31 October 2023

Preston Pysh talks with members of the Bitcoin mastermind group about all the events happening in the space during the 4Q 2023.

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  • The current bull market in Bitcoin – what’s driving it?
  • The DTCC website listing various Bitcoin ETFs.
  • Will the Bitcoin ETF even bring new interest to Bitcoin?
  • What is happening in the treasury market right now?
  • What’s the broader implications of the treasury market moves?
  • Oil.
  • PBOC liquidity injections and overall outside influences to liquidity.


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.

[00:00:00] Preston Pysh: Hey everyone, welcome to this Wednesday’s release of the Bitcoin Fundamentals podcast. On today’s show, we have the fourth quarter, 2023 mastermind discussion with Joe Carlasare, Jeff Ross, and Steven McClurg. We cover a broad range of macro and Bitcoin topics. Steven and Joe come armed with tons of information about the Bitcoin spot ETF filings.

[00:00:23] Preston Pysh: We have a big debate on all the events that seem to be converging at the start of the new year, with the reverse repo aggressively getting drained to provide liquidity and much, much more. This is one of my favorite conversations to have throughout the year, and this is definitely one you won’t want to miss.

[00:00:38] Preston Pysh: So with that, let’s get started.

[00:00:43] Intro: You are listening to Bitcoin Fundamentals by The Investor’s Podcast Network. Now for your host, Preston Pysh.

[00:01:02] Preston Pysh: Hey everyone. Welcome to the show. We are back with the mastermind fourth quarter, 2023. Man, time flies. And I’m glad it does because I look forward to this conversation every time we got Joe Carlasare, Jeff Ross, Steven McClurg. Gents, just a few things happening right now.

[00:01:23] Joe Carlasare: Just a few.

[00:01:25] Preston Pysh: I think y’all know where I’m starting, right?

[00:01:28] Preston Pysh: You all know where I’m starting. It’s, there is so much drama, so much drama on the internet, on Twitter right now. Just so folks know. The end of last week was a Coindesk came out with a tweet, everybody, including myself retweeted, and they announced that the Bitcoin ETF, the BlackRock ETF was approved.

[00:01:53] Preston Pysh: And my lord, was there a reaction, not just in the price, but like with everybody wigging out. Okay, so then let me, let me just play this forward a little bit more. So then, this week we’re recording this on Tuesday, Monday. There is a DTCC website that lists ETFs before they, you know, the tickers, before they go active and become, you know, what people can log into their trading accounts and buy.

[00:02:26] Preston Pysh: What was the ticker on it? It was like IBTC?

[00:02:29] Jeff Ross: IBTC. Yeah.

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[00:02:30] Preston Pysh: So, iShares, BTC of course they get a great ticker. Surprise, surprise. So this goes up. The market goes wild. Who knows if it was actually because of that news or what, but Bitcoin is up huge. What, like 4,000? No, more than that. It was 6,000 at the highest from, I think the day started off at like 29,000.

[00:02:53] Preston Pysh: It got as high as 35,000 for a 6,000 in fiat terms move on a single day after this ticker got listed on the DTCC website, which doesn’t mean that it’s active and having been approved. It’s just getting listed almost like in a, in a preparatory position for approval. There was also some news that came out that said that BlackRock was going to begin funding their ETF, which I have no idea what the source of was that. I saw that on Twitter.

[00:03:26] Preston Pysh: Then, today, Tuesday, as we’re recording this, it got the DTCC website delisted the IBTC ticker. Then, in the afternoon, it was relisted again, and then I had somebody, this guy goes by Army of None on Twitter, he says, also apparently the spokesperson said that this has been up on the DTCC website since August, nobody noticed.

[00:03:55] Preston Pysh: And then Kelly Gormley, he tweeted that ARK ETF is also listed. So, my gosh and, and I just want to put this out there. I recently tweeted myself, BlackRock isn’t making the fiat price go up. The countless psychopaths that have held through 70 percent drops. And bought more is why the price goes up and I stand firm on that tweet.

[00:04:25] Preston Pysh: I’m curious what, guys, what is happening? This is crazy. Is, is it Joe, I’m going to you first and I know Steven, you probably can’t say too much, if anything at all.

[00:04:40] Steven McClurg: Oh, I can say a lot.

[00:04:41] Joe Carlasare: Oh, I love that. And I hope you do.

[00:04:43] Preston Pysh: And I hope you do. Okay, Steven.

[00:04:45] Steven McClurg: I want to hear Joe first because I’ve actually seen a couple of things you’ve said, Joe, and you’ve been spot on.

[00:04:49] Steven McClurg: So hit it, sir.

[00:04:50] Preston Pysh: Do it, Joe. Sure.

[00:04:52] Joe Carlasare: Well, let’s clean up the first one, right? I think it’s kind of an hilarious story with the Cointelegraph where they basically just had an intern put something in the telegram chat and I’m understanding it somehow became news, which is hilarious in its own right.

[00:05:04] Preston Pysh: But Joe, I guess the, I don’t know that it was an intern.

[00:05:07] Preston Pysh: I think there was a person that was in their telegram chat. that posted it and then disappeared, and I don’t even know that they know who the person was that posted it into the telegram. Has that been established?

[00:05:23] Joe Carlasare: I’m not quite sure either. Regardless to say it was it was clearly, clearly not correct, right?

[00:05:29] Joe Carlasare: Like that it was approved, but I think, you know, you’ve got a lot of signs out there that, you know, this is the way we’re going. I mean, it’s kind of hard not to see that the sequences get lining up for this to eventually get approved. It’s just a question of when. Now, you know, the one thing that I think

[00:05:42] Preston Pysh: Is it that, Joe? Is it, is it just a question of when? Or are we at that point where it is going to get approved?

[00:05:48] Joe Carlasare: I mean, that’s my base case. I think it will be approved. But the big hang up at this point, I think, is I believe, and this comes from some folks I’ve talked to close to the issue, that they want to set a clear precedent.

[00:06:01] Joe Carlasare: Like, so when they, when the, when the Bitcoin futures ETFs launched originally, You got to remember they did that without an order, right? Explaining the rationale, which was specifically cited in the appellate court case regarding grayscale, that they didn’t really carve out their rationale. I believe this situation will be slightly different.

[00:06:18] Joe Carlasare: You will get an order approving these in mass. I think you’ll get a shotgun approval for most of them. And the very key reason they want to do it in sort of more of a formalized way with an order. is because I think they want to set a precedent so that they don’t have the Dogecoin ETFs filing next and the Solana and everything else coming down the pipe, right?

[00:06:35] Joe Carlasare: They want to have some precedent for why they will list certain markets and not others.

[00:06:40] Preston Pysh: Putting that all aside, right? What’s Mark Cuban, what’s Mark Cuban going to do if the Dogecoin ETF doesn’t get approved?

[00:06:46] Joe Carlasare: I don’t know. Take that up with him next time he’s on. So here’s what we do know. What we know from some official and unofficial sources, let’s start with the official sources, is that there was updates to various filing documents, without getting too technical, that many of the issuers, many of the sponsors, had to actually submit.

[00:07:04] Joe Carlasare: They have been updated. ARC, I think, updated one of theirs just today. In addition, there have been postings that were actually made prior to the govern the supposed government shutdown, or the expected government shutdown, starting the comment period. And, whenever I bring this up, folks generally respond, well, Joe, do you really think a comment period, requesting people to solicit comments to the SEC and offer their opinion, that’s going to change anything?

[00:07:24] Joe Carlasare: No, I don’t, but I do believe that they will go through the sequence of letting the comment period wrap up. And what do we know about that? We know that the comment period wraps up for the iShares ETF on November 8th, right? What typically happens after the comment period is you get a few weeks where they digest the comments, react to it, and then you get some word from down high that these things are going forward.

[00:07:45] Joe Carlasare: So where does that set the timetable? That would set it into the middle or early middle of November, early December- ish. Okay, about, that’s probably the best case scenario for hearing approval. And then from there, you got, you know, some time for them to build it out and launch it. But keep in mind, they know well in advance of the public hearing the approval.

[00:08:04] Joe Carlasare: It’s not like BlackRock’s going to read in the newspaper, any other of these sponsors are going to read in the newspaper that it’s actually coming to market. They’ll be well aware of it. So I do think it’s a question of when, not if at this point. I think that the single biggest thing, which I don’t know if it was out the last time we talked, I kind of remember it was August 29th, I want to say when the grayscale victory came down, where grayscale was able to prove that the SEC treating the futures market different from the spot was arbitrary and capricious.

[00:08:29] Joe Carlasare: That’s a massive win, right? That’s a very high standard under the law to meet and their success in that case, I think was sort of the the impetus, the proximate cause for the SEC sort of waving the white flag on some of these things.

[00:08:42] Preston Pysh: The reason I was smiling as, as I’m listening to this is because the whole time I’m thinking about your bet with Greg Foss and the timeline, as you were saying, the comment period doesn’t even end until December because so much of this sounds very procedural, like they’re not going to break their standard operating procedure within the SEC for a comment period and like all these things.

