James Lavish: (03:27)
I mean, it’s no different than if you were Microsoft or you were Apple. But you’re running your operation and you’ve got your expenses and you’ll borrow money at cheap rates in order to put leverage on your balance sheet to grow faster, grow quicker, larger. So we can do that and we’ve been doing it successfully for a long time. But the problem is now we’re running deficits that are so large that when you just pull out the big pieces… You condense it down and isolate out the big pieces.

James Lavish: (04:04)
You’ve got your entitlement spending. You’ve got your interest on your debt and those should be less than your tax revenues. Your revenue coming in are the taxes off of your gross domestic product and those are broken down into all of the categories. You’ve got your corporate tax, your capital gains. You know what all the taxes are. We won’t go into all of the nuances there. But the bottom line is right now where we stand in the United States… I was going through the congressional budget committee and they’re coming up with all of their estimates for the year 2022.

James Lavish: (04:43)
Right now they’re estimating $4.8 trillion of taxes. Well, when you take out 3.7 trillion of entitlements… Now those are in legislation. Those are not flexible like. That’s got to be paid, right?

Preston Pysh: (04:55)
Yeah.

James Lavish: (04:56)
And you estimate $800 billion for defense spending. Well, you’re left over with $300 billion for interest expense. But we’re currently running interest expense at $400 billion. So it doesn’t take a math genius to figure out that we’re running in a deficit. First of all, that’s a problem. So how do you cover that? Well, you can either raise taxes, which actually negatively impacts your GDP in the long run. So your productivity goes down if you raise taxes. It’s just natural. You can cut entitlements. That’s not popular, especially in election year. So no politician likes to cut entitlements. No politician likes to cut spending. We’ve seen it on both sides of the aisle. It doesn’t matter.

James Lavish: (05:37)
And the other thing you could do is you could borrow. You could just issue more debt, which is exactly what we’re doing. So you issue more debt to cover that deficit. But you know and I know that we’ve been talking about this for a long time is… The problem is that you’re issuing more debt into a rising interest rate environment.

James Lavish: (05:57)
And so as you’re borrowing, you’re borrowing money that’s more expensive. You’re putting more debt on your balance sheet that you have to pay off with higher interest rates. I mean, if you think about it, it’s kind of like if you take out a balance on a credit card and you run up that credit card balance. This is hard to get your head around, but to simplify it to the essence of it, you take out debt on a credit card. You run it all the way up. Well, the monthly payments that you have to pay after paying for your mandatory things like mortgage, car loans, food, you can’t meet that because your interest rate payments on your credit card, your minimum payments are too high.

James Lavish: (06:36)
So you take out another credit card to cover some of the expenses, whether it’s the food or the other interest expense of your credit card, then you’re taking out more debt. But the thing is, when you do that, your interest rate is going to go up because your credit is going down.

Preston Pysh: (06:53)
Worse, yeah.

James Lavish: (06:53)
Yeah. Your credit is getting worse. So it’s more expensive for you to borrow, right? So as you do that, then you get into a situation where, okay, now you’ve maxed out another credit card. You’re still not meeting your obligations. And now when you go out to take out another credit card, the interest rate is even higher. So you get into this trap. You’re trapped. You can’t get out of it. The interest rates are going up on your credit card borrowing. Your monthly earnings are not meeting that. They’re not keeping up. And so that’s in essence for an individual that would be a debt spiral. And we see it happen all the time in the United States. We’re a completely indebted country. But it’s exactly what’s happening in the US.

Preston Pysh: (07:39)
At a government level.

James Lavish: (07:41)
At a government level. Exactly, thank you. So if you look at where we are now, and then you tack on the fact that interest rates are going up, let’s just say… And you can look across the yield curve right now and everything’s right about 3%. So if the government’s going to issue debt, it’s going to be at about 3%. Let’s just say it’s at 3.2% and make the numbers kind of round here. And if you use 3.2% on the 30 trillion of debt that we have currently, and we have to replace that over the next number of years, that’s a trillion dollars of interest expense. That’s $600 trillion more than we currently have at 400 billion. $600 billion more than we have at our current rate of $400 billion.

Preston Pysh: (08:30)
The number goes up so aggressively with just even the slightest change in interest rate.

James Lavish: (08:37)
Exactly.

Preston Pysh: (08:38)
I just don’t think people understand that we are not dealing with a linear type situation right now.

