Preston Pysh (00:01:17):

So the real place I really want to start here with the questions is I’m looking at the landscape of what’s taken place and we’re seeing the indices go higher and higher and higher, right? And we know it’s being driven by a couple companies. But when you dig into the midsize small cap companies, they’re just getting annihilated right now. This COVID coming back at Christmas time, this is beyond destructive when you look at what the real economy is beyond those 10 companies that are driving the indexes. So, where I want to start is really in the commercial real estate space, because you just can’t drive through any town in America without it just being completely boarded up. So when does this start to matter? What are some of your thoughts on the fallout of this commercial real estate and just mid and small cap businesses in general? So I’m just going to throw it over to either one of you guys to just hear some of your thoughts and where some of this might be going?

Lyn Alden (00:02:15):

I think actually you summarized it well, because I think you’ve been saying that when everything’s in a bubble it’s the currency that’s in a bubble. And so I think that’s one of the ways to look at it. It also depends on if we’re talking about small companies it depends on what you’re looking at exactly. Because we’ve seen for example a breakout in the Russell, right? So small cap indices are doing well. But of course if you look at small businesses, restaurants, not popular trade areas, those are struggling. And so I also looked at for example I’ve been talking about the backwards square root sign recover and jobs all of last year pretty much. And with the latest data point we got with the ADP jobs, we saw the first dip in private jobs estimate since the pandemic. And so, commercial real estate I think it’s one of those things where if you put on your value investor hat, I think that there are interesting opportunities there. But the whole broad sector, I mean there’s so much change happening all at once and it’s just things that were supposed to take 10 years, we covered that in a year or two.

Lyn Alden (00:03:11):

So it’s really challenging. That’s why even as someone that really likes to go into unloved areas, I’ve been mostly avoiding the commercial real estate sector just because I don’t feel like I have an edge in there and there’s just so much disruption.

Luke Gromen (00:03:24):

I tend to agree with Lyn on that. I mean it’s got two things. You’ve got the cyclical/pandemic issues with commercial real estate and Lyn did a great job documenting those. And I would say that those are almost living by the lead of the government. So you basically it’s an interesting thing for commercial real estate, for the banking system. Because if the government doesn’t do enough, commercial real estate books for banks are in trouble. The commercial real estate sector is in trouble. What is enough and that is a political question ultimately and to Lyn’s point, it does broadly speaking, for me it’s tough to have an edge on that.

Luke Gromen (00:04:03):

But then away from the pandemic and the cyclical stuff, you also have this secular trend that was present before of Amazon/internet/e-commerce. DoorDash where I saw something a couple weeks ago of Chipotle talking about just basically putting up kitchens, no dining areas. And just the way that these productivity enhancing tools typically around the internet or mobile devices are really changing the needs and the layout of commercial real estate space heavily on the retail side. But between those two things, like I said I agree with Lyn where there’s probably some interesting opportunities. I would never say no, but boy it would have to be a nichy space with a very attractive cap rate.

Lyn Alden (00:04:51):

One thing I’d add is that the company Brookfield Asset Management of Canada, yeah I don’t know if either of you cover that one, but it’s a company that I’ve covered for a number of years. And they’re one of the biggest owners of some of the key high rise skyscrapers in major cities around the world. So New York, London, different cities around the world. And they’ve actually been scooping up some of these small properties and doubling down on some of these distressed industries. And I found that interesting because they actually have a really, really good track record and the CEO ever since he’s been in place they’ve just done phenomenal work. And of course real estates are going to be their core area, but they also have a big renewable energy business and a big infrastructure business. That’s where I’ve invested for a decade with them.

Lyn Alden (00:05:33):

But I just found that the fact that they have the guts to go into double down on the real estate side, I just found that interesting because they’re not generally dumb investors. But they for whatever reason, have the confidence to keep pursuing that area and not really backing out of it. I guess their advantage is that they’re well capitalized. So the reason they do well is because historically they go in when other people are fleeing and without capital. And they have a global mandate, so for example back in 2016 when Brazil was having a horrible time they went in and bought Brazil assets and they can always refinance things easier. So, they have this contrary investing strategy. So I’m really curious to see if it works out for them, just because those are the people with an edge and they still seem optimistic.

Preston Pysh (00:06:17):

I saw some article recently and it was just so weird that there was a computer software gaming company that was stepping in, purchased the $90 million mall complex and they were going to step in and use that space as a software gaming company. And I’m thinking, “Wow that’s just so weird to think that that much commercial real estate would be used for something like that.” So, I wonder if that company that you’re referencing, the Brookfield does not necessarily that’s it’s an arbitrage deal where they already have the person they’re going to offload it to in place. But it seems like they have a better understanding of how that type of property is going to be repurposed and what buyer it’s going to be and what price point they’re going to come in. But even at $90 million for a mall, I just don’t know how you could possibly utilize all that space and that price.

Lyn Alden (00:07:13):

Yeah and Brookfield does cite, I mean they do want to repurpose it, some of the stuff that they’re doing. Basically, their view is really high-end ones they want to keep, and then other ones that aren’t economical in their current format, they want to transform into other types of property. But it’s really interesting. I guess they have to go up against zoning laws and things like that. I mean ideally, it’s almost like you could make a mall into a little mini town. You could have, imagine if you had a senior living community. You could have people live there and they go out into the shop and they never have to go outside. They never have to drive anywhere, brave the elements. Malls have interesting things that they really think outside the box. But as currently structured, you really have to have an edge to go in that space.

Preston Pysh (00:07:53):

It’s crazy. Now, on the earnings, as we get into this I don’t know how the fourth quarter is really going to close out. Whether the Christmas, have you guys heard whether the Christmas sales were on par of what they were expecting? I know everyone was pushed online. I mean it was probably gangbusters compared to previous years. But, I’m looking more to the closeout of the first quarter of ’21 and I just, I don’t know what it is, but I just think that the first quarter is just going to be devastating relative to anything we saw in the previous year. And do those earnings start to matter? Or is this just they’re adding so many units and the expectation that they’re going to continue to add so many fee out units that we’re just going to see the indices continue to go up? Where do you guys stand on some of that?

Luke Gromen (00:08:44):

I think it’s as intellectually offensive as it is on some level. I think it really is about the government and fiscal versus monetary and now that it looks like maybe we’ve got a blue across all three both houses and in the white house. You got Schumer coming out today saying first order of business is another two grand. Got a ping about an hour ago that grumblings of everything the Democrats wanted is what’s going to get put together, or put out when they were doing the stimulus debate whenever it was two or three months ago. All of that stuff the Democrats wanted is going to go in. And so I really think it’s almost a case where because again, it’s sovereign solvency that’s being threatened here and we’re in the midst of this great power competition where if they let economics work, at the very least it doesn’t show well. At the very worst it’s a matter of national security. I just think that this overriding national security need to basically make sure the economy’s growing. And so it seems like it’s less what earnings doing and more U.S. economy with Chinese characteristics.

Preston Pysh (00:09:57):

Lyn what are your thoughts?

Lyn Alden (00:10:00):

I honestly sense these expectations are actually for a decent earnings in 2021. And so whether that’ll come to pass or not I think is up for grabs and I think to Luke’s point, a lot of that is a political question, right? So, for some companies their earnings are not going to be dependent on stimulus or lack thereof. But for some of the more cyclical ones, there is. And we started to see a dip in retail sales in November. That’s the latest data point that’s out St. Louis Fed for example. I think we’re going to see what happens in December because that was really before some of this latest round of stimulus kicked in. And so I do think it really comes down to what physical injections are being put out directly into the economy versus if there’s some gridlock that prevents that. And from what we saw from the Georgia Senate race, it seems like some of the roadblocks are reduced a little bit and so I think basically currency is being debased enough. The broad money supply is being increased enough that you can see decent earnings in [inaudible 00:10:54] terms.

Preston Pysh (00:10:55):

So we saw 20% on the M2 last year. Do we see 20% in ’21 or is it going to be even higher than that?

