A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes | Transcription

Transcription for the video titled "A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes".


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Intro (00:00)

Ray Dalio recently said, "The next five years will be a period of radical disorder." Money printing, rising inflation, a potential banking crisis, and a whole lot of debt threatened to shock the global markets. And many people, including today's guest, believe that something approximating World War III has already begun. But even if that's all true, we can't control it. Whatever hand were dealt, we have to figure out a way to play it well. So I bring you Arthur Hayes, the controversial macro investor who's going to provide a masterclass on navigating these difficult times. What are the signs that you see on the horizon that a financial crisis might be headed our way? I absolutely agree that there's going to be a major financial crisis probably as bad or worse in the Great Depression sometime near the end of the decade. Before we get there, we're going to have, I think, the largest bull market in stocks, real estate, crypto, art, you name it, that we've ever seen since World War II. And the reason I believe that is if we back up to 1945, essentially, Europe blew itself up. China was destroyed by a civil war and Japan, Russia essentially fought the war for everybody else, and massive destruction. So if you look across the world, the only country that was left was the US. And they had a manufacturing base that was unharmed from the war. And they essentially rebuilt the war and reaped enormous benefits. And we're still, people who are American are still living off of those benefits today. But at the end of the day, everybody's sort of believing this thing called Keynesian economics, which basically is if something gets in trouble, the government should rush in, spend money. If they don't have the money, the central bank should print it. And everybody collectively in the world, depending, no matter if you're, you know, what sort of ism, you believe in, subscribe to this theory. And what that means is, you know, we all have collectively agreed that the government is there essentially to attempt to remove the business cycle. I think there should never be bad things that happen to the economy. And if there are, we want the government to come in and essentially destroy the free market. So every time we've had a financial crisis over the last, you know, eight years, what happens, government rushes in, and they essentially destroy some part of the front of the free market, because they want to, you know, save the system. And what does that mean? It's like whack-a-mole. So every time there's a disturbance, you know, the central banks, like, you know, the Federal Reserve in the US, they come in, they print money, they enact a bunch of regulations, and they basically say, okay, we don't want this sector to fail. We don't want, you know, the creative destruction that is so-called, you know, capitalism, if you actually believe in that. We don't want that. And every, you know, five, seven years, there's another sector of the economy that's essentially price-fixed. And so we've gotten to this point where, you know, globally, central banks have basically destroyed the free pricing mechanism just about every single sector of the financial economy except one, which is the government bond markets, because they're so large, so unruly, that it's practically impossible to essentially remove the market forces from this part of the market. But the problem is, right now we're going to try. We've, you know, gone from, I know, 100% debt to GDP globally to about 360% as per the rural bank. And we are accelerating the amount of debt that we're adding onto the pile. Why? Because in the rich world, including China, Russia, and Brazil, we've stopped having enough kids. So the population is actually declining. So if you have all this debt and you don't have more humans being born to essentially do stuff to pay it back, the only way to ensure the system is solvent is for the government to the central banks to start printing money. And now we've gotten to the situation where we have all this debt that needs to be rolled over. We have a population that has been told that, hey, you're good, anything ever happens. We, the government are going to come in and we're going to make sure that, you know, you have enough food to eat, you got health care, we're going to protect you, blah, blah, right? And all that's expensive, especially as you have less than less humans who were doing productive stuff. And so we're just going to keep adding on debt because that's the only way the government can stay in business. And now we've gotten this in a situation where there's so much debt that, and it's accelerating in an exponential fashion, that in order to save the market this time, right, so they in the next three to six months, there's going to be some sort of major market disturbance and probably in the US Treasury or other large global bond markets. And the solution is going to be let's print the most money that we've ever printed to try to save essentially this fiat financial system that we've created since World War II, which is going to end the first instance, create a massive bull market and anything, you know, like stocks, crypto, real estate, things that have a fixed supply, maybe they're productive, they have some earnings. And then after that, we're going to find out actually the government can't save everything. They can't just print as much money as they think, just try to save themselves and fix the price of the yellow bear bonds. And we're going to get a generational collapse. And hopefully that doesn't coincide with a major global conflict. Usually it does. I hope it doesn't because they don't really want to live through World War III while I'm alive. But that's sort of the my overarching like macro cycle faces. So, you know, massive top 2026 timeframe. And then, you know, some sort of great depression like situation happening towards the end of the decade. If you want to take a look at the progress of human civilization in the past 150, 200 years, it's all predicated on hydrocarbons. The moment we started extracting oil commercially out of the ground and turning it into thousands of different products that we all use every day that basically powers our modern life, development supercharged, right? No, we went from, I don't know how many billions of people in the 1970s to today, a population more than doubled, right? And that's all because we were able to harness this particular type of potential energy of the earth that's underneath us. Okay, and we we've piled on all this debt, we brought forward all this future growth. And we haven't really innovated on another form of energy that makes us that much more productive. You know, maybe if the world started adopting nuclear today, immediately, like small nuclear reactors in our cars or apartments part of our nuclear energy, maybe we have a chance at growing our way out of this debt. Or, you know, if there's some magical alien that comes down and gives us, you know, some basic resource that allows us to tap on new source of energy and like we can commercialize it instantaneously, guess that we can pay back all this money. Or if the population doubled overnight, right, to 16 billion people, then okay, great. We've built all this stuff, there's more people that need to use it. Okay, we can pay back this debt. But borrowing any of these, you know, you know, I like to say it takes 18 years to make an 18 year old. So it's pretty much impossible to create humans out of thin air, no matter what any politician tells you. And, you know, we're not really, you know, what we've seen to be doing is in certain countries is saying, you know, hydrocarbons are worthless. We want to use these other forms of energy that are less dense, less productive and somehow think that we're going to grow our way out of this debt, which is mathematically impossible. There's just no other way other if the government wants to save itself by it than printing money. And printing money is in growth. It's just a piece of paper out of thin air. And once the population thinks, hey, there's more and more of these pieces of paper floating around, there's only so many real goods. There's only, you know, there's only so much oil. There's only so much electricity. Well, I guess I should be consuming everything I can now. That's not actually generating real growth. If we could just print our money and generate real growth, then Rome would have survived Zimbabwe would be the richest country in the world. So even Argentina, we've had, you know, the Weimar Republic in Germany, like, if this was the answer, there's putting him other, you know, society that have tried this. And the result was always the same, massive inflation, and then social unrest and collapse of the government. So I think we've proven over thousands of years of human history that printing money is not growth. It's a shimmera, and at the party, it lasts for only so long. And then, you know, it's bad news bears.

Current Political And Economic Overview

The Political Instability (09:03)

This is the thing that really freaks me out about what Ray Dalio is talking about is the predictability of the cycle. And what I want to do, you're really good at explaining this, I want to go through the different things that build up to this moment, this, this inevitable moment. And then one of the things I want to make sure we talk about later is getting the timing right on this is next to impossible. And so that's going to loom in the background. But first, I want to, I just want to go through the things.

Political context (09:30)

Now, you said that you hope that this doesn't all happen in a moment of political instability, but I would like to quote Arthur Hayes, two Arthur Hayes here real fast. This is from, this is the opening line from one of your recent articles. You said, World War three has already begun, whether the mainstream media and political elite wish to acknowledge it or not. So let's talk about the political instability. We're going to get to the debt, we're going to get to the banking crisis, inflation, all of that. But set the context for us right now. What's happening right now that unnerves you from a political standpoint? So for whatever reason, and I don't know why Western Europe starting, and then America following has it in for Russia. And if you read the, I think it's McKinder, his global home island theory that he wrote, I want to say in the early 19, early 20th, I did the 19th century, whatever, he was a very famous war strategist. And he basically said that the home island is essentially Eurasia, right? So think of China, Russia, Western Europe, right? Whoever controls that portion of the world controls the world. And so if you think about the naval powers such as Great Britain and the US, let's talk about Great Britain first, right? What was the British foreign policy all about in the 19th century and early 20th century? Preventing a strong continent, whether it was France or Germany, they didn't care. They just don't want to unify Europe. Now, as Russia industrialized in the late 19th century, they started to worry about, okay, well, what about Russia, right? We can't have an alliance of German strong Germany after Bismarck, United Germany, and Russia, because Russia has all these commodities. That would be the worst thing that could ever happen for us. Great Britain, the naval power. So what do they do with it? As soon as alliances, that we precipitated World War I, which was, let's make sure that Germany and Russia are not friends. And essentially, that was a strategy going into World War I. Obviously, that blew up. What was the strategy in World War II? If you take a look at the rise of Hitler and all the different Western powers that were okay with Hitler, as long as he was going to turn his army and just fight Russia, right? Hitler wrote about this. He said, "You want to create the space for the German people to eradicate the Slavs in Russia and go in there." And the Western Europe was perfectly happy about that, because again, what do they want? They don't want a united home island. They don't want a united Eurasia, because that threatens the hegemon. Great Britain at the time. Obviously, that didn't work out so well. Hitler turned his army on the other half of Europe, and then everybody started fighting again. And then we ended that war. And then what we were left with, we would have the United States versus Russia again. And again, it was all about let's make sure that Russia and China aren't aligned, or Russia in the Russia and Europe aren't aligned. That's why the US poured however many billions of dollars through the Marshall Plan into rebuilding Western Europe to make sure it was a bulwark against Russia and the virus of communism. And I forgot. I was reading a recent book. It was called The Wars of Asia 1911 to 1949. And the author made a very good point about why communism is so hated as a form of government to anything that's not communism. And the reason it is because, obviously communism has its flaws, but the kernel of truth for lots of people is we're going to completely uproot the social system. We're going to replace the classes that are repressing us. It's not like, okay, it's one class of elite who was running things. We're going to go over to other class of elites, which is like socialism, fascism, capitalism. It's just one group of elites versus the other. Communism is let's destroy the whole class of elites and bring the people up to power. And obviously that never actually happens, but in the beginning it does. And so if you're a bourgeois intellectual and one of these other systems, you're like, I can't have communism takeover. I can't have the actual workers rise up, replace me as an entire class, and then try to rule, which is why they hate communism so much. And so the Russian system and what they're trying to export into the ideology is so hated and they're both democratic or pseudo-fascist. West. And in any case, the US is now locked ahead of Russia to make sure that a divided Eurasia, because a stronger Eurasia will control the world because it controls most of the data resources of the world and most of the population. And that's been the US foreign policy since the end of World War II. Fast forward to the 90s when the Soviet Union collapses, the US response was not, let's do another Marshall Plan and rebuild Russia. It was let's incentivize a bunch of former gangsters now called oligarchs to come in and take all the natural resources and power to our people and move their wealth to London and New York. And so that was the policy. Now out of that came essentially Putin who was all about let's build a strong revisionist, the Russian ideal. Believe it or not, whether you think that's good or bad, but that's his appeal to the Russian people is, hey, you guys suffered through the end of the Soviet Union, the West was not your friend. They stole your shit. I'm here to rebuild the Russian for the Russian people. Believe it or not, that's his message to his constituents. You can like it or not like it. And so now we're at the situation where Russian made Ukraine and the West was pumping in resources to essentially fight them using the blood and the blood and tears of the Ukrainian people. It's not Americans fighting. It's not European, you know, the Europeans fighting yet, right? So it's a proxy war between Russia and the West. Obviously Russia is tacitly supported by China. And the rest of the world is like, well, we don't want to part of this. We're afraid to be not aligned. We don't want to get involved in this thing. So we have this sort of the setup of all over again of what was happening in the late 19th century of the West aligning to create a divided Eurasia. And so, you know, we can call it a conflict or a skirmish or whatever, but you have how many billions of dollars have been authorized by US Congress to essentially ship weapons into Ukraine. You have NATO shipping in weapons, different countries providing intelligence so that the Ukrainian forces can attempt to stymie the Russian advance. Now, while yeah, if there's not boots on the ground from the West and Russia to our knowledge, maybe there are, I don't know, it's basically a war. And so you could make the argument that World War III has already started.

Why this matters right now (16:41)

It's just not this hot super kinetic, you know, I'm going to fill my nukes at you kind of thing that we had in the last World War. Now, why do you think this matters? Is this going to play out in energy prices? Is it going to play out as a debt problem? Why does this become part of the backdrop of the context that will lead to this coming financial crisis? So at the end of the day, right, human civilization is a transformation of the potential energy of the sun on the earth into useful economic work, right? And so cheap energy prices equals prosperity. Russia is the largest commodity exporter in the world. They have oil, they've got your gas, they've got your metals, they've got food, right? Ukraine, the Korean and better bread basket was one of the largest wheat exporters in the world, sunflower seeds, oils, all this stuff is in this region. And now the West has decided that we're no longer going to trade with Russia on paper. Now, if you actually get the details, you know, India, China, some of these other countries are basically buying the Russian stuff, refining it, selling it back to the Europeans and the Americans at a higher price, right? So the result of this policy of let's ostracize Russia is let's just raise prices on our energy inputs globally. And so there gets the war is causing the inflation that now the central banks have to fight by raising interest rates, which then bankrupts the banking system because they now have all these bonds, you know, that are underwater. So the ideology we need to fight Russia to, you know, keep the Eurasian island fractured is the proximate cause of the inflation that's causing the financial crisis in the West itself. So it's a dumb policy, but it is the natural result of what happens when you say, I'm not going to trade with the largest commodity exporter in the world.

What starts the debt cycle (18:32)

I think it's important to break down exactly the cocktail of things that go into making a an economy week. This was something that took me a long time to learn and for anybody that's been watching the show for a while, they've gotten to go on this journey with me of figuring out how all this works, the debt cycle, exactly what happened with the banking crisis inflation, all of that. How does this begin? Does it all start with the money printing, which leads to the inflation, which causes the banking crisis? What comes first? How does this ball get rolling? So, you know, this situation wouldn't be so bad if there wasn't all the money printing prior. So at the end of the day, you know, let's take the US for an example, because it's the largest and richest country in the world. My, you know, opinion and thesis is, you know, back in the 1970s, the US government made a tacit promise to the baby boomers and they said, hey, go out, work, spend your money, don't save. We've got you. We're going to make sure that when you get old, you're going to have health care covered by the government. And don't worry, you could be as energy inefficient as you want, two cars in a garage, driving all, you know, all over the place, not supporting public transportation, we're going to make sure that where there's oil, we're going to get it. So our defense budget is going to be astronomical. And so the baby boomers are great.