[00:09:02] Preston Pysh: So for you guys that are closely dialed into this, are you looking at the Twitter comments and like the people who don’t understand any of this process and just like laughing your tail off because they’re just so lost? Or do you think there could be some like one off anomaly where they just blow off their procedures in the way that they commonly do business and approve this thing because there’s so much outside pressure, political pressure, whatever, for the approval?

[00:09:32] Steven McClurg: No, look, I’m, I’m, I’m watching Twitter and just laughing because you’ve got a million people that stayed at a holiday inn last night and think that they’re, you know, a securities lawyer. It’s really funny. And it’s, and it starts with, you said it started with the coin telegraph article. First of all, if you have the word coin in your name, you’re not a real news source. So just, you know-

[00:09:56] Preston Pysh: Steven, that is harsh. That is hard.

[00:10:01] Steven McClurg: Number one, right? But by the way, there’s not a lot of good news sources, even in traditional media anymore.

[00:10:07] Preston Pysh: Look at the wall street journal and they’re reporting on the Warren stuff or that she was basically using the wall street journal as, you know, authoritative source that 120 million was raised through crypto. And now FinCEN’s getting involved. And in reality, it was 450, 000 instead of 120 million, which is only what a third of a percent of what she’s quoting and basically sending an official documentation to the white house. So like, you know, that’s the wall street journal and they, they still didn’t go back.

[00:10:41] Preston Pysh: And so although your comment does make me laugh, I think that we actually get better reporting out of a lot of these, the minus coindesk, you know, using a telegram chat to post something on Twitter, which was, I could only imagine what that turns into, but sorry to interrupt you.

[00:10:58] Steven McClurg: Oh yeah, no, I mean, it’s just, so that’s the first one.

[00:11:01] Steven McClurg: And then, and then the second one, of course, anybody that’s ever launched an ETF before knows that you pick a ticker. Sometimes you pick it years in advance. So we locked down the ticker BRRR for our Bitcoin spot, ETF. By the way, I, I think, I think for iShares, I, BTC is fantastic, right? Like that works for them.

[00:11:27] Steven McClurg: I think for us, BRRR is the right ticker.

[00:11:30] Preston Pysh: Good lord Sir.

[00:11:33] Steven McClurg: So, so we. Look, we locked down that ticker in 2020.

[00:11:38] Preston Pysh: Oh, wow.

[00:11:40] Joe Carlasare: So, so, so the process of, of, of getting a ticker, the process of, of simply creating a CUSIP for a securities filing, I mean, it’s just, it’s just boxes that you’re, that you’re checking and you’ve got like, especially bigger shops, right?

[00:11:55] Joe Carlasare: I mean, look, we, we haven’t gone out and enlisted in that way yet, but if you’re a bigger shop, you’ve got teams of product managers. And they’ve got the list of things they have to do and they’re like, okay create a cueset. Done. Get a ticker. Done. List DTCC. Done. They’re not saying anything by doing that.

[00:12:16] Joe Carlasare: It’s just the list of things to do. And they’re trying to get through the list so that they can go on vacation. Right. Yeah. I mean, that’s, that’s, that’s really all it is. You know, cause you don’t want to be, I mean, look, we’re, we’re, we’re in late October. You don’t want to be coming up on Thanksgiving.

[00:12:27] Steven McClurg: Yeah. And like, Oh man, I gotta, I gotta work on Wednesday before Thanksgiving because I didn’t get my ticker done. I mean, that’s, that’s really all it is. It’s just a bunch of low level people that are, that are, that are checking boxes and getting everything in place so that they can just get this complete and ready to launch when, whenever the SEC decides.

[00:12:44] Steven McClurg: And it’s ready to launch. So the other thing that’s really interesting here too is I’m not going to talk about the Grayscale stuff. I’ll let Joe talk about all that, but that was a nothing burger as well. The court mandated. It’s totally expected is they didn’t appeal. You’re going to get that order when they didn’t appeal.

[00:13:02] Steven McClurg: Yeah, that’s right. And the order was for the SEC to re review the application. Nothing burger. Okay. The BlackRock listing, nothing burger. I mean, the market’s essentially moved up because Mr. Taylor Swift scored a touchdown on Sunday, right? I mean, so really what happened was the market started going up on all this news and all this excitement going on and short squeeze and then Asia trading overnight.

[00:13:25] Steven McClurg: The derivatives platforms were, you know, at high volume and more unwinding of shorts and. So we had this massive swing, and now everybody’s realizing that, oh, all that news that happened yesterday really wasn’t real news. So now we’re starting to see the prices go down a little bit. But going back to the process and what’s happening with Bitcoin spot, I mean, look, I’ll, I’ll verify some of the things that Joe just said.

[00:13:47] Steven McClurg: Yes, we received comments from the SEC. It happened, right? Everybody received comments from the se. Everybody that had AAS one with the word Bitcoin spot on it. Warren S3, in the case of Grayscale, received comments from the SEC right before the government shutdown was supposed to happen and the process is, well, but that’s actually pretty significant because we filed our Bitcoin spot ETF in January of 2021.

[00:14:17] Steven McClurg: Okay. This is the first time we’ve ever received comments. And anytime you get comments. So this is the first time we’ve actually got it. We understand it to be across the board. They’re pretty generic. The way the comments work is you go through and you look at what they said and you update your filing based on, based on those comments, right?

[00:14:36] Steven McClurg: To make sure that proper disclosures are in there. Certain things are answered. You know, I’m not going to, I’m not going to tell you what the letter said, but you can, you can guess. But you just make sure that you’re, you’re, you’re filing is beefed up enough to where, because the SEC’s job is to protect the public, protect the markets.

[00:14:56] Steven McClurg: And they want to make sure that all the right disclosures are in there. And there’s nothing that, you know, there’s no risks that could exist that didn’t say exist, or there’s grammar. I mean, there’s, there’s all kinds of things that go on, but it was a pretty generic list. I expect another round of comments, by the way.

[00:15:12] Steven McClurg: This week or next. And where I think the timeline is, is I think Joe’s right. I’ve been watching that November 8th date pretty closely because the SEC generally waits until the public comment period is closed before they allow something like this to launch. So that public comment period will close November 8th.

[00:15:33] Steven McClurg: And if I had to guess what the timeline is, has anybody here ever worked for the government or, or, or knows people that work for the government?

[00:15:41] Preston Pysh: Oh yeah. Very efficient.

[00:15:43] Steven McClurg: Employees don’t work on holidays. Okay. So Thanksgiving is an entire week that people generally don’t want to work. And the whole month of December is pretty much a holiday at this point in time, right?

[00:15:56] Steven McClurg: So if, if it, if a Bitcoin spot, ETF was approved, say, today, tomorrow, that means that once, that once the 19 B four, which is the exchange rule exception is approved, it’s about a 75 day clock until the actual launch. And by the way, the 75 day clock is really important because that’s the period of time that the S1, now, now it’s not always 75 days.

[00:16:26] Steven McClurg: The SEC can make an exception. It can change things, but generally it’s 75 days and that gives the public ample time to know that something is coming. It’s not going to be on Twitter that, Oh, this got approved and we’re going to have a Bitcoin ETF tomorrow. It’s a whole 75 day period from that approval, the 19 before date until the S1 goes live.

[00:16:49] Steven McClurg: And if you look at the timing, the SEC would typically want about the final 30 days before launch to read through all the prospectuses, make sure that all the risk disclosures are correct, that everything that they need is in there, and they’re not going to do that in December. I don’t think anything gets approved until November 17th.

[00:17:08] Steven McClurg: I think what’s going to happen is we get another round of comments this week. We go through, we answer them, and then we get a very exhaustive list of comments on November 17th. The week before Thanksgiving. And then the SEC is like, okay, we’re going on vacation.

[00:17:23] Preston Pysh: That sounds like the government to me is right before the holiday.

[00:17:29] Steven McClurg: We’re going to go away. You’re going to work through all this. And then you’re one, we’re going to come back, see what you put. And then we’ve got another like 30 days to like make sure that, you know, there’s nothing else. And then you can launch in February. But any date before that doesn’t give the government a full 30 day period after Christmas break to do their job.

[00:17:49] Preston Pysh: Oh, wow. That’s a good point. It’s looking good for you, Joe. It’s looking really good for you and your Greg Foss bet.

[00:17:57] Joe Carlasare: It’s just a timing thing. I mean, it really, it doesn’t change the fact that this is the direction it’s headed, right? It’s headed towards approval, which is the key thing. We can, we can say whether it’s December, January or November.

[00:18:08] Preston Pysh: Well, Foss just didn’t, he didn’t account the government, you know, calendar, the holiday calendar. He was, he was off. He didn’t take that into account.

[00:18:16] Steven McClurg: See, that’s, that’s where I’ve got, that’s what I’ve got on Foss, man. I mean, we were both bond traders, but like I, I have, I have family that works for the government. I know how it works.

[00:18:25] Preston Pysh: You know, the deal, you know, the deal, Steven.

[00:18:29] Joe Carlasare: The other big thing we didn’t mention is that and I’m curious to hear Steven’s take on this really quickly is that we didn’t get a new refiled 19 before for the grayscale following the mandate were you expecting that or do you, can you comment on that at all?