Lyn Alden (00:11:06):

So something like my latest checkup was 25% year v. year M2 increase. So a lot of that happened in April and May. That was when the Cares Act, the bulk of that came into the economy, a little bit in June. But we’ve been running at a 13% annualized rate since the end of May. That was even without another round of stimulus. It’s partially going to depend on that the fed increases their purchases. But overall, it also is going to depend on for example, if they get this extra $2,000 stimulus checks to go out. So it’s partially going to depend on that. My base case would be somewhere close to the 15%, maybe 12 to 15%. But then if you throw a big infrastructure bill on it, or you throw an extra couple rounds of stimulus checks, that number goes up. So I’d be shocked if it was below 10%, but then up from there it’s mostly again a political decision.

Preston Pysh (00:11:57):

Luke what do you think?

Luke Gromen (00:11:59):

That makes sense to me. I’ve not dug into the numbers as deeply as she has. So I would defer to her on that. But just conceptually it makes a lot of sense. I mean I think it’s really very much a political question at this point.

Preston Pysh (00:12:11):

You know Lyn, I like that you’re, I think you’re providing a conservative number there at 15%. When I’m looking at the chart over the last 10 years, it’s accelerating. It’s going parabolic and maybe it’s because COVID was an outlier in ’20 and maybe it is going to come back down into more conservative number of 15%. But when I’m looking at it, I’m thinking, “Hey this is probably going to be in excess of 20 or 25% based on just the trend of the chart.” But I mean as we all know it’s just a crapshoot. It’s just crazy to look at the rate at which it’s accelerating here in the last couple years. It’s just mind blowing.

Lyn Alden (00:12:57):

I like to break it down because it helps also people follow along. Because if you lay out the flow chart, right? So instead of saying, “This is going to be the number,” it’s like, “Here’s a flow chart to get to your number.” And you can bake in your own assumptions. And so, if you just take out stimulus and you just focus on what is the structural deficit? What is the structural situation assuming policymakers just sit on their hands all year and do nothing? That is somewhere in the ball park of 10%. And then anything on top of that is additive. So that’s why I get to that 12 to 15 baseline number. But then yeah, if you get A, we’re going to do a three trillion dollar stimulus again, right? Then suddenly that number starts going up more towards your 25% number.

Lyn Alden (00:13:38):

Now, with the current composition we do now have it looks like a narrow blue sweep. But there are still some centrist Democrats, conservative-leaning Democrats and so those really sweeping MMT like things, I think unless you were to get another contraction that forces policymakers’ hands, I don’t see some of those really giant things happening in 2021. But I think just the current trajectory can easily get to you to 12 to 15% and then like how I’d be shocked if it was below 10%. I wouldn’t really be surprised to see another over 20% year based on certain stimulus outcomes.

Preston Pysh (00:14:15):

So I love this question. This comes from a really smart account on Twitter, he goes by Eddie. He says, “Do longterm U.S. treasury holders really just look at CPI to calculate their real rates?” How do you guys respond to that?

Luke Gromen (00:14:28):

I think at least a quorum, if not a majority of treasury buying is being done for collateral needs, for liability matching, for regulatory capital purposes.

Preston Pysh (00:14:42):

They have to.

Luke Gromen (00:14:43):

For reasons, yeah. Nobody on Wall Street gets paid on a real basis as far as I know. In other words, it’s everyone gets paid based on nominal returns. And so then it’s okay, what’s your nominal liability if you’re an insurance company? What’s your regular cost to capital if your a bank? So with SLRs it’s effectively zero. And all the stuff that goes up is left out or there’s always some reason explained a way. And some of it, to be clear, there are reasons for why certain things are rising in price more and maybe they should be hypnotically adjusted or smoothed or whatever you want to do. At the end of the day, I think it’s really about doing what you’re getting paid to do.

Lyn Alden (00:15:22):

So I agree with that and basically some of the investors like banks that buy treasuries, they could do a lot more with that treasury and basically make more money from it than the ma and pa investor that just buys treasury and holds it for a trade or just trying to squeeze a capital gain out of it based on a deflationary thesis or something. Now to that person’s question about how they look at inflation, a lot of times real yields people refer to the inflation of break even rate, which is actually dictated by the treasury market. So that’s the tips market pricing in what their inflation premium is. And so that currently for the tenure just broke over 2%. And so that has a pretty good track record of forecasting official CPI.

Lyn Alden (00:16:02):

So for example, if you look at earlier this year, that had that big dip during the pandemic, the March liquidity event. But that shot up before we started to get official monthly CPI going up. And so that’s been an accurate predictor of CPI pretty much, at least officially reported CPI. Now it’s somewhat, they’re looking out depending on the maturity, looking at five, 10 years or more. So I think those are probably undershooting what’s probably going to happen. But that’s currently what they’re pricing it. And so literally according to the treasure market themselves, they are pricing themselves with negative yields because if you look at just what the treasure market is saying. They’re saying you get roughly 1% for the tenure, but they’re pricing in 2% inflation.

Lyn Alden (00:16:40):

So, that’s the treasury market. If you look at it in a vacuum it’s schizophrenic, but to Luke’s point, there’s all sorts of regulatory reasons. There’s all sorts of re-collateralization. There are multiple purposes for those treasuries, other than people just buying them, holding them, and collecting that 1% coupon.

Preston Pysh (00:16:55):

And I think to Luke’s point, the fact that you have all these regulatory requirements that force entities into buying the government debt. It’s going to continue down this path. It’s going to continue to push further and further lower, right? it’s all going to continue to stay in place. The thing that I think is going to be the really interesting dynamic as the rest of this year plays out is what Michael Saylor did with his convertible debt issuance and this is more for corporate debt. That scenario that played out, and I mean he’s already doubled, I think he’s already doubled the amount, maybe even more than that of that issuance of that $600 million issuances that he stepped into the market.

Preston Pysh (00:17:39):

And from my conversation with him, I mean it was oversubscribed because there’s a lot of people that are in the corporate debt market and they like bitcoin and they’re saying, “I want access to bitcoin, but because of all these other regulatory reasons, I can’t get access to it in these debt markets. And these corporate debt markets that I have to employ all this pool of money that I’m sitting on. So, what are your thoughts on that particular example that was done in such a dramatic and obvious way for the whole world to see? Are other companies going to start doing something like this? Is this a textbook template for what we’re going to see in the rest of 2021?

Luke Gromen (00:18:24):

In short, I mean I would defer to comments that Jeff Booth has made when we were all own together, whenever that was in October or whatever when he said he was having those conversations back then at a board level. He had a tweet recently suggesting the same thing where he is talking to private companies. I think the adoption will probably be like a lot of things, slow but steady and it probably will center around those companies that are either private or have ownership structures that are public companies that have ownership structures that are highly controlled by a few people that get the joke as it relates to bitcoin, as is the case I’d argue with MicroStrategy. But ultimately to the extent it keeps gaining momentum. I don’t see why you wouldn’t do that. And that raises bigger questions about the debt market as a whole, inflation rates, reserve asset questions, et cetera. But that’s a separate question.

Preston Pysh (00:19:21):

Well, this is the thing that struck me with the whole thing is when you looked at the terms and conditions of the deal, he did it for 75 bps, right? And then the convertibility piece was really the other piece to it and I think it was $395 where if the stock price got through that price point, then the debt owners are in an advantageous convertibility position, right? Well the stock is already through the 395 and it was oversubscribed by I think $150 million. So you have to ask yourself, was 75 bps way too high of an interest rate for the demand that came out of the deal? Would he still have been oversubscribed at zero percent? And so the deal for me was like oh, my God he could have maybe instead of the strike being at $395, maybe the strike should have been $600 or something like that and then still at 75 bps. He might have still had been oversubscribed. Lyn, what are your thoughts on some of that?

Lyn Alden (00:20:24):

Have you seen that, there’s that Twitter account of this restaurant chain in Canada and I think they do Middle Eastern food?

Preston Pysh (00:20:30):

Yes.

Lyn Alden (00:20:31):

And they also have their balance sheet on bitcoin?

Preston Pysh (00:20:33):

And their food looks awesome by the way.