Inflation and energy (20:05)

We're, you know, we're going to go out there and live our lives and consume the most in any generation ever has in human history, US baby boomers. And what's happened? Health costs continue to rise. Now they didn't rise so much starting until maybe five or ten years ago, because these have been the productive years of our life. But now, and I'm sure probably you've had some guests on talking about what they call the US sick care, right? The amount of money you spend in the end last 10 years of our life dwarfs all the money you spent proceeding. And the way the incentives work in the US health care system, there's no incentive to actually have preventative care. It's, you know, when you get sick, let's stick you up in the hospital and like just go to town on the insurance company, which essentially is a US taxpayer of Medicare and Social Security. Now, no US politician, and I don't care if you're Republican or Democrat or third party, whatever, can stand up there and say, I'm going to reform the US health care system. And guess what, baby boomers who are the richest cohort and the most politically active, your health benefits are going to decline. You will not get reelected. And so these two programs are sick or sakes. You also will not get reelected saying, Hey, we're going to really tackle this, you know, the runaway US defense budget, we're not going to go around the world bombing everybody to make sure that you have enough oil so that you can have the newest, you know, badass pickup truck in your in your garage, guzzling oil. You also won't get reelected. So health care and defense, these, these line of them in the government budget cannot be altered under the current political system. And what have been promised to the people over the last 50 years, which basically means that as the population gets older and as the world becomes more multipolar, meaning there's other challengers, namely China, who are saying, Hey, this quote unquote rules based order that's determined by 4% of the population doesn't work for the rest of the 96 of the population that never got to say. And what this order was, we want a new order. We want to, we want to have our own commodities, we want to have our own material. We also want to eat a bunch of beef and drive a car. Right. If you think about the per capita energy uses of the world, for it to match the United States on the global level, we'll require an order of energy that we just don't have, right? That just means inflation. So what our country's doing is they actually, we're going to keep our stuff for ourself. We'll only export finished products, which makes things more expensive. And so this is all happening before we even got to what's going on today. And as we've had less and less kids, because rich people have less kids, and when women have the choice of contraception, they choose not to have as many children, the federal reserve is like, well, okay, we don't have any growth of humans. We don't have any, you know, we have an escalating cost of keeping the political promises we made to our people. The only option is to print money to make sure that the government can fund itself at an affordable level. And every time the financial crisis, instead of reforming the, the, the banking system, and allowing some people to fail, they get to print money to make sure that the banking system is sound and the goal of the banking system is to take the people's savings and hand it to the government. That is why the banking system was always be saved from the government perspective, because that's what it's there for. And different countries use their banking systems in different ways to essentially get to the same goal of funding the government at a cheap level. And so that's why whenever the banking system is threatened, the government or the central bank must come in and save it by printing money. So we've gone through this situation, you know, coming up in today, where, you know, the US went from, I don't know, 30% debt to GDP in the 1980s to 130% today, which is, you know, a massive amount. And if you read, forgot the other other professor's name, Roboff, wrote a piece about debt, I think it was 2011, the book came out, I forgot where it went, sometime in the last 15, 20 years. And the empirically showed that once a country crosses about 130% debt to GDP, there is always a default. And a default could be massive currency depreciation, it could be massive financial repression, or it could be some sort of default in the government bond market every single time, no exceptions. Right? So they're at this level already. And now, the inflation comes. And the inflation is part of partial result of there's less humans doing productive things, the war on climate change and the rebuke of hydrocarbons. And then more players in the world wanting getting assertive over their natural resources saying it shouldn't just all go to the United States and Western Europe. It should come to our people. We should enjoy the same standard of living that we see in the Hollywood movies. You can reboot your life, your health, even your career, anything you want. All you need is discipline. I can teach you the tactics that I learned while growing a billion dollar business that will allow you to see your goals through. Whether you want better health, stronger relationships, a more successful career, any of that is possible with the mindset and business programs and impact theory university. Join the thousands of students who have already accomplished amazing things. Tap now for a free trial and get started today. The idea that 130% debt to GDP has always historically equal default. I've never heard that before. That's troubling. We'll come back to that. So the idea of money printing, this is what I want to anchor people around.

Insurance and energy resources (25:35)

So, okay, so you make all these promises to a gigantic generation. That generation does not replenish themselves. So they're not more people to be productive and take care of them. So your only tool that you have is to start using debt. The only way to manage the debt is to print money, to not default on it. And now walk us through, this took me a while to really get my head around. The idea that money printing is inflation. Inflation is simply saying that the amount of money is inflating, like a balloon, compared to the things you can buy with it. So, since there are no additional things to buy, then people just start charging more for the things that are on offer because there's more money floating in the system. How accurate is that? That's basically it, right? There's the denominator, the amount of money, it's just growing infinitely. And then the stuff, the finite stuff, and I think about finite stuff as energy, right? We produce, and that is, in my opinion, hydrocarbons, because that is the thing that powers our entire global civilization. I don't care what you believe about the good or evil of oil, but your entire modern life is predicated on oil, whether you believe it or not. And so it's not as if we've gotten that much more productive in pulling oil out of the ground, or have decided to commercialize nuclear energy, which has been around since, I don't know, the 1960s, right? For whatever reason, we as a civilization globally decided to ignore this amazing energy source and poo-poo it. Now, if we had decided back in the day to commercialize nuclear and spend the amount of energy and money that we have spent on wind and solar on making nuclear the safest possible energy usage in the smallest possible delivery mechanism, we might not be in this situation, but those are political choices we made as a civilization. So the energy, you might have energy in how much energy we've producing every year is not growing. In actual fact, we had pre-coil a while ago, meaning the entire growth of the oil industry has been predicated on US shale. And the number of new discoveries and new wells being drilled is declining precipitously because shale depletes itself very quickly, but it's not like refining any Saudi Arabia every 10 years. Now, these massive oil discoveries, we're just not making them like we were in the '60s, '70s, '80s. And so more debt, the amount of energy we're producing is flatish. And so that's why we're going to have energy inflation and we'd have energy inflation, you have goods inflation because every single good we use is a derivative of energy. So this is a unique take, at least for me. You're the only person that I've heard anchor everything around energy. I've heard you say, and this is really important for people if they want to understand the point of inflation and why it becomes so problematic, is that what you're really trying to do across time is preserve your purchasing power as it relates to the amount of energy. So energy is going to determine the cost of a flight. Energy is going to determine the cost of a car. Energy is certainly going to determine the cost of gas. Plastics on and on and on. Like, even when it's not, plastics can be confused because it's made of the same substance roughly. But even just to do the creation, all of that stuff requires energy, which right now, obviously the main source of that energy is still currently coming from fossil fuels. So understanding that, that you're in this race against that. So now you've got two problems. Problem number one is what you just laid out that we're flatish. We're not finding new Saudi Arabia's every 10 years, which would be lovely and would certainly help make that easier. Setting aside any obviously potential global warming issue, but just from an energy cost standpoint. So then problem number two becomes that we're inflating the money supply. And so now the cost of that is already going up. So what I want to get into, so if we know that we have this magic mark of 130% debt to GDP is going to equal a default. We're already at 130% debt to GDP. But we have two promises, healthcare, and that to keep the prices where they are from an energy perspective, we're going to have to run around the world, defense to make sure that we have access to the flows of oil. We're going to be doing more money printing. Now walk me through what are some of the things that are other than that, because the crazy thing is, is you listed those two, I wasn't even really thinking about those two as being something that's going to cause us to inflate.

The stealth liabilities (30:09)

I was thinking about, for instance, the BTFP bank term funding program, which is basically stealth money printing, quantitative easing, just under a different name. It's actually bigger than the COVID stimulus, which was 4.1 trillion. So walk us through what are some other things that you see on the horizon that are going to lead to more inflation. So that's sort of the past and the future we have, essentially, the rest of the world, and then call it the non-aligned countries, they don't subscribe to the West, i.e. NATO or the China spirit, right? They're just, "Hey, we're a bunch of countries. We've been impoverished ever since pretty much forever. We have the natural resources that are needed to power the Green Revolution. We have hydrocarbons. We have people who will come into the U.S. and be your nurses, will clean your toilets, who will take care of your children, right? This is what we have. We want to teach these resources for ourselves now. We don't want to choose a side China or the U.S. We just want to get wealthier ourselves. How do we do that? We trade. What do we trade? We trade higher value goods, right? So an example would be Indonesia, a large producer of Nickel, one of the largest in the world. Joko Waddodo, the president of the country, has recently banned the export of raw Nickel. He said, "Guys, you want some Nickel? Come down to Indonesia, build some sort of manufacturing plant and export the refined product." So I think, if I read the statistic recently, they went from about a billion dollars of economy around Nickel when they were just exporting the raw stuff to something about 20 billion dollars of value added when they were said, "Guess what, guys? You need to build stuff to employ our people to elevate the standing of our country." So this is just one country. The rest of the world is like, why the fuck are we letting these guys come down here, own our natural resources, not give us jobs, and then send back the raw stuff, and then we import finished goods, right? That's been the entire structure since World War II and why stuff is very cheap in the U.S. and Washington, relative to how expensive things are in the rest of the world. And so they're fed up with this. And now they've broken the ideological conditioning, maybe some of the leaders who were on the take from all these countries over the long run power, and they're like, we want to be like the Americans in the U.S. Western European. We've seen the movies. We want to be like them. Why can't we be like them? Well, we're going to stop giving you guys all of our stuff, essentially, almost for free. And so this is just a movement, resource nationalism. This is what I call, Karel Sokoloff from 13D calls at the Allegiance of the Agrieved. The Agrieved being anyone who's suffered post-colonial issues from essentially being an economic vessel of some European nation or America. And so they're saying, they're gaining their voice again, and at a time when the appetite of the Western public to go and not heads against the wall is declining. And so you have this situation where the raw stuff that powers the awesome standard of living that's in Western Europe and America is going to get more expensive because it doesn't come from those countries themselves. And in the case of America, America has all the stuff it ever needs. It's just that the companies in charge would rather ship all the stuff out to third world countries and have a cheaper labor base than employ Americans who are expensive. Europe's not so lucky. But I think that is a source of inflation that's only going to grow as the rest of the world says, I want to live in the Hollywood movie too. Okay, so when I think about some of the stealth liabilities that we have, the number starts getting pretty scary. When you think about the build up as we're having this big party, there's all the stimulus coming in. One, what do you think is going to trigger that? You said in three to six months, you expect some sort of big disturbance. What kind of big disturbance are you looking for? What are things that you know the government is going to pony up for? Is it just the things you've listed so far? Healthcare, defense, and then the banking sector? Or are there other things that people aren't thinking about in terms of liabilities? There's no way they'd let go down. Yeah, so at some point I need to write an essay on this. But essentially, the over the last 40 to 50 years, the financial ecosystem has been predicated on a scenario where there's never been a situation where long end, so it's called 10 to 30 year bond yields in the US rise. So they go up, but they go up faster than in short term yields. That's never happened. For a sustained period of time? No, over the last 40 to 50 years, it's called the Aberes Teepener. So if I'm a bank, I'm an insurance company, I'm a pension company, and I'm going to model what I think the future's going to look like. I'm going to model the way the future's looked for the past 30, 40 years, which is every time there's an issue and yields go up, the government comes into Prince money and squashes the bet down. They squashed their volatility down on the markets because they want to save the banking system. They don't want anything to blow up. But now, because we're in the situation, at least in the US Treasury market, where the US government is issuing the most amount of debt never, right? It's federal deficits, like 7% or 8% of GDP. It's as if we're in a war. This is the largest, longest sustained sort of deficits since World War II, but we're not in a war, at least not an overt one. You have 7.75 trillion US dollars of debt must be rolled over by 2026, massive amount of debt. That's just on the US side. So who's going to buy it? The traditional buyers were one, China, Japan, China, Japan are not buying any more US Treasuries. China, because it doesn't want to become more tethered to the dollar from a geopolitical safety issue. Japan, because it's also facing an issue in their bond market where their currency is getting trashed because they are also trying to save their bond market. Japan, thankfully to themselves, have saved a lot of money over the last 30, 40 years. So they're now starting to draw down on that money. They're not buying new Treasuries. They're starting to sell Treasuries. China's starting to not buy new more Treasuries are starting to sell Treasuries. You can look at the official data from the US Treasury. You can see the balance of Treasuries owned by China and Japan are declining.

Why don't people invest in gold? (37:33)

On the oil exporter's side, talking about OPEC, Russia is a big number of OPEC. Russia is obviously not buying any more Treasuries. They can ban them from the Western financial system. Saudi Arabia is not increasing its Treasury position. It's also decreasing. So the oil exporting nations who previously would earn dollars internationally and park those dollars in the US baking system and buy Treasuries, they're no longer buying Treasuries. The US baking system, the US baking system is functionally insolvent because the regulators made the rules in such a way that it was profitable from an accounting perspective, not an economic perspective, to essentially take in deposits and buy low yielding Treasuries. They could do it with almost infinite leverage and a few basis points difference in the change in the price and everybody make a lot of money and everybody gets a big bonus. So the banks collectively bought all these Treasuries in 2021 and obviously the prices went down a lot since then and that's why we had the regional baking crisis. So at a structural level, the US baking system cannot buy more debt because it can't afford to because it's functionally insolvent. And that leaves the Federal Reserve. But the Federal Reserve has committed to doing quantitative tightening, which means it's letting the Treasuries roll off of its balance sheet. It's not accumulating more Treasuries. So the Treasuries has to issue all this new debt. It has to roll over all this new debt. But the major buyers of this stuff, for all their own disparate reasons, cannot purchase it. And so what we're seeing in the markets is relationships that Heli Cloud are breaking down. If you take a look at the 10-year US Treasury versus Gold, you would think as yields are rising in the US Treasury market, that Gold would be getting clobbered. That's how it's worked in modern financial history. Because if the interest rate is high, money says, I want to own that. I want to own the 4.5% Treasury versus owning Gold, which pays me nothing. But nowadays, Gold's holding firm. It's not like rising crazy fashion, but it's not getting clobbered either. As US Treasury 10-year yields are at 434 basis points last time I checked. So hold on. That makes a prediction. At least is my mind grasp that people think that the bank is going to default. Sorry, the government's going to default. Because if you're getting whatever risk-free money of, right now it's like something like 5%. If you can have risk-free money at 5% and people are not fleeing Gold to get into that risk-free money at 5%, that says to my limited mind that the market no longer believes that it's risk-free. Is that an accurate assumption? The market is risk-free in a US dollar perspective and a nominal basis. Why would people stay in Gold? Because they say, I'm not getting paid enough, right? Now, I use a term of real yield and if you ask an economist who did a different answer, depending on the US, my definition of the real yield is I take the government bond yield and I subtract nominal GDP. So if I'm lending money to the government from a philosophical standpoint, I should receive at least the yield of the growth of the economy. So if the economy's growing at 10%, I should get paid 10% too because I'm contributing to that, right? I'm lending to the government, the government's doing its thing, you know, and the economy's growing. I should get paid the same amount. Now, from the government's perspective, we're like, "Hold on, I can make a profit if I can somehow engineer the economy to grow at 10%, but I only pay you 5%." That's a negative yield. But I, the government, have been making a profit. Conversely, if the yield is 10% and the economy is growing at 5%, then me, the bondholder, is earning a profit. But right now, the economy in the US, if you take a look at the latest Atlanta Fed GDP now cast and they have a real-time estimate on where the GDP is running, nominal GDP this quarter is running around 9%. The 10-year yield is about 4.34%. So I, as a bondholder, I'm getting shortchanged. Now, people are starting to realize that they're holding on. The US economy on paper is growing like gangbusters. I should be getting paid more money. If I'm not going to get paid more money, then I'm not going to own these bonds. Because I think to own something else, that's going to give me a better return, whether that's stocks, gold, crypto, whatever. Right? Is gold a tax stock? Yeah, just to take a non-controversial one. Would gold ever outperform that number? In terms of the yield? Yeah, because the way you're explaining it sounds like people are cutting their nose off to spite their face. Like, if you're going to get 5% risk-free with a treasury and you're going to get next to nothing with gold, then why on earth would you, even if you could get 10%, even if you have a moral, just you have moral outrage at the government for keeping half of that yield for themselves, which I admit, if you loan the money to the government, it's pretty fishy that they would keep that for themselves. But if you're getting a better yield, then you would get from gold.

