t know what the answer is.

[00:46:59] Jeff Ross: I’m still waiting to see.

[00:47:00] Steven McClurg: Just real quick, Jeff, the thing you said that was really fascinating is I remember Powell making that comment about people that have left the workforce. But at the same time, he’s persistent in all the FOMC press conferences, that there’s imbalance in the labor market and that they’re, they’re actively trying to trigger people to be unemployed.

[00:47:16] Steven McClurg: They’re actively want, they want people out of a job at the same time saying a bunch of people left the workforce. It, it’s so bizarre. It’s bizarre. Oland. Yes.

[00:47:24] Joe Carlasare: Well, but there’s a complete behavioral shift that happened that, that, that, that happened and is happening over the last three years. And, and it, and it was during Covid, we went from a, we, we, we kind of went from the United States to something along the lines of France.

[00:47:41] Joe Carlasare: Right. And from a, from a behavioral standpoint, people just don’t want to do menial jobs. They’d rather just not work. I mean, people got paid to not work for so long that they, they, they either don’t want to do something, they just don’t want to do. But they also have an expectation that, you know, now that after that whole event occurred, that if they run outta money, the government will just take care of them.

[00:48:11] Joe Carlasare: And, and that is a social shift in our thinking as a society, and it’s going to take us a very long time to get out of that if we ever do. Right. So, so that’s just a shift in, in, in people’s behavior, towards, towards work. And I don’t know if any of you hire people, but you know, when you’re, when, even when you’re hiring now, and it’s the whole hiring millennials kind of thing, it’s not that at all.

[00:48:34] Joe Carlasare: But it’s, it’s a very different attitude where people just don’t want to work more than 30 hours a week and work coming to the office, or you want to work in the house. Right.

[00:48:43] Joe Carlasare: Yeah. And that’s just a, that’s just a shift that’s happened. You know, and we, you, you’ve had a lot of companies that have laid off, tons of people.

[00:48:49] Joe Carlasare: We’ve laid off a ton of people, and we’re not really seeing those people going back to work. They’re just like, yeah, I don’t want to work. Some of them are moving in with their parents, some of them are doing other things. They just, they’re, they’re doing other things other than working and they’re, they’re okay with that.

[00:49:03] Joe Carlasare: And I think Powell’s going to have a very hard time trying to force unemployment because we are below fully employed. Right. I mean, if you look at a, if you, if you look at a typical society, you know, full employment is 5% unemployment, right? Because that 5% of people you don’t want to hire anyway. And, or, or, or just unhirable.

[00:49:25] Joe Carlasare: So you have that, and I, and I, and I bring this back up again, but at the same time are government is also passing massive spending measures that are hiring more government employees. So as much as we’re getting people to be laid off in the public sectors, or the, or say, so sorry, the private sector, right?

[00:49:46] Joe Carlasare: The government is hiring more people. and those are, you know, and sometimes those are easy jobs, right? Mm. I mean, not always, but you know, some of, some of them are easy. And that’ll probably be where a lot of people shift. We’ll just, we’ll just have more government employees.

[00:50:01] Preston Pysh: And when you look at the value creation that’s, that’s being rendered by these abundant government jobs like

[00:50:11] Joe Carlasare: What are you saying about the, I thought did my job in joining the irs, man, you get to , you get to carry a side arm.

[00:50:16] Preston Pysh: And some of those memes that came out of that IRS employment stuff was outrageous. Hey, I’m pulling up a chart here that shows the 30 year minus the three month. And what I find so interesting about this, you guys were talking about how long this could potentially play out.

[00:50:35] Preston Pysh: And when we look at previous cycles on this chart, you see the 30 year bond minus the, the 30, or I’m sorry, the three month note and. Underneath of it, you can see the s and p 500 and you can see the peak of the s and p 500. And when we look at the peak of the s and p 500 on previous cycles, and we take a measurement on when the 30 year minus the three month is at its highest level, it was, what was this?

[00:51:06] Preston Pysh: 863 days after we saw a negative print on the 30 year minus the three month. So let me take one more measurement. This was the 2007 time period. So here we are on the lowest. It’s not perfectly synced to the top of the s and p 500, but it’s very close. And when we go to the bottom of the s and p 500, we got 717 days.

[00:51:36] Preston Pysh: We, on this current cycle right now, have not even cl have a clear bottom. On the 30 year minus the three month. So let’s just say I take 750 days or 800 days, and let me extend that out to the, out to the right. And this is giving us basically February of 25. So Steven, do you, do you think that that’s a, a pretty good estimate of like how long risk could be punished going forward?

[00:52:07] Preston Pysh: Or are we in a new paradigm where the response that central bankers are going to have to supply once things would potentially get nasty is going to be so unprecedented compared to anything that we’ve seen historically that we get another c o v I level, a hundred percent face ripping equity market in the span of

[00:52:30] Joe Carlasare: months?

[00:52:32] Joe Carlasare: Look, if you, if you look at the last year, you know, the, the s and p is down, you know, just under 20%, right? I think it’s 18 point a half, 19%. 19.7. Yeah. And we’ll, so we’ll, we’ll go down another 20% from here, right? Based, based, based on what I’m looking at in the, in the, in the bond markets based on rates.

[00:52:58] Joe Carlasare: So even if we go up another, call it a hundred, 125 basis points this year, I, I do believe that there’s going to be a point, and it probably won’t be until 2024, Q1 or even later, that the Fed is going to have to start dropping rates again, not because, and, and, and so we’re not going to get lower inflation anytime soon.