Lyn Alden (00:20:36):

It’s literally a restaurant account, but half their tweets are about bitcoin because that’s where they put their reserve asset. And so I think I agree with what Luke said. So one thing I’ve been saying over the past year because I’ve been asked that in a couple different podcasts, is will more companies go that route? And I’ve been saying in some cases MicroStrategy and Square in the public realm are somewhat unique. Because MicroStrategy, I mean Michael Saylor is unique and he has unique control over the company. He has unique personality, he gets it. And so he can move more decisively than the average publicly-traded company, including the average tech stock for example. And Square of course, you know Jack Dorsey has had a long bullish of bitcoin. But even then that was a small move for them. So you’d actually expect almost more out of Square. So they are a trivial 50 million bitcoin allocation was what I’d expect as the base case. Whereas MicroStrategy’s was surprising in a lot of ways.

Lyn Alden (00:21:30):

And so I think that some of those tightly held companies, or privately held companies, they’re the ones that can make that move because it comes down to a small number of individuals that have a high conviction and they can say I like where we are in the having cycle, for whatever reason they want to go with. And they can just go in, in bitcoin. Whereas if you get most of these other larger companies, it’s like career risk, right? You don’t really get rewarded, the person you suggest doing that is not going to get massive rewards. But if it were to go wrong, they’re fired next year. And so, unless the CEO is just gung-ho about it, they can get away with it. But I think some of those companies where there’s just not really a central leadership structure, they’re slower to move on there. But we’ll see what happens when more quarterly reports come out and we see MicroStrategy their stock soaring and see what some other companies do in the space.

Preston Pysh (00:22:21):

Yeah. I just think it’s such a huge example because he did it in such a large way that it’s demonstrative of what even a much smaller percent. If he didn’t do it with 100% of your reserves and you just did it with 5% or 10%, it’s such an example it’s just mind-blowing what he’s doing over there. And I suspect that it’s going to be a much bigger talking point maybe mid-year of 2021 as the price, our expectations I think all three of us have pretty high expectations of bitcoin going higher. And by the time we get into mid-year it’s going to be interesting to see how some of these other companies are treating it at that point.

Lyn Alden (00:23:00):

Yeah I remember with our previous chat when we had Jeff here too, one of the things we all shared in common is it’d be weird not to have at least a 1% bitcoin position. It’s one of those things if someone goes really all in on bitcoin they’re taking a certain risk. But it’s also we’re basically saying that it’s arguably risky to have no bitcoin at all. People are basically making the case for why not have non-zero and of course as people have different levels of conviction they can dial it up from there. And as an example, one of my model portfolios this past year had a 5% bitcoin allocation, because the purpose of that portfolio is something a lot of investors can look at. It’s got your classic mix of equities and all these different asset classes. There’s some gold in there and basically a 5% bitcoin position. And that 5% bitcoin position’s been absolutely silly for the return to that portfolio without taking much risk.

Lyn Alden (00:23:51):

And so the same goes true for corporate balance sheets or things like that. It’s really easy to justify a tiny position. We saw that, I mean a really good example is Mass Mutual, right? The 150 year old insurance company, they came out and bought $100 million of bitcoin. And that sounds like a lot, but for them that’s absolutely tiny. And so, that is basically their way of saying we want a non-zero bitcoin position. We want to have this little hedge. We’re going to stick it there. They’re probably never going to sell it in the near term and so I think that trivial position is likely to keep coming up in various places. The risk, reward for having a really tiny bitcoin position is great.

Preston Pysh (00:24:27):

So I want to talk about the big announcement on Monday and I’m just going to read this from the Acting Comptroller of the currency Brian Brooks. “Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transacts stable coin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability and low cost associated with these products.” The announcement basically puts blockchain networks on an equal level of global financial networks such as Swift, ACH, FedWire. I mean this is massive, right? What are some of your thoughts on this big announcement?

Lyn Alden (00:25:13):

One thing I’d point out is I’ve been monitoring because I analyze a lot of foreign banks. And so, if you looked at some of the major commodity companies, like the really big ones like Rio Tinto, VALE, some of these really big, BHP, some of the big commodity companies, they all tested some blockchain transactions with Chinese firms. They sold iron ore basically over a blockchain. They did so, they used Singapore banks, Singapore FinTech companies as intermediaries I believe. They also saw similar things like Sberbank of Russia tested with Singapore, a blockchain base ledger settlement. And then also last month Singapore’s largest bank DBS Group Holdings, they announced that they’re going to have their own exchange for handful of the largest digital assets and that they were going to partner with the Singapore stock exchange. This exchange would be only for accredited investors and traditional investors. They’re also going to provide custody solutions, similar to what Fidelity is doing in institutional grade custody. They’re also going to do tokenized offerings.

Lyn Alden (00:26:15):

And so basically from a U.S. perspective if you see all these other banks around the world that are testing these technologies out and just seeing what works, that you don’t want your own banking system to just be locked out of that innovation. And so quickly you’re going to be like the horse and buggy against all these other cars. And so I think bitcoin has been talking about game theory over the past year, right? So if it starts to get adoption one place, it catches on. So even places that try to ban it, then went back and softened their bands and was like, “Well you can still innovate.” So they want to provide certain regulations for it, but they don’t want to outright ban it. And so I think that’s a similar thing at play here is that to their credit, they were trying to make sure that their banks don’t get regulated out of the competition.

Preston Pysh (00:26:57):

The global competition.

Lyn Alden (00:26:59):

Yeah.

Preston Pysh (00:27:00):

Now what are your thoughts on the KYC limitations? I know Jack Dorsey has been very vocal. Brian Armstrong was obviously very vocal from Coinbase. Do you see them rolling that back? Because it almost seems like if you do come out too aggressive, you’re just going to have some type of global competitor, just like we saw in Singapore. Is that going to be a driving or a common theme where overregulation is just rolled back six months or a year later?

Lyn Alden (00:27:30):

So I think it depends on the type of regulation. I don’t see that many governments rolling back KYC regulations, just because they’re really, they like to be tight gripped about that. And people often joke that if cash was invented today, it’d be illegal. It would never be allowed to exist. And so, we somehow went centuries it’s pretty hard to track payments. But in the past 50 years or so it’s almost like they don’t know how we can imagine a world where you don’t track every payment. And so, I’m of course in favor of payments privacy. But I think that’s the area where that’s the hill that I think a lot of governments are going to try to die on, which is that you can have it, you can trade it, you can do stuff with it, but we want to be able to track it. If they were to pick one thing to regulate, I think that’s certainly in their top one or two.

Preston Pysh (00:28:17):

Luke there was a question evidently, you said somewhere on Twitter that if bitcoin becomes global currency, it’s hunger games in real life. They wanted you to expound on that idea and then they wanted to hear Lyn’s response to your description of this.

Luke Gromen (00:28:33):

So, by way of background I was having that conversation with I can’t remember who it was. But the gist of it was my point was that you need to separate, you need to have … My view was that bitcoin’s your store of value, your wealth reserve asset and that fiat currencies would still have a place. You’d spend your fiat, you save in your wealth reserve asset. And my view is bitcoin, gold, silver I guess you could throw in there too. Their point then was, “Well bitcoin will become the currency and wealth reserve asset.” And my point was that what I said was, “If that was the case, if you use bitcoin as currency, then yeah you would trigger basically a global hunger games.” And my point was that effectively in short, you can either have, this is delicate. But, if you use your wealth reserve asset and you hard cap it, even if the price moves, then you’re taking the release valve from being the fiat currency to being human population.

Luke Gromen (00:29:33):

Because effectively their case is, “Well if you make bitcoin the currency, then everybody’s got to add value and to earn currency, otherwise you’re not going to. And if you don’t add value, you then,” … and it’s a very libertarian view on their part, I understand where they’re coming from. But my point is if you did that too quickly, if you went particularly from a timing standpoint, if you moved quickly from a world where you had fiat currency and bitcoin and gold as a wealth reserve asset to simply your wealth reserve asset as also your medium of exchange, then you’re basically shifting the release valve from fiat currency to the population. And you’re relying on people to be charitable. You’re relying on family connections. In some cases, those would come through and some cases they wouldn’t. And that’s just at an individual level.

