14 April 2021

On today’s episode, Preston talks with bond expert, Greg Foss, about the potential impacts of Bitcoin on the global credit market and overall financial system.



  • What were some early lessons that Greg learned that shaped the way he sees the investing world?
  • How does he think about the long-term debt cycle?
  • How can Bitcoin potentially impact the fixed income market?
  • How can convertible bonds become a catalyst for further Bitcoin adoption?
  • What are his thoughts on the contango trade?
  • His thoughts on the current sell-off in bonds and what it means for yield curve control.
  • How to think about sovereign default swaps and how it can be used as a model for valuing Bitcoin?
  • How governments will start to view Bitcoin if the trend continues.


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  • Greg Foss’s article: Valuing Bitcoin w/ Credit Default Swaps.
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Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh (00:00:02):
Hey everyone. Welcome to our Wednesday release of the podcast, where we’re talking about Bitcoin. As most people know, I love mixing Bitcoin with macro, and specifically, I like talking about not only how it’s going to impact the gold market, but more importantly, how it might impact the fixed income market. So what better guest to have on than our guest today, Greg Foss, who has more than three decades of experience as a fixed income investor, to talk about the potential implications of this current market setup. We talk about the long-term trend. We talk about UBI, yield curve control, forward guidance, more QE, credit default swaps, and most importantly, how traditional investors will interpret these signals as an ever-expanding Bitcoin price just seems to keep on coming. Get ready. Because Greg brings some serious fire during this discussion and without further delay, here’s my chat with Greg Foss.

Intro (00:00:54):
You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now, for your host, Preston Pysh.

Preston Pysh (00:01:16):
All right. Hey everybody. Welcome to the show. And like I said, in the introduction, I’m here with Greg Foss and from what I hear, Greg, everyone keeps telling me you two need to talk. So here we are. We’re going to do this.

Greg Foss (00:01:29):
I’m flattered. Thank you for having me.

Preston Pysh (00:01:31):
So Greg, I want to start off just kind of with your foundation. Early on, were you always in fixed income since the start, or is it something that you worked in the past decade?

Greg Foss (00:01:42):
It’s over 30 years and with a focus on credit and fixed income. And I did trade most other instruments, including equities. There were times when I would take equity, short positions against bond positions. We could talk about that, but yes, I’m a trader focused on credit markets and I’ve traded all sorts of derivatives, including credit default swaps, bank loans, et cetera.

Preston Pysh (00:02:03):
So when you first came into the market, give us an idea of where the ten-year treasury was at, just so we can kind of talk about this big credit cycle and kind of where you fit at that point in time and some of the narratives and that kind of stuff.

Greg Foss (00:02:16):
Excellent question. So I started my career in 1988 and the U.S. tenure was at about 14%. Let’s not argue over subtleties. The crash of 1987 was my middle year at business school in 1988 when I started working. So the crash caused yields to come in, but then they rebounded a little bit. So let’s call it 14% on the U.S. treasury. It did, as you know, hit about a 19% top in 1982-ish. So they had to come down somewhat from 19% to 14%, but in 1988, that’s when I got my start.

Preston Pysh (00:02:52):
So Greg back then, I would imagine that the narrative of rates could still go back up and hit new highs. Was that something that was still being talked about when you were coming into the fold?

Greg Foss (00:03:04):
Yeah. It’s really a bit of a different dynamic. I mean, there was Paul Volcker, he was a fair chairman in the early eighties. And he was determined to snuff out inflation. And so he just went hard on short-term rates, jacked them all the way up to stop the inflationary spiral and rates peaked out. At the time, there were a lot of different things happening. For example, the crash in 1987, the stock market crash in October 1987, that sent a ton of people for a loop because they were new things on the block like portfolio insurance, they called this thing using futures portfolio insurance. When you look back on it, it was so infantile, but this was the latest and greatest.

Greg Foss (00:03:47):
So yeah, bond math was interesting. It wasn’t a certainty that rates would come down, but the general feeling was that they would normalize from those continuous high levels in the late eighties. And then there was my inauguration, and I’ve said this on other podcasts was I started working for the Royal Bank of Canada in 1988 and it was insolvent. This is a crazy but true scenario because it had way too many lesser developed country loans. LDC. Most of those loans were in Latin America, but in 1988, treasury secretary, Nicholas Brady came out with a plan to solve the Mexican debt crisis. And it was based on zero-coupon, treasuries as collateral against the obligation. And they changed a five-year loan. These five-year loans that were non-performing, they changed them into 30 year instruments.

Greg Foss (00:04:43):
That way the banks did not have to write down the loans to market. They were backed by zero-coupon, treasury strip bonds, which at 14% you can appreciate over a 30-year term, how low the dollar price is. It’s a brilliant strategy, but it allowed all money center banks in the world to skate themselves back onsite after making these forever horrible loans to countries. And this was my first inauguration and I’m like, “Hold on a second. You don’t learn this in business school. You come and you work in the financial system.” And I’m working for the largest bank in Canada. And it’s insolvent the value of its liabilities exceeded the value of its assets, which were loans. And therefore the book value of equity would have been written down to zero if they had to write those loans to market.

Greg Foss (00:05:29):
And I looked at this and I go, “Then how is it possible this whole system functions.” And it functions because there’s a too big to fail implied put, back to the central banks, and this is no different. Manufacturers Hanover, Chase Manhattan, all these banks in New York City, which have been combined. And there have been some mergers and acquisitions, but these banks were in the same position. So treasury secretary, Nicholas Brady came up with this brilliant solution and it was my first, “Welcome to the fire Foss. You’re working for a bank. And if I ran out and told the newspapers, this I’d be fired in a second.” And not only that everyone would run me out of town because, “Oh, but the banks are also the safest things around.” Well, guys, they’re not okay. You just don’t understand mathematics. And I said, “Yes, the banks can be bailed out by the governments. And the only way they can do that is by printing money.” And that’s when I started looking for a solution to flee it.

Read More

Preston Pysh (00:06:22):
Yeah. It’s amazing to see how the restructuring is effective, the debt Jubilee, but it’s being structured. It’s all just being completely restructured and being assumed at a collective level by undertaking that reorganization.

Greg Foss (00:06:41):
Transfers of risk as you’re implying, it eventually ends up on the government’s balance sheets and that’s where it is now. It can’t go any further. This is why we’re at a particularly perilous time in the debt cycle because it got transferred in 2008, 2009 from the financial system full on to the government balance sheets. And they did nothing to solve that, they did not raise tax revenues when they had a chance to pay down their debt. And so it’s a mathematical certainty now that [inaudible 00:07:11] will debase.

Preston Pysh (00:07:14):
I want to say, what’s really fascinating about the example you just provided is the two pieces that are vital to what you’re describing is a reduction in the yield and extending the duration. You said, we went from short duration to out to a 30, and the yields went from whatever they were down to zero. And when we look at what’s happened from when you first came into fixed income to today, not just in Canada, not just in the U.S. but literally globally, we’ve seen the yields trickled down from those levels that you described at 16 percent plus.

Greg Foss (00:07:49):
You know this though. The world trades off the U.S. right? Every single other yield curve in the world trades off the U.S. treasury. Okay. You can say, “Well, that’s not the case. I’m a proud German, and that’s not the case.” And I’ll look you right in the eyes and say, “You’re wrong.” Okay? Everything in the world trades off the U.S. treasury and everyone will say, “Well, then how come there are negative rates in ECB land, but not in North America.” And you can say, “Because that’s in a different currency, but if you put everything into U.S. dollars, you will see that everything in the world trades off the U.S. treasury.” As it should, because it’s the defacto reserve assets slash currency of the world.

Preston Pysh (00:08:28):
I think an important way to look at currencies and fixed income, because they’re very closely related is just the reflexivity between them. And when you look at the amount of dollars that are in the system from a fiat currency compared to the Euro or the Yen or whatever, and you’re just looking at that size, the sheer size of it is what’s driving the impact that you’re describing there.

Greg Foss (00:08:51):
Not just domestically, but the Euro dollar market itself.

Preston Pysh (00:08:55):
I think we know the answer to this, but I’m going to ask you, because I’m kind of curious if there’s any other things that you would describe. In those early days, what were some of the really key and important lessons that you took away as a brand new person into the fixed income space that you’ll take with you forever?

Greg Foss (00:09:13):
Thanks for that question. It causes me to reflect. So when I was at the Royal Bank in 1988, to put it in perspective, the debt of Brazil and Mexico were both trading at about 25 cents on the dollar. Now, there wasn’t a lot of trading that took place, but there were trades. And not only that, when it was restructured into these Brady bonds, which was a much more attractive and formalized structure, I actually went to my CFO and I said, “[inaudible 00:00:09:38], I know we totally crapped the bed on the initial investment in these countries. But would you consider buying some more? I really think they’re cheap.” And the typical answer, not just in Canada, but this is typically a Canadian answer, “Oh no, thank you very much. I’ve spent all my money at a hundred cents on the dollar. Why would I want to buy more of them at 25 cents on the dollar?”

Greg Foss (00:09:59):
So I guess what I would say to you is what I learned from the U.S. market. And this is the market that is best at doing this. Their costs is not where they actually purchased the debt to begin with. Their cost is last night’s close. They tend to come to work within a mindset. That’s okay, everything’s marked to market. And today I got to make some money back or I’m going to make more money versus last night’s close. Whereas Canadians are like, “Five years ago, I lent this money at a hundred cents on the dollar. And I know it’s only 25 cents on the dollar right now, but I’m just praying and pleading that it goes back to a hundred cents on the dollar. And I’ll never try and correct that mistake.”

Greg Foss (00:10:43):
So it’s a combination of, you need to admit your mistakes and then you need to capitalize on the opportunities that the markets give you regardless of your cost base. Okay? If your cost base was a hundred cents on the dollar, but you do have the market 25 cents on the dollar, then you try and make that 25 cents worth 28 cents. And this is a neat thing because it is the basis of capitalism. It is an open market, determination of risk and return at all times.

Preston Pysh (00:11:15):
In my impression of what you just described is just some cost bias. So do you think that’s a cultural thing? Because you were saying that it’s more Canadian.

Greg Foss (00:11:23):
A little bit. So I moved from working at the bank and determining what the best Brady plan option was for the bank. I moved into high yield bonds. Now high yield bonds were absolutely a hated asset class in Canada. Now the U.S. had a beautiful market developed by Michael Milken and established as a return that pays you for the risk that you’re taking. In the U.S. they really believe there’s always a price, whereas in Canada, and I’ve had these conversations, or I did in the early nineties with Canadian accounts, how much would you buy, at what yield in other words, would you buy the debt of company XYZ and they’d go, “No, no price.”

Preston Pysh (00:12:08):

Greg Foss (00:12:08):
And I’m like, “Wait a minute. What do you mean no price?” And here’s the kicker Preston. And this is even more weight. They would own the equity of that same company. So there was a company in Canada and you think they know about it. It’s a beautiful, worldwide renowned company. It’s called Rogers Communications. Ted Rogers was at one point the largest high yield bond borrower in the world, not in Canada, in the world. And Merrill Lynch successfully took all of his business from Canada and issued somewhere around $4 billion into the U.S. high yield market. Now $4 billion doesn’t sound like a lot of money in today’s dollars. But trust me, in 1990, that’s a huge amount of money. So Ted Rogers was the largest high yield bond borrower in the world. And he has no U.S. dollar revenues, but these were issued in U.S. dollars. So the banks had to swap the debt back into Canadian dollars and tie up swap lines and everything like that.