James Lavish: (08:45)
We’re not. Yeah, exactly. And that’s the problem. So we’re watching the FED squirm and they know that they can’t raise rates too high. So what they’ve been trying to do is raise them quickly without breaking the markets. That’s just one part of it. But as our markets go lower, their tax revenues are going lower. The government’s tax revenues are going lower. So you have lower capital gains taxes. As the interest rates go up, it squeezes margins for companies. So their corporate tax rates are going down. Individual tax rates are going down as we enter a recession. And so now you’ve got a situation that your interest payments are going up and your tax revenues are going down and it’s just a spiral.

Preston Pysh: (09:34)
It’s spiral.

James Lavish: (09:34)
There’s no way out of it. I don’t think that we’re in a situation, Preston were the world is ending for the United States or the US dollar tomorrow. That’s not what I’m saying, but I’m saying that if you look out, there’s just no way out of this trap. There’s no way that they can fix the problem. So what are their solutions? And by the way, this is before investors around the world demanding higher rates for the increased default risk. I don’t know when that happens, but we’re in a situation now where the demand for US treasuries is lower.

James Lavish: (10:21)
The global energy crisis is causing countries to sell us treasuries to raise dollars, to pay for more oil. The last thing they want to do is have their currency being sold and we can go right into Japan off of this. But the issue is how do they bring all those US treasuries to the market in order to pay for this deficit? So the piece that you and I were talking about earlier about Luke Roman’s newsletter and he’s a brilliant observation. And that is the debt markets are… They’re kind of mirroring where we were in 2019 and how the US Treasury… So exactly what we’re talking about here. We know that they have to-

Preston Pysh: (11:13)
It was everything.

James Lavish: (11:14)
… sell more treasuries.

Preston Pysh: (11:15)
It’s everything minus the rising interest rate environment. It was bad back then and now it’s insane.

James Lavish: (11:23)
Yeah.

Preston Pysh: (11:24)
Go ahead. I’m sorry I stepped in.

James Lavish: (11:26)
No, it’s exactly right. So back in 2019 where they raised… Okay. So right now, we’ve just gotten word that the treasury is raising the third quarter borrowing estimates by $262 billion. Remember what I just said? So they’re raising it by $262 billion. Why? Because a drop off in tax receipts and expectation that tax receipts are going lower. Of course, we just discussed that. And increased spending. More entitlements. We’ve got a lot of spending. It’s a Gargantuan engine up there in DC. God help anybody who can figure out where all the money is going.

James Lavish: (12:10)
So now you’re talking about the new estimate is $444 billion of treasury issuance versus $182 billion. Well, who’s going to buy those? And that’s the problem is it mirrors the 2019 situation where they did the same thing and they raised it by about the same amount and their total was 433 billion. And what happened? The repo market locked up. Interest rates went… The repo rate went through the roof and so the FED had to step in and save the market.

James Lavish: (12:43)
So what do they do? So this time the FEDs tried to decrease its balance sheet at the same time. So they’re trying to sell treasuries themselves on top of this through quantitative tightening, right? You and I have talked about it. We’ve posted back and forth on Twitter a number of times, “Hey, look at how fast the balance sheet is coming down. Ha, ha, it’s not moving. Why?” They know. They can’t send more treasuries into the market knowing that they’re in this situation where tax receipts are going down, entitlement costs are going up.

Preston Pysh: (13:16)
No buyers.

James Lavish: (13:17)
And there’s no buyers.

Preston Pysh: (13:18)
Yeah.

James Lavish: (13:19)
Right? We’ve had countries around the world, China and Russia scrambling to get all their treasuries off the balance sheet. So what can they do?

Preston Pysh: (13:30)
This was a quote from Luke’s article, just so people can hear real simply the way Luke described it in his writeup. He said, “The FED is attempting to shrink its balance sheet into a toxic combination of a sharp rise in the third quarter US Treasury issuance. Insufficient foreign us demand and a weakening global economy, but this time with a kicker of an existential global energy crisis to boot.” And some of the numbers that you were quoting there, James, on one August, the US Treasury increased its quarterly borrowing estimates by a whopping 143% to 444 billion from 182 billion, which is what they were expecting. And then this was an interesting quote he also had in there, he said, “Jamie Dimon on August 14th said that he estimates a 90% chance the US economy goes into every recession or worse.” And the or worse part made me laugh because it reminded me of when I was a kid watching the old Batman TV show, when Robin said to Batman, he said, “Batman, we could have been killed or worse.”