Luke Gromen (00:30:28):

Now, if you take it up to a country level, there are countries that are natural current account surpluses. There are countries that are big current count deficit. So from a country standpoint, the way the global currency system has worked over the last 50 years is basically you think about it as a giant banquet and everybody around the table brings something to the banquet and United States is the guy at the head of the table. What he brings to the table is eating everybody’s cooking and that’s it. And so, in a world where bitcoin becomes currency, where there’s no separation between medium of exchange and store of value, living standards in the United States, would collapse pretty quickly. And so without that buffer there of fiat currency to take the buffer. And so that was my point is that effectively in extremist, it would be a taste of either you add value or you starve. And so that’s the background of the conversation and why I said what I said.

Lyn Alden (00:31:30):

So I separate that in two phases. And so I take the Michael Saylor of viewing bitcoin as really good savings technology. And so, I’m not at the point where I’m looking at it as a direct … I think payment rails are great. For example, Strike is really doing good work using bitcoin and lightning as payment rails and things like that. But I primarily think there’s a ton of value in bitcoin for its store value properties, because that total adjustable market on its own, the market cap is several trillions, right? So it’s far larger than the current market cap, so therefore there’s a lot of appreciation there. And so my view is let’s get there first and then start to see what comes out from there, rather than try to think 10 steps ahead. I’d rather say okay here’s a roadmap for the next three steps and then we’ll reassess when we get to that roadmap, right? And so that’s how I’m approaching it.

Lyn Alden (00:32:17):

Now I’ve answered some questions before, for example on podcasts, where they say for example if you were on the bitcoin standard, how would you stimulate? If you wanted to stimulate against a pandemic, how would you do it because you can’t print the money? And I mean in short the answer is basically you have to build and tax it out of some other group. You have to rearrange the stats that you have within the economy. And so in some ways it’s a more honest stimulus, but it’s also harder to do. So how that would work in practice, I think that’s a whole can of worms in it of itself.

Lyn Alden (00:32:47):

And as far as international trade, so one of the ways it works now is that if a country starts to run a persistent trade debt, with the United States it’s an exception which is some thing I keep pointing out and I know that Luke’s pointed out. But for most countries, if you start running a persistent trade deficit, generally what happens is you encounter some currency issue during your next recession. Investors pull out their money and some catalyst happens and then your currency devalues significantly. And it really does reduce your standard of living and makes everything hard. You go through a really serious recession. But then the outcome of that is that your exports get more competitive and it’s harder for you to import. And there’s where it forces you back to an equilibrium and it’s somewhat self-correcting. Now theoretically, if everyone is operating on a hard currency, then it’s dead what would happen is that that country instead of their currency devaluing, the deflationary force is they basically would start pricing things super low to be competitive again, at least getting some SAS back to that country.

Lyn Alden (00:33:42):

So it’s a similar dynamic. There’s a whole philosophy of looking at that and so my view is I’m taking steps back and just saying I’m focusing on bitcoin as solving one of the stores of value problem and I think I’m looking at less currently as the payments thing. Other than for example, things like Strike and things like that, that can basically make fiat move a lot quicker.

Preston Pysh (00:34:06):

I think another important point to what you were saying there on how would you stimulate in a crisis, if you’re in this type of environment your incentive structure has completely changed. You now have an incentive structure to have a rainy day fund. You have an incentive structure to pack away a bunch of savings because it’s continuing to go up in value. It’s not depreciating in value. And so, I mean you just look at the situation we just went through with COVID. Everyone has been incentivized through all these inflationary monetary policies to have literally nothing on the books for a rainy day fund and your levered and maxed and you have 15 days of rainy day funds sitting there to be used. And I guess that whole dynamic, that entire incentive structure would start moving and spinning in the opposite direction than what we’ve seen and where we’re at right now. So, maybe you don’t need the stimulate as much because people are actually having rainy day funds that aren’t being devalued at a break-neck pace.

Lyn Alden (00:35:08):

Yeah I agree with that point. And due to my work on the longterm debt cycle that Ray Dalio popularized, I’ve been emphasizing that view as well that part of the reason we got these crazy multi-trillion dollar stimulus packages against this pandemic was in some ways less about the pandemic and more about the amount of debt and solvency that built up in the system over the three to four decades really since the 70s and 80s essentially. And so if you were to realign the whole system in towards a more equity based system and less of a debt base system, it is true that in general you’d need far less stimulus and things would be able to be much more targeted for edge cases, rather than these big sweeping things because that is currently how it’s structured.

Luke Gromen (00:35:47):

And the equity base system too, it does tie into that pro-cyclicality to somewhat, or hunger games to use my perhaps a bit history on it. But directionally accurate I think view of if the value of the economy is driving the value of the currency to expand and it’s a hard currency with a hard cap, what happens when a pandemic hits? And the value of GDP drops 40%? Your rainy day fund, you might have saved 40% of you money, but your economy drops 40%, now your rainy day fund’s nothing. Now what do you do? And it’s very much a deflate to compete, deflate to compete, deflate to compete. It’s hunger games. It’s who can take the most pain?

Preston Pysh (00:36:29):

I really like this question here. What signals are you looking at to warn of another potential wave of credit stress and equity sell-off like we saw back in March? What are the canaries in the coal mine that you’re looking for that would tell you, “Hey this is looking like this might get a little nasty.”

Luke Gromen (00:36:48):

For me it’s the dollar, it’s treasure yields. It’s relative performance of treasury auctions in terms of the bid to covers and participation and the size of the tails on them. Those have been the big ones and then from markets. And then politically it’s really around the fiscal side and the monetary side. Are they going to do enough? At any point in time we can have a crisis and a dollar super spike would be the fed or the fiscal side not doing enough basically. And so then it really comes down to having to pay attention to what they’re doing subjectively or qualitatively relative to some of those other quantitative measures.

Lyn Alden (00:37:27):

Yeah, I agree. There’s a couple domestic versus international indicators. So international I look at the treasure eurodollar spread, just to get an idea of how tight that is, because that’s an indication of dollar shortage. So we saw that back in March, for example. We haven’t really seen it sense and of course we’ve had a weaker dollar environment because there has been more of that liquidity available. In the United States I’m looking at all sorts of things. I mean I have a heat map that I make every couple months and look at it more regularly which is I monitor year v. year changes and a bunch of different economic indicators. And so I watch the health of that map and I look for areas of weakness or areas of strength. And so for example, we saw over this past several months, we’ve seen pretty strong retail sales because that’s where a lot of the stimulus is keeping consumers solvent. But you’re seeing weakness in jobs for example. That’s really been the weak area.

Lyn Alden (00:38:16):

And I view them it goes back to that control systems analysis that I do as it pertains to the economy that basically if you start to get some of those breaking points, that’s when you start to get the higher likelihood of policy response because something will break. In a similar way, it depends how extreme you want to get. A mild case that I think a lot of people can relate to because of course March 2020 was extreme. But if you just look back in the end of 2018, that’s when the feds said, “Hey we’re on autopilot and we’re going to keep tightening the balance sheet and we’re going to let yields do what they’re going to do.” The 10 year yield got over 3% and the market if something had a freakout, S&P 500 dropped 20% in a couple months. But then under the surface it was bigger and so a lot of people thought that Dow freaked out and reversed course because of the equity market.

Lyn Alden (00:39:02):

But it’s also the fact that if you look at the credit market, there were no high yield bonds issued for six weeks. It just froze and so the market just stopped pricing that. That is of course a shorter timeline for disaster than a 20% equity decline. And so basically if you get one of those events, there’s a very, very high probability of a policy response in a similar way that we saw back in late 2018 and again in a similar way that we saw back in March. And so, I think Luke’s been really accurate at predicting those along the way. Basically saying that if you get these pullbacks, that’s what the policy response are pretty much going to have to be. I’ve been using a similar analysis that shows basically that they don’t really have a ton of choice.