Greg Foss (00:13:06):
But most importantly, the U.S. guys looked at him and said, “Okay, your cable is world-class. Your wireless system is world-class. And I’m getting you at a rate that is at least 200 basis points or 2% higher than an equivalently rated U.S. company.” So, yes, that’s the price at which I will lend to a Canadian, non domestic U.S. non domestic borrower. So we’re trying to break into this business at my job. I’m working at TD bank and we want to bring a high yield deal for Ted Rogers denominated in Canadian dollars. So I said, Hey, here’s a good place to start-

Preston Pysh (00:13:43):[inaudible 00:13:43].

Greg Foss (00:13:43):
Oh no, well just listen. Here’s a good place to start. Show me the holders of the equity of Rogers Communications, right? Show me the list of holders. There was one account that owned $900 million worth of Roger’s equity, 900 million. And I pleed with a salesman. His name was [inaudible 00:14:01]. I’m not going to name the account. I need to hit the key on your account. I need to talk to them about this bond issue we’re bringing. He’s like, “Foss, stay away from my account.” Because you know the way bond salesman treat their accounts. It’s like their life, their bread. And I’m an idiot trader. And anything I say will destroy his relationship.

Greg Foss (00:14:16):
But I say, “Please, please. I got to speak to these guys.” So I hit the key. Hey, Mr. Account XYZ. We’re bringing a deal for Rogers Communications. I want you to consider buying some. They go, “Well, we can’t. It’s a junk bond.” I go, “Well, okay. Pejoratives aside, you own $900 million of super junk equity. How about if you sell some of the equity, right? You got 900 million of it. If the bonds aren’t worth a hundred cents on the dollar, the equities were zero. You understand that right account ABC or XYZ?” Yes, we understand. Well then how much can I put you in for? Zero. Okay. What’s the problem? Well, it’s a junk bond again and if I had to report to my investment committee, I owned a junk bond. I’m not allowed. And I said, well, how about this? You sell some of the equity. You buy the debt at a 12% coupon. You treat the income on the debt like the dividend you are not getting on the common stock. You trade up in the capital structure-

Preston Pysh (00:15:10):
Like you’re not getting, is that what you just said?

Greg Foss (00:15:12):
Yeah. You’re not because there was no dividend. So you can pick up yield, reduce risk. How much can I put you in for? None. And this is the kicker. I said, “How much can I put you in for?” They said, “None.” Okay. Obviously the problem is price. You don’t like the yield. What yield would you buy it? They said, “There is none.” And I go, “What?” I said, “Well, what if I gave you these bonds for free? Just gave them to you.” They go, “I wouldn’t take them. I would not take them because I’d have to report.” And at that point, I couldn’t bite my tongue any longer I said, you’re the ridiculous money manager I’ve ever… And then the salesman jumps on, “Okay. Foss. Foss you’re off the key.” He runs over to me. He looks at me and he goes, if you ever, ever talk to one of my accounts like that again, he’ll take me out and carve me a new one. But it’s true. Isn’t that the most ridiculous thing you’ve ever heard?

Preston Pysh (00:16:03):
Greg, this is such a perfect story for what we’re seeing today, because I think it’s that times a hundred.

Greg Foss (00:16:10):
I’m living it. This is the same thing with Bitcoin. I’m telling you, this is why I always bring it back to my credit days. Okay. Now there’s a fully developed high yield market in Canada. I’m quite proud of it. I was the first high yield trader in Canada. I did all my trading on Wall Street with U.S. counterparties, but I was the first guy to actually set up shop in Canada and try and develop a domestic high yield market. I’ve been through it all. And guess what? Rogers Communications is no longer a high yield borrow. It’s actually investment grade. It improved its capital structure. But one of the days, that was a really bad day for Greg Foss. I own hundreds of millions of Rogers Communications bonds. Okay? Literally this was a massive position for me and I wake up one morning and the headline is Rogers Communications has more debt than the province of Prince Edward Island. That’s true. He drew the parallel that a company with more debt than the province of Prince Edward Island has had to be a worse credit than the province of Prince Edward.

Preston Pysh (00:17:11):

Greg Foss (00:17:12):
And the fact is, it’s not even true. They had way more cashflow in the province of Prince Edward Island. This is lost on so many reporters and so many guys that do flip it remarks like Joe Weisenthal commenting on Hertz equity, having value when the bonds are trading at 40 cents on the dollar, Joe. Please do some research, do not run out and draw these asinine conclusions without looking at the whole capital structure of a company. Or now this is a funny one, the capital structure of a country. And this is where Bitcoin really comes in.

Preston Pysh (00:17:45):
I think whenever you just look at how the media runs with the various headlines anymore. When you look at what’s driving that from an incentive standpoint, a salacious headline gets clicks, a click then runs the immediate ad. It doesn’t even matter if the person dwelves on the page because the ad was run and the revenues were collected. And so from that vantage point, you can see why there’s such salacious headlines. You can see why the articles are a pittance of any type of reporting. Some of them are like three paragraphs long. There’s nothing to it other than the ad was serviced.

Greg Foss (00:18:23):
Excellent way to describe it. And this is the new social media. I’m 57 years old. You need to understand that I grew up without having ever used a personal computer from my first engineering days because they didn’t exist. I did everything on a mainframe and incidentally, I wanted to mention to you that I’m pretty impressed by your background and your west point. Seriously. I mean, that’s a huge accomplishment. And I tend to find that people that are comfortable with math really tend to get it before a lot of other people. Now, the problem is most people are not comfortable with math, right? It’s probably the subject that most people decided not to take when they had the chance to choose between whether they would take mathematics or not. And you’re seeing it. Some of the statements that people make are just, “Wait a minute, you should have learned this in grade four, but you must have skipped that class.”

Preston Pysh (00:19:10):
Speaking of the math, I think it’s important for people that aren’t really familiar with fixed income that are listening to this conversation. So when we talk about when you had your start and yields were sky high and they’ve come down for the last 40 years to the point where they’re at now, what that really means for people is that the prices as the yields go down, the prices keep getting bid higher and higher and higher for the same duration of the bond. So what’s effectively taking place and correct me if you see it differently, Greg is, as these prices keep getting pushed higher and higher over this long period of time, it’s forcing everyone to make riskier and riskier decisions.

Greg Foss (00:19:50):
Yes. I agreed with everything until you said riskier and riskier decisions. So let’s just talk really quickly about bond math. You nailed it. Okay? For people that are mathematically inclined to, I always love to talk about bond math as being the equivalent of… And bond math involves duration and convexity the first and second derivatives. And then that’s the equivalent of velocity and acceleration. Okay? If you guys go back to your physics 101 class, and you remember the distance formula where distance equals velocity times, time, plus one half acceleration times time squared, the bond formula is exactly the same thing, except its duration times change in interest rates. Plus one half convexity times the change in interest rates squared, it’s exactly the same tailor series. The neat thing about it is you should get comfort then that bond math is not outrageous. It’s exactly like physics.

Greg Foss (00:20:39):
And so yes, you mentioned duration. Well, if you ignore small changes in interest rates, the bond formula basically says the duration of a bond times a change in interest rate will give you it’s change in price. Okay? And the change in price when interest rates are as low as they are right now is very meaningful for duration. So very simply the duration of a 30 year bond right now is about 1T2. It’s just a mathematical formula 22. And if you’d said, “What does that mean?” Well, it means for every 100 basis points change in the 30 year yield, the bond price will drop by 22 percent. Now, bond guys aren’t used to losing 22% in bond pricing terms, especially since rates, as you said over the last 40 years have come down. They’ve been used to these things called capital gains. It was a one-way railway for capital gains.

Greg Foss (00:21:37):
Well now and we talked about Ray Dalio’s risk parity. Now it’s capital losses. It’s the same math, except that rates are going up not coming down. So the long bond that was issued one year ago has a one and a quarter percent coupon on it in the U.S. it’s a one and a quarter of 2050, and it has lost 26% of its value in one year. That’s a tough mark to market, right? That’s 26 points. That’s 18 years or more. It’s 20 something years of coupons of the one and a quarter coupon to make your price loss back. This is tough to report to your bond unit holders, isn’t it? Hey, thanks for coming out. You just lost 26% in one year. Now that’s only a 100 basis points changing in rates. What if rates went up 400 basis points?

Greg Foss (00:22:28):
Convexity starts to come in and the price can’t go down 80%, right? Because it just doesn’t. The convexity is the shape of the bond pricing curve. But I’ll tell you, these are big, big, big price movements for insurance company. It’s in pension plans that have matched their liabilities against these assets. But all of a sudden they’re off 26%. That’s tough to take to your unit holders. So yes, you’re a hundred percent correct on that price. The difference though, is I’m not certain that it meant they had to reach out the yield curve or you reach out the risk spectrum. That risk spectrum is always there. It’s always relative generally to the U.S. treasury curve. The incentive, perhaps you could say we’re high yield bonds at a 300 basis point spread over treasuries, starting with a 14% yield, which meant U.S. treasuries were at 14% at 300 basis points on top of that, you get 17% is that 17% more attractive in 1988 versus this year when the tenure is one and 170, you add those same 300 basis points on top of it. It may look more attractive, but then you think about it.

Greg Foss (00:23:41):
You have the rates that could be going in the other direction. And you may say, “I don’t like bonds of any duration, let alone the fact that you have that spread of 300 basis points over.” So it’s harder for me to make that, to say that it was pushing people out. Now does it? It makes things like the discount rates on all assets lower, which means the price appreciation of all assets definitely goes up, but was it really pushing people out? I think that always existed for us. And I think there were always the people that would take that incremental 300 basis points. And there’s still people right now that won’t take that incremental 300 basis points at 170. And I think they’re actually being very smart right now, not taking that incremental 300 basis points, but then you talk about equities and the price mechanism for pricing growth equities and everything. And yeah, there is a cascade, no question.

Preston Pysh (00:24:33):
I guess, where I would push back on it, Greg. And I’m curious to hear your thoughts on this. So when we look at back in the late eighties and you look at the debasement that was occurring, it was showing up in the CPI gauge. It was showing up as our debasement rate back then was call it 15%. And you had that actually showing up in the CPI gauge is 15%. And I would argue today that gauge is completely utterly broken. And that the way that the basement is kind of getting inserted into the system is through the bond market mostly.

Preston Pysh (00:25:08):
It’s a little bit of it being UBI here recently. And because it’s not showing up in the CPI gauge, you have people in equities, you have people in fixed income alike that are stepping into those trades thinking that CPI is real when in fact it’s actually being manipulated lower. And so they’re actually getting into these really risky positions, but they only become risky if there’s a new alternative that shows up to the currencies that everybody is using, alike around the world, that all unravels itself, but it has to have some type of catalyst that provides a relief valve.