Bonds & the US Government (42:39)

What on earth are people doing? Just saying, "Ah, I'd rather get nothing because I'm angry. I don't understand." So most people who own bonds are holding, the bonds are priced, right? So as a yields rise, the bond price goes down. And so as yields go from 5%, to let's say 10%, say the fact this keeps raising rates, as a whole, or the bond, you've lost money because yields are rising, the bond price goes down, right? So as yields rise, I lose money because I've locked in the lower rate and it's going higher, the bond price goes down versus gold, which could go up, right? Or it could say flat at the end of the day and I'm fine. So if you take a look at returns of 10-year bonds starting in 2021 when the Fed started raising rates, you've gotten absolutely killed. It's been the worst bond bear markets in hundreds of years. So owning bonds has been a terrible, terrible investment over the last two years because inflation is going up and the bond market is saying, "Actually, I demand more yields and the keeps keeps going higher and higher and higher and higher to attract more and more buyers." Now, if the US government is perfectly willing to put the 10-year treasury yield up at 10%, they have been flood of money into the market. That's awesome. I'm getting paid the same growth as the US economy, but right now, I'm not because the government can't afford it. Right now, the treasury is already spending something like 34% of the budget's like interest payments on an annual basis. 34. 34%. Yes. So it's a $1 trillion annualized right now is the interest expense as of second quarter or last time the treasury public statistics. So they're issuing more debt and they're paying more money on the debt. And that number is just going like that in terms of the interest expense, handing out the people who own bonds. But on the long end, and this is how bonds work, the longer the maturity, the more sensitive you are to interest rates, especially if the bond, the yield starts at a low level. Going from 1% to 5% on a 10-year treasury absolutely destroys you as a long bond holder, which is why a lot of these bond funds have done terribly well, have done terribly over the last few years because of how bond math works. And it's a nonlinear change when you raise interest rates and on the bond price performs. Gold is pretty much held constant over that time. You haven't made money, you haven't lost money, but if you were holding a long bond at 1%, 2%, and now it's at 5%, you've got crushed. And that's exactly what happened with the Bicking System, you know, SBB, First Republic, Silvergate Signature, you know, this year, they've gotten crushed on long, long bond trading. Okay, I want to walk people through that. So I, when it comes to math, I have a very simple mind.

Understanding long-term bonds (45:47)

You're going to correct me where I go wrong, but I think people at home, some of them are going to benefit from what I have struggled over the last year or so to put together in my mind. Again, you're going to, when I go wrong, you need to jump in and let people know. But here is how I understand bonds. If you hold a bond to maturity, you're not going to lose your principal. So what you're losing is potential earnings. So you would not be able to sell that bond. So for those keeping score, it goes like this, you buy a bond, that bond has a, a interest payment. And that interest payment, let's say is 2%. And if you buy that bond for 10 years to get the 2%, and a year later, a new bond comes out for 10 years that pays 5%. Now, if you try to sell that bond on the secondary market, people are going to go, why on earth would I buy that? When I can, for the same price, I can get a better yield. And so you have sort of lost money in that you can't sell it before the maturity. You are now going to have to hold it all 10 years in order to get all of your money back. But if you hold it for all 10 years, you will get your 2% and you will get your money back, assuming that this is a government bond and they don't default. So that, I want to make sure people understand the difference between you're losing potential revenue, because if you didn't have your money tied up in a 10 year bond, and you could now put it into that other 10 year bond that's earning 5%, obviously you would be better off. But you don't lose your money unless you need to sell. Now that brings us, and you will notice he has not interrupted me. So I assume that's all right. I'll give it even more, even closer to home example, people who love it more than a house. I think this is even more understandable. Everybody rushed and bought houses in 2020, 2021 and the old, so I don't know, more than 30 year mortgage rates in the US are around 3, 3.5%. And now there's another job and another location. Maybe you're living in a high tax state and want to move to a low tax state. And you need to buy another house. Same value of the house that the price of the house is the same. But you need to get a new mortgage. But now the mortgage rates are 7, 8%, and you're like, "Holy shit, I can't afford this house anymore." Because this mortgage, this bond that I have at 3%, is more valuable than the bond of the mortgage at 7, 8%. Therefore, I can't find another loan that I can service with my income because of the change in interest rates. And so that's I think a even more, hence one example, the majority of the public who own a house or department or whatever, it's, "Oh, I had a mortgage at 3%, I can't afford that house in another location because I'd have to get a new mortgage at 7, 8%. That is bond math. That's the exact, and you can put the same thing for, you know, treasuries, more uses a bit more complicated, but at a high level, that's exactly the phenomenon you describe it. Now the mortgage, though, would be completely inverse, right? So on a mortgage, I want my rate going down, on a bond, I want my rate going up. Yeah, makes sense. Okay, so now let's take that. So we understand that I buy a long-term bond, and back in '21, when all the banks gobbled up all this US debt, they had to go long to get a return, which a bank has incentivized to do. So they're going to take the deposits that they're getting, everybody's getting stimulus checks, everybody's depositing into a bank. The bank's like, "Amazing, I'm going to invest." First of all, the Fed is like, "We're not going to raise rates. Oh my God, it's going to be like this basically forever." And so they buy all these long-term bonds on the word of the Fed that they're not going to be raising rates. So they think, "Okay, well, if rates aren't going to go up, then I don't have to worry about the value of this going down. This will get me a higher yield by me taking a longer term, which we need to get back to because you were talking about how it's very atypical for short-term to raise faster than long-term. So that's a sign that something weird is happening. But in '21, that hadn't happened yet. So a long-term was the way to get the extra interest payment. So the bank's gobbled up these long-term treasuries, so they're buying down. I'll add one little caveat here is you can actually hedge this stuff. So it's not as if there is an instrument for the sale, like, "Okay, I bought a bond at 2%, 3%. I'm worried about the future where the Fed raises rates. Let me go out in the market and hedge that." The big existing system could have easily hedged a lot of this risk, and some banks did. A lot of banks didn't. But that comes at a cost. So I can either have a higher bonus or a lower bonus. The Fed says, "Don't worry, I got this. Inflation is transitory. Never raising rates. We're never going above 2% inflation. Why would I go out and hedge the long-end rates? Why would I go out and hedge rates going up and reduce my bonus?" So I'll stop there. Do that's horrifying. If that, and look, I'm sure it did. I don't want to play naive, but that's horrible. Okay, so if that's right, then to get their bigger bonus, they buy these longer-term treasuries. They lock themselves in. Now, the Fed does raise the interest rate. Now, that bond, they can't sell it early, and therefore they're losing that potential income, wouldn't necessarily be a problem except for the fact that people begin to realize, hold on a second, now the risk-free rate of a US treasury that I can get myself is 5%. So I don't want to leave it in the bank where they're paying me next to nothing. I want to go get my 5% risk-free with the government.

Regional Bank Failures Are Coming (51:16)

So, hey, SVB, I will take my money. Thank you very much. And now, SVB has to cover that so that they can give you the money back. And now they're forced to sell these long bonds at a loss, and all hell breaks loose. Yep, that's exactly it. The US government bankrupted the banking system, essentially. That is brutal when said that plainly. Okay, so now my question is, they create the, I just had the BTFP bank term funding program, which basically says, "Hey, everybody, don't worry. Your deposits are safe." But the problem is that puts them on the hook for up to $4.4 trillion that they would have to print their way out of. So, do we still have a banking crisis, or do we only have a looming potential inflation crisis? There is a political choice. Either, as people say, again, I don't, I would look at the deposit rich yet, but if you are a non-too-big disheau bank, there's eight of them, it's very hard to attract deposits. And it's very hard for you to raise your deposit rate, because again, you have this portfolio of stuff, and your deposits are not guaranteed. So, if I'm a JP Morgana City bank, a Wells Fargo, I forgot the other ones. The big banks, they have an unlimited deposit guarantee. Now, they have to pay a bunch of other charges for that. But if I'm a deposit on those banks, I know there is no question. The politicians have told me I will get 100% of my money back, no limit. If I'm not in one of those banks, I have to think to myself, okay, is this bank going to get saved? Is this going to be the Lehman Brothers, or is this going to be the Goldman Sachs? Which one is going to be? They let Lehman fail, they didn't let Goldman fail. The thought, and so you're like, well, why even take the risk? Get me the fuck out of here. I'm giving my money to Jamie Dyer. And so, that's the issue. People are fleeing because, number one, the political choice has been, we are not going to extend the blanket guarantee to all these other smaller banks, because of moral hazard and all these things. We're only going to give it to these banks over here. So then the rational response of the public is, well, I don't want to be in that bank. I don't want to have to take the risk that they decide that this is the bank they're going to believe in capitalism on. I'm going to go over here. Let me go to the socialism. I get my money back. And so, I think that's driving part of it. And then the other thing is the rates are still going up, right? Five and a half percent. Maybe the Fed raises a couple more times.

The Price of Bitcoin Crashes to 20% (54:04)

Maybe at least six percent. I can literally two clicks, go online, go to my money market account, deposit money with the government essentially, and get more money than my bank can mathematically pay me. So yes, there's a banking crisis. It was smoothed out a bit with the bank term funding program. But it's not as if people have stopped noticing that in less than five minutes, they can go from zero percent to six percent interest income. That didn't stop. So the banking crisis is still there. The acute political choice that the regulators and the government is going to have to make is still there. It's still looming. Who's going to pay for these losses on the bond portfolios of all these banks? I don't know what they're going to decide, but I think they're going to decide to print the money and make sure that the electorate gets their deposit back and nominal dollar terms. So that's my opinion. So the bank term funding program does not cover regional banks. I thought it did. No, no, it covers banks that have eligible securities. So that essentially means U.S. Treasury bonds and mortgage back securities. Now, the big thing that a lot of people are not focusing on is the commercial real estate. That's not included. So it's not as if I lent money to some real estate developer in some market who's going to build office buildings. I can't take that loan right now and give it to the Fed and get back 100 percent of my money back in the end dollars. I can take a treasury. I can take a mortgage back security. I can swap that for dollars. I can't swap the commercial real estate, which is a problem because small regional banks were the engine of commercial real estate lending. Boom, over the last decades, what do you want to call it? So now as we're changing the way we work and two to three days work from home for a lot of folks, these office buildings are becoming irrelevant and the market has frozen. So now it's a question of, okay, what deals get done? How big is the price that's going to be? And are they going to have to write down this perception of their balance sheet and, oh, shit, they're insolvent again, or at least we know they're insolvent again. What's the Fed going to do? What do they want to expand the BTFP to include commercial real estate loans? Because this is the thing that's going down a price or they're going to expand it to auto loans or they're going to expand it to personal loans. All these things that the banks have been lending out, where the ability to pay or the asset value is declining, that aren't US Treasury bonds and mortgage back securities, is the BTFP going to be expanded to cover those? Because if those were down in price, the banking system still insolvent. So yes, they've solved one portion of the market, the one they really, really care about, which is mortgage back securities. They want Americans own a house and US Treasuries. They want Americans to invest in the government. Now, there's all this other stuff. They would rather not have to bail it out. But again, the banking system is choking on all this stuff and they're going to have to make the political choice at some point. Either of them, they're going to let the non-tubic to fill banks actually fail and a lot of Americans with small deposits not get their money back, or they're going to come in and save the day and bail everybody out and print more dollars. I think this is the part in our program where we point out exactly what inflation is when it was first described to me as an invisible tax. I was like, it didn't make sense to me. And now, understanding it better, I realized that what you're doing is you're saying, okay, we're going to make everybody's money worth a little bit less. So by making more of it, then the value of any $1 just reduces a little bit. And so it becomes a way to spread the taxation across everybody. So the real question the government is asking is, okay, this bank, whatever, they did something that isn't a, well, so we already know that mortgage backed securities and treasuries, those are going to be one for one. But if they have something other than that, they're asking the question, do we want everybody to have to cover this thing that didn't end up working out, this investment that didn't work out, or are we just going to let them roll over and die? As you look at that, and when you think about this three to six month big disturbance, is that the thing that you think happens that we get something triggers a run on these small banks could be commercial real estate starts something kicks off and it starts going down? Or are there other things on your bingo card other than the regional bank failures? I mean, usually it's the problems are known. It's a question of whether or not we're focusing on and we being the market, right? So the market knows the commercial real estate is a problem, but we haven't really seen a big price markdown because no one wants to trade. The sellers don't want to realize a loss and then have to mark the rest of their portfolio down and thus be insolvent. And the buyers don't want to buy this price because they know it's too high. So nobody's trading. Right. So it's that calm situation where, okay, well, the price is still where it was, you know, two months ago, but there's no transactions, right? So once there's a few transactions when people have to sell for whatever reason, we don't know what that it's going to be, then we're going to go, then it's the fiduciary responsibility is, okay, well, there are these transactions in the market. And I now need to mark down my portfolio report to my regulators. Oh shit, my capital buffer is declined. Therefore, I'm insolvent. And what usually happens is, you know, because of the politics, they'll let somebody fail. Someone's going to, there's going to be at least one failure. And then the market's going to fucking throw a fit. Shit's going to be trading all sorts of fucked up ways. And then, you know, on one weekend, like, okay, we can't let the next one fail. Right. They let silver gate fail in March of this year, but they didn't let SVB in my failing mean, to forget when bankrupt and the depositors are not guaranteed to get their money back by the federal deposit insurance company at FDIC. Whereas with SCB and signature and first republic, they were bailed out. They being the depositors were bailed out. Now, obviously the bank managers replaced and equity holders lost money, but the depositors were bailed out. So usually one person fails. There was only even there was a bear before there was Goldman, Morgan Stanley, everybody else sitting here. So they'll probably let somebody fail first, because the politics demanded. Once the fear of looming collapse is instilled in the regulators, they're then going to say, we have to print the money because the system is going to fail. What that's going to be, I don't know, I just see that for whatever reason, financial crises happen in the fall and in the winter, in the Northern Hemisphere perspective. And so, they haven't solved any of these problems. They're only getting worse. They're getting exponentially worse. And the countries that would usually bail out the American financial system by buying assets for their own reasons can't do so. And so as we progress further into this season where traditionally crisis happens, there's going to be something. I don't know what it's going to be. That's just my base case. And I want to prepare myself and make sure that I'm able to make money in a situation where she gets all fucked up. Yeah. Okay. I didn't know that there's a preponderance of problems in the fall and winter. Is that the obvious guess for somebody that's never heard that before would be has something to do with energy prices as people have to crank up there. Usually, so in the past, it was agricultural issues. So the farmers, the credit tightens in certain parts of the year, depending on when the farmers eat credit to buy more equipment to do the winter planting. They receive a bunch of money. Now they need to draw down on credit. And so that's where you get the spikes in credit as we move through the agricultural cycle. And that's part of the reason why you have different Federal Reserve banks and different districts is to try to smooth out that the demand and supply of credit between the banks and the east and the agricultural regions and sort of the center of the country.