Lyn Alden (00:39:39):

I think the equity market can have pretty big declines potentially before there’s an issue. But some of those other things that generally go along with an equity decline, like the credit market freezing up, those are the things that are really breaking points. And of course the treasure market going to liquid like it did in March is the shortest breaking point of all. That’s the one where they have an emergency meeting on a weekend and respond to Monday morning.

Preston Pysh (00:39:59):

All right, so these next two questions are crypto specific. So these are more oriented towards you Lyn. Luke if you have an opinion on these ones, please chime in. But I want to talk about Tether specifically people suggesting that Tether is what’s pumping the bitcoin price and I want to capture Lyn’s opinion on that. And then I also want to capture you opinion on Ethereum because I saw Lyn you recently had a post on that. So, let’s tackle the Tether FUD first. What is your opinion on Tether, Lyn?

Lyn Alden (00:40:32):

I get asked a couple times. I usually refer people to Nick Carter on that subject because he’s done a lot of analysis. As an example, people often cite that Griffin and Shams study that argued that Tether was correlated with bitcoin and could be driving it. But people often don’t reference the fact that there were two more studies soon after it that showed the opposite conclusion. And so I had one of them here, one of them is [inaudible 00:40:54] and Atrage and Alliance and another one from [Wang Chu Why 00:40:59]. And so these were comparable studies and the third one I believe had a larger sample period. And they basically just found no correlation. There’s all sorts of things like basically a lot of people argue that Tether’s just no fiats going in and that it’s printing units and that’s jacking up the bitcoin price. One thing that for example Nick Carter did on his podcast is he interviewed people that actually converted fiat to Tether. And so they were saying, “Yeah I was there. I was one of the whales putting fiat in and getting Tether out and using it.”

Lyn Alden (00:41:28):

And so a lot of people just look at that tether creation as driving bitcoin. But there are bitcoin exchanged or crypto exchanges that use Tether as their unit of account. So when people want to buy bitcoin, they convert fiat to Tether and then they go and buy bitcoin. And so that correlation is questionable at best. I don’t really concern myself too much with that FUD. But I do think that I wouldn’t be surprised one day to wake up and see that one of these stable coins is under attack at some point or some revelation came out and then that becomes insolvent and certainly result in the high volatility for a variety of assets that day. I’d be more worried about the alt coins when that happens than I would be about bitcoin. Nick Carter’s argued for example that bitcoin could see a spike in a similar way that the dollar sees a spike if you get a liquidity shock. That that’s basically the go to asset in that space.

Lyn Alden (00:42:18):

But I don’t really have a strong view on that. I don’t really view Tether as driving bitcoin in the longterm. But I wouldn’t be surprised if something were to blow up. I wouldn’t be surprised to see upside or downside bitcoin volatility that week.

Preston Pysh (00:42:29):

One of the things that back in 2017 this was a huge talking point. Everyone was, and let me tell you, that bull run where we were at in late 2017 was percentage-wise way higher of a run than what we’ve seen to date on this bull run. And I’m telling you on Twitter everyone was going berserk saying Tether is the reason that this is getting pumped. It’s Tether, it’s Tether, it’s Tether. And then the price contracted 80% from that high. It went up, it kissed 20,000 and then there was an 80% contraction. And having lived through that entire experience, Tether didn’t blow up after it contracted 80%. And you would think that if there really was some shenanigans happening there with whether they’re actually taking fiat and holding it into some type of treasury for how much Tether’s on the market, in those types of scenarios in my experience is when you’re running some type of scheme like that when the price contracts 80% it blows up and we didn’t see anything of the sort.

Preston Pysh (00:43:30):

So just like you Lyn, I don’t know what the ground truth is because it doesn’t appear that there is an auditable treasury of fiat that’s back behind these tokens. But from what I’ve seen since 2017 and all these articles that you’re also referencing, to me it seems like it’s more of a talking point and somebody just throwing up a risk without it fully being vetted or being validated as being a truth. Just more of a rumor.

Lyn Alden (00:43:57):

Yeah, I agree.

Preston Pysh (00:43:58):

How about your thoughts on Ethereum because because I’m not going go to lie, I was a fan of your post the other day.

Lyn Alden (00:44:04):

So it’s complicated, because if you look at bitcoin, bitcoin is a finished product, right? So they’re still doing updates and security updates and things over time. But essentially what bitcoin is at its heart has not changed in a decade. And so it continues to ossify around what it is. Whereas Ethereum it’s infinitely malleable. It’s changing at a far more rapid pace than bitcoin. Some people consider that a good thing. Other people consider that a bad thing. But for example, they’re going to change their entire protocol from proof of work to proof of stake. And so in doing that, for example to back up for a second, basically they’re running all these decentralized applications. But there’s a lot of issues with that.

Lyn Alden (00:44:41):

So for example, they rely on these no infrastructure providers that are almost act like the Amazon web services. And so these “decentralized applications” are often just referring to these big third party enterprises that are actually doing a lot of the back end work for them. And so they end up being a far more expensive version of the Amazon web services. And of course you’re still getting some aspects of decentralization. They’re not really hard in against say a state actor coming in and saying you can’t do any of this, we’re going to stop all this. You don’t really have that infrastructure to build a go down into survival mode and keep operating the way they are.

Lyn Alden (00:45:16):

Now, they are trying to address that, but then that radically changes the protocol. So for example, with Ethereum they’ve had issues with throughput, right? So you need other tokens to run all those smart contracts and they’re actually having issues with transaction fees because there’s only so much scaling. And they, kind of like bitcoin, they’ve been trying to look into off chain solutions to try to increase that throughput. But their ultimate solution is to move towards Ethereum 2.0, which is actually delayed because if you look at how complicated it is, it’s extraordinarily complicated. And so it involves they’re rolling out the beacon chain, which is going to be like another chain running in parallel. They did that in December. And then they’re going to basically split Ethereum into 64 shards they call it. So it’s these 64 parallel chains. Then they’re going to start moving from proof of work to proof of stake.

Lyn Alden (00:46:02):

So if you have 32 ethers you can become a validator and you can start validating transactions on one of the shards. And so unlike bitcoin where every node can see the entire system, with that new system each validator only focuses on the shard that it’s on. And the beacon chain coordinates how that works across the board. And so the idea is to make those nodes would be smaller and people could run them, but they’re only partial nodes. So it’s just basically an extraordinarily complex system and at some point they want to build that whole thing in parallel. And then they want to take the existing Ethereum blockchain and merge it into one of the shards and become one of the shards. And so that’s a Ethereum 2.0.

Lyn Alden (00:46:42):

And so therefore, any pricing model you had over the past five years is out the window, because now you’re looking at a total different system. And then the way that the issuance is going to work is that instead of a fixed issuance schedule, they’re going to have you get certain rewards as a validator for validating the network. But then also anyone doing smart contracts they burn ether basically to fuel smart contracts. You have an inflation mechanism and you have a deflation mechanism. And which one wins out in a given year will depend on in part based on how many validators there are, how much throughput’s happening, things like that. And so there’s not a clear connection between … Even let’s say first you have to have an idea of how well the Ethereum network is going to do for any applications they want to do.

Lyn Alden (00:47:25):

Then there’s not a clear signal that would translate that into a specific token price, right? Because the fees can adjust based on throughput and all sorts of stuff. And the whole point of Ethereum 2.0 is to have a ton of throughput, meaning you shouldn’t need a lot of Ethereum to run these smart contracts. And then the question is so what does Ethereum become worth? And of course people that like Ethereum they want to become validators, so they have an incentive to gather Ethereum and they actually even going to lock it up for two years while they do this whole rollout. So I wouldn’t be surprised to see Ethereum price do pretty well.

Lyn Alden (00:47:55):

But just unlike bitcoin that I think you can have pretty firm price targets on. I think you can do some good [inaudible 00:48:01] analysis and come up with a fundamental view, and it’s really a finished product. Ethereum it’s far more of a speculation. There are just so many moving parts there and I don’t view it as hardened against as decentralized as bitcoin is against for example state of tax or things like that. And so I don’t personally invest in Ethereum.