Greg Foss (00:25:44):
What a great explanation. So now I understand what you’re saying. You know, what’s neat? So I never traded bonds for inflation expectations. I was a credit guy and perhaps this’ll help explain it. And I believe this sincerely, I believe that credit concerns will overwhelm inflation concerns, whether those…

Greg Foss (00:26:03):
Will overwhelm inflation concerns. Whether those inflation concerns are actually being properly measured or not. I believe that it’s credit that’s going to be the defining characteristic of setting the base rate. Every base rate is a combination of an inflation expectations as you point out and historically that’s been the overriding factor and a credit component. My argument is that the 10 year US treasury has an inflation expectation in it but it also has a credit component. It is not, even though it’s termed the risk-free asset in the world and there’s no one that’s better. It’s still not risk-free because if it was risk-free, the credit default swap market wouldn’t be charging you a premium to insure against the default of the US treasury.

Greg Foss (00:26:48):
My argument is yes, inflation expectations are there, they’re a concern for all fixed income investors but that’s a backward looking concern. The forward looking concern is credit. Now, will credit be impacted by increased interest rates due to inflation, a hundred percent. It’s cause and effect but I see now what you were saying about how the gauge did. The CPI, I agree is not a realistic Chapwood index, the money supply growth as Michael Saylor would say are all much better reflection of true inflation.

Preston Pysh (00:27:24):
It’s a fascinating topic that I think really gets to the root of why there’s so much misconception in the financial markets in general, because you know as well as anybody Greg, that if you went and talked to a hundred people in finance and said, is CPI your inflation gauge? I think 99 out of a hundred of them would say, “Yeah what else would it be?” Well, that’s a dumb question.

Greg Foss (00:27:51):
Unless though and this is what’s a head-scratcher for a lot of people right now. Why are house prices going crazy in most countries for sure North America? I just saw a Wall Street Journal article about what’s happening with house prices in the United States and Canada let me tell you this is going off the charts as well. If that’s not an indication of inflation concerns, I don’t know what is and why is that? Well, people will say, is your house price really going up? Or I ask the question, is it just that your unit of account is going down that quickly?

Greg Foss (00:28:22):
Your house doesn’t really change in value. It’s always been valuable and there’s arguments that people will pay more over time for that value but certainly not anything like the growth in the house prices right now. It’s just that the unit of account, the fiat currency is going down so quickly.

Preston Pysh (00:28:38):
At least my experience with saying things like that to people, even though I agree with you a hundred percent, when I say this to people, they just look at me like, is this guy talking about unicorns?

Greg Foss (00:28:48):
You need to understand how blessed you guys are in the United States because there’s over 150 fiat currencies in the world. A lot of these countries have been serial defaulters, I wouldn’t say serial but they’ve defaulted more than once. They experienced this, [inaudible 00:29:05] in Patagonia, the reason he loves Bitcoin so much is because his family went through three episodes where they lost everything. I experienced one of them in 1988, Argentina was bankrupt and it looks like Argentina may go bankrupt again. This is really sad but it’s a fact. The United States, is there a chance it’ll default? Yes, there is because there’s a credit default swap market on the United States that is not zero but it’s extremely low. The chance of it is extremely low. It’s not zero but it’s extremely low.

Greg Foss (00:29:36):
When people start doing the math as to the true obligations that the United States has in terms of it’s funded and unfunded Medicare and Medicaid, it’s off the charts guys. The math is just undebatable. You cannot tell me that the fiat currency will not debase at an accelerating pace for the next and now I hope it’s a long time. It may not be where people call out a fraud or the Ponzi. Hey, this has got to stop and does the US very quickly go to Lakewood, Venezuela? I hope it doesn’t but is the chances zero? No, it’s not because they’re both based on the same principles of fiat and printing money.

Preston Pysh (00:30:15):
Greg, talk about what that was like when you were dealing with this Argentina crisis back when you first started. What does that mean for the various securities that are domestic to that country that are denominated specifically in the fixed income way that are denominated in that local currency? What does that mean for the equity market? Talk us through some of those things so that people can understand what happens in these types of scenarios.

Greg Foss (00:30:45):
Great question. It always starts with the plumbing of the financial system. I won’t go quite to Argentina because I don’t know Argentina. I know they’ve defaulted a number of times. Their capital markets are nowhere near as developed as any G7 or G… they are a G20 nation but they’re not a G7. Let’s talk about G7 experiences. It starts in the plumbing of the G7 nations and it will extend to the emerging markets like Argentina. They’re so far down the scale of true developed risk markets that they catch a cold every time the United States sneezes, right? Emerging markets change direction because of either the currency, the strength of the currency or outlooks for commodities, et cetera, et cetera. What happens always is the plumbing of the financial markets, which include things like bank swap spreads, the TED spread, that’s the Eurodollar versus T-bill spread.

Greg Foss (00:31:46):
It’s the overnight funding, it’s repos. It’s all these things that occur in a financial system that’s levered 25 times to its equity cushion. When these things start raising concerns, there’s flags raised. It’s like, “Oh, all of a sudden I don’t trust this counterparty ABC as much as I did. So we’re not going to be doing business with them anymore.” The funding rates start increasing. Do you remember in 2007 this was before the credit crisis actually happened. It was the summer of 2007, Bear Stearns was in trouble. Jim Cramer on a very slow afternoon in the middle of August, saw it on TV at his rant. You remember? He said, “They don’t understand the fed is asleep at the wheel and they have no idea how bad it is.” Do you remember and the poor girl, she’s no longer on CNBC she’s looking Jim and he lost his mind.

Greg Foss (00:32:39):
Well, he did. He was part of the community that convinced the fed to respond to the gurgling that was in the financial system, that the credit markets because of Bear Stearns because of subprime pre warnings, because the Lehman Brothers. Bear Stearns stock was still at a hundred and something dollars at that time. They cut rates, they encouraged the fed to cut rates and equity markets went to a new all time high and credit markets did not budge. They’re like this doesn’t solve anything and it still started gurgling. Even though equity markets went to an all time high, three months later in October it really started to unravel again and Bear Stearns stock went from 120 bucks to… in 2008. I think it was 2008 maybe early 2009 when JP Morgan bought it for two bucks a share.

Greg Foss (00:33:27):
That’s the danger is always the plumbing of the financial system. Now I would extend that to Argentina and I would say, yes, of course it happens in Argentina. If it happens in the biggest, most developed US centric financial markets, then yeah, it happens so much more quickly in the tertiary markets like the low G20 and the other fiat currencies that are supported by the IMF. It’s so dangerous, you see it coming Preston. The equity markets, they frequently don’t see it. They just say, “Oh, well the fed cut rates so everything must be good-”

Preston Pysh (00:33:58):
Must go up.

Greg Foss (00:34:00):
… and that’s the scary part because there is a real disconnect between equity risk taking and credit market understanding. Equity, risk guys. They are so bold up, they’re emotional, their trees grow to the moon. You got to own equities, grow this and sometimes they’re not wrong but sometimes they’re so wrong and it always generally starts with their lack of understanding of the credit markets.

Greg Foss (00:34:27):
I say this often, I say credit markets are a dog and the equity markets are its tail. That tail gets whipped around and they sometimes have no idea. There’s poor guys they’re out there buying common stock. When the CDS, the credit default swap guys are buying puts on the common stock because they need to buy insurance. The equity markets going, “Why is this getting beaten up?” I have no idea. Guess what? It’s being driven by the credit markets you knuckle heads and you no idea. You’re just being used as a whipping boy.

Preston Pysh (00:34:59):
When you just look at the sheer size of your fixed income compared to equities, what’s the numbers you’re over a hundred trillion in fixed income and I think equities is half as much, right?

Greg Foss (00:35:10):
I use a number there of 300 trillion.

Preston Pysh (00:35:12):
300 trillion?

Greg Foss (00:35:13):
300 trillion and equity markets are… You could argue it’s 90 trillion, I think that’s a bit of a stretch, but it’s yeah. It’s at least three to four times. Three to four times. But most importantly, most importantly, don’t forget the leverage in the system. The system is leveraged 25 times. 25 times. That’s your common bank, is levered 25 times to it’s loans. You have $4 of equity capital for every hundred dollars of loans. Well, it’s the way banking has worked and Ford pointed this out. Henry Ford pointed this out in the early 1900’s. I believe he said something like if American citizens understood the way the banking systems work, they wouldn’t put any money in the banks.

Preston Pysh (00:35:56):
Which is so true. Yeah.

Greg Foss (00:35:59):
It’s the way it works. In confidence and when you lose that confidence, contagion is such a… it happens so quickly. I often say look, you need to buy your insurance before the calamity hits. You don’t try and buy fire insurance when your house is already burning. You need to buy that fire insurance before it’s burning. This leads to my belief that Bitcoin is that perfect. I call it an anti-fiat. I can give tremendous comfort in the fact that Bitcoin it’s equivalent to default insurance on a basket of fiat credit. It’s that simple and you need to own Bitcoin as a hedge to the regular calamities of the fiat system.

Preston Pysh (00:36:45):
What we’re really talking about is the… We’ve talked about the 40 years of yields going down but if that starts to unwind itself, which you and I both have the same opinion that that’s a very real possibility. That’s going to wreck havoc on this market.

Greg Foss (00:37:03):
It can go up for two reasons and we mentioned them. One it could be inflation expectations and the other one is just a high yield market. “Hey, you’re more risky. I need to be paid more to lend you money.” People will say, “The US it’s a quintessential risk-free borrower.” I’ll say, “It was until they lost control of their borrowing habits.” If I may, there’s some really good questions that came up. That you said, “Hey, I’m interviewing Foss, do you guys have any questions? At this point I want to… there was a really good question by somebody who asked me to explain why is it a certainty that fiats are going to debase? It’s this simple, okay guys, ladies and gentlemen. The total debt in the world to total global GDP is over four times. Let’s just use four as the total debt in the numerator.

Greg Foss (00:37:52):
Four, multiple of the GDP, which is essentially your tax base. Now it’s total debt, it includes corporate debt and everything but interest expense is tax deductible. You need to include total debt in your numerator against your tax base in the denominator. If this is four times as big, if your numerator is four times as big as your denominator and the average coupon on that debt, you pick a number. I’m going to say, let’s say it’s 3%. I think that number is low but debt has a coupon it needs to be paid. That means that your numerator, right Preston, is growing at 12%, just organically.

Greg Foss (00:38:29):
That doesn’t even include any of the deficit funding that is going on right now. If your numerator is growing at 12%, your denominator, which is global GDP needs to grow at 12% over time forever to keep up with your numerator, not including any of this deficit funding. It’s impossible. Global GDP will not grow at 12%. Therefore the currency needs to solve the… and I term it, the error term. It needs to solve that equation where you can continue to grow your debt by printing more money. Simple mathematics you guys. You need to understand that that’s called a debt spiral and you’re in one and you cannot get out of it. You are a hundred percent certain to be debased because they need to continue to print money to solve this debt spiral.

Preston Pysh (00:39:22):
Ray Dalio who we’re going to talk about his risk parity. He says that there’s four main things that eventually get you out of these situations. All of which are not convenient for portions of the population, depending on where they sit. I would argue in this situation, people that are heavily exposed to fixed income in their portfolio are going to be huge bill payers for that, at least the ones that continue to hold. What are some of your thoughts on who the parties are that are going to be impacted the most by this?

Greg Foss (00:39:53):
I have enormous respect for Mr. Dalio. It’s funny he’s 99% of the way there. I just think that he’s missed the Bitcoin train in that. That’s an aside. Okay.