James Lavish: (14:47)
Or Hermione.

Preston Pysh: (14:49)
Yeah. We could have been killed or worse.

James Lavish: (14:51)
Or worse expelled.

Preston Pysh: (14:54)
Exactly.

James Lavish: (15:00)
We’re sitting here laughing about it and it’s not funny.

Preston Pysh: (15:03)
What else can you do? It’s nuts.

James Lavish: (15:05)
It’s ridiculous that we’re in this situation. Right? Okay. So what can they do? Again, we’ve been laughing about the FED going up to Jackson Hole this week to have their annual meeting. The social awareness there is just, I mean, rock bottom to go to… I love Jackson Hole. It’s beautiful. I don’t know. Is government people out there?

Preston Pysh: (15:30)
Yeah. It’s crazy.

James Lavish: (15:32)
While we’re in this major problem. Anyway, so the world is on fire. Everything is fine. So we’re talking about what can Powell do? We’ve watched the markets fluctuate pretty dramatically around his comments and the other FED governor’s comments. And so he’s walking this really thin line. So he doesn’t want to break the markets, but he’s got to get inflation down. But he knows that he can’t raise rates too high because he could break the bond market. And he knows that the treasury is over there on the other side.

James Lavish: (16:07)
They’re supposed to be separate, right? So I wrote a piece about this in another newsletter about the FED and how it’s supposed to be separate. Of course, it’s super political. I mean, it’s obvious. But they’re supposed to operate separately. Well, the treasury is over here and they have a balance sheet issue, or they have a revenue and expense issue that the FED is now going to exacerbate by raising interest rates, so they know that. So what can they do?

James Lavish: (16:39)
They can let inflation run hot. And so we’ve been talking about this and Greg and I been talking about for a while is about… Greg Foss, sorry. They’re going to quietly, I think, they’re going to quietly raise the inflation target from 2% to three or maybe even four. And they’re just going to let it run a little bit hotter. It allows them then to monetize the debt.

James Lavish: (17:04)
It allows them to pay down the debt with cheaper dollars in the future. And so that’s one thing they can do. I don’t know how long [inaudible 00:17:15] because we said it again, as soon as they pivot… And we’re talking about QE infinity. So I don’t think they’re going to pivot before the economy breaks. And this is my personal opinion. I don’t know.

Preston Pysh: (17:30)
Yeah, I agree with you.

James Lavish: (17:33)
I don’t think that Powell is going to pivot until it’s absolutely abundantly clear that inflation is coming down. Well, the indicators are there, but employment is still high, CPI is still high. As long as the employment is… They’ve got the dual mandate. As long as… Where it’s kind of at full employment, they’ve got to get inflation down. Well, he’s going to continue raising rates until the employment number moves.

James Lavish: (18:02)
Unfortunately, as we’ve seen and we’ve seen evidence of employment often is the last indication of a recession. The employment number comes down after the recession already hits. So that’s an issue. So what else can they do? They can let it run hot, but we get into the same problem. CPI goes through the roof, asset prices just soar. And whoever is closest to the spigot gets benefit of the dollar printing, the Cantillon effect and then you’re back to where we were in February, in January, but even worse.

James Lavish: (18:41)
So there’s another thing they can do, which I haven’t seen many people talk about yet. I’ve heard Lyn say something about it before, Lyn Alden say something about it.

Preston Pysh: (18:52)
The SLR?

James Lavish: (18:52)
I can’t remember when. Yeah, exactly. And if they change the reserve requirements… Or they let-

Preston Pysh: (19:02)
So the SLR is the Supplementary Leverage Ratio and this is how much treasuries the bank is allowed to hold on their books like that amount for how much they have lent out.

James Lavish: (19:18)
Exactly. It comes out of the great financial crisis and the new leverage ratio laws and what banks can hold. But what they could do is just… And that’s exactly right. Perfect. Keep it simple. But what they could do is they could either change that ratio or just say, “Well, you don’t need to have a ratio at all in this environment because it’s so important as the repo market starts to break, we’re going to need you to come in and buy these treasuries.” We know there’s a $2 trillion plus of cash out there that we’ve got reverse repoed constantly.

James Lavish: (19:57)
Well, that cash, you go buy those treasuries. The treasuries go on the bank’s balance sheets. And what is that? That’s essentially a form is sneaky form of additional QE.