Preston Pysh (00:48:23):

At the end of the day from an engineering standpoint, and I know that’s how you’re looking at things because that’s your first love is engineering as is mine, I mean it looks like an open heart surgery from an engineering standpoint. And it looks extremely complex what they’re trying to do. The one piece that I got a lot of concerns with and this is the thing that you were addressing which is the nodes. The size of the full nodes that need to be run and the fact that a state actor could step in, depending on where those are hosted. And I’m not necessarily concerned about the size today. I’m worried about the size in 15 or 20 years from now. Because the size of all these smart contracts all being run on a base layer like this, you have to keep it decentralized, but you have to keep it decentralized into perpetuity.

Preston Pysh (00:49:09):

And that’s where it comes off the rails for me is in 15, 20 years from now what is the size of a node, a full node? And they’re going to get into a terminology thing I found online that they like to change the terminology of “full node” to fit their narrative and their interest. I’m just not buying it. The other thing that I think is really important is there’s no, and a lot of people in the bitcoin community call it number go up technology, which is the four-year having event, combined with the two week difficulty adjustment to keep the supply schedule intact so that the stock to flow just keeps ramping up every four years. That’s the number go up technology. In Ethereum you don’t have anything of the sort. And so effectively, I look at it as more a fish that’s just effectively sucking off of the movement of the stock to flow in bitcoin and you’re seeing a portfolio allocation percentage-wise that’s coming off of that bitcoin number go up technology being dropped into Ethereum. At least that’s how I view it and it seems like you’re nodding your head and you agree.

Lyn Alden (00:50:15):

Yeah. I mean from an engineering perspective I prefer bitcoin’s design. I really like modular components, right? So things that are just in built to be hardened. And so the fact that bitcoin has a really simple base layer and then you can scale it with things like lightning and liquid and some custodial things like that. It’s a variety of … It depends on how much trust you want to have in your particular layer. But there’s trustless second layers and then there’s trusted second layers. I think that design just makes a lot more sense and I think it’s really well designed from the beginning. Whereas Ethereum I think is the proponents of it like how ambitious it is because they’re trying to put so much right on the base layer. But I’m also concerned with how that turns out.

Lyn Alden (00:50:50):

And so I’ve used the analogy of the Concord right? So 50 years ago we invented this commercial jet that can go mach-2 and you can get to London to New York in three hours. But it never really was used very much because it was so complex. Because once you’re a pilot, basically once you go above mach-1 everything changes. It’s all different now. And so, to get that to work in a economical way is extraordinarily difficult. And so basically from a cool factor if I look into some of the details of what they’re doing with Ethereum 2.0, I’m like okay this is really neat. It’s cool. But I don’t know how to price that. I don’t really know how to view that as money and I’m concerned about the decentralization aspects of it. And so it’s like I’ll see it when I believe it. Get to Ethereum 2.0, let’s see what happens. But I think the risk, reward is really strong in bitcoin’s favor at the current time.

Preston Pysh (00:51:39):

It’s a solution looking for a problem.

Lyn Alden (00:51:42):

Yeah.

Preston Pysh (00:51:43):

Hey, Luke this question I like this one because this isn’t something I’ve really talked about too much, but I know Kyle Bass has been very vocal about this. And the simple question is, is China’s economy a mirage?

Luke Gromen (00:51:56):

I remember asking a friend of mine that question who is in Hong Kong for 20 years, fluent speaker. Said, “Is it a bubble?” This is probably 10 years ago. They said like, “Yeah it’s a bubble.” The question is when’s it going to burst?

Preston Pysh (00:52:11):

What isn’t?

Luke Gromen (00:52:13):

And it all gets into a relative question, right? I mean it’s like if you ask a fish to describe its environment, the very last thing it would list would be the water, right? So we’ve got a bubble currency, bubble sovereign debt markets. I mean the way I’ve always looked at china’s economy is when you look at some of the things that Kyle describes in terms of the loan growth, the banking system loans relative to GDP. Yeah, they look precarious. With that said, I just get the sense they look at things differently which is to say in the world in which we live and have lived for the last 10 years, 20 years, 50 years, if I’m China would I rather have 20,000 kilometers of high-speed rail or whatever they’ve got. Some of which currently goes to lightly populated city centers shall we say.

Luke Gromen (00:53:03):

Or would I rather have the equivalent amount in treasury bonds that the U.S. has to price at a negative real rate in order to keep the wheels on the cart? And I think if you take a look at what China has done, I think a lot of what they have done has been based on this view that basically and understanding of money at a very fundamental level. That here in the west, here in the U.S. we’re almost like the Roman Catholic Church with a geocentric model of the solar system saying, “Well the dollar is the center of the world and everything is evolving around it.” Then the Chinese are looking at it going, “We’ve been to this movie before. We’ve seen this movie several times in our history. You know what, send us the commodities. We’ll build a whole bunch of cities, because the cities are going to create employment as we build them. It’s going to be a better store of value. It’s going to create jobs as we maintain them.”

Luke Gromen (00:53:58):

They’re coming at it from a completely different angle. And what’s interesting to me is when I read the book, The Raven of Zurich, a memoir of Felix Somary there’s this chapter and I’ve actually put, highlighted the quote in Twitter before. This is 1913 Felix Somary said that the Europeans are at the height of their economic power, four different major empires. They all looked at the Chinese with curiosity with their infatuation with gold and silver. They weighed it. They weighed their currency, that’s how they got when they did a transaction they would weigh the currency relative to what they were selling. And the Europeans looked at that at the height of their power with great curiosity and Somary said, “We thought they were two generations behind us and it turns out they were a generation ahead of us.”

Luke Gromen (00:54:38):

And so it’s been interesting to me as my view all along has been the Chinese is it a bubble? I guess, but I think it’s a differentiated view of money. And that we would rather have the stuff because if you look at the obligations of the issuer of the currency, they’re going to have to create a lot more currency units and so we fast-forward a generation and what do we find? We find the U.S. talking about things like MMT. We find the U.S. running an economic model that is starting to look very much like a Chinese economic model, centrally planned. And so I hear what Kyle’s saying, but I just think it’s all a relative game and I think they’ve been coming at it differently. And I would argue that our economic model is shifting more towards theirs, rather than out of necessity more than theirs towards ours.

Preston Pysh (00:55:28):

Yeah, I think that’s really well said. Lyn, did you have any other comments on that one?

Lyn Alden (00:55:33):

Not particularly. I mean I think it depends on what aspect you’re looking at. And so for example, China’s had a very large corporate debt bubble. And if you just measure it as corporate debt to GDP for example. Now because a lot of that debt is denominated in their own currency, and because they have a lot of top-level control, they have a lot of leverage to pull to smooth that over, over time. And then the fact that their sovereign entity is rather unleveled. So they have a lot of assets around the world. They have foreign exchange reserves. So they have a lot of leeway to manage those issues. And so it has been a sight to behold because they’ve been an [inaudible 00:56:09] deflating bubbles gradually. They say you can’t deflate a Ponzi but they have a decent track record of deflating these Ponzis and then building up the next one.

Lyn Alden (00:56:16):

And so when people refer to the ghost cities and then a couple years later they’re not ghost cities anymore. It’s like, no they were just five years in advance and they overbuilt, but then those got populated. And so it really comes down to political philosophies. So for example if you look at China and India, China has managed to industrialized faster than India, in part because they are able to use some of that essential planning to do things. But of course, that brings up all sorts of privacy issues, human rights issues. And so I think to Luke’s point it’s all relative game and so for example I think one of the biggest bubbles is persistent U.S. trade deficit. That’s a bubble that’s been building for 50 years essentially, without being allowed to normalize in a way that many other countries are able to normalize their trade balances. And so I think that there are a number of bubbles around the world and China’s corporate sector debt is one of them. So it’s among the many that I think are a problem, rather than I don’t really view as the single worst bubble. I think there are a lot of really big bubbles.