Preston Pysh (00:40:03):

Greg Foss (00:40:04):
Ray you haven’t missed it. Okay. You’re so bright. You’re just overthinking it by a half. You’re too smart by a half Mr. Dalio. That’s a bond term. Okay. He knows it’s worth 85. The market right now is 40 to 42 and he’s bidding 41 and a half and he misses the trade at 42, even though he knows it’s where 85 okay. It’s called being too smart by half. Don’t be too smart by half. Mr. Dalio. Bitcoin is frigging cheap right now, frigging cheap. What is he saying? He’s absolutely correct. There are going to be a lot of pain and who’s going to bear the brunt of this pain.

Greg Foss (00:40:39):
In your traditional 60 40 portfolio, If you’re CalPERS, you have 40% of your portfolio, at least 40% but we use the 60 40. 60% equities, 40% bonds. 40% bonds yielding right now, let’s say their average yield if you include high yield and all the fixed income instruments they have, let’s be generous and say it’s a 3%, okay. Because in US 10 years 170, high yield for coming up with a number of 3%. On 40% of their portfolio, they’re earning 3% without defaults. That’s not even including any defaults, that’s assuming that that 3% is certainty. They have a prescribed rate of return of 8%. That’s for their defined benefit pension plans. Well if you’re only earning 3% on 40% of your portfolio, that’s 1.2% coming from there. That means that your 60%, which is equities, needs to make, helped me with the math 6.8%. 6.8% on 60% means you need equity markets to grow at something like 12% a year for the rest of time just for you to make your prescribed bogey of 8%.

Greg Foss (00:41:53):
That’s why these pension plans are absolutely cornered. They have these prescribed defined benefit pension plans that will never meet their obligations. They say it’s a funded rate of 8%, while they’re trying to come down to 7% or 6%. As soon as they do that, they become, “Oh, we’re fully funded at an 8% a prescribed rate of return but at 6% we’re way underfunded.” That’s what happens. You’re saying, okay, so who bears the brunt of this? It’s even going to be worse. If people who are used to earning capital gains in bonds, now get capital losses because interest rates start rising and they need alternative asset classes. All of this blends very nicely with the conclusion that we all know we’re going to come up with is they need to hedge with Bitcoin okay. Only math, let’s not get overthink it.

Greg Foss (00:42:44):
Mr. Dalio, once again, you understand it and I know you’re let’s just say he’s 1 trillion. It’s fidelity and those guys are $1 trillion guys. Their whole fund is about the size of the entire Bitcoin market cap. Say the Canadians they’re having trouble getting involved in Bitcoin at a trillion dollar market cap. That Bitcoin is worth more than the market cap of the entire Canadian banking system combined. The flip side of that is it’s almost worth as much as the US market cap of US banks. Are you telling me that market’s not big enough for you to get involved in? I think you’re mistaken. I think the number of people that think they’ve missed the train right now, I argue that it’s still in the early innings and it’s actually less risky to get involved now than it was when people were getting involved three and four years ago. On a risk return basis, Bitcoin is less risky now than it was three or four years ago.

Preston Pysh (00:43:42):
There’s a lot of people saying that narrative right now where, because now that it’s at a trillion, that it’s become way more investible to a lot of different institutions. What are some of your thoughts on that?

Greg Foss (00:43:53):
I agree with that. It’s like you’re… let’s make the math easy. Let’s say you have a hundred billion dollars. You’re managing a hundred billion dollars of assets all across the spectrum, equities and bonds. That hundred billion dollar asset manager probably has at most, let’s make the math real easy, 25 analysts. Each analyst needs to cover essentially 4% of the portfolio, which means each analyst really well they can effectively cover 10 companies. Let’s say that’s 20 companies. The point is in order for a hundred billion asset manager to get a weighting in their portfolio that justifies the time that the analyst will spend on it, as well as meaningfully impact the performance on their portfolio, assets have to be a certain size they’ve invest in them. Markets have to be a certain size.

Greg Foss (00:44:46):
As the market for Bitcoin grows, it increases the universe of potential buyers because it’s big enough for them to get a line awaiting in that line. They can meaningfully impact their performance of their overall portfolio. It’s that simple, it’s about allocating people’s time as well as being able to get the performance out of that line. If you say, “Hey, I can’t own more than 10% of an asset or a company.” Imagine if you’re dealing with a company that’s only got a market cap of $10 billion. If you can only own 10% of that company, that’s a $1 billion allocation and what if you’re a hundred billion dollar company? Well, that restricts you to owning 1% of that company. There’s a lot of companies they are way smaller than $10 billion. There again is how the system just differentiates and it doesn’t allow big funds to get into perhaps more efficient parts of the market.

Preston Pysh (00:45:46):
Do you have any thoughts on the insurance industry and some of those key players starting to take small Bitcoin positions because they’ve historically invested their float in a lot of fixed income through the years. Like we saw with Berkshire Hathaway and their treatment of GEICO, they’ve just been starting to take a lot of cash equivalents on their balance sheet in this past decade, mostly because of where interest rates have been at down near zero. I think it’s interesting to see some of them entering the Bitcoin space.

Greg Foss (00:46:18):
I agree with that. Again, Preston, it’s all about a risk return calculation and an asset is an asset is an asset. It doesn’t matter whether it’s digital or physical. I truly believe that The MassMutual is a very important leader in the space right now. They’ve made two investments, one they own Bitcoin but the more important investment they’ve made I think is within NYDIG and their funding for round two financing. They were involved Soros, Morgan Stanley, New York Life, MassMutual and I’m missing one of them. The point is these are really, really important players. All of these players, insurance, pension funds, CalPERS, CalPERS is the largest, if not the largest pension plan in North America, it’s certainly close. We have some massive pension funds in Canada that should be involved in Bitcoin.

Greg Foss (00:47:09):
Why? You can talk about the non-correlated returns but in my opinion, it’s way more about the asymmetric trade opportunity. I believe that Bitcoin at 50 or $60,000 is still a rounding error based on where it can go. I mentioned to you I calculated the value I think that Bitcoin has intrinsic value based on the credit default swap market. That number is in my opinion, at least a hundred thousand dollars a coin right now, based on credit default swaps spreads. It’s between 110,000 and 160,000 US dollar per coin right now, depending on CDS spreads. As those spreads widen, the intrinsic value of Bitcoin will just increase. Not to mention the fact that it can increase on a whole bunch of other metrics as well, supply and demand and network value, et cetera.

Preston Pysh (00:47:59):
Simplify for us how you came up with that valuation.

Greg Foss (00:48:04):
Again, credit default swaps are a brilliant invention in the credit markets. They’re not that old, I’m going to say they’re 10 years old, hold on. No, they can’t, they got to be more than that because they were the crux of a lot of the 2008, 2009 unraveling. Let’s say they’re 15 years old, they were invented at a JP Morgan early two thousands in the US as a way of creating credit curves for companies that didn’t have outstanding obligations at each term in front end of the structure. A typical CDS insurance contract is just like a credit spread. Is issued in a five-year term and each 90 days there’s a new issue. The five-year term goes to four and three quarters, four and a half, four and a quarter, all the way down. There’s a very efficient credit curve for the top credits in the US in both corporate and sovereigns as well as municipal states.

Greg Foss (00:49:00):
These are very well-defined insurance products and they call it insurance but just think of it as a quasi bond. It’s a derivative, it’s a bond-like derivative. This CDS also trades on sovereigns. Now, I mentioned to you that the 2008, 2009 financial crisis only transferred risk from the financial system onto the risk of the governments. Therefore, I believe that you need to look at the credit default swap rates of governments and evaluate their relative potential for default. What’s the biggest one right now, we’ll Turkey. Turkey is a G20 nation that is trading at about 450 basis points in the five-year term. That means it costs you $450,000 a year to ensure $10 million of Turkish debt against default. There’s all very efficient pricing, these are traded by sophisticated global players and Turkey is in the lowest rung. Then in the top rungs are all the G7 nations, including the US which trades at 10 basis points.

Greg Foss (00:50:06):
10 basis points for five years, again is only $10,000 a year to ensure $10 million of debt against default. I’ll remind you, in 2006 Lehman Brothers was trading for six basis points, six basis points or $6,000 a year to ensure $10 million of debt. Three years later, that insurance was worth $6 million. That’s a pretty good insurance policy to own. The problem is if you own that insurance policy from someone like Bear Stearns, you’re worried that, “Oh my God, this insurance company that I bought it from called Bear Stearns may itself default.” You have to run out and buy insurance on Bear Stearns. This is called counterparty risk and this is why the contagion in the world [inaudible 00:50:51] and erupt really quickly. Long story, I took the current CDS rates. I adjusted them from five years to what I believe to be an appropriate duration for the unfunded and funded obligations of the countries.

Greg Foss (00:51:06):
I came up with a simple mathematical cumulative basket of what Bitcoin as I described it as the anti-fiat would be worth. Let’s walk, because if someone asks us to do this, I’ll walk through it really quickly with the United States. United States government owes $30 trillion worth of debt right now. They have 160 trillion in unfunded, Medicare and Medicaid obligations. That’s $190 trillion. Their swap CDS five-year is 10 basis points. You adjust it to a term which I viewed to be between 10 and 15 years as the appropriate duration of those unfunded obligations. You get a number and you can just draw a credit curve and you can argue with me that my credit curve is too steep or too flat. At the end of the day, you take that number, you get a number for the United States, you add all the other G20 countries onto it. You divide it by 21 million points…

Greg Foss (00:52:03):[inaudible 00:52:00] countries onto it. You divide it by 21 million coins and that’s what each coin is worth. Very simple, and it’s based on a fluid functioning market in risk that changes daily. And again, I’ll tell you, as those rates widen to reflect increased credit risk, which is a function of inflation expectations as well, the intrinsic value of Bitcoin will increase in lockstep, and where can it go to? I’ll just say a lot higher. And are my numbers similar to what Michael Sailor’s numbers are? In all due respect, his numbers are very good targets that I believe in as well.

Preston Pysh (00:52:40):
I really like that, because to date we’ve heard a lot of different opinions on what we think the market cap could be. People were comparing it to gold, people are comparing it to whatever. But I’ve never heard it approached from… People call it chump insurance.

Greg Foss (00:52:56):
Chamath, yeah-

Preston Pysh (00:52:57):
Chamath calls it-

Greg Foss (00:52:58):
That’s okay, but this is real insurance guys. This is insurance that trades in the market, right?

Preston Pysh (00:53:02):
That’s what I like what you did is you’ve taken something that’s just kind of a catchy phrase, and you’ve actually put some math to it. I think that you’ve done it in a thoughtful kind of way. And what I find really fascinating is it’s a similar price point to what a lot of people are seeing this current bull run that we’re in, achieving. I find that fascinating.

Greg Foss (00:53:25):
Let’s not stop there. I need to stress to you, imagine if the United States goes to 50 basis points. The rest of the world is unraveling everywhere.

Preston Pysh (00:53:35):
Yeah, yeah.

Greg Foss (00:53:35):
Okay. Because the US at 50 means Canada… I don’t even want to know where Canada is. I’m going to point Canada out because I’m so concerned about my home country here. Canada actually has a higher credit rating than the United States, according to S&P. We are still AAA, and the United States is AA+ yet the United States trades at 10 basis points in five-year CDS and Canada trades at close to 40.