[00:53:24] Joe Carlasare: So the Fed is going to have to deal with that. We’re not going to get higher unemployment anytime soon. So the Fed’s going to have to deal with that. And these are all policy decisions, you know, again, that the Fed has to deal with the thing that’s going to push the Fed. , it’s going to be a failed treasury auction.

[00:53:43] Joe Carlasare: Right? So what that means is people are just going to capitulate and say, well, I just don’t own treasuries here because, you know, why would you, why would you continue to buy treasuries at the, so, so the Fed is selling treasuries at the same time as raising rates. Governments around the world are going to kind of give up on buying treasuries, and money managers are just going to say, well, I’d rather own something else that gives me a better return, especially if my expectation is inflation’s going to be higher, so a failed treasury auction is going to be all right.

[00:54:15] Joe Carlasare: Well, we’re, we’re going to have to step in and do something. We’re going to, and, and likely what that action is going to have to be is the Fed is going to have to capitulate themselves and say, well, it’s time to start buying treasurers on the balance sheet again. Which of course creates more liquidity in the system, creates more inflation.

[00:54:34] Steven McClurg: Joe, I don’t, I want to hear, sorry.

[00:54:37] Joe Carlasare: No, sorry. Go finish. Steve. I’m, I apologize.

[00:54:40] Preston Pysh: Joe’s very excited to respond.

[00:54:42] Steven McClurg: We’re in a death spiral. We’re in a debt death spiral right now. Yeah, and it’s going to take a lot to get out of it. So 2025 is unhear unheard of. Well, okay, so let’s go back a second. Inflation isn’t. I think, and I don’t want to put words in your mouth, I thought you said something like, inflation isn’t going anywhere down.

[00:55:01] Steven McClurg: I don’t see a metric on anything I look at that isn’t showing inflation going nowhere but lower. You have gas prices today in the United States on an average basis lower than they were a year ago. Okay. Every forward looking future contract tells you inflation across the board from purchasers, from manufacturers, from even services inflation is heading lower.

[00:55:20] Steven McClurg: If the real estate market continues on the path that I think we’re all headed to owner’s equivalent rent is going to sink like a stone. So in terms of inflation, I don’t see inflation being the story at all of 2023. I think if anything, it’s disinflation and potentially deflation, especially if we get these hard downs in financial markets and, and in, in the real estate market that you’re, no one’s going to be talking about inflation.

[00:55:42] Steven McClurg: They’re going to be talking. So let, let’s put that there.

[00:55:44] Joe Carlasare: But you’re saying you think we’re going to get a negative inflation prep?

[00:55:47] Steven McClurg: No, no, no, no. I’m just saying. No disinflation is that the rate of change is slowing. That’s, that’s general disinflation that you’re, it’s not growing as fast as it was previously.

[00:55:58] Steven McClurg: So if you have, if you look at any forward metrics from commodities, from services across the board, I mean just like look at energy, right? The backbone, the lifeblood, I think we all agree on that. And how energy is imp is critical, right? Gas price is lower today than they were last year at the same time.

[00:56:13] Preston Pysh: Joe, how do you, how do you, I’m sorry to interrupt you. How do you look at the rest of the world and the impact that, that might flow? Cause that’s the thing that I’m struggling with. I think in the US I hear everything you’re saying and pretty much agree with you, but whenever I look at Europe and I look at the UK and I look at Japan, they’re not having that scenario.

[00:56:32] Preston Pysh: They’re actually, it’s, it’s a, it’s still going up. They’re double digit inflation. And so my concern is, is how does that potentially come in and spew and trickle itself into the US economy? Where, I mean, there’s no central bank in my opinion, that’s able to really kind of do something all out on their own.

[00:56:53] Preston Pysh: It’s so coordinated at this point.

[00:56:56] Steven McClurg: So how do you handle that? The way I view it is that the US has been more aggressive than nearly every other central bank. People make arguments about Australia because they move faster, but virtually us has been the fastest. Okay. They have, they’ve hiked the fastest and you’re seeing the effects in real time.

[00:57:12] Steven McClurg: You’re seeing demand beginning to crush. And manufacturers, the savvy home builders look at the price of lumber. They are recognizing this and they’ve sniffed out that we are headed for really rocky economic waters. There isn’t a CEO you can talk to professionally, personally, that won’t tell you they’re in batten down the hatches mode for a recession.

[00:57:30] Steven McClurg: Okay. And they see it in the consumer data. So tell me how you get inflation when across the board. Every single person saying, we’re cutting and reducing. I don’t understand. That doesn’t mean I don’t think that,

[00:57:40] Joe Carlasare: I don’t, that’s would

[00:57:41] Preston Pysh: just to, but that’s not what Steve, Steven was saying, that you’re going to have a treasury market that seizes us up.

[00:57:47] Preston Pysh: It’s not necessarily civil.

[00:57:48] Steven McClurg: Yeah. We’ll, we’ll get to that in a second. So, so when you, when you tell about inflation, okay, inflation, you know, obviously it, it took longer than most people will think, but it is, it has peaked, right? The rate of change is 0.1% month over month, you’re getting cooler prints and with consistent demand destruction, it’s going to come down.

[00:58:05] Steven McClurg: Now what, what I do agree with Steven on, I think what I, I think the, the key thing is that you could have long run inflation remain elevated for the remainder of the decade, right? But that could mean, you know, instead of structural inflation at 2%, you’re at 3% for the remainder of decade. I think that that’s very likely, right?

[00:58:19] Steven McClurg: And that changes the way investors have to position, it changes what central banks and policy makers can do. But to answer your question about globally, If the US has moved the fastest and has hiked the fastest and crushed demand the quickest of e, everyone else and the US enters a hard downturn, you’re going to see, I mean, the US I is the silly 800 pound gorilla economically globally, right?