Preston Pysh: (20:08)
QE.

James Lavish: (20:09)
Right?

Preston Pysh: (20:09)
Yeah.

James Lavish: (20:12)
I mean, it’s money that was printed in last the two years that they’re using to buy the debt to monetize the debt. I mean, it’s kind of then, where do we go from there?

Preston Pysh: (20:25)
If they do that, are the yields going to start getting suppressed from reality like the reality of going higher? Are we-

James Lavish: (20:34)
Absolutely.

Preston Pysh: (20:35)
Yeah. We’re able to rates down.

James Lavish: (20:37)
Yeah. It’s a form of yield curve control. Absolutely. It’s a form of yield curve control. So let’s talk about that. I mean, look, I don’t know when this happens, but I do know that there’s decreased… You can see it. There’s decreased demand for US treasuries. And at some point you’re going to hear about the repo market breaking. And just like it was in 2019, I think that Luke is 100% correct.

Preston Pysh: (21:07)
He thinks it’ll happen soon. In his newsletter-

James Lavish: (21:10)
He thinks it’s imminent, yeah,

Preston Pysh: (21:12)
Yeah, like weeks.

James Lavish: (21:15)
Yeah. I mean, he’s right that the FED should be pausing at least by now, but I don’t think they’re going to. They’re going to raise rates again. 50 basis points in September. And then I think they’re going to raise them again. Unless something happens, something changes, they’ll raise them again in November and December and then pause.

Preston Pysh: (21:32)
So this was something that was tweeted out tonight. I know it’s by zero hedge, but this is what they said. Kashkari who’s the FED official says, “Very clear FED needs to tighten monetary policy.” And then this is their snarky reply to his comment. It said, “Translation: Very clear, only way to fix collapse and commodity supply is with millions of unemployed workers.” And so I find their reply to be very… I know they’re joking, but they’re serious at the same time is like, “Hey, so we keep tightening. We already have severe disruptions in commodity supply chains and so now we’re going to get a whole bunch of people laid off to only make that worse and only make these desirable goods and services continue to go through the roof because people are now getting laid off?” At what point does the playbook from the last 40 years, are we at the point now where that playbook is you got to literally throw it out?

James Lavish: (22:35)
Scrap it. Remember the leverage where we are in right now. I mean, we’ve never gone through a recession like this where we have debt to GDP far above. I mean we’re above 100%. We’re at 137%. We’re not making enough money to pay for it. We’re just-

Preston Pysh: (22:54)
Just the interest expense.

James Lavish: (22:56)
We’re trapped. We’re trapped. And it’s just a question of how long we can play this charade. I think that Russia is calling us out on it.

Preston Pysh: (23:05)
Yeah. I think their whole move was that was-

James Lavish: (23:07)
Yeah, they’re just like, “Look, it’s fake money. It’s Monopoly money. Everybody wake up. It’s Monopoly money.” And then when we pulled them off a swift and we seized treasuries, that’s just-

Preston Pysh: (23:20)
This is insane.

James Lavish: (23:21)
It’s insane. I think it was a fumble. Oops. Everybody is looking around saying India, China, they’re looking around saying, “Well, we can’t trust that the treasuries we own are… They’re going to make good on them.” That’s insane. We want treasuries to be the reserve asset of the world, we should honor them.

Preston Pysh: (23:49)
James, I would say-

James Lavish: (23:52)
Forget about ethics of war or anything like just focus-

Preston Pysh: (23:56)
On the math.

James Lavish: (23:57)
The math, just the math. Yeah.

Preston Pysh: (23:59)
Yeah. I gotcha. When I’m looking at how bad, and what we were describing was all US based math. When I look at the European situation…

James Lavish: (24:13)
11th grade, 11th grade.

Preston Pysh: (24:14)
11th grade math. Yeah, thank you. When I look at the European situation, it seems way more dire, way more insane, way more difficult from just like, what is the incentive structure? Who is a net exporter? Is there even any left in Europe? Cause it used to be Germany and now they’re not even net exporters

James Lavish: (24:38)
Germany was it, right? Yeah.

Preston Pysh: (24:40)
They’re like in a real make or break energy crisis.