Market Problems And Investment Structures

Known problems in the market (01:02:15)

And every other country is kind of the same. Farmers are always in debt and they're always borrowing money and then receiving lots of money depending on how the harvest goes. And I think that's part of the reason why we usually experience crises in the harvest season and then winter planting. Now you said the problem is usually known, but it's a question of whether the market's paying attention to it or not. What are some of the problems that you're already aware of, whether the markets focus on them or not, that could be those early dominoes that fall? So we already know that the US Baking System is insolvent. From a US perspective, we already know that the major buyers of US Treasury debt are not buying and the Treasury needs to issue a lot of it. That's known. We already know that commercial real estate in the US is a problem. It's just that nobody's trading right now because of what I just described. Globally, we already know that China has this massive real estate issue and is deleveraging, which means that China cannot contribute to global growth in the ways that it used to, meaning doing massive government stimulus and essentially buying stuff in the rest of the world to build up their country. China's been powerhouse of global growth, which leads into the US and European economies since the early 90s. They have lost their capacity to stimulate in the ways that they're used to. Japan is a problem. Either they're going to save their government bond market or they're going to save their currency. Japan holds as one of the richest countries from an asset perspective on their balance sheet. Are they going to sell down their treasuries, their fancy US real estate? Their equity positions to essentially help fund the ability for their sector to manage the depreciation of their currency. These are all known things. There's nothing hiding. Which one is the one that causes the spark for everyone to start focusing on freaking out? I don't know. As we start putting all of these pieces together, what becomes the next step? Is there the crisis kicks off? The money printing continues. I assume when you think about money printing and analogy to use would be a rubber band that's being pulled farther and farther back.

Rubber band effect (01:04:56)

Every failure releases tension because those people, they lose and we don't have to make them whole and there's no more printing. It's not inflationary. Every time we print more, there's more tension, more tension, more tension. Is that how you look at that? You're waiting for the domino, the housing mart or sorry, the regional banking goes, the Fed decides they're going to bail them out. We pour a ton of money into the system and you're just waiting for that moment where there's too much tension. Do you see a big disturbance happens? Do we just load up more tension on the rubber band but we're still, who knows, 10, 20 years away from a real crisis or do you think it has to break and that's why we go into a great depression style problem? So I think we've moved the crisis upstairs to the sovereign debt markets and so this crisis will be the buyers refuse to buy long end bonds of a particular government because we're all, every government's in the same sort of position, different things considered off but again, global debt to GDP is 360%. Why on earth would I as an investor own a long end bond when I know that there's nobody getting born and there's not going to be an energy productivity miracle? There's just no way for me to get paid back in a real dollar, a real yen or a real for M&B at a rate that's affordable for the government for me to make money over time. So then why on these bonds? I'm perfectly happy to sit in like overnight, you know, Fed deposits or short end bonds of a particular country because I know I can sell those pretty quickly and not suffer any sort of capital loss but if I'm forced to sell a 10 year treasury or, you know, a 10 year Chinese bond or a Japanese government bond 10, 30, 20 years because rates have got up, I'm going to stuff a massive capital loss. So then why even own that stuff? And if nobody wants to own the long end of the government bond market, the rates will go up a lot and then the response is some form of either closing down the banking system so making sure that depositors cannot flee to other asset classes and then forcing deposits to buy government bonds. This is called fiscal dominance, this is a theory or it's called the next thing it's called yield curve control where the central bank says, okay, we know you all want to leave this market so we're going to fix the price at a particular level, whatever is politically expedient, whatever is affordable for the government. We're going to telegraph this but we're going to expand our balance sheet infinitely to make sure that the rates say they're level. So in Japan, the Bank of Japan has been doing this for almost a decade where they say they determine a band of the yield and they see if the yield gets to a certain level, we will go into the market and buy bonds by printing money to make sure the yields don't go up. The United States did this back in the late 40s and early 50s to pay back the debt from World War II by capping long end treasury rates, 10 and a half percent. The Fed was expanding its balance sheet to make sure the rate is that level. So if we get a revolt from large asset holders who say, I don't want to own these long balance because I know mathematically there's no way for me to make money in a real basis, I would rather own stocks, I would rather own crypto, I'd rather own oil field, I'd rather own gold, whatever it is, then the only response is to move to the end game which is, okay, we fix the yield and we just print money until as long as it's required to keep the yield at that level. And once you've gone to yield curve control or something similar in the US, it's already in Japan, something might happen similar in China and other places, then the question is, okay, can the authorities keep the money inside their banking systems or are there ways for us to people to get our money outside of the system so that on a real basis, we're able to maintain our energy purchasing power and that becomes the real fulcrum of the crisis because if all the money is sitting in the banking system that can't leave, which has been able to do prior to Bitcoin and some of these other blockchain based cryptocurrencies, then they get to tax us all and over time the government basically earned itself out of the situation. Yes, there's high inflation depending on how your country is structured, maybe it's hyperinflation, maybe it's just high inflation and some governments fall, some governments stay the same, but at the end of the day, most the government can survive. But if we, the people can get our money into a type of money or a type of asset that's outside of the government control, outside of the banking system, then the system collapses. Well, that is a very unnerving thing said very calmly, Mr. Hayes.

Why yield curve control is a problem (01:10:01)

So, okay, how gimme, gimme like the odds here. So if, if Japan has been doing yield curve control for a while for a decade, you said, I've been to Japan. It's amazing. So is there really a problem? Because it sounds bad, but having experienced if my time in Tokyo is what yield curve control looks like, it's not so bad. So what am I missing? Why is that something to be very wary of? So I think people have a mistake in the fact that you've been able to print so much money and not have an adverse effect. They're not looking at why, what has changed in the global economy over the past, let's call it 20 years. And what has changed is China. China joined the WTO in 2000 and essentially became the workshop of the world. And so you've lowered the cost of goods across every single sector because of China and they're willing to, number one, degrade their environment to capture market share in a lot of the dirty processing, so rare earths, different types of commodity refining that the West and Japan are not willing to do. They have had a growth of young people willing to go into factory work and do these things at a very cheap wage. And that is it. We don't have China anymore. China number one is dying, just like everybody else. The population is like forecast to be half of what it is by the end of the century. China, the population in China has also decided that they do not want to live in a small field factory and they have told their government to prioritize protecting the environment, which basically means that China does no longer want to essentially pollute itself so that America, Washington, Europe, and Japan, Korea don't have to. So we're going to make these things more expensive. And so there is no more big country that's going to join and essentially degrade themselves so that the rest of the world, the rest of the very developed and rich world can enjoy a higher standard of living all the while they're printing a bunch of money. So there is no more that's not going to happen again. And so I think that's what people miss about why we were able to print all this money over the last 20 years and not really have any sort of adverse effects. That's just not going to happen anymore. Well, so I'll ask maybe the uncouth question but the obvious question. So India is still growing. Is there because the thing that I'm dancing around is being right about the concepts but getting the timing wrong is the same as being wrong. And so what I don't want to do is get myself all worked up that the sky's falling, this is all going to be bad. I need to get my money out of the banking system. I don't want the government to close the exits. I don't want them to force me to buy things. I want to maintain my financial autonomy. I want to maintain my freedom. I want to come and go where I want. And certainly there are many, many, many horror stories throughout time of governments doing that. And if there is a way to keep this party going, again, I'll just use Japan as an example. My whole life, I've heard Japan is in stagflation. But again, being in Japan, it's beautiful and lovely and there are wonderful restaurants and exceptional people. And for me, as a storyteller, some of my favorite storytelling comes out of Japan. There just doesn't seem to be, and look, I've never lived there, but there doesn't seem to be downsides. It's not like I'm like, oh my God, I would never want to be in Japan. I'm like, this fucking place is amazing. So I hear your point about China and China, the just booming growth and the amount of things that we were all able to reap the benefits of as the developed world, a little bit ahead of them, we were able to reap the benefits of their transition period, which is just astonishing to have been cognizant while it was happening was really something magnificent. And look, I was far removed, but still had a sense of how extraordinary their growth was. Are we not poised to see the same thing in India? So on the Japan thing, because this is called the widow-maker trade, the, oh my God, Japan's dying. Oh my God, that's GDP. It's the only goes in one direction. Oh my God, the B.O.J. 's balance sheet is going through the roof. So Japan is essentially just like China. Japan is a more successful version of China. They both are from the exact same industrial playbook. Japan had two nuclear bombs dropped on it by the United States. And the US essentially made it a colony for a bit. And so what did Japan do? They reoriented themselves to making shit for America. And essentially the Japanese government and the large companies made essentially a pact. It said, okay, we're going to give all the people jobs for life. You work really hard for the nation of Japan to make things, to grow the prosperity of the country. And but you're not going to keep all of the productivity gains. Right? That difference is going to go essentially to these large companies. And they're going to reinvest that profit back into the United States and then Western Europe essentially. So if you look at Japan's country, they're one of the richest countries in the world on a net investment portfolio perspective. They've got one or two trillion dollars worth of assets. What are those assets? That's essentially the productivity gains of their people since World War II. So Japan has this buffer of money that can cushion themselves. They owe the money to themselves. It's not as if the money is owed to the foreigners out there. You really can't buy Japanese debt in large quantities. So yes, Japan is a unique situation where number one, they have a lot of assets. Number two, their banking system is relatively close. It's not as if Saudi Arabia can go in there and buy a trillion dollars with Japanese bonds. They just won't let them do it. Because they don't want the situation that the United States is in. We're essentially capital holders to determine the policy of the nation. And number three, Japan has been very fortunate to use the labor of China and Southeast Asia to reduce the cost of labor. If you look at the major Japanese trading houses and manufacturers and you go around Southeast Asia, you see there's a lot of Japanese companies who have factories in all these countries employing all this labor that's very cheap versus the very expensive labor in Japan. Japan is a very special case. But again, all that's running out because the countries that did not benefit from the last 80 years, they're like, well, why am I the donkey for Japan to make a lot of money or the United States? We're from Europe. I want high wages. I want to live in the Hollywood movie. I want more energy consumption. I'm not going to sum my resources to these other countries cheaply anymore. And so inflation in Japan is actually first-time rising. It's at four or 5% highs in 40 years. The Asahi for the first seven 30 years raised beer prices. So the problem is when inflation shows up. And so when you exhaust the cheap labor, when you exhaust the cheap energy, when you sell down all of your trillions of dollars of assets and inflation remains in a world where the United States is not able to dictate the flows of energy unilaterally, then your special circumstance since the collapse of your equity market and property market since the late 80s is no longer valid. And so I think people are making a mistake by not understanding why Japan is successful to say, oh, if Japan did it, they can be successful. Let's take a look at the United States. The United States owes the world something around one to two trillion dollars. The United States runs a current account deficit and a budget deficit. So it's a completely different financial situation in Japan. The United States foreigners own a lot of the debt. The United States relies on the foreigners to buy the debt, to fund itself at affordable levels. It's a completely opposite situation of Japan. So saying that Japan did it is okay, if you're working in the United States, misses the differences fundamentally between the two situations. Now, onto like, don't freak out and go, move all your money into gold or whatever or something and suffer some capital losses. My, how I structure my portfolio is to benefit from both situations. I have high nominal rates right now, right? I know in a real basis, I'm losing money, but thankfully, as a percentage of my net worth, the amount of money I consume on food and energy is very low. So even if I have a 5% rate and it's still a negative real gate on the amount of capital that I have, I'm still making more than I need to sustain myself. So keep some money and cash, put it in the money market fund, you're making 5%, 6%. And take whatever you can afford, small amount and put it into something that's going to benefit if money printing resumes. That could be Nvidia stock. It could be Bitcoin. It could be productive farmland, whatever. You want to have a barbell. You want to make sure that in the event that the money starts getting printed, I can easily move out of my short-term, money market fund government bonds into the risky stuff for the fixed supply and zoom up that way. Or if nothing happens, I'm still earning money. I'm starting to earn a yield over here on my treasuries or whatever, short-term government bonds. I can fund some of my expenses and I run a positive carry trade, meaning I've structured my portfolio such that if the ship really fucks up, I'm going to make so much money in that situation. But as long as it's very calm, I'm still covering day-to-day expenses. And so you want to have an optionality portfolio that costs you little to nothing if not making money over time. If you're able to construct that, then again, timing doesn't matter because you're not paying for time. If you're selling a bunch of stuff and you've got everything in the risky bucket, yes, I would agree with you, then you're like, well, when is it going to happen? It didn't happen last month and I'm down such percent or I needed to buy, go to the hospital because I had an emergency injury and I had to sell down some of my portfolio that I'm betting on this collapse and that was financially ruinous. So it's all about trying to construct this portfolio where the cost of waiting is zero to making money versus it's costing me money, the longer this takes to happen. How often are you checking your credit score? Afraid of identity theft or account breaches?

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How Do You Structre Your Portfolio (01:21:49)

So I heard that we're going to do a barbell strategy. We want to make sure that we can move one way or the other depending on what's going on as something starts to pop off. But you said risky stuff with a fixed supply. So hiding in that are what I'll call two philosophical principles. Risky stuff, I'm guessing you mean high volatility. And so explaining to people why volatility is a feature and not a bug, I think may be surprising to somebody. And then why a fixed supply? So again, we want to make the, we want to basically participate in the upside to the maximum we can, right? So we want the high volatile stuff. We want the crypto. We want the tech stocks, right? But when stuff doesn't happen, then we want our breaks. So we want like a car, right? You want to go as fast as you can in the straightaway when you are racing and you want the best breaks possible so they can take those corners and not get wrecked. Right? So the breaks are cash, short-term cash instruments that are earning yield. That's paying you your grocery bill, you're filling up your car tank, whatever it is that you need to do. You want to be making sure you can cover those expenses with some cash in the bank or in a money market fund or something like that and hire a yielding instrument so you can pay some of those expenses so that when shit's ready to go, oh, I'm over here. I'm ready to make as much money as possible when they're printing money. I'm not in this safe, boring thing because this situation doesn't happen. There's not very many straightaways. I need to make as much money as I can when making money is good and then put the breaks back on. Right? As if you were a race car driver, that's kind of how I want to think about it.