Preston Pysh (00:54:01):
Yeah. I’m looking at this right now because I pulled up this chart that you shared with people.

Greg Foss (00:54:04):

Preston Pysh (00:54:05):
I see it. It’s a 30-

Greg Foss (00:54:06):

Preston Pysh (00:54:06):
We’ll call 38. That’s crazy.

Greg Foss (00:54:09):
Please mail my Prime Minister, I know he failed math. Justin Trudeau is not good at math. He said, budgets will balance themselves. Hey, what? They don’t budget themselves. And the market is telling you, we are much closer to a Single-A credit rating. Modus score Portugal, modus score Italy, trades. Canada is not backed by this ECB. Canada only has the Bank of Canada. We’re in big trouble.

Preston Pysh (00:54:33):
How was it.. Hold on. Help me understand this because this-

Greg Foss (00:54:35):

Preston Pysh (00:54:36):
Makes no sense because-

Greg Foss (00:54:40):
It’s a market. It absolutely makes sense.

Preston Pysh (00:54:43):
Are you telling me an efficient market is real. Okay. So, I’m seeing an S&P 500 rating, United States, AA+. Canada, AAA.

Greg Foss (00:54:53):
Would you wrap fish in an S&P report? I wouldn’t. Okay. It’s an opinion by a credit rating analyst that wants to work on Wall Street. And the best way he can work on Wall Street is give ratings to Goldman Sachs, underwritings, it help Goldman Sachs trade their, or sell their product, okay?

Greg Foss (00:55:09):
All this mortgage backed security structures and all these alchemy that these guys came up with, they were being rated by credit rating analysts that wanted to work for the people that were coming to them for credit ratings, okay. It’s so conflicted.

Greg Foss (00:55:22):
It is just so wrong and yet these are what sets the investment guidelines of some of the biggest pension funds in the world. So, you’re correctly viewing this. You’re calling out that the rating makes no sense relative to what the market is charging them. And guess what? In CDS land in 2006 and 2007, neither did those. And the market was telling you, “Hey guys there’s smoke, okay?” The markets are truth. Rating agencies are so-so. There’s conflicts everywhere, the issuer pays for the rating. I mean, it’s just guys, it’s so antiquated. You got to get off of this but again, they set the rules.

Preston Pysh (00:56:02):
It’s nearly a 400% higher insurance policy. That’s crazy.

Greg Foss (00:56:08):
Isn’t that crazy?

Preston Pysh (00:56:08):
That’s crazy.

Greg Foss (00:56:10):
And yet we have a higher rating. So, the S&P gives us a AAA rating. The prime minister of Canada can run around and say, “Guys, we’re still AAA,” And guess what? The insurance markets are saying, “No, you’re way closer than Single-A,” but he doesn’t understand that.

Preston Pysh (00:56:24):
Because you guys are so nice.

Greg Foss (00:56:27):
Or until we’re not, right? This is so dangerous. I’m so concerned for my kids. I’m so concerned for people that don’t understand the real workings of the credit markets. That’s just about every politician in Canada, except for there’s a famous guy, Pierre [Poilievre 00:56:45]. Anyway, him and Pierre Roshard need to talk as they speak the same language.

Greg Foss (00:56:49):
And they’re finally getting it, but people turn him off because he’s Oh, he’s anti social programs. And Hey, I support social programs as long as we can pay for them. And if we can’t, it’s going to bring everybody down.

Preston Pysh (00:57:02):
Okay. So talk to us. What’s going on with gold right now? When I say right now, I really kind of mean like the last six to nine months.

Greg Foss (00:57:10):
Respectfully, I’m going to have to say, I’m not sure I’m not a gold expert by any means. And do you have any ideas? I believe that Bitcoin will absolutely overtake the market cap of gold. I believe in the hard asset value of gold, but I also know that gold is not a fixed supply. I know that is not divisible. It’s not transferable. It’s not portable. It’s not everything that Bitcoin is. And therefore, I think it’s just a matter of time before Bitcoin overtakes the market cap of gold.

Greg Foss (00:57:39):
It’s a better form of a store of value. Is gold a horrible store of value? I don’t know, I don’t think it is. But that being said, and I always point this out and people are okay, stop talking. There’s 20 million pounds of gold and seawater. I think that technology someday we’ll be able to remove gold efficiently from seawater. If that happens, all of a sudden it’s 2% growth rate in gold is no… The 2% annual growth rate and gold is no longer 2% annualized. Is it going to happen? I don’t know. Technology is pretty darn smart, but there is nothing about gold. It is better. That makes gold better than Bitcoin. Nothing. You cannot tell me one characteristic of gold apart from filling your teeth and a little bit of electronics. Okay. And even then it’s a bit of a stretch.

Preston Pysh (00:58:26):
Do you find that the rest of the financial community is starting to come around to that same narrative that you just said?

Greg Foss (00:58:34):
The expression rights slowly. Then suddenly one of the things I want to do Canada, Northern Ontario and Canada have some really important gold mines in some towns are built up on the gold industry. I firmly believe that some of these gold miners with excess electricity power to start mining Bitcoin to hedge their gold position. And if you believe in a store of value and yes, for 5,000 years, gold was, is and was the go-to store of value. Well, it’s going to be subsumed by Bitcoin because $10 trillion for Bitcoin is barely a stopping point. Okay. Bitcoin is going to many times higher than $10 trillion in market cap. It’s just a, easy calculation as a function of total global financial assets and what level Bitcoin will hold of those total global financial assets. And it’s interesting thing. I know I’m rambling a bit, but I believe that Bitcoin becomes the defacto global reserve asset when energy is priced in Bitcoin, which is totally natural since Bitcoin is digital energy, it makes tons of sense to me that oil and natural gas should be priced in Bitcoin.

Greg Foss (00:59:47):
I think that Russia would much prefer to have Bitcoin than US dollars. And you’re seeing that they’re doing some deals with the Chinese and in Yuan, and all these things note on that chart, Preston where Russia trades FCDs. Russia’s a triple B…

Preston Pysh (01:00:01):
I did see that.

Greg Foss (01:00:02):
Minus rated credit. Very important, very, very important. Okay. This is not a drill. You guys, these are real life insurance rates for sovereign default.

Preston Pysh (01:00:15):
It’s more than double that of Canada.

Greg Foss (01:00:18):
If you look at that, go up a little bit to the right more, you’ll see the profitability of default. Okay. That’s a pretty neat line. I don’t want to get too granular with everybody.

Preston Pysh (01:00:28):

Greg Foss (01:00:28):
But it shows actually the probability of default based on a 40% recovery rate, okay. 40% just happens to be a number that credit traders gravitate to as a recovery value of it’s. There’s nothing scientific about it, but using 40% recovery rate, it gives the different levels or the different probabilities of default.

Greg Foss (01:00:46):
And if you look all the way down, even to Turkey, it’s still under a 10%. If I’m not mistaken, a 10% probability of default. What if you start getting up around 25%? That’s when things really start getting exciting. By the way, when I say exciting, it means…

Preston Pysh (01:01:00):

Greg Foss (01:01:01):
Well or contagion.

Preston Pysh (01:01:03):

Greg Foss (01:01:04):
And Hey, I own Turkey. I’ve written default insurance on Turkey. So I better hedge somehow. And I’m going to do it at Texas hedge. So I’m going to run out and start buying ’cause I’ve sold insurance. I need to buy insurance on and then I’ll buy it on Russia. And then I’ll run around and tell everybody, since I own Russian default insurance, as Warren Buffett says, “Well, you buy insurance on someone else’s house. And then you go and try and light house on fire.” There’s a little bit truth to that, but really it’s nothing more than contagion.

Greg Foss (01:01:31):
It’s like the domino effects. It’s about hedging, your own risk. And the guys that are selling right now, the guys that are selling protection on the United States at 10 basis points. Trust me when I tell you they’re not using one-to-one leverage, okay. They’re using probably 10 to one leverage. They’re using that leverage. And that is a way of turning it into a hundred basis points, annualized return. And then you realize, Oh, I’m picking up nickels in front of a steamroller because that contagion, Hey, I’m a seller, I’m a seller. And then your boss taps you on the shoulder and goes “Foss, you know, you’ve way, oversold your position, go out and buy some.” And you know in your heart of hearts, “But boss I’ve been the only seller. There’s no other sellers I’m trying to protect my own market.” And then it starts to really gap because the market says, Hey, the only guy that was selling insurance to us all like long-term capital management, they’re now a buyer.

Greg Foss (01:02:24):
Okay. That’s the scary part. It’s when the seller turns into the buyer and the market realizes holy moly and that’s called contagion. And it happened with long-term capital management. The whole street ran to long-term capital for vol long-term capital was selling volatility based on six years of historical data, by the way. And these guys are Nobel prize winners. My Lord.

Preston Pysh (01:02:48):
That should have been enough to let everybody know.

Greg Foss (01:02:52):
Well, until Wall Street runs to their best client, Hey, I’m purchasing vol from you. I’m purchasing vol meaning I need protection. Vol is when you buy vol, you’re buying insurance, you’re buying protection, I’m buying vol and long-term sell, sell, sell. And whoever the Nobel guy was, “Whoa, this is crazy. We’re at 99% confidence intervals.” And Hey you are. If you base it on six years of data, come on, you can’t run a whole long-term capital management on six years of data, but that’s what they did.

Greg Foss (01:03:22):
And then who bailed them out. Okay. So then another example of socializing losses, because if they had failed, then so would have some of the big investment banks failed. And if the investment banks failed, then some of the cronies would have failed. And Hey, I lived it, man. I’m not telling you this is, there’s anything right about it. It’s just the way the system works.

Preston Pysh (01:03:43):
That’s how I found Bitcoin, on how to buy it as guys just look for some Nobel prize winners, crude men. And I was, Hey, I need to be on the buy side of this.

Greg Foss (01:03:52):
Okay. That’s a good way of doing things to someone who’s a hundred, who’s wrong. A 100% of the time is just as valuable as someone who’s right. A 100% of the time, right? So it’s very important.

Preston Pysh (01:04:02):
I’m obviously joking.

Greg Foss (01:04:03):
We have to be, but kind of, this is the biggest problem is that these people have a podium without actually doing any research. And people believe that they’ve done the research.

Preston Pysh (01:04:14):

Greg Foss (01:04:14):
Right? And they get up there and they spew this fudd and people take it at face value because this guy must know something. When in fact he’s just regurgitating stuff that he’s read and hasn’t peeled back the layer of the onion. I would always say, if you have not actually seen the blockchain in action at, or if you have never experienced the beauty of transferring value from a Bitcoin wallet, iPhone to other mobile phone, you have not even done the research at what makes this system so beautiful. Right?

Preston Pysh (01:04:45):
Mm-hmm (affirmative).

Greg Foss (01:04:46):
And having grown up without a personal computer because they didn’t exist in 1986. I’ll tell you, it takes a lot for an old guy like me to come to grips with things like Twitter, to come to grips with things like an iPhone. That’s so powerful. It’s more powerful than what was required to put two men on the moon, right? It’s just unbelievable technology. And what I believe to be the most beautiful asymmetric trade I’ve ever seen in my career.