[00:18:43] Joe Carlasare: Did you expect them to just go on the old app or what do you think about that?

[00:18:48] Steven McClurg: No, I think there’s, I didn’t expect it. There, look, there’s, I think there’s like three camps of people, right? There are the nervous Nellies on one hand that are like, every time that they get a single comment or something changes, they’re, they’re, they’re quickly doing an update, quickly doing an amendment.

[00:19:01] Steven McClurg: Like, okay, we’re here. We’re ready to go. Let’s go. And then you got all the kind of the old pros that are like, Oh no, we’re, we’re going to, we’re going to, we’re going to do everything at once, you know, we’re going to get, we got our comments in, we’re going to get a few more, we’re going to make sure it’s correct.

[00:19:16] Steven McClurg: We’re going to take our time. And because we know everybody’s going at once. And then you kind of got the ones in the middle that are not sure that, okay, this could be, this could be this. And sometimes they’re hurry up and wait and sometimes they’re not, we’re just kind of watching and laughing, you know, and we’re like, no, we, we know how this works.

[00:19:30] Steven McClurg: I truly believe everybody’s going on the same day.

[00:19:34] Joe Carlasare: Will everybody be able to launch on the same day? Logistically? I mean, I agree with the approval, but do you think they’ll be able to logistically launch on the same day?

[00:19:41] Steven McClurg: Yeah, absolutely. I mean, it will create a little bit of chaos with some APs and lead market makers, but I don’t think it’s going to be that bad.

[00:19:50] Preston Pysh: Is the reason that you guys have so much conviction that an approval is coming is because they lost the case where it, which was the main point of the case that they lost was that they approved the futures. A spot is less risk relative to a futures approval. And therefore the, that egregious action, is the reason why the SEC is going to have to go down this path.

[00:20:15] Preston Pysh: Is that the rationale or that you have so much conviction in the approval?

[00:20:19] Steven McClurg: I think it’s lawsuit prevention against the government. If you choose BlackRock first, even if it’s by one day, then you’ve got a mass lawsuit.

[00:20:30] Joe Carlasare: It’s totally numerous. You’ll see gray scale. Sue them again. I mean, everybody would sue them.

[00:20:34] Joe Carlasare: Yeah, I totally, I totally is. Your question, is your question, why do we have a confidence that there’ll be approval at all? Yes. Is that what the question was? Yes. The both, both of those things. Yes. Well, well, my answer to that is it’s not any one thing, it’s just sort of the totality of the circumstances and, you know, losing the case.

[00:20:49] Joe Carlasare: Asking folks to update these forums and, you know, just sort of laying the groundwork for a lot of this, the Ethereum futures, I mean, all of this is showing that they’re going to wave the white flag, I think, but the case was big. I mean, that was a huge part of it, I think, in my mind.

[00:21:04] Steven McClurg: Yeah, look, I mean, the comment, it’s both things.

[00:21:07] Steven McClurg: It’s the fact that we’re already getting comments and the fact that this lawsuit did kind of push them into some kind of action, because I think it probably would have been another year without the lawsuit. But, but the comment period is really important because, you know, kind of going back to my earlier, earlier comment.

[00:21:23] Steven McClurg: Yeah. The SEC has a lot of people, but they’ve got a lot of things they’re dealing with. They’re, you know, you’re dealing with, you’re not just dealing with Bitcoin spot ETF. You’re dealing with IPOs. You’re dealing with making sure that markets markets are functioning. You’re making, you know, you’ve got a lot of other ETFs.

[00:21:36] Steven McClurg: You’ve got a lot of these publicly traded vehicles. You’ve got. private vehicles that you’re, I mean, you, you’ve got asset managers that you’re dealing with. I mean, there’s a lot going on and a government employee doesn’t create work for themselves. Unless they’re actually going to do something. So going back to, you know, earlier comments, you’re not going to create a bunch of work just to create work for yourself.

[00:21:58] Steven McClurg: Yeah. When you’ve got all this other, all these other piles of work to do. Right. And that’s the comment period right now. So that tells me it’s like, no, they’re, they’re moving forward.

[00:22:05] Preston Pysh: What are your thoughts on like, so once we get approval on the other side of that, I know Saylor has said that you’re basically creating a situation where now corporate entities have a turnkey solution to have exposure to Bitcoin without managing keys and all these other things.

[00:22:27] Preston Pysh: Do you think that that is going to be how this kind of plays out, which turns into a, a massive bull run, or do you think that. You know, I’m much more of the opinion that the hodlers that just endured the drop over the last year and a half and stacked all the speculators coins through that period of time are the reason that the price action does what it does in the next cycle.

[00:22:50] Preston Pysh: But it’s a little bit of both. What are your thoughts after approval, like the impact that something like this is going to have? Is it a, is it a major shift? Is it something that is going to be a whole new paradigm in this next cycle?

[00:23:03] Steven McClurg: I don’t think it’s as big as people think it’s going to be. Joe, you agree?

[00:23:06] Joe Carlasare: Jeff. Jeff. What’s your Jeff’s thoughts?

[00:23:10] Jeff Ross: Well, I like hearing your 75 day window, Steven, because to me, that makes the most sense is I think it’s going to be a buy the rumor, sell the news kind of event. So I think it’s going to get, we’re going to have a jacked up run. First, you know, Q1 probably of 2024 if the timing works out and that kind of works with my timing and I’m sure we’ll get into this a little bit later in the show, but macro events that are coming on things like the overnight reverse repo markets and, and liquidity and all those sorts of things that that would fit with what I think is most likely to happen where we get a huge run up based on the ETF.

[00:23:43] Jeff Ross: And then this, it looks like the world’s going to collapse, the system’s collapsing and Bitcoin just gets hammered back down again. And then we start this. And then it starts in earnest at that point. So then I think, you know, the QE starts again, the Fed steps in again, then, you know, people get serious about the fact that we have these spot Bitcoin ETFs, money kind of slowly enters into it.

[00:24:03] Jeff Ross: I don’t think there’s a huge wall of money that’s just going to jump into it initially. I think a lot of the boomers and the cautious people who are waiting for this to happen, They still, I think are going to watch and wait. And yeah, so you, so you pop this up. So I didn’t mean to, to turn the conversation here, but this is kind of how I view all these things is I think at some point, what you’ll notice, this is the overnight reverse repo market.

[00:24:24] Jeff Ross: It has absorbed a ton of the T bill issuance by the treasury. So as we all know, and I’m sure we’ll talk about this too, the government has been on the massive you know, spending spree. They’ve been borrowing crazy amounts of money, running massive fiscal deficits. If you look, you’ll see that little point right at the beginning of the year that, yeah, right close to the marker there.

[00:24:42] Jeff Ross: So the overnight reverse repo market at that point was 2. 55 trillion. And if you fast forward to today, you can see in the upper left hand corner, now it’s one, about 1. 1 trillion. So it’s down about 1. 4 trillion. That has absorbed almost all of the issuance of T bills, the short dated treasuries. So that’s great.

[00:25:03] Jeff Ross: What that means is that net liquidity has been basically flat instead of getting hammered on the liquidity side, the liquidity has basically been flat, even though the Fed has still been allowing mortgage backed securities and treasuries to roll off its balance sheet. And even though the treasury general account has been filling up.

[00:25:19] Jeff Ross: Why is that significant? At some point, this is going to run out, right? It’s a pretty clear trajectory that we’re heading down. If we continue the same rate that it’s been going, it could be January, February, March, somewhere in that timeframe, where basically the overnight reverse repo market basically runs out of liquidity.

[00:25:35] Jeff Ross: At that point, I think things get interesting. And by interesting, I mean, things could get bad. The treasury market could lock up at that point. It’ll be completely dependent on the treasury will be completely dependent on the private markets to absorb their massive, massive amount of issuance of treasuries.

[00:25:50] Jeff Ross: And if they don’t, who’s the buyer of last resort? It’s the Fed. So that’s kind of how I look at all this stuff. I think that there’s going to be, there’s still a reason to be optimistic. We’re still not in a recession, technically, and I’m sure we’ll talk about all this too. But at some point, this is going to come to a head.

[00:26:04] Jeff Ross: We’re going to see lots of this play out with the move index, right? We’re going to watch bond volatility. I think skyrocket at some point, probably Q1 or Q2. And that’s because nobody is going to be willing to buy the treasuries or at least not, not enough people. And that’s when the fed will be forced to step in and act.

[00:26:20] Jeff Ross: And that’s where we start getting the next round of QE. That was a huge divergence from war.

[00:26:25] Preston Pysh: No, no, no, no. It’s not. This is where I really wanted to go next. Cause as we’re talking about this approval, which is right in the wheelhouse of this timeline that you’re talking, which is, which is next quarter, right?

[00:26:36] Preston Pysh: So when we talk again, after Christmas, We’re going to be getting right into the heat of what you’re talking about, which is the TGA has been heavily utilized by the federal government in order to provide liquidity into the system so that we don’t get disorderly moves in credit and equities and financial markets at large.