[00:58:40] Steven McClurg: And if the US is in a hard recession, other countries are going to follow suit. In other words, you’re not going to see a situation where the US goes into a hard recession, but the remainder of the wor world somehow averts that recession or avoids that recession. It’ll pull down prices across the board. But there is definitely concern.

[00:58:56] Steven McClurg: To your point, Steven, I think about liquidity issues in the treasury market. That’s one of the reasons why the SEC and some of these entities are trying to do this reform for clearing. The key thing though, again to bail out the treasury market is how do investors position, because you have to put those trillions of dollars somewhere in the face of a very difficult economic downturn.

[00:59:15] Steven McClurg: You’re pulling them from risk assets and you will pull them to bail out the treasury market. That’s where there’s a mandate to effectively bid these things up. And I, I’d love to hear your comment as a, as a former bond trader on that, because, I mean, isn’t that the normal play in a recession and a hard economic downturn?

[00:59:31] Steven McClurg: You’re going to go into the treasury market because it, if at all, if there’s one thing we can be certain of, it’s that the United States government hopefully won’t fail. Well, right

[00:59:39] Joe Carlasare: now there’s a, a big move to make up for the fact that we’ve got a lot of unfunded engines and we’re not hitting our actuarial rates in for, for insurance accounts.

[00:59:51] Joe Carlasare: And we’ve missed that as a, as a market for so long that right now you’re playing catchup. The rate that you need in insurance, for instance, is about five to 6% in pensions. It’s anywhere from seven to 9%. And even where bonds are today, you’re still not getting that without taking extraordinary risk.

[01:00:15] Joe Carlasare: Right. And the way that pensions have gotten there before is they’ve, they’ve offset their bond portfolio by investing in private equity. Well, private equity and public equities are expected to go down, so you can’t really invest there, but you’re not going to move into the bond market because the yields aren’t high enough.

[01:00:32] Joe Carlasare: So you have to go into, you have to go into corporates and the corporate, the only corporates that make sense right now are really your, your your Triple Bs. Right? Because the spreads are still very over, over treasuries in single A through triple A corporates. Mortgage rate, you know, mortgage-backed securities don’t make a lot of sense right now too, just because of what you just said with the housing prices going down.

[01:00:57] Joe Carlasare: So you don’t want to be in that product. So, so triple Bs and then, and then, you know, barbell your strategy with high yield and, and investment grade corporates is, is the way that you sort of average it out, but, but treasuries just don’t get you there, so you’re going to have to have the fed step in and take that nut.

[01:01:15] Joe Carlasare: Now, as far as in, now as far as inflation go, you know, taking a point of time and trying to make a trend out of the point in time doesn’t always work. I don’t think that we have a trend going down. I see us having a reversion to the mean. So, you know, I don’t think we’re going to get down to two, 3% because a lot of the inflation numbers that we saw a year ago where we spiked were one time, even though we were trending higher overall.

[01:01:43] Joe Carlasare: And then a lot of the numbers that you’re seeing for, for commodities and other prices today, Are a point of time that are probably closer to a bottom because we had a, you know, one time release of strategic or reserves, but energy will and, and we’ve had a, a warmer winter than a lot of people expected.

[01:02:03] Joe Carlasare: So that’s just a point of time data reversion to the mean. But I still believe that energy prices are going to continue to go up, despite the fact that a lot of companies are laying off. You’re mostly seeing that in the tech sectors and the banking sectors. People that don’t really produce anything. Trust me, I know I’ve been, I’ve been in the finance sector, we don’t, we produce a bunch of spreadsheets.

[01:02:23] Joe Carlasare: We’re, we’re, we’re losers, man. . But people that are in, in, in the service, in the manufacturing industry, it’s still very hard to find that labor and the labor price isn’t going down. So anytime you have wage inflation, So wage inflation was one of the primary movers of in, of, of inflation over the last three years.

[01:02:44] Joe Carlasare: And we continue to see wage inflation for important jobs, for, for things like service and manufacturing. So those, so, so those are the factors that are really pushing inflation to continue to trend higher. Even the, even though we’ve had a reversion of the meme that we’re seeing over these two points of time.

[01:03:02] Preston Pysh: So Steven, would, would this be properly, I, I’m curious if you agree with this opinion. Is this, are people forgetting about how broke the supply side is and are just focusing on the demand side like we’ve seen historically over the last 40 years where everybody’s looking at the demand metric, right? The, oh, everybody’s losing their jobs.

[01:03:22] Preston Pysh: They’re not, they’re not spending as much. And so that’s what’s going to cause inflation to start going down without even talking about how ports are jacked, how shipping. You know, transportation is jacked and these things that you just can’t get it as fast. You can’t get the quality that you got before.

[01:03:45] Preston Pysh: And that’s the thing that, and, and you just don’t have the people, you don’t have the demographics to, to work, and therefore it’s going to cost more in order to offset those things from the supply side.

[01:03:57] Steven McClurg: Well, I, I, I think it, I think it’s still both, right? I mean, we talked about earlier how, despite the fact that people are losing, losing their jobs and moving in with their parents, and we still, you know, bank statements still show that there’s plenty of cash to go around.

[01:04:13] Steven McClurg: So there’s still a lot of demand. Mm-hmm. , it’s not as high as it was a year ago, but there’s still a lot of demand. And then on the supply side, that’s really driven by the labor market. Mm-hmm. and skilled labor in, in, in areas like manufacturing is still hard to find. I mean, who’s going to hire, you know, the community organizer from Twitter to go.