James Lavish: (24:49)
I mean, look at this. They’re in a major problem. So you just saw the French energy cost that I sent out that I reposted a chart about the French energy prices. The prices are up everywhere. It’s everywhere in Europe. They’re just soaring. Well, they don’t have capacity. They don’t have capacity. So how do they get capacity online? Well, they just took three nuclear generators offline in Germany and they were supposed to decommission six. Well, they’ve decided that, “Okay. We won’t decommission the last three.” I mean-

Preston Pysh: (25:29)
Well, I thought they were going to do that after December.

James Lavish: (25:32)
Yeah. They’re going to keep it through December, at least to get their people through the winter. Although to me, I think winter goes through March-ish, right? I don’t know who’s in charge up there and then you’ve got… But just talking about the money situation out there though. I mean they’ve had free money for 11 years. In fact, they’re paying you to take the money, right? Not really because you can’t get negative interest rates from a bank, but they had a negative key target rate. The key interest rate. The ECB held it below zero for 11 years. They finally raised rates in July just a few weeks ago, finally, after they’ve had record inflation for months and it’s now at 0%.

James Lavish: (26:23)
So talk about a union that has no… They have no room. They have no room, none. So as soon as they started talking about raising the rates, you and I talked about how the Italian bond markets started to break. And so Lagarde came out and said, “Oh wait, wait, wait. Don’t worry. We’re going to be there. We’ve got this anti-fragmentation tool. It’s yield curve control, but it’s deliberate yield curve control that picks out specific country bonds at specific mature and specific denomination. They may pick out the two years. They’re saying the 10-year we’re going to defend the 10-year. Don’t worry about it.”

James Lavish: (27:05)
And the 10 year came down. I mean, if I’m an institutional investor, I don’t particularly want to own those bonds because the free market is telling you that they should be trading at a certain price. But now the ECB is coming in and essentially using the stronger country’s balance sheets to monetize their debt, to monetize Italy’s debt and Greece’s debt. So now you’ve got Germany who’s taking on the debt of these nations that are not operating at an efficient level. By all means they should be defaulting on their debt at some rate here. So how long can that last? I mean, you’ve studied you tell me how long do you think it could last?

Preston Pysh: (27:59)
Well, I would’ve told you it couldn’t have lasted this long. I guess when I’m looking at the whole situation where the hell was academia for the last decade in this situation where you were running negative rates and instead of them speaking up and sounding the alarms and being the canaries in the coal mine, they were literally out writing books about MMT and how this is normal.

James Lavish: (28:27)
The MMT experiment.

Preston Pysh: (28:28)
And how it needs to be more negative. And so it’s just like, “What’s their incentive structure?” You pull back and they’re being funded to write this crap by the same people that are causing it all.

James Lavish: (28:41)
Right. I mean you could make the argument that we couldn’t have made the productivity gains that we have without running deficits in debt. I mean you could make that argument.

Preston Pysh: (28:55)
No, I totally agree with that.

James Lavish: (28:57)
But now we’re addicted. There’s no way off that addiction. Everybody needs debt. Everybody’s borrowing.

Preston Pysh: (29:09)
Everything has turned into a zombie from the individuals to the companies, to the government.

James Lavish: (29:17)
Exactly. Now, here’s the problem. So you had individuals and companies that were zombies back in the great financial crisis. Well, we kicked the individual problems up to the banks and straight up to the government. Well, where are we going to kick it now? There’s nowhere to kick the problem any further. That’s it. We’re kind of at the end of the line. So the question isn’t whether sovereigns start to fail. The question is which ones start failing first and emerging markets, their balance sheets are not as strong and their currencies are not as strong.

James Lavish: (29:59)
We’re seeing the US dollars sore here because people, they’re taking risk off and they’re looking for safety. So you’re going to have smaller nations that fail. The currencies are going to fail. They’re going to go into hyperinflation and they’re going to have to reset. And the question is which G20 goes first. Is it Italy?

Preston Pysh: (30:25)
Do you think we see that in the coming 12 months that we see a G20 go in the coming 12 months?

James Lavish: (30:34)
Well, I mean, I could get to a place where the EU has no choice but to talk about breaking up.

Preston Pysh: (30:40)
Within 12 months?

James Lavish: (30:43)
It’s possible. I mean, this energy crisis, if it worsens, it’s possible. I don’t predict that. I can get there. Do we see emerging markets fail in the next 12 months? It’s very possible. A G20? I don’t don’t know. These things take so long.

Preston Pysh: (31:02)
Once they start unraveling, they happen I think faster than everybody thinks it could happen.