[00:26:58] Preston Pysh: Even though they’ve been heavily utilizing that and draining that reverse repo facility, we continue to see bonds sell off. In this past couple of weeks with quite a bit of volatility, basically setting new lows way beyond where I would have thought that this would have gone and you combine that with a narrative that well, I don’t even know that I would call it a narrative that’s running rampant on wall street, which is, are we in a debt spiral and are we beyond an event horizon with respect to this?

[00:27:34] Preston Pysh: especially in the face of multiple wars and conflicts and issues that will just make the money printer go, you know what, which is Steven’s ticker, which is one hell of a brand, sir. I’m thoroughly impressed with that ticker. When we look at all of these factors kind of converging into the first quarter, second quarter of 2024, I guess my question to the group is, Like they have to turn the printer back on at some point.

[00:28:06] Preston Pysh: So for you, where is that? And when is that? And then how in the world does the treasury market respond when they do that? When we have yields this high and prices this low?

[00:28:18] Steven McClurg: Well, bonds are a very simple function of supply and demand. Right. And, and of course, government intervention. So we’re at a spot right now where we are having to print more bonds or sell more bonds than demand can absorb.

[00:28:34] Steven McClurg: And I’ve been, I’ve been saying this all year. It’s going to happen. Right. When there’s a, a, a lower demand than the amount of supply rates go up, because that means that someone’s like, well, I can’t really take more bonds. Well, unless I can get a higher rate, then I’ll take it because now I’m having to, to, you know, I can sell something else that has a, a lower expected rate of return than, than, than what I’m getting over here.

[00:29:01] Steven McClurg: All that’s going to do is continue to drive, drive yields up. It’s why the 30 year crossed 5%, it’s why the 10 year is floating up. It’s, it’s not because we’re coming out of a, it’s not because we’re, we’re, we don’t expect a recession, which by the way, we, in my opinion, we’re already in a recession and the yield curve’s inverting because things are going well.

[00:29:21] Steven McClurg: The yield curve isn’t really de inverting, it’s still inverted. But rates are floating up on the long end because that’s just what it’s going to have to take for me to buy those bonds, plain and simple.

[00:29:34] Preston Pysh: So I know Joe disagrees with this, but before you go, Joe, I just want to, I want to pose a thought experiment that goes to Steven’s point, because I agree with Steven.

[00:29:45] Preston Pysh: For the last 40 years, when we go into a recession, treasuries got bid and rates got compressed. If we’re truly on the other side of that 40 year bull market and now we’re in a bear market, okay, wouldn’t a recession do the opposite of what it did in the past? which means yields would go higher and prices would go further down during a recession, which he’s making the argument we’re in right now, which is completely, which is-

[00:30:17] Steven McClurg: Traded bonds during the last recession-

[00:30:19] Preston Pysh: Which is completely antithetical to the consensus on Wall Street. Right?

[00:30:24] Joe Carlasare: Cause the last recession, they went to zero. So, I mean, you know, that just shows you where money goes when it’s afraid it goes into bonds and you had this year. Okay. If we were truly in a different dynamic, right. Why do we see the largest single day drop in yields in 30 years since 1987 when the SVB bank collapsed?

[00:30:42] Joe Carlasare: Because all money managers bid up treasuries because that’s where money goes when it’s afraid. And as growth has reaccelerated, right, which we’ve seen a growth impulse through the last half of the year that we just experienced, you know, you’ve seen these unwound. But I do want to talk about the funding because what Dr. Jeff brought up I think is the key that that I think that tells the whole story of what what’s going on if you want to go there but I don’t want didn’t want to interrupt you I’m sorry.

[00:31:06] Preston Pysh: Are you talking about this here the-

[00:31:08] Joe Carlasare: No no no no so I want to go back to what what Jeff said which I think is really key. Let’s talk about like the dynamics of supply and demand, which Steven brought up.

[00:31:16] Joe Carlasare: Basically since late 2022, to the extent Janet Yellen was able to fund the government, she chose to do it mostly through the use of bill issuance, which are far easier for folks to absorb from a balance sheet perspective. You don’t have the duration risk, you don’t have the exposure, just rolling the bills.

[00:31:35] Joe Carlasare: And then you can make an argument that there was actually a dearth of bill issuances as evidenced by the fact that people were choosing to park money in reverse repo. What she has done since basically the debt ceiling were being resolved, she has issued bills, right? And starting within basically July, she gave her intention through the quarterly financing announcement, quarterly refunding agreement that basically she plans to issue more bonds, right?

[00:31:58] Joe Carlasare: And that’s when you’ve seen the equity market peak, you’ve seen the long end sell off because you’re finally getting supply of duration coming to the market. Because keep in mind, QT, the QT mechanism itself, okay, a passive roll off does not actually introduce new bonds into the system.

[00:32:13] Joe Carlasare: It rolls off the balance sheet and effectively it’s repaid, right? It’s not like the Fed goes and actively sells that paper into the market, which is a big difference. Now that she’s issuing the longer end, that’s going to change the supply demand and dynamics that Steven was just talking about. And then to the point I think Jeff made earlier, the Fed in many ways was kind of hampered by the treasury’s decision that they were going to basically just spend down the T, the, the TGA.

[00:32:36] Joe Carlasare: They were not going to do any issuance that was going to provide liquidity to the market and they wouldn’t have to issue anything. Right? So net, net, not draining liquidity from anything. But now we’ve got a double whammy because now she has to rebuild the 1.6, you know, trillion dollars TGA, which she’s doing right by the issuance of bills.

[00:32:53] Joe Carlasare: But she’s also trying to keep that balance sheet composition where she has sufficient bills and bonds, right? She doesn’t just issue her ent, the, the TJ’s entire account in bills. They have to generally keep. I think I’ve heard between, you know, 20 to 25 percent of it in bonds in longer term paper and shorter term paper is like, you know, similar 30, 40 percent thereabouts.

[00:33:13] Joe Carlasare: And then there’s sort of belly of the curve issuance as well. So that composition affects the supply and demand dynamics, which, you know, it’s not a coincidence in my mind that smart and savvy bond traders saw. There’s a heck of a lot of supply of bonds coming to the market as opposed to the last year and a half where there’s just been bill issuance, just short dated paper, which is far easier to resort.

[00:33:33] Steven McClurg: I mean, look, when yields were spiking in June and July, we were on a hedge fund that’s supposed to be focused on crypto, but you know, we didn’t really see a lot of opportunity in crypto during that period of time. So what did we do? We, we, we sold out all of our risk positions and started trading T bills.

[00:33:50] Preston Pysh: And I’m just pulling up the chart here so people can see in the summer right here where we were getting this volatility spike. You were talking in May. Okay. Yeah. So this was the bidding from call it October of 2022 until May where you saw that bidding stop. And then it’s just sold off. It’s just sold off aggressively since that period of time.

[00:34:13] Steven McClurg: As it’s pulled off, we’ve, we’ve traded, we’ve traded out of that and back into, you know, more more, more risk positions.

[00:34:20] Preston Pysh: So Joe, the point that you made earlier that in COVID, how it got bid, I mean, it got bid down to, I think the tenure was down to like 50 bips or something like that. For me, when I’m talking about the thought experiment that I proposed, right?

[00:34:34] Preston Pysh: Like that was literally the top. that moment that in COVID when the tenure was at call it 50 bips, that was the, the sheer top of a 40 year bull market in bonds. And now I think now that we’re on the other side of that hill, and now I would say we’re in, we’re getting ready for a long term bear market in bonds.

[00:34:59] Preston Pysh: I would expect the yin and the yang of, of what we’ve seen historically. that when you go into a recession, instead of it getting bid, you actually see it sell off and the yields pop even more through a recession.

[00:35:12] Joe Carlasare: What do you just say? The yin and the yang, right? Yeah. Pull up that chart of the 10 year, right?

[00:35:17] Joe Carlasare: What you see in the 10 years, you see it basically like a step ladder down.

[00:35:21] Preston Pysh: You’re saying during the Silicon Valley bank scenario.

[00:35:24] Joe Carlasare: No, no, no. I’m talking about the 30 year chart. Pull up the 30 year chart of the 10 year, just a long dated chart of the 10 year, going back to the seventies and eighties. If you pull up that chart for the 10 year, you see a stair step down, right?

[00:35:38] Joe Carlasare: And what, what tends to happen is as you’re entering a period of growth coming out of recessions or sort of downturns, even not if it’s a formal recession, but downturns in the economy is yields tend to rise coincident with economic growth. Yields rising are generally a sign of strength in the economy, whereas yields falling are a sign of weakness, right?

[00:35:55] Joe Carlasare: Every single major recession. It led to the, so to your point, if you’re going to go the opposite, so the opposite chart and you’re entering a structural bear market in bonds, you wouldn’t expect it to just go straight up regardless of economic conditions, you would expect it to go up and then in a recession decline, but not go back down to the low to set a higher low, right?