[01:04:32] Steven McClurg: Work in your, you know, in your manufacturing plant for 15 mil. For 15 mil, and they’re certainly not going to go work at Waffle House. Right. . So , so, so, so you still have, you still have those both, both supply and demand side issues? That, that I believe is going to, is, is still, is still trending US high inflation now, I, I don’t think that we’re going to hit, you know, you know, in c p I of 8.9% again, but we might be at a steady, you know, six to 7%, which is, which is still bad.

[01:05:03] Steven McClurg: And by the way, I’m, I’m unpopular in this, in this, in this opinion, you know, they’re, a lot of other economists, more economists than not believe that we’re going into a, a, a, a deflationary environment. I, I’m, I’m just not there. You know, I, I focus on, I focus more on, on, on looking at labor trends and other issues when I’m, when I’m really thinking about this and I, I know, I, I know I’m kind of theno the anomaly here.

[01:05:31] Steven McClurg: So just you think, you think c p is going to be like, this time next year will be year over year. An annualized above say 6%, let’s call it five to seven, but yeah, five to seven. Yeah. Yeah,

[01:05:43] Jeff Ross: yeah. Gotcha. Steven, can I pick your brain for a little bit? Why, why do you think the, the high yield spreads haven’t really blown out much yet?

[01:05:51] Jeff Ross: Are you surprised at how calm the spread is so far? Or do you, do you think this is just because it’s going to be such a slow process that they will blow out, but it’s going to take maybe a year or two, two years to, to happen?

[01:06:03] Joe Carlasare: What’s it take? Yeah. Yeah. I think it’s going to be a while before I, I don’t think it’s going to happen until we start seeing defaults pick up, but, but spread really has more to do with demand as well.

[01:06:13] Joe Carlasare: Even though, even though what the spread should be is probably, you know, 200 basis points over what they are, there’s just, there’s just still so much demand for yield. Mm-hmm. . . And, and I know that’s hard to say because yield has gone up, but it’s only caught up really in the short end.

[01:06:31] Joe Carlasare: Right. So it’s really been unmoved relatively in, in the, in the long end of the curve. And that’s where big money buys, you know, and we’re talking about, you know, insurance and pensions. So, so yeah, there’s, there’s still a lot of, lot of demand on the short end of the curve. Lot of demand for yield.

[01:06:49] Joe Carlasare: And we’re just, we’re just making up for the fact that, well, let’s take, let’s take a life insurance company, or, or let’s just take any, any insurance company right now, for instance. Okay. There’s a lot more claims that have come in, in the last three years, right? Whether it’s health claims or accident claims, or more claims are coming in, which means that the premium you have to charge for insurance is higher, or the return you have to get in your bond portfolio has to be higher.

[01:07:19] Joe Carlasare: Okay. So premiums have gone up, but that only works in the short run. People just stop buying certain types of insurance or, or they start, you know, reducing their policies. And then what happens on the, on the management side of things is you’ve gotta re, you’ve gotta produce that higher return. So, so return demand has gone up and that’s just, that’s compressed spreads.

[01:07:44] Joe Carlasare: Even though, even though yields have gone up.

[01:07:46] Preston Pysh: Joe, just another wrinkle in the argument about inflation coming down. Mm-hmm. , how much do you buy into this China coming back online narrative that you keep seeing in the, in the news ?

[01:08:01] Joe Carlasare: Not at all. I, I think that it was China in many respects was never offline.

[01:08:06] Joe Carlasare: They’ve got political instability. That has forced their hand. And I, I’ll, I’ll, I’ll, so I don’t get in trouble for it. I’ll quote Mike Green, who talks about this extensively in a recent podcast he did. You have people literally in China that are locked into factories, forced to do work to support the government.

[01:08:26] Joe Carlasare: Okay. By any stretcher of the imagination. If you just look at what that, what the reality is on the ground, it’s let’s modernize slavery, right? Yeah. That’s what’s going on in China. Yeah. And, and we should call it what it is, and in some ways we continue to be complicit in supporting this by buying all the cheap craft from China.

[01:08:42] Joe Carlasare: And I, I do not believe that the, the, this was at all covid related. I think the Zero Covid policy was a fiction created to disguise the political instability and threats to the government over there. So put that for what it’s worth, that’s my, my overarching view in China. I can tell you as an investor, as an investor who likes to support, Value-based principles and, and companies where, you know, I, I have confidence in the governments in which they operate.

[01:09:09] Joe Carlasare: I don’t put any money in China. I try to keep as little exposure to China as possible. And I think it’s good that you got some of these companies moving out and trying to disassociate themselves from China.

[01:09:18] Preston Pysh: I think that’s a really positive, so you pay attention to counterparties Of course.

[01:09:22] Joe Carlasare: That’s same thing we’re talking about earlier, right?

[01:09:24] Joe Carlasare: I mean, it’s China, China, you know, that’s, that’s all I’m going to say on that.

[01:09:29] Preston Pysh: Steven, I’m curious to hear your thoughts because I, I tend to agree with Joe on this one.

[01:09:34] Steven McClurg: I, I agree with Joe as well. I mean, I, I actually spent a small portion of my career working in China and I mean, this was 2005 I think. And I, I predicted that this would happen way faster than it actually did.

[01:09:47] Steven McClurg: Just, just watching these cities being built in the middle of where, yeah, with, with nobody living in apartments, they’re just, they’re just building empty apartments. Empty buildings. And, and the really interesting thing is, is you know, the economy kind of opened up and you would have these people from the, from the Communist party that were given land grants and they became developers overnight and they made a lot of money.

[01:10:12] Steven McClurg: And what they would do is they would borrow money from, from, from a, from a bank, build their projects. Somebody else will do the same. This guy would sell his building to this guy and then he would sell his building for this guy and they would create a bunch of paper wealth. Kind of reminds me of, of, of Ftx or Genesis.