Are you Up or Down (01:23:39)

Okay. So knowing that these trades are excruciatingly difficult to pull off, so for people that don't know you, you manage your own money, you've often said you find it intellectually stimulating, it's fun, I will ask the question that better be on everybody's mind. So lifetime, are you up or down? Up. Okay. Good. So we know at least your strategy has worked once. That's very valuable. So how do we make the volatility work for us because the, obviously, the best advice and people laugh at this, but I think they laugh at this at their own peril because they don't understand why it's become the phrase, buy low, sell high. Now it got repeated so many times that it became funny because people think it's so self-evident, but in reality, it's the thing people never do. They almost always buy high and sell low. They buy high because it's hype, it's moving, they finally pay attention, they ape in and then it starts trending down, they panic and they sell as it's lower than when they bought it. So let's assume that they're going to be emotionally cognizant, they're going to stay calm, they're not going to make that mistake, but how do they know which of the risky assets to do? How do they know how to do volatility well? Um, it's personal preference, right? Like obviously I'm in the crypto sphere, I love crypto, I understand it. The volatility doesn't scare me. For some people they might, you know, that's too much for me. Maybe I'm going to stick with Nasdaq tech stocks, I understand that. I understand why this particular company could do well. You know, I'm going to jump on the AI tech, but it doesn't really matter what it is, right? But looking at whatever it is that you think is going to be your upside winner, look at how- - So hold on, it not only does it matter what it is, it's the only thing that matters because if they bet wrong, they either make no money or God forbid they lose a lot of money. So the most important thing is not the upside, it's the break. The break is, I own, right now the break is I own cash in a five and a half, six percent yielding money, my friend, or wherever you are in the world, whatever that is, like the short term, or that's the break. That's paying your bills. That's, you know, paying your rent. That's earning you a little bit of income, right? Because at the end of the day, you want this portfolio to make you money while you're waiting. So if you put a portfolio- - Okay, so to turn it into a principle, you're saying basically you're going to move into high volatility something that you have some reason to believe is going to do well, but you should not be putting more into the high volatility than you can see go to absolutely zero. You should have enough in the break category that even if all of that goes to zero, that you're still going to be able to eat until you're tank up. - Exactly, because you're going to know when to move into high volatility. Fed market panics, everything's getting dumped, Fed comes in overnight, says we are backstopping the financial system and we've created some alphabet letters that essentially mean print money, right? And it could be, you know, pick your different central bank and wherever you're from. Then you know, okay, cash is trash. I was earning six percent overnight now at zero. I'm out of this. And guess what? You're not going to suffer any capital laws versus if I were in some other type of instrument, it needs a liquid or whatever, right? So I can get out of this thing very easily. And boom, I maybe I had some already in my high volatility bucket, but now I'm fully at a high volatility bucket because I no longer am earning anything on the cash. So there's no, why would I have anything in the other bucket? I wouldn't because I'm getting zero. I'm getting nothing. So I have to go into that because I have to find something that's going to maintain its purchasing power. What's the denominator of fiat money expands infinitely. So you'll know it'll be it's not as if like the S&P went up three times the instant that Ben Bernanke unveiled quantitative easing in March 2009. It took many, many, many years. It's not like it's you have time. This isn't like, oh shit, I got to go, you know, sell this by this and I miss it by a day and therefore goes my return for the next year. No, you're going to have time. It'll be very clearly communicated.

Investment Strategy And Advice

Advice for People (01:28:04)

It's just, are you listening to what they're saying? Okay, so that makes investing sound easier than I have experienced it to be. So the way again, saying very clearly, nobody should take investing advice from me. And I mean nobody. I am still grappling to understand this stuff. But when people do ask me, hey, Tom, with your limited understanding of investing, what do you advise that I do? My thing is always you're going to lose if you try to trade. So don't try to trade meaning actively like I'm in there. Oh, I got just right. And I'm trading in the morning in the afternoon. Like you're going to lose guaranteed. What I would tell them to do is pick the most diversified bundle of whatever, whatever. So whether that's S&P or you said AI growth stocks, I don't know if you'd consider that high volatility. But something that where it spreads your risk that is commensurate with the amount of knowledge that you have. If you don't have a lot of knowledge in it, then I would go very broad and I would be very careful. And I'd be trying to get as close to Ray Dalio's all weather fund as humanly possible, something that's going to perform four or five percent, no matter what happens. That's when you're ignorant, like me, that is the thing that I would push people towards. Do you agree with that when people don't know? And do you agree if you're going to get into something that's high volatility, you should only do it in an area that you understand? I think you needed to find your time span. I think a lot of people think they're like, wow, I see this person on TV or TikTok or Instagram or whatever.

How to Succeed with High Volatility (01:29:29)

And they went from zero to hero and five trading days and made all this money. So I should do the same thing. Like, if you're not willing to dedicate 24/7 of your life energy looking at a screen, then you should not be trading on short timeframes. So what does that mean? Don't use leverage. Don't open up the options trading account or the futures trading account. If you're not willing to put in the work to sit there and trade. Now, obviously, I have a large ownership and a futures exchange. I'm not saying don't use my product. I'm saying if you are going to be a day trader, then be a day trader and dedicate yourself to doing it. Don't work a day job. Think you're going to come home at night for two hours and just treat yourself into quitting your job. It's a profession. It's a dedication. You can do it, but be willing to put in the work to do it. If you're not willing to put in the work to do it, then broad-based indices, different things. Whatever you understand, collectively, okay, I want to own stocks. I don't really know what. Okay, well, my country has a particular index. Everybody's going to be a lot of people going to be on this by the same thing. It's a question of taking that index and combining it with the breaks. That's the point to be able to both participate in the general rise in asset prices, but not care when it happens.

How to do well in both good and bad moments. (01:30:51)

If you can construct that portfolio, then you can sit at home and not worry about it. Not worry about it, meaning you need to have patience for when the moment is actually right. If you've deployed capital into long-term things, you're not going to be able to take advantage of the moment when it comes. Or if you've basically thought you're going to day trade yourself out of this and you're staring at the screen all day and you're not willing to put in the work to actually be a good day trader, then you've squandered your opportunity versus saying, "Okay, I don't know what the timing is going to be, but I know that I have, thankfully, to these relatively higher interest rates, I have the ability to both earn some income on my excess cash and putting a small amount of cash into what I believe is highly volatile things, whatever it is for you. That can allow you to sit there and patiently wait for the inevitable math to catch up with the bad politics. Okay, so let's run through what you said is your likely scenario. That three to six months, something bad is going to happen. It's going to cause a ton of money printing, but I'm guessing in the money printing is when you're saying we're going to have this sort of jubilant moment where everybody is feeling flush and I forget the, you said it's going to be some huge moment. I forget how big you were saying, but it's really going to be wonderful and then it's all going to lead to something like the Great Depression. How do we ride that wave and that crash so that we do well in both moments? When the money printing starts, we want to go to high volatility. That's the play. Yeah, so my sort of mental mind cap now is I think the biggest trend in, so you always want to own the new tech thing in the and the bunty-biting bull market. So if you look over history, the new tech thing, it's been railroads, it's been radios, it's been computers, it's been the internet. Every single money printing cycle has a new technology that's going to fundamentally alter this modern civilization that we've had since the industrial revolution in the mid 19th century and therefore we all need to be in that because the way we exist human is going to fundamentally change. And yes, that's true in a longer term perspective. However, there's a many other happens. So the mania this time around is going to be AI, where a chat GPT has been the fastest growing technology adoption ever in human history, one from zero to 100 million years, and however many days it was, it's fastest ever. So we are all in on AI. If you look at NVIDIA and some of these other AI related stocks and they do not give two fucks about this baking crisis, about the debt overhang, the population issues are going straight to the roof, right? Because everyone's like, okay, I know AI on a long-term basis, fast forward today is going to completely change what it needs to be human, what the human economy is or isn't. And I want to own the next Google, Facebook, Amazon, Alibaba, ByteDance, right? I want to be in that company. And so I'm going to start trying to find anything that's related to AI and pumping money into it. So on one hand, we have the most amount of money that's ever going to be printed in human history to try to save the global Keynesian bond market of all these governments. And we have the newest technology that has the fastest adoption ever in history of a technology. We're going to combine those two. We're going to get the biggest tech boom mania that we've ever seen. And it's going to be predicated on anything related to AI and RFL show intelligence. So for me personally, I have a portion of my portfolio that is predicated on AI. I actually am one of the largest shareholders in one of the largest sextile manufacturers in the US and as robotic sextiles. And so I did not see that coming. I think we actually plan on going public at some point. So that stock, that company, I think it's going to do very well in this boom. On the crypto side of things, I've been making the case that artificial intelligent economic agents inherently need decentralization. And therefore, they should be using Bitcoin for money. They should be using Ethereum for smart contracts and governance and dows.

How do we use the upcoming mania for technological growth to invest? (01:35:13)

And they should be using filepoint for decentralized storage. I own all three, whether it's my companies in filepoint, filepoint itself. Lots of Ethereum. I have my family office. We're investing in decentralized architecture technology that's going to power the growth and decentralization in the future. And obviously, you have, you know, I have a lot of Bitcoin. Right. So I am all in on number one, AI in the traditional sense, AI robotics. And I'm all in on the intersection of AI and crypto on the technology front, because this is the mania that is going to captivate investors to take that money and to funnel it somewhere. Because they're not going to be buying companies like general motors. I mean, maybe it'll go up, but that's not going to be where the zeitgeist of a world is. It's what is AI? The government's are printing all this money. It's got to go somewhere. It's going to go predominantly, in my opinion, to AI listed companies, venture capital funds doing AI investment. And so it's going to be absolutely insane because we're combining the most money amount of money printed in human history with the most destructive piece of technology to what it is means to actually be human and interact in this universe. And so it's going to create fantasies of growth that will never happen in the timeframe that they say it is. But we're going to believe it as a collective investment public, which is going to drive that. So that's my super volatile segment that I want to participate in. And then on the boring side, I will continue to move money from the high interest earning money market fund and stuff, as rates start to come down. But I'm not going to do it beforehand. I'm going to wait for them to tell me. And usually, unfortunately, right after the Fed or any other such a big as printing money, there's usually some sort of financial crash because the reason that printing money is something bad happened. So it's not as if they start printing money and things just keep going up further. Things usually went down a lot. Something happened. They said, Oh, should we get the money? They put the money. Then things go, they retake that level and then they go higher than that. So it's a mistake to think that just because we're investing now, yes, if you have a long enough timeframe, you should make money if they print enough of it. However, it's very path dependent. So instead of trying to time the market, just wait for them to tell you about it. They're going to tell you. But why not just earn 60% of your money market fund just chilling? So I'm not trying to time when it's going to happen. I have a mental model. I'm getting prepared and making sure that we're ready to make investments and identifying the things that I think are going to do very well from a macro perspective and a thematic perspective in terms of where I think the investment public is going to focus on. But I cannot predict the timing and nor do I want to lose money because I try to be too cute and predict when something's going to happen and where exactly it's going to happen in the financial system. And so when you say that they're going to tell you, meaning we're going to print money. We're raising rates. We're lowering rates, whatever the case may be. Yeah, they're going to come out and say, oh, because something happened in the financial system, we have that lower rates of this. We've introduced that program, whatever it is, it's very transparent. Regardless of whether it's the Federal Reserve, it's the PBOC, it's the European Central Bank, it's a big Japan, big of England, they're going to tell you exactly what it is. Because what do they want you to do? The market's already falling. They want you, the investing public, to gain confidence, to go and buy stuff. So then you'd be very clear about what they're doing. And the question is whether you're not, you believe them, or you're just going to say, no, no, no, I'm just going to stay in this very, very safe thing. It's fine. But on a real basis, you're probably not going to make the money you would like to make before we get judgment day when things go down a lot. Okay, so if we know that the market prices in, the things that it already knows, you have to be betting against the consensus and being right. So what would a well-intentioned person who disagrees with you say to what you're saying right now? Because it really was that easy. Everybody watching this video would just do that and they'd make out like bandits. But of course, it won't play out like that. The consensus says that we're going to have a soft landing that these few men, most of the men, very few women, have somehow divine the business cycle and thus can print just enough money and raise rates just enough. And the inflation rate of the world is going to come down just to the level of 2%. And the employment is going to stay the same. And we're just going to go along and be nice and happy. That's the consensus. That these guys know exactly what they're doing. And they got it. So which means you don't need to sell your stocks. You don't need to sell your bonds. You just sit tight and keep adding more because there's not going to be any financial disturbance because they have it right. And the inflation is going to trend down right to their level exactly at 2%. And it's going to be amazing. That's the consensus. So if you don't believe that, then you believe something on either the regime is going to have to, either rates are going to go really, really high or some financial disturbance is going to happen because they keep raising rates and force them to go right back down to zero. And so my thesis is that when you have 360% level with that to GDP, you no longer have situations where things happen in a common fashion. You go to the extremes very quickly. And so to think that all of a sudden, you know, less than 100 people are able to determine how this global economy is going to somehow soft land after printing the most money that we've ever printed in human history and gone from 5,000 year low of interest rates rising the fastest pace ever and in financial markets, then you're, you know, that's a bet that I'm not willing to take. Do you know Chamath, Polyapatia? Yes, I know Chamath.