[00:36:18] Joe Carlasare: That’s the opposite, right? So imagine a recession where the 10 year is currently trading, you know, close to 5%, you know, 4. 8, whatever it was at today. Imagine it goes into recession and you only get it down to three and a half and then the economy starts to reinflate and then the next cycle you take it above the prior high, you go instead of, you know, four, five, you go to six and then it goes to five in the recession, but then it goes after that because you can’t get inflation under control.

[00:36:44] Joe Carlasare: And there are many economies where you see this, you see it moving these large historical trends, where it goes, trends down, hits the generational low. And then if you have a more inflationary decade due to structural supply shortages and other issues, you have a stair step up, but markets don’t generally go in a straight line.

[00:37:01] Joe Carlasare: They, you know, tend to, you know, go through cycles like everything else.

[00:37:05] Preston Pysh: Steven, Jeff, what are your thoughts? Anything to add on that one?

[00:37:10] Jeff Ross: I’ll just throw it out there that I agree with Joe. Couple of points. I think that we are officially back in a bear market. I think we’re in a 40 year, 50 year type trend.

[00:37:18] Jeff Ross: I think the bull market is over for sure. In bonds, in bonds, in bonds. Yes. And so during periods of growth, as Joe says, we see interest rates rise. I think we’re going to see something in this decade, similar to the seventies, even though there’s a lot of difference from the seventies. I do think one thing we share is that we’re going to see these large moves in bond yields.

[00:37:36] Jeff Ross: So we’re going to see these periods where we have this inflation is a concern. Yields are rising. You know, we’ve already gone from zero to 5%. We saw back in the early seventies, yields went up to like 8 percent or so. And then during a recession, they dropped all the way down to about 3 percent or so.

[00:37:52] Jeff Ross: I would not be surprised to see the same kind of move this time around. Maybe we get up to five and a half or 6 percent on the 10 year. Recession hits, everybody piles into the 10 year. I think maybe go back down to three, two and a half, somewhere like that. But I don’t think we go back down to zero. I think the zero interest rate days are over.

[00:38:07] Preston Pysh: This is where, by the way, this is-

[00:38:08] Joe Carlasare: Sorry, Preston. Go.

[00:38:09] Preston Pysh: Oh, no. I was just going to say that where I think this is so different than anything we’ve seen in the last 80 years is you were never at a debt to GDP of 120 percent plus. Now you are, now you are. And I think everybody’s looking at the, at the fiscal responsibility of appropriators and they’re saying it’s getting worse by the day, they’re getting more irresponsible by the day and their issuance to cover this irresponsibility plus the existing debt burden, which is 120 percent plus is why I guess I have the opinion that it’s not going to get bid.

[00:38:47] Preston Pysh: But I, but I want to, I want to emphasize this. I wouldn’t be surprised if it did. Okay. It doesn’t make sense to me from the math standpoint and looking at the holistic picture of how in debt we are, that that would be the case. But if I was going to argue with myself, I would say the fractional reserve nature of fiat itself and how it becomes impaired and disappears because it’s nothing but promises is why maybe it would. Right?

[00:39:14] Steven McClurg: Well, here’s the question. Where does the bid come from? And if you think about it-

[00:39:19] Preston Pysh: I can’t tell you. The government.

[00:39:22] Joe Carlasare: I can’t tell you either. Right. It is. I can tell you, go look at the chart. We posted that. That’s a, the segue of the BOA chart. I mean-

[00:39:30] Preston Pysh: Which one are you talking about, which one are you talking about?

[00:39:32] Steven McClurg: The different segments of investors. You know, so, so first of all, retail investors are completely done right now. And retail investors typically spend excess capital on, on, on, on investment. But if you can’t afford food, gas, and housing, you’re not investing your money and you’re certainly not investing in bonds. Okay. Now let’s look at the larger pools of capital.

[00:39:56] Steven McClurg: Let’s start with the pension fund. Are pension funds going to buy treasuries in a flight of safety, in a flight to safety? The answer is no, not in a high inflationary environment. The reason why is because pension funds have to earn even more money in a higher inflationary environment. to pay their pensioners.

[00:40:18] Steven McClurg: It’s not 5 to 8 percent anymore. It’s going to be 8 to 12 percent to be able to fund pensioners. The reason why, number one, inflation, number two, you’re not going to get that yield and bonds. So pension funds will typically stay risky, right? When I say stay risky, It’s not going to be treasuries. It’s going to be things like asset backed securities, mortgage backed securities, high yield bonds, even cuspy credit, double B, triple B, single A minus, to get enough yield to overcome that.

[00:40:52] Steven McClurg: Insurance companies. That’s the next one, right? Insurance companies have to manage their actuarial assumptions, right? Actuarial assumptions go up in a higher inflationary environment. So if inflation is at 2%, that’s fine. You’re probably targeting 5. But if inflation is 3, 4, 5%, now you’re targeting 8%.

[00:41:13] Steven McClurg: You’re not going to get the yields you need in treasuries, so even in a flight to safety there, you’re going to go after higher yielding products, and higher return products. Might even be increasing their allocation to things like private equity. And there’s a big, there’s a big area to invest there.

[00:41:31] Steven McClurg: You’ve got that. And then you’ve got financial advisors. That’s another big area, right? So financial advisors, when you have low consumer sentiment, you’ve got higher inflation, their clients feel a little poor. So they’re not necessarily buying treasuries there in a flight to safety. They’re buying defensive stocks, right?

[00:41:54] Steven McClurg: Because they still need to hit targets. So you don’t have a bid on treasuries.

[00:41:59] Joe Carlasare: If you could pull up the chart, Preston, this is the one that starts the one you had up the treasury flows one.

[00:42:03] Preston Pysh: Yeah. Okay.

[00:42:05] Joe Carlasare: This one’s the only chart you really need to look at along with the BOA flows one. If you look on the right side for the viewers that can’t see, and they’re just listening to audio, there’s a black line.

[00:42:14] Joe Carlasare: Okay. And the black line indicates when the fed started raising rates. There’s a green line that shows the fed is obviously in a steady decline. They’re doing passive roll off in the form of QT. But you see the fastest increase in terms of buying from households, which is the blue line at the bottom, the orange line or yellow line that says real money that has declined, but is now ticking back up.

[00:42:40] Joe Carlasare: That’s that is defined as institutions under the graph. The foreigners obviously are also increasing their holdings of treasuries based on maybe not to the highest level, but they’re nearing record highs. And then if you look at the second chart I sent you, the BOA private client flows, that’s a stunning chart.

[00:42:58] Joe Carlasare: It tells you the preference Private clients, which BOA Global Strategy Investment, my understanding is defines those in excess of holdings with a billion dollars. And you see the fastest flows to debts as a percentage of assets under management in the last over 10 years. Can you pull that one up? It says BOA.

[00:43:18] Joe Carlasare: Okay. Is it this one here? Yeah, it’s a little small, but I don’t know if you can make it bigger, but yeah, see, look at that. I mean, look at, you basically went from massive outflows through 2013, 2014, and also, you know, huge sales of bonds when the Fed’s buying them really in 2020 to where we saw the last year, which has been effectively let’s ape into bonds.

[00:43:41] Joe Carlasare: And this is also confirmed by some of the flows to TLT. Believe it or not, the number two ETF right now in terms of purchases by retail this year is the TLT ETF, the long bond ETF. And it’s kind of stunning. I think Lynn Alden posted a chart about this, that despite getting their faces ripped off by a constant decline in bonds.

[00:44:01] Joe Carlasare: Like the retail is aping into bonds particularly older folks who can say, Hey, if I can just get 4 percent of my money, I don’t really care about any of this else. I, I, I will be happy with three or 4 percent of my my money that that’ll get me through you know, the next 10 years, little do they know that inflation is a problem.

[00:44:17] Joe Carlasare: But I think the way to look at it is like the Fed is effectively paying a premium right now, mostly in the, in the form of having. These really high rates, which I disagree with Paul. I think they are restrictive. I think it’s just a matter of time before you have to get the maturity walls hit, but they’re paying a premium probably before our above our star, what the natural rate of inflation would be to conquer inflation.

[00:44:38] Joe Carlasare: They’re trying to smack the economy hard enough to bring inflation down where these bonds actually have value and are attractive on a real basis. And I mean, you’ve got real rates now across the curve. And that’s a different dynamic than we’ve had for the last 10 years. That’s a different dynamic for investors.

[00:44:55] Joe Carlasare: I was listening to a podcast today about tips. You know, you’re getting 2. 5 percent on a real basis for tips that that’s unheard of. So I definitely think there’s a bid there. Now whether the bid comes at a higher yield, sure. But you know, that’s like the old adage says that I know Steven’s aware of.

[00:45:12] Joe Carlasare: It’s like, you know, there’s no bond, there’s no bad bond, no bad bonds. There’s bad bond yields, right? There’s bad bond prices. There’s bad, you’re paying for bad instruments at bad value, but that’s a different dynamic than we’ve had the last 10 years with zero policy.

[00:45:27] Preston Pysh: And to that, you’re saying that in a world where everybody’s got massive issues, the US debt, because it’s better than all the other turds out there is why it would get bid.