James Lavish: (31:09)
I agree.

Preston Pysh: (31:10)
Just any type of liquidation event. The thing people all say is it happens so fast. It happened in the blink of an eye. I think this situation, it’s brewing. I don’t think people have an appreciation for how insanely fast this could ripple throughout every country… Because everything is intertwined.

James Lavish: (31:31)
Right. And the US dollar will soar. The US dollar will swallow everything. The milkshake theory. Right?

Preston Pysh: (31:37)
Mm-hmm.

James Lavish: (31:39)
And I can see countries collapsing within absolutely in the next three to five years. I can see that happening. Well, how does that happen? Well, because we go through one more cycle like this and it seems like the cycles are getting shorter and shorter.

Preston Pysh: (31:56)
Shorter, tighter and more pronounced.

James Lavish: (31:58)
Shorter, tighter, and more pronounced. And so I could see that happening where we go through this QE, we have our recession, hopefully not a depression, but we have a recession and then we have our pivot. We go through QE again, stop the QT, put bonds on balance sheets, whether it’s the FED or we change the reserve requirements. And then we start giving out entitlements. We subsidize and we send out more checks and that really causes inflation. And then the inflation runs so hot again that you’ve got to tighten again. But you raise those interest rates. You put more debt on the balance sheet. We’re in the debt spiral, right? We’re already in it. You put more debt on the bank’s balance sheets. You borrow more as a US government. Your tax receipts are going down again as you raise rates, yet your interest expense is going up and it just goes in the stairstep and I could see it in the next maybe two cycles where it breaks a number of G20.

Preston Pysh: (33:02)
I don’t know how you could possibly get. When I look at the streets of Philadelphia, San Francisco, New York. You name it, right? Name your city. How in the world could we possibly go another two cycles at this point, without there just being absolute riot?

James Lavish: (33:26)
There you go. And that’s the problem. The problem is that the separation of wealth is just being more and more pronounced. It’s getting more pronounced with every single cycle. And that’s the issue. So when you’ve got FED governors out there saying, “I don’t see a recession. I don’t feel anything.” Well, when you make $8,000 a week, whatever it is.

Preston Pysh: (33:53)
Whatever it is.

James Lavish: (33:55)
Between their speaking engagements or whatever, I mean, of course you’re not going to feel it. Come on, give me a break. You’re going to Jackson Hole to talk about all the problems.

Preston Pysh: (34:05)
Gulfstream was delayed. We’re not leaving until 10.

James Lavish: (34:09)
I couldn’t get gas. I couldn’t get jet fuel. It’s insane.

Preston Pysh: (34:19)
Let’s pivot to Bitcoin. I don’t know if you know Eddie, but he posts some awesome questions online. He had a question for you. What is the most important change institutional investors are waiting before changing mandates to include the direct BTC exposure?

James Lavish: (34:38)
I think they want clarity around regulations. They want regulatory clarity. How is it going to be treated?

Preston Pysh: (34:45)
Well, you saw Gary’s write up this week, right?

James Lavish: (34:50)
I haven’t seen it yet, no.

Preston Pysh: (34:51)
You didn’t see his write-up in the Wall Street Journal?

James Lavish: (34:53)
No.

Preston Pysh: (34:53)
He’s basically like, “Hey, all these borrowing lending platforms were doing legal things and this article was proof that they were, because we just said that they were. So have at it.” That’s basically the…

James Lavish: (35:06)
Did he lump in Bitcoin with it?

Preston Pysh: (35:08)
That was my 10-second summary.

James Lavish: (35:11)
That’s great. [inaudible 00:35:12]

Preston Pysh: (35:11)
He basically said that, it doesn’t matter whether it’s Bitcoin or any other token because these borrowing and lending platforms are out there doing these things, these security things that there should have been disclosures by them to the public. And so the public has damages.

James Lavish: (35:31)
Regulation. They want oversight, oversight, oversight, oversight. I think there’s a line there though how much oversight versus the strength of Bitcoin being hard money. When institutional investors get both clarity around regulation and their knowledge base rises, and they understand Bitcoin as a completely separate asset than an Ethereum than a Cardano or Solana or whatever, when they can see how it’s unique and this has to do with educating all of the investment managers that are going to be making these decisions. I can tell you right now, Preston, there’s a lot of ignorant managers out there who have no idea the difference between Bitcoin and Ethereum.