Chamath, probabilities, and putting your money into safe investment (01:41:01)

Okay, I could be misquoting, but I'm almost certain this is correct that he was saying that, you know, people make such a big deal out of this 130% debt to GDP, but it's a big nothing burger. It doesn't really matter. There's no law of physics that says that we can't go over it. So even though historically that that's been a sign that has led to collapse given the modern economic theory, and I'm so, this is how I remember it. Oh, God, forgive me Chamath if I'm way off. But that was my takeaway. So other than it's very compelling to me that we have all the historical examples to say every time that we do this, it leads to collapse. But what do you, if you were to take his stance for a second, can you see how maybe it is possible that we get the soft landing that they do get it right that that isn't some magic, you know, thing like the speed of light, it can be crossed and people can still come back from it. And I think you would say that, well, I'm just going to, I'm going to listen to what they say anyway. I'm not going to make a move until I actually see it happening. Yeah, could he be right? So I would say we're investing as a game of probabilities and expected values. So if Chamath is saying, okay, there's been umpteen other examples where this has not been the case, but this is going to be the one example where the market just keeps running a bit higher. Okay, then you're taking a, this is this time is different, mentality. And every single time who has been at this type is different, whatever aspect of the financial markets, right? The problem is you're not just getting, you're not getting paid enough for this time is different. This time is different means S&P goes up, I don't know, four or five percent, right? I'm making 6% sitting in my money in cash. So why bet on this time is different? If I can earn the majority of the excess return of stocks, but I literally just put in my money in a money market fund and I have no risk. The Federal Reserve is going to pay me that money. Why take the risk on this time is different because usually it's not different. It's the same as every other time. But there's something I'm not getting paid enough to be this time is different. The only way to get paid enough is to add more leverage, which increases your risk. I'd rather take, okay, well, everyone believes this time is different. Therefore, I'm not getting paid enough for it. But the other alternative, which is it's the same as it's always been, but I get paid a lot more money to be in that camp. Well, I don't want to go there. And on an expected value basis, I'm going to make more money over time. Why not? If you believe in Jamov, just put your money in a money market fund. Don't buy any stocks. Why? Like the S&P part from, you know, Nvidia and Facebook and Yughal and those seven big stocks has not beaten return on cash. So either put your money in cash and go on AI stocks and believe this time is different. Or just put your money in a money market fund. There's no point to take the risk on the general market for this time is different because it's never different. It's always been, you know, this time is different gets clobbered.

David's investment picks (01:44:14)

Other than the AI high volatility stuff, do you have anything deployed in the stock market right now? Uranium. So I believe the finally going to get our shit together and somehow believe in nuclear. And there's been vast underinvestment in uranium refining capacity. And as the world moves to nuclear, maybe the West decides that they want to be dumb and not do it. Fine. But China's going nuclear India is going nuclear. Saudi Arabia is going nuclear. The rest of the world's going nuclear. And it's just not enough for fine yellow cake to go around. So, you know, uranium mining companies in certain jurisdictions are going to do very well. And I'm in a large, but not large. By the largest equity position is a Kimiko mining CCJ. It's up, I don't know, 80% this year. So that's something that I believe in as a larger term energy play.

Futuristic Investments And Impact Of Inflation

Making your own investment euphoria (01:45:07)

Okay. So understanding now, then the way that you're deployed, I want to talk about euphoria. So I'd never experienced what euphoria at the like humanity level look like until the 2021, 2020, 2021 crypto rush. It was really fascinating to watch. It was great. And it felt a certain way. So I certainly know now what to look out for in the ether. How do you think about as a disciplined investor? How do you think about euphoria? I know you're planning it into the AI. Like, hey, I know people are going to get their stimulus checks or the bailout. However, we want to categorize it. They're going to put it into whatever is the hype thing of the moment. You're expecting that to be AI. How do you know, because I'm assuming you're going to get in, probably not try to time the top perfectly, but you're going to get in, you're going to get some level of gain, and then you're going to come back out. I would assume if we're talking about euphoria, because euphoria is, I would say, quite irrational. And we know when that clicks over, I would now be fearful when others are greedy and greedy when others are fearful. My now honed instinct for that would kick in. So I think euphoria, my perspective is the willingness to invest in illiquid things that have a beautiful long-term future. So the problem with AI is that to get liquidity in my cycle of time, which is the 2020-26 timeframe, you need to have been investing three, four, five years ago. If you're talking about equities, it takes five to seven years to go IPO for a company. So if you're putting money into a Series A startup today, you're not going to see any liquidity until 2003, you know, time for well after the bull market. Even though on paper, your thing might be up. You can't actually sell it, because it's not liquid. Now, obviously, I do a lot of cryptographic token investing and stuff. Again, if I was signing a term today, due to lockups and whatnot, I'm not getting my tokens until maybe 2006-2027, which might be a little bit too late for me on the cycle of time perspective. So to the extent that I can, I want to participate in my theme, which is AI and crypto, in a way where I have liquidity by 2025 and 2026. So that, when I get the feeling in, you're going to see something, I don't know what that something is, whether it's just something that looks mispriced, like, I don't know, FTX has Tom Brady and a basketball student, right? This exchange never existed two years ago. Now, now has our logo on top of in Miami and Tom Brady, one, some would say the biggest American football player ever is now stopping for them on TV. That looks about strange, right? This is going to be something that looks a bit strange. That's going to tickle your mind. You're like, huh, that doesn't make any sense. Maybe we've gone too far. When you get that sense, you want to be able to go to your portfolio and liquidate things. Now, the euphoria is that I believe that, you know, AI is going to be such as a transformative thing that I'm willing to give somebody some money and not see it for a very, very long time and not be able to liquidate it at all. And therefore, you're going to get caught off sides when the market all of a sudden goes, okay, well, show me the growth. Show me how you're going to generate enough earnings to pay me back a hundred times earnings in video. Show me all the people willing to pay real money for these AI solutions. Show me how your startup has any defensibility against OpenAI or BARD or any of these other large initiatives that could essentially just, you know, just to mediate your little plugin on top of their large language models. Show me the money. When the market starts saying that and you can't liquidate, you're wrecked. Because then the market's going to start asking the question of where is the revenue, where are the users or where are the users that are actually willing to pay real money for the product? And that's usually the end of that particular bull market. And things just start falling in bed because there's just no liquidity and people can sell what they can. And so, and the game is up. Now, obviously, the out of the wreckage comes, your Amazon was down 90 something percent from the high in 2000 or 2002 or whatever it was and then rockets up multiples and what it was worth. But the majority of us are not to be able to find the Amazon's. We're going to be finding the pets dot com. And so that's the game. So it's trying to, trying to invest in the theme and the liquid vehicles available and not getting the caught up in the hype and putting your money into e-liquid things that you can't sell when the mood turns. That's really interesting. So with your AI stuff, you're planning to be in a position where you are liquid by the time that that euphoria peaks, you see the FTX moment and you exit. So you've, this isn't something where you're going to wait for that first moment where they say, okay, we're printing money and then you're in, you're already deployed in some of the places that you're expecting to be ready to go at that time of euphoria. Yeah. So thankfully I have the capital position to do that, right? I can pay my bills with my income from just stuff, right? So I can actually be a little bit more early and wrong on things because I don't need the money. But for somebody who does need the money, you're not going to have that opportunity to have invested in an AI startup or some crypto thing years before and now we're receiving liquidity at the top of the market, you're going to have to be very disciplined to participating in the things that you can know you can buy and sell on a day's notice and not get suckered into your boy down the street. He's got this new AI thing he's been cooking up and watches lend him some money or invests in his startup and in seven years he's going to go IPO, right? That's what gets you in trouble. Yeah, you can buy the liquid stock and it goes on 90%, at least you can try to sell it. You can't sell the term sheet. So that's where people get in trouble with buying the liquid stuff that's predicated on the theme continuing forever. Okay. So that is the first part of the wave. Everything goes up. Looks like it's going to last forever, but then we get the big explosion.

AI, the party, and the explosion (01:51:23)

We lead to something like the Great Depression. How does that party end? Just all the money got poured into the new hype thing. Let's say it's AI and what makes the music stop? Well, if we've already built up, we've already put the money to do yield curve control and the system is still buckling, whether that's the price of oil is $1,000 a barrel now or something like that. It's going to be some energy component of it that or the cost of end-of-life care is millions of dollars. You can't print health care. You can't print oil. So these are the things that are going to go up massively at price and then the system breaks because people are like, "Holy, hold on a second." Yes, the government bond yield is 2.5% of the baking system is solid on a nominal fiat basis, but it costs me $10,000. I feel it's my gas tank to be up to use here. Then there's social unrest because I can't get enough to eat or you've broken the promise of the lifestyle that I'm supposed to live being in this country, what I was promised to vote for you and then no longer going to be there. Then it's okay, well, if I don't have an internally, let me go out and get it somewhere else. Don't worry, everybody. We're going to go over there and take those shit and give it to you. Support me as a politician. Trade no longer becomes a way in which we acquire the things we need, we resort to force. Then that's, unfortunately, how we lead to conflict. When you look at that, is this a US-China conflict? Do you see that going hot? Hopefully not. I can't pronounce her last name. Pippa and something rather. She coined the phrase a "a hot war" in cold places, cyberspace, the Arctic Circle space. These wars going on right now, these different views that are not the same as boots in the ground in the kinetic conflict. What's more important today? Owning territory or owning your citizens' data. There's different things that we consider important and the substrate to our modern life. If we are in this new AI world, your data is more important than going out and acquiring territory. It might be that the war is not, shoot them up on some border, but it's aggressive hacking between different countries, trying to ensure that they have access to certain data or their AIs are able to operate in certain fashions. It could be a different type of war, not exactly the same war that we're used to. Maybe that's even more dystopian. I'm hoping that we don't get into, I'm just going to go take your shit and maybe get to the nuclear situation. But again, whatever it is that countries believe is the good that they need to provide to their people to stay in power, they're going to try to go out and take it for some of the AIs. I'm going to set aside the most dire stuff largely just because I hope it doesn't happen. I don't know, just like the best thing so rarely ever happens, I think the worst thing so rarely ever happens not that it doesn't happen. I'm certainly a student of history and am well aware that things do actually go off the rails. But let's take a scenario where we don't end up in a hot war, but we do get that rubber band snap effect. We just printed too much money. Gas tank is way too expensive to fill. We do have the social unrest. Government does lock things down, put in capital controls. We do more silly things like sanctioning countries and so they're terrified of buying our debt. And we just end up in a position where other countries are incentivized to begin to break away from the dollar.

De-dollarization (01:55:32)

Do you see a real threat to de-dollarization? And if so, how does that impact the average person? So de-dollarization negatively impacts the financial elite of America. It could have zero if any impact to the average American. Because I've argued in some essays that the current system of the fiat financial system that works in America doesn't really benefit the average American. It benefits New York and San Francisco and LA, right? It's essentially the coast. People who are in finance, people who are in tech. The average in America has a place as a great land mass, right? It has enough food to feed itself. It has enough oil. I think the US is either number one or number two largest oil producer in the world, right? It is, which I was surprised by. It's protected by two oceans and Canada and Mexico, you might as well just call part of America, right? And if you count the Mexican population and growth in terms of their demographics, America actually can hit the replacement rate of, like, was it 2.05 kids per woman, right? So as an economic unit, America is unique in that it can become an otarchy. And it basically was until World War I. And so it can go back to that place. But the current crop of people who are in power would lose standing in that sort of situation, which is why they continue on carrying them out with the value of the dollar is because their wealth is international companies where half the business is abroad, where the workforce is in China, Vietnam, wherever, right? It's not in America. So de-dollarization is, you know, playing this big thing and America needs to protect the dollar, but for who? It doesn't actually benefit the manufacturing worker, the UAW, you know, union worker or the UPS truck driver. I mean, so it's good to question of what the political system is there to benefit. Who is it there to benefit? And so America and the de-dollarization, it's, you know, banning about this super bad thing. And yes, it's bad for some people who are tied to the fiat financial system and that's where their wealth is. But if you want to think about it from the average American person made in America, that's great, wages for the bottom 50% rise. They have better purchasing power. Yes, stuff is more expensive, but at least they're able to get it. There's lots of parts of the world in Europe is probably the most fucked, where they don't have population growth, they don't have energy and they don't have enough food. That's where you probably could see a big internal conflict again as the edifice of the euro is crumbles, where these countries are like don't want to be tied to a bunch of faceless bureaucrats and Brussels who tell them what to do. Do you see that as a real concern? I didn't realize that Europe was higher risk. Yeah, I think Europe is higher risk because again, it's dying like the worst of the Western world. It doesn't have energy security. It doesn't have food security. I mean, most of productive region of Germany was power by Russian gas, right? The Ukrainian bread basket helps feed a lot of Europe, right? North African oil and natural gas helps keep things running in most of Europe. And so removing those things, the euro's fucked. It's a construct, this I'm quoting, paraphrasing macro guy, Felix Zuloff. The euro was created to keep France strong in Germany a week. And it's attempting to paper over these differences in economics with this structure that just doesn't work. And it'll come to a head when all of a sudden there's just not enough stuff to go around. And Europe's traditional trading partners are like, well, if you're going to be aligned with the US, then we're going to allow you to sell yourself on a preferential basis. There's no longer any Russian gas. There's no longer a bunch of West African countries willing to sell you stuff cheaply. We're just going to let you figure it out yourself. And what's the answer? Print more money. But again, with the euro perspective, you have a bunch of countries that think that they are some sort of democratic, you know, pulp pollities and the population might be why we have the euro anymore. But there's obviously an elite that likes the euro and that could come to blows. Okay, so I've talked to Ray Dalio several times. And one of the things that I'm asking him routinely is because he sees so much disruption coming, what do we do about it?

Where crypto enters the thesis. (02:00:11)

Where do we go? And he keeps drumming this idea that what matters is how people treat each other. And he said, you want to be somewhere where people are treating each other well, there's rule of law that you can trade. What is the move? And is this how crypto enters your thesis? What is the move if the western world does get dramatically disrupted either hot wars and cold places or capital controls? So the government is trying to lock things down, yield curve control, you know, they're just doing all of those things to continue to prop up the system. What's the play? You obviously are American, but you do not live in America. Yeah, how do you think about that step? And is cryptocurrency part of that? So the easiest thing right now is to protect your financial wealth, right? For the first time in human history, we have a financial system that is not predicated on government violence. That is crypto. It's an opt-in violence free violence free coercion system, where I can opt into this system's Bitcoin blockchain based financial system. And now I have a way to transact with anyone around the world on an honest, transparent, open source basis. And I can escape the fiat system with as much as a little wealth as I deem appropriate. Right. So now I have the ability to take my wealth outside of the government system. And unlike gold, nobody knows how much crypto I have. I can store my crypto in my head. I can memorize my private keys in my seed phrases and restore any of my wallets. And that that I do this, but you can do it if you're good at that. So you can hold as much wealth that you could in Fort Knox in your head. That's absolutely revolutionary. And so that's, we have the financial freedom if you choose to use it. And so once you've obtained financial freedom, then it's about, as Bellagie says, choose your tribe. Where is a place that has the same ethos as you? Has a good food supply, the weather, you like the weather, but most importantly, you like the community of people who are there. And there's no prescriptive of where that is that's that's very personal. Maybe it's where you are right now. And the only thing you need to do is obscene your financial freedom such that if the borders close or whatever, you're cool, you're able to maintain purchasing power and energy terms. And but you're around a community of people that you like and love. So I think, yeah, the community aspect is a very personal one. There's no one right place. The financial aspect is if you have the ability to do so, get your financial freedom for the amount of capital that you wish from the fiat financial system. If you believe in the thesis of me and others and that the math is going to collide with bad politics, then now have financial freedom, which gives you the ability to move if you want to or not want to. So the thing I think a lot about with this is timing. I'm obviously a big believer in crypto. But I really don't want to leave where I'm at. And I'm not only am I in America, which does not strike me as the most crypto friendly place. I'm in California, which is definitely done some legislative things that I have found questionable. But man, I don't want to leave. So is that is that how they get you like that you just wait until it's a little too late or did that play into your decision to move out of the US? No, I'm going to add to the US because it's just not a place that resonates with me personally, right? I love being in Asia. I love the people I love the culture. Yeah, just, you know, my place, the economic opportunity, all that kind of stuff, right? For some people, America's great. And that's fine. It's a very personal thing. But yes, there's a lot of inertia with people and money. They understand how this monetary system works. Bitcoin didn't exist 20 years ago. You're really going to take your hard-earned money and you're going to put it in magic internet money with a bunch of people with like, pikey penguins and crypto punks as like avatars who are like debating macroeconomic policy on Twitter and other social media platforms. You might think these, you know, we're a bunch of fucking clowns over here, right? And so like, why would I, why would I trust this financial system versus the man and a woman in a navy suit with an ermine's tie and a pair of Louboutins on, right? So it's all these things that factor into whether or not you trust a financial system or not.