[00:45:41] Joe Carlasare: And keep in mind, it will get bid in a recession. When you’re on the doorstep of a recession and you’re afraid to hold some of these other assets, we’ve talked about stocks and, you know, private equity in a recession, man, I wouldn’t want to have exposure to a ton of that. Same thing with real estate, other aspects, other assets, right?

[00:45:58] Joe Carlasare: But I think from my perspective is if you don’t get the recession, if there isn’t a recession, You’re exactly right. Yields are going higher. This is why people like Jamie Dimon are saying 7 percent rates are possible, which, you know, if we don’t get a recession, I think that’s where we’re headed to be quite clear.

[00:46:13] Joe Carlasare: But if you’re predicting imminent doom and the economy rolling over, you know, bonds are going to get bid. And by the way, this is what Bill Ackman said, right? When he said, I covered his bond short the other day that caused that reaction in the marketplace. And You saw 17 BIP drop, I think, within an hour or two at the long end, crazy moves, right?

[00:46:29] Joe Carlasare: It’s trading like like an altcoin that you don’t see that with the U. S. Treasury market. That’s crazy. But the interesting thing he said was that, you know, the world’s too uncertain. There’s too much risk in the marketplace to be short treasuries. I mean, I think that’s telling what, you know, at least some big money managers are thinking.

[00:46:44] Joe Carlasare: He didn’t say that he went long either. No, he didn’t, but he said it’s too risky. He said it’s too risky to be short, right? Because you would blow up if bonds get bid.

[00:46:52] Preston Pysh: Yeah, yeah, the government steps in and basically…

[00:46:56] Joe Carlasare: Either one. Yeah, it doesn’t matter. Right.

[00:46:58] Preston Pysh: So so you posted this idea on Twitter and Joe, if, if you don’t want me putting this up here, I just, you know, I’m going to quickly show folks this if I can find it on my screen here.

[00:47:10] Preston Pysh: Here it is. You quickly posted something back in September about this idea that foreign countries are dumping these. I responded with a Luke Roman report that I had recently read, kind of providing a counterpoint to your argument. And then Luke piggybacked on my comment and was basically saying that this gap, this ever expanding gap between the federal debt, the total public debt, and the amount held by foreign entities, international investors is diverging and growing further apart.

[00:47:43] Preston Pysh: And that’s the point that’s more important than just looking at the nominal value of treasuries being held by foreign entities. Because as, and I’m just going to try to explain his point of view, if maybe I’m doing him a disservice, but his argument is as the fiat money supply, M2 money supply is, is drastically expanding, that expansion relative to the amount that foreign entities can buy up is, is the point of why it’s becoming uncontrollable.

[00:48:12] Preston Pysh: To which there was a long exchange back and forth between the two of you here. People can go dig this up and, you know, read for themselves what, what they think. But if you were going to counter that argument that Luke was making in his response to you, like what, how do you respond to that?

[00:48:29] Joe Carlasare: You have to look at who holds the debt Right, right now, right.

[00:48:31] Joe Carlasare: I mean, you hear this constant hysteria over China’s selling treasuries. Right? And I posted a follow up tweet to this. China holds less than 2% of all US debt. Okay? Less than 2%. If they were to dump all of their debt, they would cause volatility and yields would spike on an interim basis, right? But two, three percent, all that means effectively is you need more, you, first of all, would make it more attractive to domestic buyers, which hold the majority of the debt anyway.

[00:48:57] Joe Carlasare: And guess who holds the single biggest amount of the debt right now? The Federal Reserve, right? They hold the majority of the treasury. So for folks constantly fretting and wringing their hands about foreign buyers not buying it, but to me, which, you know, depending on your political perspective or however you want to see Bitcoin succeed and respond to all this, all I think it means is you will eventually move closer to having the Fed have to monetize more of that debt.

[00:49:23] Joe Carlasare: But, I mean, the fact that we’re in a debt spiral when you’ve got, you know, many countries well worse off who don’t have access to the dollar, don’t have access to the U. S. Treasury as a collateral asset. I think it’s just kind of fantasy. I mean, the Federal Reserve, I expect it before any, you know, sort of collapse of the system that you hear people talk about.

[00:49:40] Joe Carlasare: I expect their balance sheet to eventually go north of 20, 30 trillion. I mean, I think that’s where it’s going. That could take 20, 30 years from now. I see Jeff nodding his head. I’d be interested in his take. I mean, the notion that we’re at the end of this is just kind of, I think it’s extreme.

[00:49:55] Jeff Ross: Yeah, I’ll jump in there.

[00:49:56] Jeff Ross: I agree, Joe. And I, I feel kind of like the anti boy who cried wolf because right now it’s super sexy to talk about the debt spiral. I don’t think there is a debt spiral. I think it’s just business as usual, personally, right now. I don’t think that that because a debt spiral insinuates there’s an acute, terrible, out of control type event that’s going to lead to massive more and more debt issuance and eventual hyper inflation.

[00:50:21] Jeff Ross: I do not think that’s going to happen at all, even though yes, we’re at 120 percent debt to GDP. I think 10 years from now, if we’re still having these conversations. The debt to GDP is going to be like 190 percent and we’re just going to be kicking it talking about like, is that sustainable or not? Are we in a debt spiral or not?

[00:50:36] Jeff Ross: I think it’s going to be just kind of more of the same. So I guess I agree with Joe. I think there’s too much concern and worry about that, even though it isn’t a problem for sure, but look at Japan, right? And I know we’re different from Japan. But I just think that this is the way the world works. And unless the one caveat to all of this is if we do hit a world war three, that’s where spending it’s out of control.

[00:50:56] Jeff Ross: That’s where the U S dollar would be at risk for actual hyperinflation. But barring that we don’t enter a world war three type event, I think we’re just going to continue businesses as usual. We’re going to continue to pile up debt and it’s not an out of control debt spiral. It’s just more of the same.

[00:51:13] Preston Pysh: Steven, unless you have something to add, I’m going to move on to one more topic here. Nothing to add.

[00:51:23] Jeff Ross: Hey, can I add one anecdotal thing to correlate with what Joe’s chart showed? You know, I’ve been running a fund since the beginning of 2014. For the first time since 2014, this month, I’ve actually added fixed income to my fund and for my client accounts.

[00:51:37] Jeff Ross: Above and beyond. So not treasury, but actually, so like senior loan, senior credit, taxable munis. Those kind of things. I, we’re getting a yield of about eight ish percent seven and a half, eight percent first time. And, and so basically 10 years. So I actually think this rise that we’ve seen in treasuries is healthy.

[00:51:56] Jeff Ross: You know, could it go higher for sure, but then I plan on buying some more and, and, and pushing my yields up to more like nine or 10%, which I think would be fantastic. So I think what’s fantastic about this, this rise in yields is that there finally is an alternative to stocks. We finally have another asset class to invest in, which I would say has been uninvestable practically for the last 10 years.

[00:52:15] Joe Carlasare: So, which is so important. If I could just jump in real quick. Okay. Everybody knows the pitfalls, I think, of the passive indexation, right? And the passive 60 40 portfolio, and we all complain about it, right? Because it’s not, I don’t think it’s a good risk return to have 60 40 bond stocks, right? But there are a ton of people that do have it.

[00:52:35] Joe Carlasare: And what I think is really key to understand right now is as bond yields rise, the bond prices fall, basic bond math, right? And in that dynamic, your 40 percent of your portfolio loses value. And what happens, what does that do to the equity market that causes all the passive indexation and all the vehicles that the 6040 portfolio responds to.

[00:52:58] Joe Carlasare: It causes them to sell their equities and rebalance into bonds. And you see this in some of the Vanguard target date funds ever so slightly. It’s probably why we didn’t reach a new all time high this year. You see some of the passive flows starting to turn from equities to fixed income because of that reason.

[00:53:13] Joe Carlasare: So I think that’s going to really wreak havoc on the folks that are 60 40. I think they will continue to sell their equities, which are better performing, into bonds to rebalance.

[00:53:22] Preston Pysh: Are you guys bullish here on bonds because you know the government’s going to intervene or because you think market forces are naturally going to, to create a bid?

[00:53:33] Joe Carlasare: I’m not bullish on bonds. I don’t, I’m not somebody who’s saying like, go, go load up on fixed income. That’s not what I’m, so don’t, don’t accuse me of that in the comments for the trolls. That’s not the point. I’m saying, all I’m saying is there are structural reasons in place. Why bonds could catch a bid.

[00:53:49] Joe Carlasare: Okay. I’m, I, I have no exposure to these things at this point. And Steven agrees.

[00:53:52] Steven McClurg: You’re, you’re, you’re giving a little nod down there. We’re, we’re, we’re, we’ve, we’ve completely changed. And Jeff said this, right? We are in a generational bear market in bonds. Most of us have only lived through a generational bull market of bonds.

[00:54:11] Steven McClurg: Well, all of us here have, you know, right. And, and, and certainly there’s, there’s, there’s very few people left that are still very involved in capital markets that were, that were pre 1984 that, you know, and those, those are guys that I love talking to, right.

[00:54:27] Steven McClurg: I mean, I, I love talking to Mike Milken. who was around right before that.