Preston Pysh (01:05:13):
Greg help me understand what you said something earlier about the 40% recovery is this the currency got devalued by 40%?

Greg Foss (01:05:23):
It’s typically in bonds. Okay. What tends to happen, it’s sort of needed when a bond defaults corporate, or we say governments, but generally it’s around quarter. It always tends to be at the lowest levels of subordination. There tends to be about a 40% recovery rate. I don’t know why it just is a number that the market again has gravitated to. There’s nothing scientific about it. There’s a bond trading expression that bonds do not spend much time in the sixties. Okay. They either go from 60 back to the seventies or they go from 60 and gap down to 40.

Greg Foss (01:05:57):
Because people then realize, Oh my God, it’s gone from being a bond to a quasi equity because what is the bond trading at 40 cents on the dollar? It’s not the bond of the company anymore, or the credit it’s actually the equity of the company.

Preston Pysh (01:06:10):

Greg Foss (01:06:10):
And all the equity has just been crammed down. The equity gets crammed down and it becomes an option. Okay. And when there’s a restructuring 40 cents on the dollar, so they pick this number, Preston, it’s nothing scientific. And if you lowered that recovery rate, the probability of default would actually go up because it’s just backing out the probability of default in a mathematical formula-

Preston Pysh (01:06:31):
We were talking about sovereigns. What does that get you? ’cause it’s not like you’re being dropped down in the equity.

Greg Foss (01:06:38):
Excellent question. And this is why we can’t go too far on this path. I mean, if you put a recovery rate of 5% in there, which probably is more likely the right number for a sovereign versus a corporate, then you’ll get a much higher chances of proximity. You back out hired a defacto chance of, or probability of default. And then people might really start getting scared. And I’m not here to scare anybody as much as just tell people, look at these markets. These are true risk markets. You get so many people who say, Oh, you must have had so much fun. You had a negative view on these sovereigns. You must have had so much fun shorting their treasuries. And I’d say, that’s how little you really understand about credit. You don’t short a treasury bond. You buy default insurance. It’s a floating rate obligation that changes as a function of the credit, not as a function of administered yield rates or yield curve control or all this other garbage that the central banks can do. And I wanted to hit on that.

Preston Pysh (01:07:39):
Let’s talk that yield.

Greg Foss (01:07:40):
Yield Curve control what’s going to happen. If the United States invokes yield curve control, typically they’ll peg the tenure rate at some number. So right now it’s a one 70, let’s say they decide to peg the tenure rate at one 75. My opinion is that’s going to get so many more people looking to the credit default swap market for truth. It’s going to push people into this somewhat esoteric. Part of the credit markets called credit default swaps, and people will focus more on it.

Preston Pysh (01:08:13):
What happens to the price? does a double? Does it go to, instead of it being at 10, does it go to 20?

Greg Foss (01:08:19):
Preston, I’ve seen it see, when it started with Lehman brothers, it didn’t go from six to 12. It went from six to 60, and then it went from 60 to 150 and then went from 150 to 7% upfront. And this is when the contract changes from a annual premium to, Hey, you want to you want me to insure $10 million of your debt, give me $4 million upfront because that’s what happens. That’s how the contract actually starts changing. And these gaps are painful and they tend to be driven again by people who were selling and leveraging a low basis point return picking up nickels in front of a steamroller. They went from being a seller. They had to reduce their position i.e. Become a buyer, and there was just a wall of buyers and the spread just lifts really quickly.

Preston Pysh (01:09:11):
All right. Greg, I have a ten-year treasury chart pulled up here on my screen, and I really like what you just said, because it’s, to me, it’s a very tradable idea that we’re about to talk about here because I find yield curve control to be right around the horizon. Now whether it happens in the next six months or year to year and a half, I have no clue, but I would suspect that the trigger for such a thing would be kind of based on the yield curve or the yield on the ten-year treasury, getting outside of a comfort zone. That in my opinion has been clearly defined based of off a trend that’s been running like we had earlier discussed from the 1980’s.

Preston Pysh (01:09:53):
So when I’m looking at specifically the chart that I have right now, which is showing that trend from 1980 up until right now, this sell off that we’ve seen since the start of the year has been of epic proportions just by looking at it from a yield.

Greg Foss (01:10:09):
Okay. Fair enough. Yeah.

Preston Pysh (01:10:11):
Right. So I mean this yield has just sold off in a cataclysmic way and we’re approaching 2% based on the trend. It looks like it’s going to make a strong run at 2%.

Greg Foss (01:10:23):
Rick Santelli who traded in the pits for many years would agree with that. It’s about returning to reversions to the mean, and what happened in the last year was just a total manipulation and whatnot. And it’s like a spring, a coiled spring and sits it’s a bouncing back. So yes.

Preston Pysh (01:10:43):
Now, if I was going to draw a line out on this trend, it really kind of takes me to probably around the 3% mark, cause this on the chart here, I don’t know if you can see it or not. That’s two to four.

Greg Foss (01:10:54):
I do. I see you there.

Preston Pysh (01:10:54):
So for me, that would probably be the pain threshold. Just looking at it in a super simplistic-

Greg Foss (01:11:01):
Let’s assume. You’re right. That means that the 10-year bond, which has a duration of about an eight, if it goes from one 70 out to 3%, another 1.38 x 1.3 means that 10 year bond will lose another 10 points in value. Just to get to where you think it’s going to cause maximum pain. And I’m going to tell you what, that’s wicked more than maximum pain. And then you take the 30 year bond. That’s already lost 25 points. So I actually think your 3%, I think that’s high. I actually think it’s…

Preston Pysh (01:11:32):

Greg Foss (01:11:34):
2% and maybe even right around 175, cause don’t forget if it goes out to two, they can’t just stop it at two. They need to bring it back and actually make the bond perform. So they need to get that extra 25 basis points as making it appear that the bond is performing this yield curve control, whether it’s 175 or 250 or 3%, again, will cause people to look to the credit default swap markets.

Greg Foss (01:12:03):
Okay. Cause people will start saying, Oh my God, this is not a true reflection of risk. I need to look to true reflections of risk. And the US treasury is not going to be able to sell default protection on themselves. You don’t go to an arsonist and purchased fire protection or fire insurance right? The US treasury will never be able to control the credit default swap markets. And that is why you need to look at those for absolute indications of stresses and risks in the system, not manipulated like yield curve control. But if you, I want you to expand on that. So let’s say it is somewhere between two and 3%. So I’ll go with you.

Preston Pysh (01:12:43):
For me. I think what you’re saying there is they’ve got to get ahead of. I was calling it, the trend line at 3%, but really that’s the point where they have to have it fixed by. Yeah. You got to have it fixed by then. So yeah, you’re probably right. That a 1.75 to 2% is where they’re going to have to start doing some action. And since we’re at 1.7, whatever 1.71 or whatever right now-

Greg Foss (01:13:07):
Still, basis points. Basis points are for kids, right? I mean, at the end of the day, it’s all about price, right? Bonds trade for price. They do not trade for basis points. And each one of those basis points when durations and rates are as low as they are. And duration impact is as high as it is. Those bond prices are very meaningfully changed by changes in yields or weights.

Preston Pysh (01:13:32):
And again, for folks that aren’t intimately familiar with bonds, when we’re talking about the rates gone from 1.7 to 1.8 or 1.9, those bonds are selling off and they’re selling off in a very meaningful way for a market. That is, if you talk about all the bonds together, like Greg said earlier, maybe $30 trillion across the whole global market.

Greg Foss (01:13:53):
Oh, no 300 trillion.

Preston Pysh (01:13:54):
I’m sorry.

Greg Foss (01:13:57):
That’s just so massive guys. And it’s just what happens when 300 trillion loses 10% of its value. Oh, that just happens to be the equivalent to the entire USA deficit. Now we’re talking real money that who was this born by, this is born by people that have matched long-term assets, being their purchase of long-term bonds with their longterm liability. So insurance companies, pension plans, all of that.

Preston Pysh (01:14:25):
I really like this chart and I just want to show it to you. I don’t know that this does a lot of favors for our audience, but I think this is a really interesting chart here where it takes the 10 year, minus the two year spread. And then when you compare that, when you see it start rising like this, it had a really meaningful indicator for the 2008, 2009 crisis and you can see it-

Greg Foss (01:14:46):
So the steepness of the curve, it reflects the steepness of the curve.

Preston Pysh (01:14:50):

Greg Foss (01:14:50):
And right now the only thing that the US treasury actually focuses on are not, they’re purchasing $120 billion of bonds each month, but they’re focused on manipulating the short term yield or the overnight the fed funds rate. But they have not specifically said that they’re going to jump into the yield curve control.

Preston Pysh (01:15:12):
I mean, based on just looking at the numbers and looking at the trend, to me it seems yield curve control is coming by mid-year to the third quarter of this year just kind of [inaudible 01:15:23].

Greg Foss (01:15:24):
I have no experience in that. And I honestly hope it’s not the case because as a credit trader again, it’s like, “Oh, well, isn’t that interesting?” The sweat is starting to appear on the brow of the borrower being the US treasury. They’re starting to sweat there. That’s not what you want to see as a lender, right? You actually just want to see confidence. You want to see, even though they’re out in the market, purchasing $120 billion of debt each month, they’re doing it in a fashion that isn’t implying pegging the yield curve, per se. I need to stress that the US treasury deciding to buy high yield bonds was in and of itself such a monumental event. And it was only because they needed to protect against the downgrade of four potential candidates being downgraded from investment grade or the triple B credit rating level to the double B credit rating level or high yield.

Greg Foss (01:16:25):
Okay. Those four credits were General Electric, General Motors, Ford, and AT&T. Those four credits themselves are bigger than the entire high yield bond market. Can you imagine if those four credits got downgraded into the high yield bond market, the calamity that would have caused in the equity markets and in the subordinate markets of the capital structure, it would have been crazy. So the fed went in and said, yes, we can buy high yield bonds. Now they didn’t just buy those five names or four names. They decided they would buy the entire market. Well, now you’ve seen that high yield bonds are at the lowest yield they’ve ever been in history. And I will guarantee you again, I’ll make another guarantee. It’s a 100% certain that if you own high yield bonds right now, you will lose money on a real basis over the next five years on a real basis.

Greg Foss (01:17:18):
And you probably will on a nominal basis as well after you subtract out true defaults. Okay. It’s only math. You need to pay your high yield bond manager a fee after you’ve paid all your fees. And you’ve paid for defaults. Anyone who owns high yield bonds right now, I don’t know if they must be just getting into the game. Okay. Because if this, if you showed me this 30 years ago, I honestly would have told you, well, it, no, it’s impossible. It would not exist, but yet here’s where we are.

Preston Pysh (01:17:46):
You said something to me that I had not thought about that I think is a really important point. When we’re talking about this yield curve control, they have no incentive to announce that they’re doing it. They have no incentive to actually come out in a messaging kind of way.

Greg Foss (01:18:01):
If I was advising, if I was advising them on that?

Preston Pysh (01:18:03):

Preston Pysh (01:18:03):
The messaging [crosstalk 01:18:01]-

Greg Foss (01:18:03):
If I was advising them on that-

Preston Pysh (01:18:03):

Greg Foss (01:18:04):
100%, if I was the Wall Street guys advising them on that, I would tell them, “Do not do that.”