Luke Gromen (00:57:14):

Yeah I want to actually say that’s a great point on the trade deficit to where I would actually argue that that’s exactly what the Chinese have been doing is saying, “Okay, well that’s the bubble and the mirror image, or the other side of the T account is okay, well then here’s how we hedge that. Because whenever that bubble bursts, if we store our wealth in paper, it will be a flaming pile of paper. And so, we’re going to take the dollars and put them into things that hurt when we drop it on our foot.

Preston Pysh (00:57:42):

All right, so this is the last one. We’re going to go around the horn. What is a question that you’re chewing on right now that you just are struggling to answer for yourself or something that you’ve just been thinking a lot about and you don’t necessarily know the outcome, but you want to propose the question to the group and we’ll start with you Luke.

Luke Gromen (00:58:03):

The question I’ve been thinking about is would U.S. policymakers be willing to burn down the system to try to defend the dollar? So you’re seeing basically a jailbreak. I mean it started six, seven years … central banks stopped buying treasuries on a net basis. And then you saw Russia and China in particular moving to gold instead of treasuries and basically putting their money into anything but treasuries. Now you’re seeing I would argue a jailbreak of and maybe a jailbreak is a bit of a strong term. Price performance is influencing maybe that term. But, U.S. citizens, global citizens, global corporations starting to move into bitcoin away from dollars. It’s an indictment.

Preston Pysh (00:58:49):

You know Luke, when you look at policymakers right now something that was just in insane headline to me this week you had Nancy Pelosi and you also had Mitch McConnell, both of their houses were vandalized. And I think what was written, I don’t know which house had this written on it. But one of the two of their houses had, “Give me my money,” spray painted on their front door, right? And the picture of that for me was just such a mind blowing moment of even if policymakers want to defend the dollar at this point because they know that that’s what’s best from a national standpoint, is the population in a position where they’re going to allow their elected officials to act in that manner?

Luke Gromen (00:59:40):

I don’t think they will and I think today in particular, as we got into what was happening this afternoon and tonight where you have members of Congress cowering in the capitol. I don’t think that they would try. But when I see Hank Paulson’s [inaudible 00:59:55] in the Wall Street Journal a month ago. When I see Kevin Warsh’s [inaudible 00:59:58] in the Wall Street Journal yesterday, when I see Larry Summers talk about the people shouldn’t get their 2000 bucks. To me it just raises this question of are they actually starting to think about that this is something that they could try or that they should try or that it might actually work. Because the answer is no they shouldn’t try it. No it’s not going to work. It’s going to be like trying to give themselves a root canal with a shotgun is how it’s going to go. But, that doesn’t mean they can’t try. And I don’t think it would last for very long, but that’s something I’ve been thinking about.

Luke Gromen (01:00:30):

Basically the story of 1971 up until just recently was about subjugating the U.S. middle and working classes in order to support the dollar and the dollar system. And my view is post-COVID we move to a shift to subjugating the dollar to support the U.S. middle and working classes. And there seems to be noises amongst certain influential policymakers or former policymakers that maybe we need to go back to supporting the dollar and subjugating the middle working classes. I don’t think it’s a good idea, but if they tried to do it, everybody is offsides, myself included personally.

Preston Pysh (01:01:11):

Lyn, any thoughts on Luke’s question?

Lyn Alden (01:01:14):

No, I have a similar outlook. And so, I think that there will be attempts where they try, but then the feedback loop of either the votes or some of these popular uprisings, kind of answers that question. In a similar way that the fed tried to keep normalizing things into late 2018 and then it got punched in the face and they were like, “Oh, we were just kidding. We’re going to reverse now.” And so I think we saw it this summer where some politicians were like, “I don’t think we need any checks.” And then we actually saw the interesting dynamic that wasn’t cleanly across party lines because the Democrats were like, “Okay, we passed this three trillion dollar thing this summer. The Heroes Act I believe it was called, and then Republicans are like, “Our starting position is nothing or maybe we’ll give 600 billion and maybe some small business aid and tax cuts and things like that.” And so you had these really wide starting points. And then they narrowed more and more. They started coalescing around 1.9 trillion, which a trillion here, trillion there starts to add up to something big.

Lyn Alden (01:02:10):

But that never really took off. Then, of course, we had the elections and then during this past thing they really come to an agreement and then Trump comes out and says, “I want $2,000 checks.” And so the Republicans were in an interesting position where the Democrats wanted the bigger checks, their own president and their own party wanted the bigger checks, but they didn’t want the bigger checks. And so you almost had that three-way battle going on because it’s no longer cleanly among party lines. Instead of left versus right, you have establishment left, establishment right and you have populist left, populist right. You have a bunch of different quadrants here that are competing.

Lyn Alden (01:02:43):

And so, I think my question along similar lines is what is the fed’s pain point for treasure yields? And so what we’re seeing lately for example is that inflation expectations are rising. They just got above 2%. We just had the 10 year go above 1% and so actually real yields are staying pretty static. They’re hovering around negative 1% and that also puts some downward pressure on gold over the past several months. And so what I’m watching is what are the feds statements and meeting minutes talking about in regards to yield curve control, or increasing purchases at the long end of the curve, which they actually did talk about in the latest FOC minutes as a potential option. Because I don’t know exactly where their pain point is. And I think that’s pretty important for certain asset classes.

Lyn Alden (01:03:27):

And so that’s something I’m watching closely. If you use as a reference point in 1940s they had 2.5% as their pain point. And so, in 1940s you had three major spikes of inflation, two of which went in well into the double digits and they held the short end of the curve near zero and the long end of the curve at 2.5%. So I’ve been using roughly 2% as my estimated pain point because if their inflation target is 2% or above, I don’t think they want 10 years going above 2%, maybe less. But I don’t have a strong conviction within 100 to 150 basis point range of where their pain point is. And I think there are different fed officials that have different pain points.

Lyn Alden (01:04:06):

So if some of them wanted to be able to curve control yesterday and other ones are talking about tapering purchases. So I don’t know exactly where that pain point is, but that’s the big questions I’m watching is language from the fed around shaping the long end of the curve.

Preston Pysh (01:04:21):

And I don’t think that with the new administration if, and I think the expectation is that UBI is going to become the new insertion point for liquidity or at least it’s going to be used more aggressively than it has historically. If that’s true, I think it only adds more pressure to that yield curve control that you’re talking about, right? I’m curious, do you agree with that Lyn?

Lyn Alden (01:04:45):

Yeah, generally the more stimulus there is, especially stimulus that targets the working and middle class.

Preston Pysh (01:04:50):

Yeah.

Lyn Alden (01:04:51):

The more velocity you can potentially get, especially when you’re talking about a post-lockdown scenario. So then that could push up official inflation expectations and basically if left unchecked, that the feds say, “No, we’re only going to buy this amount, but yields are going to do what they’re going to do.” So they said, “Okay, we’re taking this excess supply off the market, but with the remaining supply the market’s going to price it.” I think you could move into an event that looks a lot like late 2018 where suddenly the market says, “Wait the feds are really not going to buy more?” And then there’s a big sell off and probably gross stocks take the bigger hit because if you look at late 2018, it was the Nasdaq stocks that were getting killed. I mean Apple was down 30 something percent whereas [inaudible 01:05:30] were actually holding up.

Lyn Alden (01:05:31):

So I do think that if they were to just let that run the fed might just test what the pain point is. They might say, “Okay, we’re going to keep adjusting things gradually,” and they’re going to let the pain point sort itself out. So rather than say we’re going to say ahead of time with the pain point is, they must just watch what happens and when they find the pain point, they’ll say, “Okay we’re just kidding. We’re going to go ahead and up our purchases some extent or increase duration of average duration of purchases,” whatever the case may be.

Preston Pysh (01:05:57):

Okay, so here’s my question for you guys that I’m chewing on. Right now you see everybody coming out all these big banks that are saying that their price expectation or what they think the value of bitcoin is, is basically plan B stock to flow valuation of call it two to $300,000. Everyone and their kid’s sister is coming in and saying, “Yeah, I think bitcoin is worth this amount,” right? Well, it appears that the stock to flow valuation has a lot of validity and a lot of correlation. When we look at just the chart that was published well in advance of the having. We look how it’s playing out to date. It really appears that that’s what’s taking place. If we can continue to see that play out in 2021, and the price does go to 100 or $200,000, is everyone just going to lose their calculator and not be able to do a discount model for the stock to flow price of 2025?