[00:54:32] Steven McClurg: And some of the stories that he tells, but there’s just, there’s just not many guys like that left. And it is a different market function when you’re in a different super cycle. So things don’t always work the way that we expect them to, because that’s the way that we’ve always observed them working.

[00:54:50] Steven McClurg: Right. And on top of that, we also have a, a 1970s like environment, where we’ve got, we’ve got high inflation. We’ve got a, a bond bear market, a generational bond bear market and moving into a recession at the same time. It’s not quite something that any of us have experienced. And it’s even difficult to look at history to determine what will happen.

[00:55:14] Steven McClurg: I mean, a lot of the things that we’re talking about is like, okay, well, this is what’s been happening for the last year or the last six months or happening today, but that will all change when, I mean, we hit on it briefly, World War III, right? We’ve got a war going on in Ukraine that looks like it’s never ending.

[00:55:32] Steven McClurg: We just entered into a war in the Middle East that has never ended since 1947 and is going to continue at a pretty interesting level. We’ve got, people aren’t even paying attention because of, because of those two situations, what’s going on in Korea. What’s going on in Taiwan? What’s going on in the Philippines?

[00:55:53] Steven McClurg: So, we could very easily move into a situation where we’ve got war in the Middle East. Asia, Europe, all at the same time. And sides are being determined as we speak. I mean, most people kind of already know where the sides are, but this does look like World War III and that changes everything.

[00:56:15] Preston Pysh: Well, before it was the movement to the petrodollar system, and now we’re just moving to a Bitcoin system.

[00:56:20] Preston Pysh: And, you know, it’s, if only people could figure out like what the education is on Bitcoin, I think we could have a whole lot more peace around the world. Anyway, the last thing I want to talk about here is the high yield spreads. So I’m going to put up a chart here of the high yield spreads. Joe and Jeff both submitted this slide, so I figured we should cover this.

[00:56:47] Preston Pysh: What’s the narrative? What’s the voice over here? Why is this important, guys?

[00:56:51] Jeff Ross: Well, I’ll just start since we both submitted it. I included it all the way back to like 98. Joe’s, this one goes back to 2016 here. So the point of this is when high yield spreads start to blow out, that’s usually a good sign that we’re heading into a recession.

[00:57:05] Jeff Ross: It doesn’t always mean that, but it’s one of the indicators I look at. I know it’s one of the indicators Joe looks at. I’m sure all you guys look at this too. There’s lots of things you can look at, right? The price of oil, high yield spreads, you can look at unemployment, those sorts of things tell us that a recession is actually imminent.

[00:57:19] Jeff Ross: Like we’re heading into it. So right now that the spread between when we say a high yield, most people know that as junk bonds. So the, the spread between junk bonds and their underlying treasuries is still, if you look at it, it’s what it doesn’t say on here, but it’s about four and a half percent or so that is to the level where I start to notice it.

[00:57:37] Jeff Ross: I don’t really pay attention to this until it gets above 5%. Once it hits 5%, I think, okay, this is worth paying attention to now. sort of like the move index, which we had talked about earlier. Once it gets above 125, I think it’s concerning. Once it’s above 150, I think the, the central banks have to decide what to do about it.

[00:57:54] Jeff Ross: So we’re still in the the part of the OAS spread where there’s really nothing to do about it. It says that we’re not yet in a recession. I think that’s why when we talk about you know, are we in a recession? I don’t think so. I still think things are okay. And then one other thing that I didn’t submit a chart for, but the S and P composite index came out today.

[00:58:12] Jeff Ross: That’s 51. It’s still, it’s, it’s an expansionary mode. It’s actually increased a little bit. Yeah. Here’s a longer data chart. So, you know, same chart that Joe showed, but we’re really not out of the range of normal for where the spread is right now. If it jumps above five and heads towards six, then I’ll start getting concerned and I’ll start probably telling people that it looks like we could be headed into recession if other indicators correlate that.

[00:58:34] Jeff Ross: But as far as I’m concerned, you know, that’s why I remain crabbish because liquidity continues to remain crabbish. And that’s one other chart I showed is we’re still range bound for, from a net liquidity perspective, since April, 2022, we’re literally in the exact same range that we’ve been in since April, 2022.

[00:58:50] Jeff Ross: That’s what, 18 months or so. So I don’t expect much from risk assets or even Bitcoin, honestly. Yeah, here’s another chart I showed. It’s kind of a sloppy chart, but basically what that shows that big, long blue thing on top, WALCL, that thing, that’s the net liquidity since the beginning of April, 2022.

[00:59:07] Jeff Ross: And then what I put over that is what the NASDAQ stocks have been doing, small, small caps, the S&P 500 and Bitcoin. You’ll notice that the small cap stocks, which is that teal line is basically trading in parallel with what net liquidity does in the US. The Q’s are outperforming it. They’re up about 16 percent over that time period.

[00:59:25] Jeff Ross: I think it’s because the Q’s in general, mega cap tech stocks are seen as worldwide assets and not necessarily just U. S. based assets like U. S. small caps are. So that’s why I think around the world, they tend to view that as kind of a safe haven asset, almost not quite on par with treasuries, but, but it’s sort of up there.

[00:59:42] Jeff Ross: And then Bitcoin, you see, it took that big dip down and it’s been catching up again. So a month ago before, if you kind of negate that last line. I was saying that I think Bitcoin is still oversold and it needs, it needs to catch up basically to net liquidity. Whereas the Q’s look kind of overbought and need to come down a little bit.

[00:59:59] Jeff Ross: And then one last point, and then I’ll stop talking. The bottom part of the chart with that pink box, that’s my poor man’s version of a worldwide, basically M2, kind of worldwide liquidity. And what you’ll see there is that it has dropped since April of 2022 by about 10 percent or so. And so if you wonder why you know, risk assets, Bitcoin and things have not been performing very well and why I still remain crabbish and not overly optimistic, it’s because of those factors.

[01:00:26] Jeff Ross: I think of that as the oxygen for markets, especially for risk ads, especially for Bitcoin. And as until those things make a noticeable move higher, I just won’t get overly optimistic or overly bullish.

[01:00:38] Preston Pysh: Sorry, I dropped your chart there and I brought up the global M2 combined here of all the different M2s, all denominated in USD so people can kind of see what that’s looked like over the last decade or so.

[01:00:53] Jeff Ross: I love it. And notice that like the rate of change, which I think we’re showing on the bottom there like it, it has bottomed. It did bottom in the fourth quarter of 2022. I remember we talked about this on this show a couple, couple episodes ago. But it’s generally trending higher, but we still haven’t seen a sort of the all in, you know, the, the, all the central banks thrown in their hats and going back to QE.

[01:01:13] Jeff Ross: They’re very reluctant right now to do any sort of QE because of the higher inflation, but at some point, and I think probably some point soon, like Q1 or Q2 of 2024, I think they’re going to be forced to do QE and that’s where things get real again and get kind of exciting again.

[01:01:28] Steven McClurg: You know, I, I look at the high yield spreads and I actually see something entirely different.

[01:01:33] Steven McClurg: If you look at that chart again on option adjusted spread, what I see is institutional investors are trying to hit targets, right? And they’re simply reaching for yield. What you have to remember is typically high yield bonds are, are maximum five year maturities. So this spread is actually to. It’s actually two to five year.

[01:01:58] Steven McClurg: In some cases, the two or three year, it’s not actually that indicative of what’s happening on the long end of the curve. The second thing that I’ll, that I’ll point out is, so institutional investors are simply reaching for yield. So they’re getting in some cases up to 10%, but, and that’s enough to really pad a portfolio and to enter into a barbell strategy of riskier assets.

[01:02:26] Steven McClurg: With a 10 percent yield that they can hold on to for the next five years. And I believe investors are doing that because there is a belief that the Fed is going to have to lower rates and this is simply a trade. But what I see is high yield bond investors aren’t actually getting rewarded for the risk that they’re taking.

[01:02:49] Steven McClurg: I think the fault rate. So, so this is also indicative of what a potential default rate is, right? Potential default rate of, of a 5 percent in my opinion is, is pretty low for the risk that we’re in right now. The spread should be closer to 7 to 8% given the environment that we’re going into. So I think you’re going to see in some cases.

[01:03:10] Steven McClurg: Faces getting ripped off. And this happened back in 2006, 2007, as well, there was, there, there, there was, there was such a demand for yield that spreads were really tight and then they blew out all at once. Right. And obviously you saw that on the chart, but there’s two different types of high yield managers, right?

[01:03:32] Steven McClurg: There’s the type that actually analyzes the debt. That they’re going into and they’re only buying higher quality bonds that, that, that still have a low credit rating. And then there’s a type that are just buying the market, right? It’s no different than guys on Twitter that we deal with in the crypto community, right?

[01:03:51] Steven McClurg: There’s the people that actually understand what they’re buying and focusing on Bitcoin, the high quality stuff. And then there’s people that are like buying Doge hoping for a quick lift. People think that traditional money managers are super sophisticated and most of the time they’re actually not, they’re just buying the market, you know, if you, if you look at, you know, some of the bigger, bigger asset managers and you think, oh, you know, that I’m really impressed, you know, they have over a trillion dollars in assets.