[01:10:28] Steven McClurg: But but it was the same kind of thing. And, and I thought that the whole thing would fall apart way sooner than it did. But with all of these things that are being built and, and it wasn’t just, you know, cities and office buildings and it was also manufacturing plants and there was a, a big demand and drive to produce things to sell to the rest of the world so that they could collect all the money.

[01:10:52] Steven McClurg: Right. Well, there weren’t enough people to do it, so they forced people. out of, out, out of the countryside and out of their farms to come and work in these manufacturing plants. People just didn’t want to do it. You know, they were happy farming on their farms and being self-sustained, and, but the government didn’t like that, so they forced people into the cities to, to fill them.

[01:11:15] Steven McClurg: And, and I saw the forced labor even then, and the fact that it’s just now coming out and, and causing problems. I mean, the, the problems that it’s causing is they still can’t produce the things that they, that they want to produce and ship around the world. There’s just not enough labor to, to catch up at the demand, which is why they changed their, their one child policy.

[01:11:36] Steven McClurg: Hmm. Yes.

[01:11:38] Preston Pysh: Well, so the stuff that Ray Dalio puts out about China, it almost seems like he’s compromised or has a severe conflict of interest. At least that’s my opinion. Right. I’m looking and seeing a lot of these things that you’re talking about. And the things that I hear and the things that, that you see on Twitter that, that are being posted that, you know, are leaking out of there, that are closely contained from their general population from seeing.

[01:12:04] Preston Pysh: And, you know, then I read these books that, that Ray pumps out and just, I mean, he’s just talking about how everything’s moving to China and how that’s the beacon of like, hell, you even have people like Charlie Munger talking about it.

[01:12:17] Steven McClurg: And I mean, he’s, I was just going to say Charlie Munger, he’s even worse,

[01:12:20] Joe Carlasare: you know, he’s, he’s getting pretty old.

[01:12:22] Preston Pysh: But I just, I, it, it really seems strange to me that you have these really high powered macro investors talking up the game over there when people that maybe don’t have billions of dollars coming as investment capital into your fund from such like China. It just, it’s very strange to me and I think extremely suspect and I think it’s something that people should pay close attention to when, when they’re hearing these, these narratives that are being shared by these people.

[01:12:50] Joe Carlasare: Yeah. When you, when you manage a fund as, as large as Bridgewater, you’re getting capital from all over the world. Mm-hmm. , and you, you, you, you will begin to stop talking negatively or even hinting at issues from some of the areas where you’re getting capital from. It’s just the way it works. Yeah. It’s his, it’s his incentive.

[01:13:13] Joe Carlasare: I’ve pass too. It’s like, you know, once you start getting pension money, you know, the, the pension system’s the best thing in the world, right?

[01:13:21] Jeff Ross: Yeah. So, just to be controversial and a little bit immoral based on the great arguments that I agree with all of you guys, by the way, in your points on China, if I had to invest in either the US stock market or the Chinese stock market for the next three to six months, I would absolutely invest in China right now.

[01:13:37] Jeff Ross: okay, go ahead. I want to hear this. It’s, it’s, it’s January 4th right now. So China, just from a momentum standpoint, for the first time since May of 2021, they just popped above their 200 day moving average. They have a lot of solid momentum and heading into the second quarter, it looks like they’re actually going to have some positive GDP growth.

[01:13:55] Jeff Ross: And it looks like, for me, at least from what I’m looking at, I think the US is going to be like in the heart of, you know, a recessionary bear market. At that point, I think we’re going to have negative GDP growth by the second quarter. So stocks looking ahead, you know, this is just for what it’s worth, but it looks strong to me right now and it looks strong for the first, it’s just interesting we’re talking about it because for today, for the first time I’ve, I’ve got, I’ve gotten interested in China for probably.

[01:14:19] Jeff Ross: It’s been a year and a half since I’ve been serious about it. So take it for what it’s worth. I still think for the long term I agree. If you want to invest in what you believe in, you should absolutely not be investing there. But if you’re just a crass, you know, capitalist and you want to make some money in the next six months, that’s where I’d put my money.

[01:14:33] Steven McClurg: I’m really interested in that. So you think that as the US center’s a recession, which sounds like at least the consensus pokes here, that’s what it, the consensus, you think that the Chinese equities will rally on the US entering a recession?

[01:14:47] Jeff Ross: Yes, because I think they’re on a slightly di different business cycle than we are and they’re a little bit ahead of us and I think they’re going to start doing some easing well before we do here and, and well before Europe does as well.

[01:14:57] Jeff Ross: So I just think they’re going to be pumping their markets higher, man, I think. I think the Chinese stocks are already sniffing that out personally. So anyway, it’s just, just my 2 cents.

[01:15:06] Preston Pysh: So Jeff, I’ve got a chart that I just pulled that shows all major equity indices around the world. I’m going to go ahead and share this with the group.

[01:15:18] Preston Pysh: Okay, so as you’re looking at this chart, I’ll just go through the colors as people are looking at them, and these are all converted into US dollars. The top one there you have India, is the, is the purple, the US Broader market index. I think it’s the Russell 2000 there. The I W V, no, I’m sorry, Russell 3000.

[01:15:39] Preston Pysh: That’s the second best performing this. The snapshot comes from the start of 2014 until today. You can see the credit cycles in the, in the markets, the global equity markets. On this chart, as we go down, we have the dark green, this is Japan. This right here is China, G X C. The next one’s Canada, Europe, Hong Kong, and then Korea on the bottom.