Preston Pysh (01:18:10):
Yeah. You can do it in practice.

Greg Foss (01:18:12):

Preston Pysh (01:18:12):
You can do it with the numbers.

Greg Foss (01:18:14):
Correct. Correct.

Preston Pysh (01:18:14):
But don’t stand up there on the stage and say-

Greg Foss (01:18:16):

Preston Pysh (01:18:17):
… “We’re officially starting yield curve control, and-”

Greg Foss (01:18:19):
I think you’re right.

Preston Pysh (01:18:20):
“We’re a buyer at any price, as long as it keeps the yields right here.”

Greg Foss (01:18:24):
I think you’re right. I think it would be, again, showing a sign of weakness rather than a sign of strength. I think that Chairman Powell is doing everything he can to provide the confidence to the system. I need to be clear. I do not want our system to fail. It will, over time. Okay? It’s again, a mathematical certainty, but how long is that time? I will give you probabilities that it’s most likely within the lifetime of my children, which really makes me upset. Okay?

Greg Foss (01:18:51):
It’s maybe not as likely, certainly not as likely, as it’ll fail before my lifetime, but it doesn’t matter whether a G7 country fails. If it’s a G7 country, the likelihood… the market’s telling you this… is it’ll be Canada before anyone else. That pains me as well, but there will be other countries that continue to fail. This is just a fact of life, and the IMF and the Special Drawing Rights that they’ve come up with, and all this political back-and-forth between who will be the global reserve currency of the world. No one’s saying Bitcoin, but that’s what it’s going to be.

Greg Foss (01:19:26):
Bitcoin will be the global reserve asset, in my opinion. It’s the most likely outcome, it’s the safest outcome, but it doesn’t mean the other system doesn’t continue to function. We hope that fiat will continue to function to allow for commerce rather than barter, to allow for free-market setting across currency rates, across the world. We hope that, because why? Because you can’t just overnight go to a Bitcoin standard. It would be absolute calamity. You don’t want that as the interim step. You want an orderly transformation of the understanding of what a reserve asset really is.

Preston Pysh (01:20:07):
Greg, what are your thoughts on the contango that’s currently existing in the Bitcoin market?

Greg Foss (01:20:13):
Boy, there’s a lot of people who wanted us to get into that. I’ll just say, look, it exists. One of the most interesting things that I’ve seen about the contango is not that it will give you an annualized return in the double digits. Sometimes you need to be careful by turning short- term returns and multiplying it by four, turning it into an annualized return. Let’s just look at the returns that are available now on the non-regulated exchanges like OKEx and… what are some of the other ones… Binance, I guess Deribit.

Greg Foss (01:20:47):
Those returns are actually meaningfully higher than the contango that exists in the Chicago Mercantile Exchange. That’s pretty interesting. Why does that now exist? It’s because your prime broker is not giving you leverage on the CME because of the blow-ups and things in the most recent fund universe, like the family office, Archegos, or however you pronounce it. Your prime broker has just lost a ton of money, and he’s not giving you leverage on these things. So it’s interesting that the contango that exists in the CME is meaningfully lower than the contango that exists on the non-regulated exchanges.

Greg Foss (01:21:26):
So I’ll say, yes, it exists. Is it a true cash-and-carry trade? Absolutely. They tend to exist in futures markets. Is it a trade that I ever focused a lot on? I did not. So I’m by no means an expert. I will tell you this, though. I own Bitcoin, not to earn a yield. I own Bitcoin as a hedge. I wouldn’t want to give away that hedge by locking in a cash-and-carry trade, by owning the spot and selling the future, and playing the upward-sloping yield curve or contango. It’s so funny, contango. People say “contango” and nine out of ten people, even in finance, have no idea what it means.

Greg Foss (01:22:08):
Then you would just say, “Well, upward-sloping,” and you go, “Well, god darn it. Why didn’t you call it upward-sloping?” Because you don’t call a yield curve in contango. You only call a futures curve in contango. Yet, they’re both drawn the same way generally. Right? Then you say something like “normal backwardation” and that’s it. People’s eyes glaze over and you just think you’re smart, right? It’s all these derivatives guys-

Preston Pysh (01:22:27):
That’s just it.

Greg Foss (01:22:27):
… who always think they’re so smart.

Preston Pysh (01:22:29):
You can’t sound smart if you don’t say it, Greg.

Greg Foss (01:22:32):
Let’s call a spade a spade. Things trade for price. Okay? That’s at the end of the day, things always trade for price. You never settle anything in basis points. You always settle something in price. Any time someone starts talking to you in these fancy damn things like, “You earn 20% annualized,” and you say, “Well, how do you get to that annual?” “Well, you earn it for five days, but you multiply it by 60, right? Or 50.” You’re like, “What? This is some sort of convertible arbitrage.”

Greg Foss (01:22:58):
That’s the funniest thing that they always do. They annualize the returns when there’s a merger… I said, convertible arb, I mean merger arb… when a target company’s getting taken over and it’s going to be done in 60 days. So they decide to annualize it by multiplying by six, and say, “Yeah, well, I’m earning 15% over 60 days. That means over an entire year, I’m earning close to 90%.” Guys, it’s not that. That’s buggering up the mathematics of it. Okay? It’s about a price. Okay? The thing that you’re investing in, and you’re going to earn something that goes from 97 to 100, but it could also go from 97 down to 77, you’re not even reflecting the risk.

Greg Foss (01:23:37):
You’re just saying, “Oh, I’m doing merger arb, and I’m earning this, annualized.” It’s the same thing in the futures markets. These curves change all the time. There’s counterparty risk. There’s so many things that people just overlook. I would just say, I’m in Bitcoin, not to create a fixed income or an income instrument. I’m in it because I think it’s going to go from $50,000 or $60, 000 a coin to at least a million dollars a coin. I’m not sure how it’s going to get there. I don’t want to be not long it, if it gaps up by a couple of hundred thousand dollars because some country comes out and says, “We’ve successfully acquired this many bitcoin for our treasury, [crosstalk 01:24:19]-

Preston Pysh (01:24:18):
That’s the real risk. What you just said was the real risk.

Greg Foss (01:24:23):
Of not being long, right?

Preston Pysh (01:24:24):

Greg Foss (01:24:24):
That’s the real risk, of not being long.

Preston Pysh (01:24:26):

Greg Foss (01:24:27):
These tape bombs. Okay? These bombs that come across your tape are real. They typically go, on an asymmetric trade like Bitcoin, they’ll go against you. So not only if you’re not long Bitcoin, you are so short if you’re long it, but you’re not. It’s a core position, but you’ve been [inaudible 01:24:46], you’ve been trading it, and you’re not at your core holding. You’re somewhat below it, and one of these tape bombs comes out where a central bank has purchased it for their reserves. You just missed your whole opportunity.

Preston Pysh (01:24:59):
You blew it.

Greg Foss (01:25:00):
Especially if you’ve done all the homework, like Ray Dalio. He’s done it. Ray Dalio has done the homework. Yet he just won’t say the word. He’s still relying on risk parity, which Ray, you’re also smart enough to know that that only worked when rates went from 14% down to zero.

Preston Pysh (01:25:15):
Down to zero.

Greg Foss (01:25:15):
Or 60 basis points. It doesn’t work going the other direction, [crosstalk 01:25:19]-

Preston Pysh (01:25:18):
He has to know that.

Greg Foss (01:25:19):
He does. In the hedge fund that I worked at for five years, we tried to mimic the Bridgewater portfolio. Because why? Because it’s a brilliant portfolio-

Preston Pysh (01:25:28):

Greg Foss (01:25:28):
Provided interest rates truly are non-correlated with equities, but when they’re correlated, which they are right now… meaning if yields go up, bond prices go down and equities go down as well… then your risk parity needs to be rewritten. You need another asset in there. Psst, hey, Ray, that asset is called Bitcoin. You know. Don’t be scared.

Preston Pysh (01:25:52):
No, you’re so right. Ray obviously understood the long-term trend of interest rates, the direction they were going.

Greg Foss (01:25:59):
Brilliant, brilliant [crosstalk 01:26:00]-

Preston Pysh (01:25:59):
Yeah. It was such a brilliant strategy, but like all things, it comes to a head based on what’s playing out right now. If anybody understands it, it’s him, but it’s just surprising to see… Now, whether he’s doing it privately and just not talking about it, who knows?

Greg Foss (01:26:17):
It’s like everything, the theory of agents, right? It gets harder and harder to resist it when Morgan Stanley says that they’re doing it, when Goldman Sachs says they’re doing it, TD Bank in Canada has just come out with a really, really good research report, where their head of research says it’s still a Ponzi scheme, and that’s good. Because if TD bank actually embraced it, they didn’t ever embrace high-yield bonds until after 30 years, until the US guys were doing it so successfully. So all I’ll say is there’s always a continuum of people that are early movers and early adopters, but it gets harder and harder for people to ignore it if big funds like Morgan Stanley, New York Life, MassMutual, come out and endorse it.

Preston Pysh (01:27:00):
One of the things I wanted to comment on, where you were talking about the spreads being much larger on the newer exchanges like Binance versus the CME.

Greg Foss (01:27:12):[crosstalk 01:27:12].

Preston Pysh (01:27:12):
What I find interesting is, so the CME obviously has scar tissue from past experience based on this fractional reserve banking system that exists.

Greg Foss (01:27:22):
Okay. Okay.

Preston Pysh (01:27:22):
When you look at how everything in this new crypto economy settles, it’s an immediate-settlement way.

Greg Foss (01:27:30):
Yes, yes. Yup.

Preston Pysh (01:27:30):
That’s the whole reason you have these US dollar coins that have been stood up.

Greg Foss (01:27:34):
Correct, yes.

Preston Pysh (01:27:34):
Is so that you can remove that risk of the fractional reserve system. What I find fascinating, although you can go way more levered in these positions on these new exchanges like Binance than you can on the CME, I would argue that the risk might not be there. It could be, maybe there’s something technically happening that I don’t fully understand, but I do know that they immediately settle. Which if the risk is reaching the parity of whatever’s on escrow, it’s immediately settled, and all parties are settled out of the positions without any type of impairment happening on [crosstalk 01:28:12].

Greg Foss (01:28:11):
Okay. I will plead ignorance. I’ve not traded on any of that. I do not have an operations department behind me to go into depth in that. Again, I’ll just stress, that’s not what I am in Bitcoin for.

Preston Pysh (01:28:26):
Oh yeah, no, I’m with you. Yeah.

Greg Foss (01:28:28):
I think that you can create [inaudible 01:28:31]… I’ll go on the positive side. Any developed market needs a derivative market. Okay? Everybody says, “Oh my God, something like credit default swap was an evil thing,” if you believe Charlie Munger and Warren Buffett on that fact, and about purchasing fire insurance on somebody else’s home and then going out and trying to set their home on fire. That was an interpretation that was wholly misinformed.

Greg Foss (01:28:53):
The derivative market and the credit default swap market was such a brilliant invention because it allowed the creation of credit indices, much like equity indices. Equities don’t have a maturity, whereas all credit does have a maturity, and therefore your index could theoretically mature. That’s not what an index is, but what the CDS allowed is the continuous creation of a five-year contract that was placed in an index, and allowed guys like Bill Ackman to go out and purchase huge insurance on the credit markets, and thereby hedge his equity positions. It was what’s called an upside-down trade. Okay?