[01:04:15] Steven McClurg: Well, when you have that much in assets, you’re forced to buy the market and you’re forced to buy the crap along with the good stuff. And anything that’s available and you’re forced to buy yield and duration. So what I’m seeing is I’m seeing a potential disaster in the high yield bond market.

[01:04:30] Joe Carlasare: Yeah, if I could tie both of those comments together very briefly, Preston.

[01:04:33] Joe Carlasare: So if you pull up the chart, the one that says net interest costs, I think it tells the full story of what’s going on here and why this cycle has played out very differently than prior cycles. Most of, all of us really on, on, on the call here, we have lived through a period where the Fed hikes, particularly they’re hiking aggressively and you see a leveraged player in very short order get blown out and the Fed has to respond very quickly.

[01:05:00] Joe Carlasare: And what this chart shows, and I think it’s confirmed by also some of the maturity data we have regarding high yield, is that in past hiking cycles, you see almost right away a response as per percentage of net interest costs from companies that they have to absorb those higher rates, right? You see a very responsive, reactionary effect on companies, particularly their net interest costs from a hiking cycle.

[01:05:26] Joe Carlasare: You haven’t seen that this time. We’ve engaged in the fastest hiking cycle in the last 40 years and you have seen actually net interest payments as a percentage of post tax profits decline. Why is that? How can that possibly be the case given what Steven and Jeff are saying? In my read of it is that many companies and individuals were pigs at the trough, loading up on cheap debt.

[01:05:49] Joe Carlasare: Many cases they loaded up on five or 10 year paper, longer dates of maturity than at any point in the last 40 years, which makes sense because interest rates were at zero. So when the Fed engages in their hiking cycle, they could hike rates to 10%. In the short run, it’s not going to effectively affect the people that impact the people that took out a lot of paper and have that paper until it has to be rolled most of the beginning in next year and into 2025. There’s very little high yield that had to get rolled this year on a relative basis. Most of it starts to pick up next year and really ramps up into 2025. And if you talked to various clients that are entrepreneurs and innovators and small businesses, they are telling you that they’re banking on the fact that interest rates are going to come down.

[01:06:32] Joe Carlasare: They’re going to be able to roll this paper in the middle to later part of next year. I’ve talked with CFOs on the subject in particular, there’s just seems to be this blind faith. or maybe it’s a, you know, some sort of illusion that they’re all playing, that they believe that they’re going to be able to roll this paper when in reality, they’re going to have to roll it at two, three, four times higher.

[01:06:51] Joe Carlasare: And that’s going to really start to affect things. But the problem is they haven’t had to roll it yet. So, you know, if you’re a company, if you’re an individual and you haven’t had to roll the paper yet, interest rates in the short run are kind of, you know, they’re not particularly meaningful.

[01:07:05] Steven McClurg: Well, and you make a good point.

[01:07:07] Steven McClurg: The higher credit rated companies aren’t going to have a problem. It’s the, you know, the triple C’s, the single B’s. They’re the ones that can’t even get five year paper done. Right? They’re the ones that are issuing two, three, four year paper. And they’re forced to refinance often as opposed to waiting. So they’re the ones that are going to be impacted the most.

[01:07:33] Steven McClurg: And so, so we’ll, we’ll likely see default rates among those groups much higher than say double B.

[01:07:42] Joe Carlasare: So you see this in the charts, right? Everybody says, well, the stocks are in a bull market. Pull up the micro caps ETF, the IWC, right? Micro caps. You just hit a new low taking out the 2022 low. Look at IWM.

[01:07:55] Joe Carlasare: IWM, same story, right? Hovering right at the 2022 lows. Looks like it’s going to break down eventually at some point. Those are more interest rate sensitive companies where you have your mega caps, which Jeff talked about. They’re bulletproof, right? They’re international assets. There’s no way Apple’s not going to be able to, arguably, people are going to want Apple bonds over US government bonds.

[01:08:14] Joe Carlasare: So, I mean, they’re not going to have, they’re not going to have these sort of issues with higher rates, whereas the smaller players are going to get knocked out.

[01:08:21] Steven McClurg: Yeah, and what’s really interesting here too as well is that when this really starts going down, the highest correlated assets to high yield bonds is actually the S&P.

[01:08:32] Steven McClurg: So if you start seeing high yield bonds blowing out or start seeing defaults, then you’re going to see a massive move down on the S&P.

[01:08:41] Joe Carlasare: Look at IWM, Preston. You had IWC. That’s real small microcaps. Look at IWM. Look at the chart. Does that look like a bull market? Doesn’t look like a bull market to me.

[01:08:50] Preston Pysh: Yeah, you’ve been in a sell off for how long?

[01:08:53] Joe Carlasare: 719 days. Right. So that’s the interesting thing. I’d love to hear Jeff’s point on this. Like if it were purely liquidity that was driving assets, right? Why is IWM look like this? To me, go ahead.

[01:09:08] Jeff Ross: Yeah. Well, if I can, it actually almost perfectly mirrors net liquidity. Remember what I said? That net liquidity is chopped sideways and has been range bound since April 2022.

[01:09:18] Jeff Ross: Look at this, that how it where it starts. Not that if you can go to April, 2022 with your marker, I don’t know if you can get that. Getting there July, June. See that?

[01:09:29] Preston Pysh: Yeah. Yeah.

[01:09:30] Jeff Ross: You see how it’s choppy right there? It almost perfectly correlates with the movements of net liquidity. I don’t make the rules.

[01:09:37] Jeff Ross: I’m just, and I could be wrong, but it’s uncanny how closely it follows net liquidity.

[01:09:43] Joe Carlasare: So, but it’s a totally different chart with S&P, right? So like those-

[01:09:46] Jeff Ross: S&P is different, but, but because S&P has the mega cap tech stocks, which are the international assets, as we talked about, that pulls it higher.

[01:09:54] Joe Carlasare: So would you, would you characterize it that assets like the S&P are not as liquidity sensitive?

[01:09:59] Preston Pysh: Here since April right around here?

[01:10:04] Jeff Ross: Yeah, it’s pretty interesting. So, so what I’ve noticed with the Q’s and the S&P 500, because of the mega cap tech stocks, they do have a different characteristic to them. Why that happens, I’m not totally sure, to be honest. They diverged from underlying worldwide liquidity as well, which they traditionally have followed that.

[01:10:23] Jeff Ross: But if you look recently over the last several months, there’s a huge increase in JAWS, like the JAWS are getting wider and wider. between what worldwide liquidity is doing and what the Q’s have been doing. So at some point, those jaws need to close. And I don’t know if it’s because liquidity is going to take off.

[01:10:39] Jeff Ross: I don’t think so. Or because the Q’s and S&P 500 also need to fall enough to close that gap because historically they have followed very close with worldwide liquidity. I don’t know if that answers your question, but.

[01:10:51] Joe Carlasare: Yeah, no, it definitely does. And do you think passive indexations, most people just piling into S&P and not thinking like that’s at play here?

[01:10:59] Jeff Ross: I think that’s a, I think that’s a big part of

[01:11:01] Preston Pysh: it for sure.

[01:11:03] Preston Pysh: We’re at the

[01:11:03] Preston Pysh: end of the show and what happens, just so folks know, like when we stop recording, we continue to talk about this stuff for like another hour and we always say, Oh, we should have recorded the rest of this. But gentlemen, I think that that’s where we’re going to wrap it up.

[01:11:19] Preston Pysh: Those were the topics that I wanted to cover. Always such a pleasure to chat with all of you guys. Let’s go around the horn. You guys can give a handoff if people want to learn more about you, Jeff, go ahead and start it off.

[01:11:30] Jeff Ross: Sure. You can find me on Twitter. My handle is @VailshireCap. I also run a hedge fund and it’s called Vailshire. So if you just go to feel free to shoot me an email or a message if you’re interested.

[01:11:44] Preston Pysh: Steven.

[01:11:45] Steven McClurg: My Twitter handle is @stevenmcclurg and I’m with Valkyrie. And also run a hedge fund and some ETS and some other things.

[01:11:54] Preston Pysh: Joe.

[01:11:56] Joe Carlasare: Yeah. Joe Carlasare @JoeCarlasare. If you also Google me, you can find my firm’s website. We represent a variety of Bitcoin miners. We’re involved with disputes in the litigated disputes in the, the crypto space, which there’s a lot of fraud and wrongful conduct going on. So if you have been a victim that has been wronged by a bad actor in crypto, please feel free to reach out. If I can’t help you, somebody else will.

[01:12:20] Joe Carlasare: And if you have any claims, breach of fiduciary duty, litigated commercial claims. Happy to help and happy to talk with you at any point. Just reach out to me on my website. On Twitter, I mostly post macro stuff and don’t post as much legal stuff as I probably should, but looking forward to talking to anybody who wants to pick my brain about something.

[01:12:36] Preston Pysh: Gents, thank you so much for your time. This was a blast.

[01:12:40] Joe Carlasare: Thanks Preston.

[01:12:41] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm.

[01:12:54] Preston Pysh: So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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