[01:16:07] Preston Pysh: As far as the performance, When I’m looking at these, I’m just seeing China as being a pretty volatile version of whatever the credit cycle is historically. Like look at the bottom here in the markets of January 16. I just don’t, I’m, I’m particularly looking at the China won the GX C, which is, I guess Orangeish.

[01:16:28] Preston Pysh: Orangeish. It doesn’t seem to really front run or here, let me slide this over so we can get a snapshot of the actual performance.

[01:16:37] Jeff Ross: You can see started at be, I think it all, I think Covid is when the business cycles, the current ones started because China got hit first and then it spread to the rest of the world and that affected everything from there.

[01:16:48] Preston Pysh: Okay, so here, I’m going to pull that up just to kind of give people a snapshot of, of. See, here’s the bottom of Covid, and this is their performance. And what I’m particularly cl paying attention to is, is the bull portion of it. Assuming your narrative there of them running hotter or faster than the rest of the markets.

[01:17:07] Preston Pysh: In this scenario, or at least in this last one, it looks like Korea actually ripped the hardest.

[01:17:12] Jeff Ross: So notice how the Asian markets kind of peaked first and then started their diss descent and then Yeah, Japan.

[01:17:17] Preston Pysh: Yep. China was next,

[01:17:19] Jeff Ross: and then US and Europe was delayed behind them. So they’re like a a three to six month lag behind, excuse me, like we are relative to China and, and to Asian economies.

[01:17:29] Jeff Ross: And so that’s why I think they snap out of this from a business cycle perspective sooner =than we do.

[01:17:33] Preston Pysh: But if you go to that longer duration that we talked about earlier, and, and I’m not saying I know what’s right or wrong, I’m just trying to push back a little bit on the idea, you know, if this would push out till 25 before we find a bottom, like trying to time an Asian recovery, Might be pre a little preemptive because I think you’re going to, you’re going to have some type of capitulation that’s going to end this cycle.

[01:17:57] Preston Pysh: Would you guys agree with that?

[01:17:59] Jeff Ross: That’s going to define, it’s going to define let’s slow grind lower the, the, like we were talking about earlier, this is where I’m struggling because I look at business cycles and things and from what I see is that, like in the US here, to me it looks like the business cycle bottoms in the second quarter of 2023.

[01:18:14] Jeff Ross: And then we start growing a little bit more strongly from there. And if, and if risk assets can sniff that out, they could start growing. China looks like it’s going to bottom like right around now and then start to accelerate into the second quarter. But that’s, that’s the smaller business cycle picture.

[01:18:29] Jeff Ross: And then we have this larger secular picture of this, do we have this recession that lasts a process for two to three years or even four or five years or so and it’s ongoing and maybe we just get this sort of sideways choppiness. That, to me, that actually seems probably the most reasonable and, and things like commodities and hard assets and things actually outperform.

[01:18:49] Jeff Ross: Equities and the bond market as well. And we just deal with kind of volatile inflation throughout the 2020s.

[01:18:55] Joe Carlasare: That seems most likely to me. But are you trying to work at Bridgewater? No. What’s going on here?

[01:19:01] Steven McClurg: I’m, I think it’s really hard to, to, to understand how it plays out, because I can understand your point.

[01:19:07] Steven McClurg: That’s why we do these, right, these macro podcasts, because I think it’s, it’s really challenging to look at the data in front of you and even forecast, you know, six months, let alone several years. And, you know, to the point we had earlier about, you know, where do equities perform? You, you see that chart precedent?

[01:19:24] Steven McClurg: You put up, look at, you know, look at some major Asian indices. Look at the nek, right? You still haven’t taken out the prior, you know, early, what is it, the early nineties. All time high. We never even got back with, talk about the country that’s done the most liquidity injections of all we unlimited. You, you still haven’t taken out the 1990 all time high on the, the nek despite unlimited money printer go brewer.

[01:19:47] Steven McClurg: So, you know, you, that’s why I think it’s fascinating and again, this is this is not my base case at all, but I, I threw over that chart about growth versus value breaking out of a long-term trend. I think it’s fascinating to think, you know, maybe we’re all wrong in this. Maybe we do see a changing of the guard with respect to leaders.

[01:20:02] Steven McClurg: There is a history and if you go back decades in the market that the. The, the leaders that emerged from a hard bear market are not the ones that led you as bulls in the prior bull market, right? So if the story of the 20 2010s to 20, you know, 22 was the high growth, the speculative companies, the Q qqs, the nasdaq, the over concentration of US equities.

[01:20:25] Steven McClurg: Maybe the story is some of the smaller markets, things like India, right, could be entering into a decade bull market. I, I, I love Indian equities. I, I have exposure, full disclosure, but, you know, those are things I think about. Do you really see a dec decade that looks very different than the past one? And you have to at least keep that on your radar and not assume we’re going to go back to what we’ve experienced for the last 10 years.

[01:20:45] Joe Carlasare: Completely agree.

[01:20:47] Jeff Ross: I will. I, I think it’s going to be akin to the post.com bubble a after that crash, you know, the.com obviously tech stocks led up into that. They didn’t recover for 10, 15, sometimes 20 years. Cisco still hasn’t recovered, I think from its all time high. Back in 2000. And I think, you know, and then, and then it was a decade of value right up until the, the global financial crisis.

[01:21:08] Jeff Ross: And I think that we’re going to have a similar, and I think we’re already seeing that right now. I think. And it was, to your point, to a chart you showed value is already starting to outperform for the first time in like 12, 13 years. I think that continues for this decade for sure. And it, it is not going to be the decade of Kathy Wood.

[01:21:24] Jeff Ross: In fact, I don’t know if she makes it out of this decade. I dunno if Ark survives. Honestly, I don’t know if they do. Me. I don’t.