Greg Foss (01:29:34):
He was using the top part of the capital structure to hedge the bottom part, but he did it. What did he take out of that trade? It was some crazy amount. It allowed Bill Ackman to put up numbers, during the COVID crisis, that he otherwise would not have been able to put up because his positions in Hilton Hotels and all these other things were getting carved. He just went out and bought enough protection on the credit markets that he offset his losses in equities.

Greg Foss (01:30:02):
People will say that was luck. No, man, that’s not luck, that is skill in managing risk. You need these instruments to allow you to manage risk. That’s all Bitcoin is, it’s a risk-management tool. Despite Peter Schiff and all his venting over how it has no intrinsic value, all that Peter Schiff has successfully done is shown you what a poor risk manager he is. Okay? Because he has been, for so long, so wrong and he is not [inaudible 01:30:34]-

Preston Pysh (01:30:33):
For decades.

Greg Foss (01:30:34):
… position.

Preston Pysh (01:30:34):

Greg Foss (01:30:35):
Okay? So, you know what? You need to always admit your mistakes. You need to understand when you’re wrong, and make adjustments accordingly. That’s the key. I will just say, this is why we need it for Canada. We need people to understand this. We need to understand, the politicians to understand, the fact that Canada’s trading at 40 basis points is so much more important than the fact that it has this AAA credit rating, which is wrong. This is the danger.

Preston Pysh (01:31:04):
The only thing I wish that this website that you shared for the CDS has was just a timeline that showed-

Greg Foss (01:31:12):
You can get them. You can get them.

Preston Pysh (01:31:13):
Yeah, that’d be great.

Greg Foss (01:31:15):
You can drill down and you can get the spreads over time, and you can do it. It’s there. I don’t have it in front of me. I’m not smart enough to show you on the computer [crosstalk 01:31:24]-

Preston Pysh (01:31:24):
Is it on the same site?

Greg Foss (01:31:26):
Yes, it is. Yeah. [crosstalk 01:31:27]-

Preston Pysh (01:31:26):
Oh, there you go. Okay.

Greg Foss (01:31:28):
You can get a history of the different spreads. You’ll notice in the COVID-

Preston Pysh (01:31:36):
Oh yeah. I see it now, Greg.

Greg Foss (01:31:37):
… rescue for USA. You’ll see, and again, everything will trade relative to the USA, including all the banks. Okay? So all the banks, if you pulled up a JP Morgan five-year CDS, it trades in lockstep with the USA. There was a question that came up on your Ask Foss questions. Somebody said, “Will high-yield ever flip in the US Treasury?” The answer there is, “No. Okay? The US Treasury will always trade at a lower yield than the high-yield market. It doesn’t mean that a particular corporate credit… and there are very few AAA corporate credits left, but there could be a time, and this has happened in the past, where corporate credits have traded at tighter spreads than the US Treasury. It’s hard to imagine.

Preston Pysh (01:32:23):
Look at Michael.

Greg Foss (01:32:24):[crosstalk 01:32:24] happened. I’m sorry?

Preston Pysh (01:32:25):
Look at Michael Saylor. 0% yield.

Greg Foss (01:32:27):
No, you can’t. You can’t. Okay? Because he’s a convertible guy. He has optionality in there.

Preston Pysh (01:32:32):
Yeah, yeah, yeah.

Greg Foss (01:32:32):
He has equity vol priced in there. So there’s a big difference between-

Preston Pysh (01:32:36):
Yeah, I gotcha.

Greg Foss (01:32:37):
… a convertible bond, which Michael Saylor is, and a true senior credit that has no equity vol in sight. Michael Saylor, he’s so smart. He already knows if he did a straight senior issue, he’d probably have to pay about 250 basis points more than treasuries. But the reason he went to the convertible bond market is because the convertible bond arb guys, they want to buy equity vol. They want to own his equity vol. By doing that, they effectively compressed his yield spread to zero.

Preston Pysh (01:33:08):

Greg Foss (01:33:08):
Okay? It’s not, though, a true credit spread. It’s equity vol impacting that yield spread.

Preston Pysh (01:33:16):
Do you see a world where you could actually do negative yield or a negative coupon for some type of equity that’s promising to buy Bitcoin, if this continues to go in the direction-

Greg Foss (01:33:26):
This is really interesting. How about credit default swaps that are settled in Bitcoin rather than settled in fiat? These are some wicked, wicked-

Preston Pysh (01:33:34):
Wow, yeah.

Greg Foss (01:33:34):
… cool ideas, but yes. So one thing I’ll take out today is, so I saw a tweet by Anthony Pompliano, which was quite smart, except he said that they should take… GameStop today announced that they were going to do a shell filing for a billion dollars of debt and equity. I think they just probably said equity. He said, “Well, they should put it all in Bitcoin.”

Greg Foss (01:33:56):
I said, I thought to myself, “No, you know what? They don’t need to put it all in Bitcoin. The first thing they need to do is pay down some of their high-yield bonds, because GameStop is a high-yield borrower.” High-yield borrowers themselves should… are typically, their high yield is because they’re straining to meet their interest obligations, let alone their term repayment of debt.

Preston Pysh (01:34:17):

Greg Foss (01:34:18):
To own Bitcoin in that scenario is much different than a high-grade credit that has a very low leverage or a higher-yield credit, but has very low leverage. GameStop has enough debt, they have $200 million of debt, that they should actually pay down. It’s a two-year maturity. They need to pay that down, get it off their balance sheet. Their credit rating, it’ll change their default profile meaningfully, because if you have no debt, you can’t default. Then they could start playing the Bitcoin game. But the first thing for them to do is solve their debt maturity profile before they jump right into Bitcoin. Okay?

Greg Foss (01:34:58):
This is what Saylor understands so well. He used an instrument that’s a quasi-equity instrument. It’s not a debt instrument. A convertible bond, a large portion of it is equity. That’s what he did. He used the equity, the convertible bond, which is an equity derivative market, to fund his Bitcoin purchases. Brilliant guy. Saylor, you’re a rocket scientist, man, you know it, these guys are just… I went to McGill and I took a couple of engineering courses with these walking mainframe computers. The beautiful thing about Saylor is he can actually speak-

Preston Pysh (01:35:30):
Yeah, true.

Greg Foss (01:35:31):
… as well as understand the math, right? Here’s the thing, some of these guys you go to school with, they’re just so smart, they can barely even speak. They speak the base language of the world, which is called mathematics, but they don’t speak any other language very well. They’re just a walking computer mainframe, right? At least Saylor, he can talk the talk as well.

Preston Pysh (01:35:52):
I love it. So true. All right, Greg. I could literally talk to you for the rest of the night. This is really fun. We have to do this more often.

Greg Foss (01:36:01):
Tell me what the score is in the NCAA game right now, do you know?

Preston Pysh (01:36:03):
I have no idea.

Greg Foss (01:36:05):
One guy said, “Why are you doing it on a Monday night?” The only thing I could think of is because Gonzaga’s playing and I’m like, “Okay, I haven’t even looked at the score, but I’m hoping there’s still enough time in the game.” I wanted to thank you. Look, and I want to point out something that I’m really proud that I learned about you. West Point grad, it looks like you flew an attack helicopter at one time in your career. I had a friend from my hometown in Montreal that actually went to West Point as well and flew a helicopter for the US army in Alabama, or [crosstalk 01:36:34]-

Preston Pysh (01:36:34):
Yeah, Fort Rucker.

Greg Foss (01:36:36):
Okay. He was based out of there. He lives in California right now. He’s not in that, but he’s a great guy. Let me tell you, it’s the service that you guys give to your country that makes you guys so good. One of my roommates from Cornell died in 9/11, in that horrible accident, or that horrible event. So as a Canadian, I’ve experienced some of the ebbs and flows of the US culture, it’s way different than Canada. We need you guys.

Greg Foss (01:37:08):
I need Canada to get their arse in gear, but we won’t do it without the US doing it, because we never do. This is why it’s so important for our kids to embrace the alternative that I see as Bitcoin, that fix the money, fix the world, as Marty Bent says. This is so important. It’s important for people like yourself, that put service into the country. You don’t do that because you don’t love your country. It’s because you love your country. We’re doing this for Bitcoin because we actually love the country.

Preston Pysh (01:37:36):

Greg Foss (01:37:36):
We’re not trying to destroy the country. We’re trying to help the countries, right?

Preston Pysh (01:37:41):
Absolutely. You couldn’t say it any better, Greg.

Greg Foss (01:37:44):
It’s so important. This is a non-conscription army that you guys have, the highest technologies in the world. Bitcoin can help so many things. It can bring x86 chip manufacturing back to North America, which itself is a potential national defense issue. Canada needs that. Because we’re a country of basically the population of California. We don’t have a big central bank behind us, like the ECB or the Fed.

Greg Foss (01:38:10):
Quite honestly, we’re in trouble, and that does not make me happy, because my granddad served the country in two World Wars. He didn’t do it because he didn’t love his country. He did it because he wanted a better future for our children. I just want the same, and I’m sure you do. So let’s do this Bitcoin thing. I wanted to thank everybody listening, and to tell you guys that I take tremendous strength from the Bitcoin Twitter community. I’ve learned so much. I wanted to thank you for the opportunity to share my experiences.

Preston Pysh (01:38:43):
Greg I’ll have your Twitter handle in the show notes. Is there any other links or anything else that you want to point people to?

Greg Foss (01:38:51):
I wrote a paper. I wrote a paper. It may be published in Bitcoin Magazine, but I’ll send you the link to the paper. It’s in PDF format. It’s long enough. It’s maybe more than 40 pages or something. So I put my history there, and I put my methodology for pricing Bitcoin as a function of credit default swaps, and why I think it makes sense. I’ll just send you that link. Okay?

Greg Foss (01:39:15):
I’ll put it in our DM, and you can attach that. Anyone who has any questions or most importantly, any criticism, okay? I’m wide open. I want you guys to carve holes in this. Okay? I believe I’m right, but I’m never 100% certain. I will not go out and say I’m 100% certain, about very few things, because you just can’t be. You need to hedge your risk and always learn, and learn if you’re wrong and adjust your position accordingly.

Preston Pysh (01:39:42):
Greg, thanks so much for making time to come on the show. I thoroughly enjoyed this conversation as I-

Greg Foss (01:39:49):[crosstalk 01:39:49], thank you.

Preston Pysh (01:39:49):
I look forward to bringing you back on.

Greg Foss (01:39:51):
Okay. My friend, it’s so nice to talk to you guys. I’m not sure who you guys want to win in the NCAA, but I hope it’s a close game. I hope there’s a buzzer beater to celebrate. Thanks a lot for having me, and I look forward to our next encounter.

Preston Pysh (01:40:06):
Hey, so thanks for everybody listening to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that. If you have time, leave us a review. Thanks for joining us this week, and we’ll catch you next Wednesday.

Outro (01:40:21):
Thank you for listening to TIP. To access our show notes, courses, or forums, go to This show is for entertainment purposes only. Before making any decisions, consult a professional. The show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or re-broadcasting.


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