On paper. (02:04:56)

Again, very personal. But the unfortunate part is that most people aren't taught the math. They don't understand how a bond works. They don't understand how a bank creates an removed credit from the system. They understand why mathematically this cannot continue the way it's going and that there will be a reckoning and history has told us the exact playbook they're going to use. It's not as if they're hiding it from us. There's paper, a bottom paper written about exactly how to financially repress a population to make sure money doesn't leave the banking system. To use the banking system to purchase the government debt at a level the government can afford that is below the level of growth in the economy, such that the government profits. This has all been written about. You can read it on the internet, but most people are too lazy or too distracted or they work a job and they're just too tired to open up a book and read. But it's all there for you to read. And if you read it all, you'll understand very quickly that the situation cannot continue and you have to do something. And that something depends on your financial position. Obviously, I'm in the position to put a lot more of my wealth in the crypto and not care.

Inflation impacts indiscriminately. (02:06:01)

So much for the price goes. Maybe you're not. The most insidious part of inflation is that the poorer you are, the harder the more percentage of your income is spent on energy, therefore the more inclined you are to become a degenerate speculator. Because the little bit of money you're able to save, you need to lever up so much just to make an impact on the depreciation of your wages versus the cost of food and fuel that you make bad choices, especially if you're not educated about what these financial markets are. Because that's been essentially government policy globally is to keep people in the dark about how money works. So it just blindly trusts the supposed pros and the power. Yeah, that's something that I heard you say that really hit me, which is that inflation makes a speculator out of all of us. Speculation is a one thing that really, I find super unnerving that I to me, speculation and gambling are basically the same thing, like people are just taking a guess. How is it though that people cannot understand the system and yet still feel the force that compels them to be a speculator?

Financial Speculations And Cryptocurrency

Why do people turn to speculation? (02:07:06)

Is it that they're looking at their wife and their kids and they're like, I'm only going to get a 2% raise, but I can feel that that's not enough? Like, I don't even know if they like, it doesn't seem like they would think through all of that. So what is the instinct that kicks in that makes people speculate? Because I want to, I know I can't earn my way out of this. I can work as hard as I want. I can put as much overtime, but I'm only going to make so much money per hour, period. But I watch the TV and I see the successful mostly men driving the fancy car as a nice clothes, whatever. And six months before, he was on the street, whatever the story is. It's the Horatio Algar, you know, rags or riches. Very little effort. There was this thing I did. It was trading stocks or whatever it is, right? Usually it's financial markets because things move so fast and can apply leverage. And yes, there are people who have done that, but the majority of people who try that fail because it's very, very difficult to do. And so you're desperate. You're like, I know I need to uplift my economic earning potential, but working my job in my lane, I can't do it. It's just impossible. I see myself losing day after day after day. I see my family having a lower standard of living day after day after day. If I could only pick the right stock, if I could only predict where the yen Euro crosses go on 200 times leverage, if I could only hit black five times in the roulette road, if I could only, you know, go to the casino and play crap, if I could only and then be spiral out of control. Yeah, it's interesting. The idea of creating a financial system that people can, and I'll use my words, that people can bet on to create capital, to move capital into the system. So if I'm a company and I'm trying to grow, I could say, hey, who would like a piece of this? I don't even have to offer a dividend, like dividend stocks, I understand because they actually, you're getting profits out of the company. That makes all the sense in the world to me. When I was first, when I was in my 20s trying to wrap my head around the stock market, I was like, okay, so wait a second. Some of them are baseball cards and some of them are dividend paying stocks. That was like, that just made sense to me. I was like, okay, well, sure, like if this thing, which does not pay me a dividend, but if I can get somebody to pay more for it to own it for whatever reason, then I can, which is that they think somebody else is going to buy it from them. Now, all of a sudden, that company has access to capital. I see, well, that's good. I have a chance if I can actually sell it to somebody, then, okay, that makes sense for me. I'm able to make more money. It's really a genius system, but hiding inside of it is the greater full theory of, well, wait a second. If the stock isn't paying a dividend, then if no one else is willing to buy it for more and the number is not always going to go up, I mean, it's never always going to go up, but it can go up for some companies for a very long period of time. But it's really ingenious. But yeah, that the element of speculation, the element of I have to, the element of, I don't know what I'm doing, but I'm going to yellow in anyway, it all makes me very nervous. So one thing I hear people say a lot is crypto is your exit from that system where because it can't be inflated and this is the thesis with Bitcoin and again, stop me if I go awry. Bitcoin has a finite supply. Going back to one of the things you said very early on is that it's risky stuff, but it's a fixed supply. That idea of it's a fixed supply, there's only 21 million of them. They're not going to be any more made. They can't be more made cryptographically. So, and therefore, if everyone agrees that it has value and I put money in that, then that money should maintain its value because it's not going to get inflated away. But is that really an exit from the system of having to speculate or is it just another bit of speculation? So you can speculate in crypto absolutely completely. There is all, you can speculate in Bitcoin itself, right? You know, you put a lot of your wealth in it. It's very volatile, goes up and down a lot, right? So when you're removing yourself out of the spectator category, if you're putting a certain amount of money into crypto, for example, and you say, I'm going to assume this goes as zero and I'm not going to care, then you're not speculating, right? Respectly on a future, but again, your lifestyle is not going to be impacted. Like the worst part about speculating is, I need this to go up because I need to buy my dinner tonight, right? And so that is when you get into problems. But yes, speculating on more human humanity getting into a new system and that's this and being worth more because there's a bigger community, fine, but just choose the size. It's all about sizing. No one knows the future. We're speculating every second of every day, every step we take, right? We're speculating on things. We have informed, you know, historical experience to say that this thing is less risky than the other, but none of us know what the future holds. We're always speculating. The question is the size and the risk, right? Don't put your whole net worth in into crypto where if the price goes down a little bit, you can't eat. That's not smart. Seems as if you don't put your money in the SB 500 or, or, you know, some other stock in the sea and go long, you know, too much for if it goes down 1% you can't eat, right? Again, it's all about, you know, creating a system that works for you and where your financial position is in life. And if you do want to go into the super leverage speculating aspect, make sure it's a pot of money that you could afford to lose. What's your thesis on crypto? Why do you think that it's going to be here for the long run?

Block times (02:13:07)

It's been around for 12 years, 13 years, something like that. Obviously, it's done well, but that's a pretty short period of time. What, what is the thing that gives you confidence that it's going to keep mattering? So it's a financial system that's gone from zero, right? You know, first just as black in 2009 to a system that has weathered multiple crises, right? And the most recent we had one of the largest exchanges in the world, a bunch of the largest lenders, some of the largest hedge funds, massive amounts of fraud. All this happened in the span of six months. People lost hundreds of billions of dollars in value, yet blocks kept being produced every 10 minutes for Bitcoin, 10 seconds for a three and whatever the block tends down for a lot of other currencies. The decentralized finance or DeFi movement, people were still trading on decentralized changes. People were still borrowing and selling, borrowing and lending different currencies on some of these lending platforms. The financial architecture worked even though we had one of the biggest losses of wealth and biggest amounts of financial malfeasance ever in the crypto ecosystem. And I mean, if you want to compare the amount of money that San Bankman freed and his crew allegedly stole from their customers, it would rank its one of the largest thefts, financial frauds in human history, right? All this happened. There was no bailout. There was no central bank that said we need to preserve the system and therefore, if assuming they could, print a bunch of Bitcoin or Ethereum or whatever and make sure these entities are made whole so that certain people don't lose any money. None of that happened. People lost a lot of money, but the architecture of the system worked. The community was still there. People are still shipping code. I was just at 2, 4, 9, and Singapore. The energy, 11,000 tickets sold out, basically almost took over the whole of Marina Bay Sands Convention Center for this conference. People around the world believe in this system. There's some of the smartest people in the world, whatever a map, who are willing in this system. You take a look at who are the smart people in the the scholeric financial fiat system? What's a fucking muppance, right? They're there because they've always been there. Not because they're special, not because they're inspiring. So they're not building anything new. They're trying to keep the old thing irrelevant. And so that's why I believe this is going to have staying power because the math works, the cryptographer works. But most importantly, the people are so impressive and so dedicated and so enthusiastic about what they're building. And I've worked at a bank too. There was none of that energy working on working in the traditional financial sector. We're there punching a clock, earning a paycheck, and trying to take as much risk as possible so we make a little bit of money so we can get the fuck out of there. Okay, but there is a question to be asked, which is there's regulation for a reason and that the average person, I mean, look at FTX, the very thing that we're talking about, it's very impressive to me.

Why isnt fintech more regulated (02:16:23)

And again, I want to say I am a big believer in crypto for a different reason than you, which is interesting. But at the same time, I want to face head on the things that strike me as worrisome. And this may be a feature and not a bug and we may all just have to wrap our heads around it. But there, the amount of regulation that's in the tradfi world is pretty extreme. Now I will admit the first time I realized that just because I had over a million dollars that I was suddenly a, oh, God, I was a qualified investor, it's not the term, but that I was now accredited. I was an accredited investor. And I was like, but wait, I don't know anything more about investing money now. I know how to make money. I don't know how to invest money. And so I was very shocked by that. It just seems stupid that you couldn't pass some sort of test and be able to do your thing. But at the same time, there are people get their wallet strained constantly in crypto, the amount of malfeasance just in FTX is just absolute bananas. And either crypto tends to attract those people or the current lack of regulation just creates the incentive structure where that's what's going to happen. One thing to jump in there is FTX was regulated and I don't know how many jurisdictions around the world, they had licenses all around the world. Right. So the notion that regulation would have stopped the FTX is patently false. They were highly regulated. Not as regulated as a bank, I wouldn't say, but they did have regulators around the world that had given them licenses and they were supposed to do things in a certain way. Right. If you want to take the other example, let's take a look at Credit Suisse. Now they didn't still need what is money. Right. But Credit Suisse was a global, systemically important bank, a G-SIP. Right. And yet the most highly regulated of regulated industries in the world banking, the most highly regulated regulated banks, Credit Suisse, in Switzerland, fucked up and blew up and required the Swiss taxpayers to bail them out for umpteen billions of dollars. Right. So financial regulation, when the incentive structure doesn't work, is useless. It doesn't solve anything. It makes you feel good at night. That's fine. You can get your money back on a nominal basis. But what happened? They printed more money and made us all poor in the result. So I would say that financial regulation, yes, it's nice that as a bank, it's going to be run in a certain way. But it doesn't prevent bad people from doing bad things. It just makes the, if someone's going to run a scam, it usually makes it bigger.

Wills crypto replace fiat? (02:19:06)