[01:21:29] Joe Carlasare: So anyways, you’re calling for her death.

[01:21:30] Steven McClurg: She’s going to die in this decade.

[01:21:32] Jeff Ross: she’s not going to die. I’m saying Ark might die. I think hopefully she lives. I, I don’t wish any ill on her, but those types of stocks, I don’t think will do well this entire decade.

[01:21:39] Steven McClurg: Yeah, it’s, it’s possible, right? Because the deck chart of of the s and p is great because you look at it and everybody remembers, right? The post 2008 collapse and then just the vertical line, right? But look, before that, look at those two mountains that you see where, you know, we peak around the same exact range every time and then sell off hard.

[01:21:56] Steven McClurg: It, it could take, you know, and again, this is not my base case, I’m not calling for this, but it could take a long time for these markets to recover and I highly recommend everybody listen to or read Lynn Alden’s article, the Capital Sponge. She wrote it, I think last year. It, it was very good. It talks about the concentration of foreign investment into US equities and how you’ve reached sort of critical mass with a lot of those in terms of relative share of the marketplace.

[01:22:20] Steven McClurg: I was, Preston, we were talking about like, you know, the the, the global E T F vt and I’ve been doing a lot of research under the hood on that. You know, what does VT look like in terms of global share of equities with respect to the US composition five years from now? That’s fascinating. I don’t know, is it still a stay around 60% of equity exposure globally by market cap as in the United States?

[01:22:41] Steven McClurg: I don’t know. Yeah.

[01:22:42] Preston Pysh: I kind of tend to agree with Lynn’s thesis there and. I, I don’t think it will be. Guys, we could talk all I we could do this all night. I, I, I’m like a pig and mud having these conversations. , I want to respect your time guys. Go around the horn, Joe, kick it off. Give people a hand off to your Twitter feed or anything else you want to share.

[01:23:02] Steven McClurg: Go ahead. Yeah. We didn’t even get to talk about Bitcoin.

[01:23:05] Preston Pysh: We, how do we turn? Alright, so let’s Bitcoin before we wrap. Come on. We did, we started off with the Samsung. Okay. What do you think’s going to happen with Bitcoin in the, in the coming two quarters? Is it a grind? Is it a sideways grind? What, what are we, what are we thinking?

[01:23:17] Preston Pysh: I think that that’s the general consensus, but go ahead.

[01:23:20] Steven McClurg: Yeah, unfortunately it’s tied up with the equity market. So tell me what the equity market’s going to do. If you get a, if you get a countertrend rally. If you get a bear market rally from here, which is possible. Okay. You can’t, you can’t say no that We’ve seen it a couple times and, and bear markets tend to have really vicious rallies if you get that.

[01:23:36] Steven McClurg: I, I don’t think it’s crazy that Bitcoin, you know, bounces up and does well. I think it’s going to be, it’s going to be hard in this environment for Bitcoin to get a sustained rally forward and I think that’s the general consensus, but to me, the big story that I, I’m really interested in is GBTC. What’s going on with gbtc?

[01:23:53] Preston Pysh: Oh yeah, let’s cover that. We haven’t talked about that. You guys good? That’s fine. You guys good on the timeline here?

[01:23:57] Jeff Ross: Preston’s trying to wrap up and we’re going to start.

[01:23:58] Preston Pysh: No, no, no, I’m not. I’m sorry. I am not trying to wrap up. I want to just make sure I’m not like, you know, we can make new, we want Steven to come back.

[01:24:05] Preston Pysh: We want Steven to come back. yes. Go ahead.

[01:24:10] Joe Carlasare: I read about, you know, I, I just, public information. I don’t know if you can talk about it, Steven, but this eval effort, I’m aware of some other entities that are trying to become the, the sponsor, replace the sponsor for gray scale on GBTC.

[01:24:23] Joe Carlasare: I know a lot of people are upset that hold it and, and upset about the, the thoughts. I’d love to hear Steven’s take on it if he has anything he can say.

[01:24:32] Joe Carlasare: Well, look, I mean plain, plain and simple. We, we have a hedge fund that looks for opportunities in the market. One of the opportunities we found was GBTC at a massive discount.

[01:24:42] Joe Carlasare: And we decided that we would take an activist position in it. And that’s, that’s, that’s really how all this started. And then sure enough, one thing after another, the FTX failure, we realized, Genesis was really at the crux of a lot that had happened. We already talked about all this part, but the most interesting thing that I, I don’t know if this is true, but this is what’s circulating around out there, and there’s certainly evidence pointing to it that Genesis was, was creating loans to people like Three Arrows or Celsius or Alameda trading, that they were essentially creating loans out of nowhere for them to buy G P tc, say, Hey, we’ll give you a loan, but you gotta buy G P T C with it.

[01:25:29] Joe Carlasare: And then they were immediately taking that as collateral and we just kind of, the, the light went on and we’re, wait a minute that that violates rule 1 44 because if you’re buying it on the, on the primary market, you’re not allowed to assign it or sell it to anyone for in the case of GBTC six months.

[01:25:48] Joe Carlasare: So, We’re creating leverage and liquidity outta nowhere. Just, you know, kinda like, kinda like what our government does anyway in the fiat system. And then, but then, but, but for a specific person that you’re supposed to be our specific purpose that’s supposed to be arms linked, to create shares of, of this thing over here so that they can make money off of it.

[01:26:10] Joe Carlasare: And then refusing to even file for a Reg M exemption. Yes. But people can actually get their Bitcoin out at par and we’re like, this, this is awful. We, something has to be done. So we, so we took that activist position. Look, I, I can’t really say anything beyond that, but there’s a lot of people out there, not just us.