Preston Pysh (01:06:56):

And where I’m going with this is so I obviously have a large bitcoin position in my portfolio. Everyone’s talking about how they’re basically going to use the stock to flow model in order to miss the next big 80% drop and then they’re going to somehow step back in and capture the next big stock to flow move to a million in 2025. I just don’t buy it, at least that’s my position of how I’m chewing on this problem. Does it just keep going? Do people start pricing in the 2025 valuation of a million dollars and start discounting it into today’s value? Because if you do, you don’t sell. You just continue to hold, because any price under 200,000 is a great price, right? So, I don’t know how to answer that. But I’m curious how you guys see whether you even think the stock to flow is valid. Whether you think this is the “final cycle” for bitcoin or whatnot?

Luke Gromen (01:07:53):

I’ll be quick. I think the stock to flow model has been demonstrably valid and so I would watch it until it’s proven otherwise. The thing I have found that I’ve seen much of the bitcoin discussion on FinTwit in particular, but some of the price targets as well, centers on the technological side, or coming at it from a technologist. And the thing I’ve not seen as many people coming at it from is the other side which has never been true before, which is the U.S. is insolvent. You look at the U.S.’s big three expenditures, entitlements defense and treasury/interest, it’s 140% of tax receipts. COVID basically blew a gaping hole in the U.S. fiscal position.

Luke Gromen (01:08:39):

And what I bring this up because if you overlay that with your view of, “Hey does it just take off and run,” the thing I don’t see anybody talking about as it relates to this, the typical stock to flow where you have the run up and then it pulls back 60, 80% and then it all for another is, is in none of these prior cycles has it literally been the case where the U.S. can’t make ends meet unless the fed is filling in the gap. And my gut tells me that at the very least, that suggests that the stock to flow model dictated pullback will be much less severe than it has been in prior cycles and best case just skips over them entirely. But I’m coming at this from a complete non-technologist standpoint. So I’ll stop there. But personally that’s how I’m thinking about it, that basically you won’t get as big of one or you might not get one at all because of what has happened to the fiscal situation.

Preston Pysh (01:09:38):

Yeah the backdrop is just that ugly.

Luke Gromen (01:09:41):

It’s gotten so bad, so fast.

Preston Pysh (01:09:42):

Yeah. Lyn, help me. And if I was going to rephrase it, it’s like what in the world do I say on this show after the price goes through 100,000 when people are saying, “Do I buy?” How in the world can you possibly answer that question? I know it’s going to be a huge, huge issue for me later in the year if this keeps going in the direction I suspect it’s going. What do you say to somebody?

Lyn Alden (01:10:06):

Yeah, I have similar issues. I have clients asking like, “Let us know when you think it’s a good time to sell.” The way I’m approaching it to back up is so I went long in April 2020. I wrote that big public article in July 2020. And so my view at the time was that I had a very high conviction that bitcoin would do very well through that year into 2021 based on the 18 months or so after the having event. Now, the part that I had low conviction on is what priced target it would reach. Basically, it was like north of here by a lot. I looked at percent gains of previous cycles. In general each cycle had a smaller percent gain, even though it was still outrageous. So with the stock to flow ratio, what I found was that I really liked plan B’s charts, the ones that they are color-coded. They show how it relates to the having cycle. I thought those were extraordinarily valuable.

Lyn Alden (01:10:53):

I didn’t put a lot of emphasis on specific price targets because that is a supply only model, whereas demand is what dictates how far it overshoots. How far it comes down. It’s ultimately going to be dictated by supply and demand. But that has an implicit static demand assumption. And then the fact that it overshoots and undershoots that is because man is somewhat flexible. And so, my base case was that it would be a parabolic increase, but that it would probably be smaller than the previous one. And so far it’s above the previous one in terms of the post having, where we were what is it eight months since the having. We’re actually above schedule. And so I don’t know if that means we’re due for a correction and then more up from here and then it kind of slows down. Or if that trend is broken and that this cycle will be bigger percent-wise than the previous ones. I don’t really have a good answer for that.

Lyn Alden (01:11:42):

I am monitoring things like the market cap to realized cap ratio. Basically monitoring a bunch of different [inaudible 01:11:48] indicators, sentiment indicators and basically my view would be to let people know when some of those indicators look a lot like previous tops. And then people from there can judge what to do with their own situation. That doesn’t mean it’s going to crash, it just means historically this is we’re in the danger zone now. That can mean different things depending on what happens. And so my view is that basically you have a blow off top and then if you were to get enough of a correction that shakes people’s confidence in it, that’s when the narrative shifts.

Lyn Alden (01:12:17):

Because I think we’re in a bubble in a sense. Basically with any investment there’s a really big spectrum of information, right? So whether it’s a stock that people know the fundamentals of and they can tell you everything about it, versus someone who thinks just that they did a share split so the number’s going to go up. Just low information investor versus high information investor. Same thing with bitcoin, right? There are people saying that it’s only going up because of reasons X, Y, Z and they’re not talking about the supply. They’re just having a narrative. Whereas other people have been showing ahead of time what the value would do and it’s done almost that exactly. So I think there’s a spectrum of information there and I think that there are some people that when you get that blow-off top, they can say, “Oh, it’s been a bubble. The narrative,” and you could get a lot of that doubt, right? So people say maybe it was a bubble. Crazy, I want to sell. And then you get the momentum to the downside.

Lyn Alden (01:13:03):

My base case would be that that would be smaller than the previous percent-wise. I do think there would be probably some correction, but I don’t know. I think that the best way to answer for people is that they can make sure that their position size is one that it doesn’t keep them up at night. I think that’s the way to handle it. I don’t think that there’s … they’re trying to time it perfectly is probably not the right approach. And instead it’s saying, “What is the position size right for you?” There are some hardcore bitcoiners that are just never going to sell. They don’t care if 95% of their net worth is in bitcoin.

Lyn Alden (01:13:34):

So that’s their answer. Whereas if you’re someone else and they put say 5% of their portfolio in bitcoin and now it’s 50% of their portfolio and they’re checking bitcoin five times a day, maybe for that person the answer is okay, rebalance. Go back, get your target allocation. I wouldn’t really recommend having zero bitcoin, but I think that there are ways that they can dial back risk, especially when you’ve had a 5X or 10X gain at some point and you want to just rebalance some of those into other assets. I think it really is going to come down to the individual sentiment and individual circumstances of that person.

Preston Pysh (01:14:06):

Really well said, both of you. Guys, that’s all I have. I just want to thank you. I mean I really enjoy these conversations. I forgot we had Jeff here last time. The next time that we do this, I promise I’m having Jeff Booth with us. It’s going to be the four of us again. We’re going to make this a theme every quarter or whatever if you guys are willing to sit down and have that chat because I really enjoy talking with you two and Jeff as well.

Luke Gromen (01:14:33):

Sure.

Lyn Alden (01:14:34):

It’s almost like there are so many subjects, yeah.

Preston Pysh (01:14:35):

There are so many subjects. But yeah, real fast give people a handoff. Luke, I know you have a book there that’s outstanding and then Lyn, give a handoff to folks to your site as well.

Luke Gromen (01:14:47):

Yeah, sure. If people want to learn more about what we’re up to check us out at fftt/llc.com and check out different products we have there.

Lyn Alden (01:14:56):

I’m at Lynalden.com. I’m also on Twitter at Lynaldencontact. I have a lot of free articles and newsletters and I also have a low-cost premium research service that comes with a variety of different asset classes based on where the good opportunities are. Equities to commodities to bitcoin, whatever the case may be.

Preston Pysh (01:15:12):

Guys, we’ll have that in the show notes. I highly encourage you to check out both of those, just incredible resources and incredible people. Guys thank you for your time today. This was really a lot of fun.

Luke Gromen (01:15:22):

It was fun.

Lyn Alden (01:15:24):

Thank you.

Outro (01:15:26):

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