So what do you think? How does this all begin to settle out? And I'll give you my thesis. The reason that I think that um bit coins specifically and crypto in general will be here is I believe that tomorrow is going to be more digital than today. I believe that every generation grows up like a fish in water. And when you're born and crypto is just a thing and you don't even think about it, uh yeah, it would not make sense to you that that is somehow less valuable than uh fiat money, especially when everything you do, you buy your skins and video games into you. Those are as valuable as your real clothes and you love them just as much. And um so you know when I think about kids and v bucks, it's they're just digital natives like through and through. So I think for them, it will just make all the sense in the world. And so once something is digital, then why wouldn't you want your money to be digital as well? Then it becomes a question of control because hey, the government will be more than happy to come out with a CBDC. Uh and the that then collides with freedom. So I don't know how humanity is going to answer that question. I'll be completely honest. When I think about, I think people like being taken care of, I think there is a heat like when you read the rhetoric from 1776, like those guys were ready to die for freedom. We're not there. We're not there. Like right now it is just a different time, man. And so I think people will want the convenience of something digital. I think money will be digital. I think people will live in digital worlds. I think they will buy digital goods. But I don't know where we're going to settle on a desire for protection. Like even myself, I, it wasn't until SVB looked like it was going to collapse that I finally was like, you know, I should just get, I didn't have any direct exposure to SVB. But it made me just take everything off every exchange. But then when you look at the realities of cold storing and you realize that you have to store them in different places and not at your house. And it was like, oh God, like I just felt so, I still feel so paranoid. I'm going to forget where I put something or half of my key, which is in, you know, this place. Like I forget, which one has what? Oh God, like that kind of stuff terrifies me. And so what do you think about that? Do you think that people will truly, while they'll embrace digital money, I think most people will agree to that. Do you think they're going to care enough about money privacy, which is something I've heard you talk a lot about with Bitcoin? Will they care enough to make Bitcoin, which maybe is trying to be choked by the government and all that? Will they do it or will they just take their CBDC? So I think most people don't care about privacy. And that, I know this because they have a mobile phone in their pocket, a smartphone. A smartphone is tracking you. We voluntarily have given the most amount of information about ourselves to Facebook, Google, Alibaba, we chat, all these things, right? Because we want community, we want to communicate with each other. We want to look at third straps, whatever the reason is, right? We've done this. The government didn't force us to do this. These are private companies creating these products. Right? So most people, as you said, it's just too much to be financially independent to actually be your own financial institution for a lot of people is, is just too much. And they're going to stay in, in this system. And I like to say that there's a, there's a flood coming, this, you know, inflationary, maybe pseudo collapse with a fiat financial system. There's a, there's a, Noah's got an arc of, you know, Satoshi down there with Bitcoin, 100, unfortunately, most people are going to drown because this isn't, this isn't for them. Right? And so, we move it up to the government aspect, crypto in itself isn't a problem. The problem is that the people own it. And it's not the standard individuals and firms that are used to owning the new levels of technology. And that's their issue with it. And so now we're seeing that this, the experiment has worked so far. We have however many millions of wallets created. We have however many trillions of dollars worth of transaction that have been completed on these systems. They work. It's more sound than the traditional finance. It's faster. It's cheaper. Fine. Well, let's not have a bunch of muppets running around the world who under a bunch of old bald dudes, singing New York, London, and Paris and whatever, owning this thing, we want to move it back to who should be owning this. So we're going to now allow the traditional financial players to launch things like ETFs, right? Which is a very easy way for everybody to own the financial return of Bitcoin. Very important, I say the financial return, not actual Bitcoin. As you said, I don't want to marry private keys. I don't want to worry about where I put my wallet. I guess you want to earn that inflationary protection aspect of Bitcoin, but I don't necessarily care to really experience the real financial freedom of it of owning my own financial system in my pocket, in my head, right? So I'll just put some fiat into the BlackRock ETF, the Fidelity ETF, or the Pick Your Large Essay Manager, wherever you're from ETF, right? You don't own Bitcoin. You don't care about custody. You're like, "Oh, the price goes up and down on the screen. I beat inflation." But guess what? My money, what I want to sell comes right back into fiat, right back into the banking system, right back ready to be financially repressed to make sure that bonds are purchased by the banking system to keep the governments afloat. Now, fine, Bitcoin is an open architecture. Everyone should be able to build whatever financial products they want. The question then becomes, and I don't know the answer to this, is will so much value and currency be owned by these centralized asset managers who are essentially arms of the tri-fight ecosystem that the underlying fundamentals of what Bitcoin is, the privacy, will those be altered? Will a BlackRock support through maybe ownership in large mining companies, different sorts of improvement protocols that detract from the immutability of the money or the censorship resistance or the decentralization, right? So while we as traders are cheering, "Yes, ETF, ETF, ETF, that's going to bring all this money into the system because now people who want to escape inflation understand the value prop of fixed supply and all that, but just don't want to deal with the technology aspect of a cryptographically bare asset because the human goes bad with mid-passwords and whatnot, people don't want to deal with that. They want to put their money in the ETF and we're like, "Yes, great, more money in the system, number go up, everybody's rich, but are we inviting in something that's going to fundamentally change what Bitcoin is because now they're going to have a say through larger to ship in mining pools or they're going to run a bunch of nodes or they're going to have control over the price." It's an open question and this is going to be the real crucible we're going to have to face as an industry of determining what is Bitcoin when now we have Tratify who is a stakeholder in this system. How do we deal with them? How do we maintain this ethos that makes Bitcoin a valuable, this immutability, this money, this the hardest money ever existed with a system that is basically trying to capture as much capital and sequester it so that it can pay the inflation tax to make sure that the government stay afloat. I don't have the answer to that, but that is the real crucible that we're going to have to face in going forward because as you rightly point out, it's just pain in the ass to be your own financial institution. It's interesting. That one feels easy to me. If the money really stands for freedom, then you have to let people do what they're going to do. I saw this in web 3 a lot and there was a sense of we the vanguard of web 3 are going to decide who is web 3 enough and if you don't pass the purity test, then we don't want you in here. It's like you're never going to be able to get something to scale by trying to impose culture top down. Culture is always, and I mean always, going to arise from the bottom and you can manipulate it through media and stuff like that. But at the end of the day, man, that what people internalize is going to become the culture. The youth will always get whatever culture they decide they want. It is just an unstoppable force. Yeah, to me, it's like Satoshi created the thing and then the thing is going to become what the thing becomes. If there is a way to control it, then it will become no better than the thing that it's trying to replace, which is already something that's being controlled. And the whole point is, you think you want to be able to control it because you think you have all the answers and you're going to do everything right. And the reality is as soon as somebody can control it, then they will control it and use it against you, which is the whole point. Like, I mean, just to get myself in hot water here, when I saw what was going on with the Canadian trucker convoy, I was like, yo, they are freezing people's assets that donated to a cause. Like that's crazy. I couldn't believe it. That that really got me way more interested in having something that I could control. Now, I'm not convinced the government can't use force to get what they want at a crypto because at the end of the day, look, if the government puts a big enough gun in my face, here's my crypto. So, you know, I get it. It's easier. And if I leave before they start breaking out the guns, then fair enough. But God, I don't want to, I don't even want to contemplate a world that gnarly.

Price of BTC (02:28:58)

Yeah. I hope it never comes past. You and me both. So, I have to ask, where do you think Bitcoin is going? Is this something that, you know, breaks 100,000? Is this something that breaks a million? Is Michael Saylor going to be a hero or the world's biggest L? What do you think? So, my working model is that, you know, we're going to continue chopping around 25, 20, 30,000 this year as we get to some sort of financial disturbance. And people recognize that real rates are negative. If, you know, if government to growing, if economy is growing at nominal rate of 10% and we're only getting 5%, 6%, even though it's high, people are on the margin going to start buying other stuff, crypto being one of those things. So coming into 2024, either we get a financial crisis rates go to zero or we keep raising rates, but not as fast as governments are spending money because they're just trying to keep people doing things. And the rates are negative that we get to crypto around 70,000 by then 2024. And that's combination of the crypto havenning event, right? Maybe there's going to be, you know, a few ETFs launched by large asset managers in the US and Europe and China, maybe Hong Kong to be specific. So we regain the all-time high to the end of 2024. And that's when the real fund starts, right? That's when the real boom market starts. And so my mental model for where we could go, I think we're going to go somewhere between, you know, 750,000 million dollars in Bitcoin on the upside, right? And we're going to, whatever the level is, there's going to be a round number, I was going to be focusing on it. Just like Bitcoin hit 69,000, 999 didn't hit 70,000. And then it's going to go and just crash, you know, 75, 8, 90%, whatever it is, right? Doesn't matter. But yeah, somebody upside target issues, so the 75, 750,000 million dollar level, 2026 timeframe, just because, again, I believe this is going to be the largest market in financial, bull market and financial assets we have ever seen in human history. So not only will Bitcoin be at a ridiculous price, you know, now is that going to be a ridiculous price. S&P will be at a ridiculous price. You know, pick your, you know, stock in a scene wherever you're, if you're not in one of the, in the Europe or the US, that'll be at a ridiculous price, right? Certain types of property, ridiculous prices. So we're going to have a lot of ridiculous prices out there and not just in crypto. Yeah, that that will be a weird moment. And with people thinking that the party is never going to end, of course, it always does.

China clamping down. Why? From the voice inside China's brain. (02:31:41)

Let me ask you so that I can help better understand the sort of way that this all plays out at the global level. What, what is with Hong Kong and crypto? China clamped down really hard. It seemed like that was a really bad sign for me. I was like, whoa, this was the thing that I was concerned about that a government would be able to effectively eliminate it from its country. Not that they'd be, no one trying to never eliminate a crypto, it never eliminated crypto from China. Tell me more. So the, the, you know, if you want to think about from the Chinese government perspective, the thing that they most, they care most about is social stability, right? And so as everyone becomes a speculative because they're desperate, right? The last thing they want is a bunch of modern pops rolling up and gathering in groups with a communal grievance. It could be crypto, it could be anything, right? And we know all this stories, you know, has played out over Chinese history. They do not like this. And so seeing that, you know, that could cause disturbance in China and also the energy aspect of Bitcoin mining, consuming a lot of electricity that could be used to do other things, they basically made it very hard to trade it. So the exchanges are left, you know, Chinese people still own Bitcoin, that hasn't changed. You can't mine it. There's no exchanges fine, they can't really acquire it. But at the end of the day, I think the Chinese government sees that this is a technologically sound thing. And they want more of it in the Chinese diaspora that they can control. It doesn't necessarily need to be in a government coffer. But the Chinese government thinks if you are Chinese, we own you as a person. You are Chinese, you have a Chinese government, therefore you are a subject, no matter where you live around the world, ethically speaking. And so if you think about Hong Kong, which is part of China now, and always was, but now it's very explicitly part of China, but it has this Western capital, Western Eastern capital reading point. If they want to experiment in allowing a more general ownership of crypto, or if they want to allow certain types of Chinese individuals to own crypto through Hong Kong regulated finance institutions, which essentially means that they're controlled by the Chinese government, in the same way that Black Caucus control by the US government is no different. Then they're going to allow these companies to buy a whole crypto, because at the end of the day, as long as the crypto is inside of China, they believe that they can control it. So why not let a part of the country experiment with this thing, let people own it, let people buy it, by controlling it in terms of the way firms are able to acquire users and let those users own crypto. So that's why there's been licenses issued. The Hong Kong government is very positive on Bitcoin. The Hong Kong government is part of China. Therefore, they would never do this if it was not blessed by blessed invasion. It's part of a national prerogative for this particular kind of China to be positive on crypto. So it's similar sort of situations in how to describe the BlackRock ETF. Larry Fink and BlackRock having a trillion dollars of Bitcoin under its custody is the same thing as Bank of China launching an ETF on the Hong Kong Stock Exchange and having a trillion dollar group. They're both essentially in the orbit of either the United States or China, and that's the goal. If this technology is as transformative, if it is the hardest money that's ever existed, wouldn't you rather your citizens have it rather than someone else's? And so as the American political establishment decides what they want to do with crypto and then certain she drives companies out of America out to the rest of the world, China's already gone through that. They've already purged the exchanges, starting at 2017 and culminating in 2020. Now they've gone the other direction. Okay, let's try to control this. That's try to permit certain types of ownership through firms that we can control in Hong Kong, which is our testbed region for financial innovation and give the Hong Kong economy something to draw in to expertise for capital because Chinese government believes in technology. Crypto is a four-foot of financial technology. Why not bring these smart people here, let them experiment, and we think we can control what they do. So that's in my opinion what's behind the Hong Kong story. We're going to see how that progresses. I obviously live in Hong Kong, I love Hong Kong. I hope that there is a vibrant cryptocurrency ecosystem there and that people are able to experiment with different things because there is a task that governments support for the technology. We'll see what happens at the extreme. If all of a sudden there's all these firms who trade a dollar with crypto, I don't know, but at least there are some people who are given the space to at least experiment and try it versus other places in the world where they're being pushed out and shunned. I'll be very interested to see how it plays out. I was super intrigued when China opened that back up in Hong Kong and made me realize, okay, maybe they're not as negative as I thought they were. Like you said, this is really an element of control, which does make me super uneasy in terms of just governments having more control than I am comfortable with. But I fully recognize that the way that it's looked at and as somebody who lives there, you can certainly speak to this better than I can, that it's not necessarily one is better than the other. They are just different. But man, from my perspective, it just seems better to be free, but I won't try to export my values. So one thing that I want to get a better understanding of is I had Peter Schiff on the show and in the comments, because he was like right down my alley in terms of all my fears, like he was right there, everything that if I'm honest, he comes very close to articulating exactly what I think is going to happen when I just objectively look at the math of all this. And then one of the comments in the feed was, Peter Schiff has predicted nine of the last two recessions.

Counter Perspectives To Current Predictions

What if all the horrifying predictions are proven wrong? (02:38:09)

And I had to laugh at that. So, you know, we've the backdrop to our whole conversation has been a sort of mutual acceptance that yeah, all hell is probably going to break loose that we think we have a pretty good handle on just the physics of the math and that it can't go up forever that you using my analogy, you will pull this rubber band back until it snaps. There's just no way around it. What if we're wrong? So what if we're wrong? Well, if we're wrong, if there is a energy miracle, like we discover some form of energy instantly commercialize it like think of how long it took for us to get to a car in every household in the US. Think of how long it took us to electrify the world, even though these technologies have created in the 19th century. But that already assumes we can't have a soft landing. What if we just they get it right? If they get it right, then you earn, you're where you earn now, right? The S&P is up. I don't know. Let's remove the tech stocks, right? It's up six, seven per eight percent this year, whatever it is. Right. What could have made the same one say you could have made the same amount. I can make the same amount in bonds and literally overnight lending to the Federal Reserve. Zero financial risk. I get paid five and a half, six percent. Why take the risk? If they get it all right, great. I'm taking I'm getting two thirds if not 75% of return of in the US stocks with taking none of the market to market risk. So it's actually makes zero sense to own stocks if you believe they're going to get it right because stocks aren't returning enough. It's not like the S&P is up 25% and cash yield six, right? So from a risk adjusted perspective, if they get everything right, then I'll keep moving the only stock I should have done in the video. Fine. The rest of the market is dog shit. Why haven't played the game? Put your money in a money market fund. Take your money out of your zero percent, you'll be making count. Put it in a money market fund. There's just no point to trading stocks. If they have it all right, what would have to be true for you to say, yeah, I no longer think there's anything looming on the horizon. There's no financial crisis coming. They'd have to get I assume the debt to GDP down below 130. I assume they'd need to start pulling some money out of the economy without it causing any sort of secondary knock on effect.

Potential Shifts In Economic Perspectives

The conditions that would turn Pepes' perspective 180 degrees. (02:40:42)

What else? Well, so the US government right now is running the playbook they should be running, which is nominal GDP is at 9%, but the government debt yields four and a half call it. So the government's making money. If it could continue to keep money in the bond market, in the banking system, at these rates and at this growth level, then the US government, at least for them, will deliver themselves over time. The problem is that capital could move. So we're making the assumption that capital doesn't move. So for the go to the golly luck scenario, number one, no capital leaves the long term bond market when they have a negative real yield. Number two, there is a energy miracle or we decide that nuclear is the next thing and we run out to invest in all sorts of different types of startups to basically miniaturize nuclear reactors such that instead of pumping oil into our car, we have a small little nuclear reactor in that power as our vehicles or we're going to build all these different power plants. That needs to happen immediately. Those are the things that was okay, maybe I'm wrong and we're going to have an acceleration in energy productivity. Therefore, I should own a company that makes real stuff apart from semiconductors. Otherwise, I'm just putting overnight bonds because at the second they cut the rates, cool, I don't care. I don't lose any money. I just take money on the bonds and they go buy stuff. But I'm definitely not going to own long term long end bonds. That trade is negative EV, negative expected value in my perspective. I don't see how they get all these things right before money leaves the system saying, fuck this, I want 9%, not 4.5. So why own the long end? Just put all your money in short term bonds. If you believe that they are going to get itself everything, just put your money in short term bonds and take no risk. Arthur Hayes, this has been a wonderful conversation. Where can people follow you? So on Twitter @cryptohaze, I have a sub stack as well, same handle @cryptohaze. And I write essays probably twice a month on macro geopolitics. Obviously, there's always a crypto angle. But yeah, that's where you can find me. And I speak globally at conferences around the world. All true. Well, thank you so much for joining me today. Everybody, if you haven't already, be sure to subscribe. And until next time, my friends, be legendary. Take care. Peace. If you really want to understand the complex financial landscape we all face, watch this conversation with biology, Shreena Vassen. The problems go all the way to the bedrock of the financial system in terms of treasureries being the new toxic waste. It's going to be at least as bad as he does need to probably worsen that.

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