[01:26:30] Joe Carlasare: There’s a lot of activists out there that are, that are really upset and, and going after this thing and going back to the price of Bitcoin, you know, usually, usually there’s, there’s three legs down on a chart. You know, I’m not a chartist, but, but this is also a behavioral thing. The first leg down, we had a massive leg down when Celsius and block five and Boger all blew up.

[01:26:54] Joe Carlasare: So we actually got ahead of the equity markets. So I actually don’t agree necessarily that if equity markets go down, Bitcoin goes down two because we’re, we’re, we’re already ahead of those markets. We, we got there last spring and then the second leg down was FTX that decimated the market. We still have one more leg down.

[01:27:14] Joe Carlasare: We still have one final shoe to drop. And I truly believe that that is the leverage provider, the group that was at the middle of it all. And I truly believe that, that, that Genesis, grayscale, DCG, all the entities that are related to them, you know, the so-called journalist at CoinDesk, they’re all the problem at the center.

[01:27:37] Joe Carlasare: Of everything else that happened and it’s bigger than ftx. And that’s, that’s, that’s what I believe. I, I don’t know if I Right. All that falls apart, , Bitcoin will not go up. And, and, and so we need to, we need to cleanse the system so that we can get back on the right path, number one. But also I do agree with you that until equity markets start going back up again, we probably won’t see Bitcoin going up.

[01:28:03] Joe Carlasare: So there’s, there’s two things. There’s the macro factors, but then there’s also just the systematic issues that, that really rest on DCG and, and, and everybody related to them.

[01:28:15] Joe Carlasare: So I want to make sure I didn’t miss serious. Steven did. So are you saying you believe that that group that you just outlined does blow up?

[01:28:22] Steven McClurg: That there is a liquidity event with them? A liquidation event? Absolutely. Wow. That’s, that’s absolutely, I don’t, I don’t see any other way. Mm-hmm. I mean, I think, I think Jim and I is serious, you know, and they’re not the only ones. I mean, That’s one group that’s posted $900 million of collateral with Genesis, they can’t pay back.

[01:28:45] Steven McClurg: How many other groups are out there that are post that, that are still existing today, that are posting collateral with Genesis and, and, and when I say posting collateral, they’re, you know, they, they, they have, you know, it, it’s either collateral for a short position or a long position or some kind of margin trade or, or other types of lending vehicles.

[01:29:05] Steven McClurg: They’ve posted the collateral, they, they’re owed money and they can’t get their money because they, they’re owed money from three arrows, from ftx, from Celsius, from Block. Fine. They’re not getting it back. And we don’t know how many other entities are out there. And they’ve created leverage out of nowhere to buy, you know, to to, to create shares of GBTC.

[01:29:26] Steven McClurg: And that trade is absolutely distinguished.

[01:29:30] Preston Pysh: Do you see Silver Gate caught up in all this as well?

[01:29:35] Joe Carlasare: I don’t know. I think Silver Gate’s actually fine. The problem, well, here’s the problem with Silver Gate, their deposit base has gone down about 70%. And anytime a bank has operations that they built around a deposit base Mm.

[01:29:49] Joe Carlasare: And then it shrinks that much. Yeah. They’re, they’re, they’re operationally in a lot of trouble. Hmm. But I don’t, I don’t think they’re illiquid. I don’t think that they’re, you know, I don’t think they’re going bankrupt. I don’t think depositor, I don’t think there’s any depositor risk. Hmm. But I’m not holding my funds at surrogate , nor nor am I holding client funds at surrogate

[01:30:13] Preston Pysh: Wow. And here I was going to wrap up the show. Thank you, Joe. Thank you for making me Sure. I did not wrap up the show. Joe , go around the horn. Let’s, let’s close this.

[01:30:26] Joe Carlasare: I’ll start. I got sidetracked, Joe Carlasare, again, with Amundsen Davis Law Firm out of Chicago. You can find me @JoeCarlasare on Twitter.

[01:30:34] Joe Carlasare: Easiest way to reach out. Dms are open. If you google my name as well, you can readily access my, my professional webpage and my firm’s page and shoot me an email if you have any litigated dispute whatsoever. Commercial litigated by day especially is in digital asset disputes. So if there are scammers or people breaking contracts or people releasing their fiduciary duty or committing fraud, I’m your guy.

[01:30:55] Joe Carlasare: Love to help you.

[01:30:57] Preston Pysh: Steven.

[01:30:58] Steven McClurg: Hi, Steven McClurg from Valkyrie. Twitter is at @stephenmcclurg. It’s really hard to remember and you can probably just Google me and find all kinds of things you don’t want to find.

[01:31:13] Preston Pysh: Jeff.

[01:31:13] Jeff Ross: Yeah, Jeff Ross. My Twitter handles @VailshireCap. I spend way too much time on Twitter.

[01:31:19] Jeff Ross: I run a hedge fund in a RIA business called Vailshire. You can look that up and it’s super fun being on the show again, Preston, thanks for having us on.

[01:31:27] Preston Pysh: Oh, what a pleasure. This was just such a fun chat. Can’t thank you guys enough for, for hanging in there for such a long conversation, but like I said earlier, I’m a picket mud and I could, I could do this all night.

[01:31:39] Preston Pysh: I absolutely love these, these quarterly mastermind discussions. So guys, thank you for making time and coming on the show.

[01:31:46] Steven McClurg: Thank you.

[01:31:47] Joe Carlasare: Thanks Preston.

[01:31:48] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular.

[01:32:01] Preston Pysh: If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate.

[01:32:17] Preston Pysh: And with that, thanks for listening and I’ll catch you again next week.

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