James Lavish: (36:27)
None. It’s not that they’re dumb. They’re not. I know very smart people who have no idea what the difference is and why they should be buying Bitcoin and treating as a separate asset class. And part of the reason is, “Well, they don’t need to know. They’ve done very well in this current system that they’ve been thriving in for decades.” They don’t need to know what hard money is. They have manipulated money and that’s treated them very well.

James Lavish: (36:59)
The Fiat system has treated them very well. So that’s number one. And then just the institutional money managers themselves have a lot of hurdles to get through and we’ve talked about this before. It doesn’t get on their balance sheets quickly. It takes a long time. So you’ve got to get enough of them to get comfort around regulation and whether or not it’s going to be, number one. And if it’s not going to be the comfort around that, understanding it and then get through all of their processes and operational and legal settlement, custody processes that they have to iron out at each of those institutions in order to own it as a separate asset class. And that’s going to take time. But having-

Preston Pysh: (37:42)
Do you think pain is the instructor for them to try to understand it? And when I say pain, I mean, all these supply chains are breaking down. Our prices are blowing out. How does this possibly solve itself? When I look at the FED, they’re going to keep printing more. They’re doing QE. Does all of that force them to try to understand what this is?

James Lavish: (38:05)
It could, but you’ve got all of this noise out there around proof of work versus proof of stake. And the amount of energy that Bitcoin uses to be mind. I think there’s going to be a lot of noise about that over the next year or two. Unfortunately, that’s been a headwind and it’s going to increase. I have no idea what’s going to happen with Ethereum in a few weeks. I have no clue if it’s going to work or not going to work or what’s going to happen.

Preston Pysh: (38:37)
It sounds like you know the same as the developers.

James Lavish: (38:43)
Right? Did you hear that conversation?

Preston Pysh: (38:45)
Insane.

James Lavish: (38:46)
Crazy. Yeah. I think you said that to me. It’s insane.

Preston Pysh: (38:50)
Well, let me ask you this then, James on the energy side. So I was talking with Parker and Will Cole last week and they’re telling… I mean, they were down in Houston and I asked them, is it inevitable that you’re going to see this merging of infrastructure between the miners and large cap energy companies? And they both looked at me and they’re like, “Yeah, that’s happening.”

James Lavish: (39:13)
No brainer.

Preston Pysh: (39:13)
It’s a no brainer.

James Lavish: (39:14)
Yeah, it’s a no brainer.

Preston Pysh: (39:15)
So do the Apples of the world who are not in that particular space that might be looking at this and saying, “Well, I don’t know which one of these things are going to win. I just know that we’ve got issues and they’re not getting resolved.” When they look over at an ExxonMobil or a Shell… Is Shell sponsoring the Bitcoin 2023 events?

James Lavish: (39:35)
Is it really?

Preston Pysh: (39:37)
It’s either ExxonMobil or Shell or one of these large cap energy companies is sponsoring the next Bitcoin conference down in Miami.

James Lavish: (39:46)
That’s a big deal.

Preston Pysh: (39:47)
That’s a huge deal.

James Lavish: (39:48)
It’s a big deal.

Preston Pysh: (39:50)
I think you’re going to all these narratives around energy and how corrosive proof of work is to energy, I think these energy companies are like, “Cool story, bro. But we just doubled our bottom line or whatever.” And we’re actually having a favorable environmental impact by actually storing all this energy that we’d be just pissing over the dam or not capturing-

James Lavish: (40:19)
Right, exactly. You’re flaring gas.

Preston Pysh: (40:24)
It’s crazy.

James Lavish: (40:25)
Just a massive amount of waste. So it’s funny you bring that up because I was thinking about that in the Bitcoin conference this year and how much fun. And that was my first conference. I had never been to the Bitcoin conference before in Miami. I thought how much fun it was to be around all these people who are super passionate about this emerging technology, but it’s really a global money saving discovery. Right? And the energy around there is just incredible. I was looking around, I was thinking, “Well, what’s it going to be like when you’ve got Goldman Sachs here and Credit Suisse?” Oh, maybe not Credit Suisse anymore, but JP Morgan. And like you said, Exxon and Shell and all these major companies and Apple and everybody is there. Apple is in there talking about lightning and Exxon is talking about mining.

Preston Pysh: (41:19)
It’s going to be time for us to find a different venue.

James Lavish: (41:22)
Right? It’s going to be boring, right? It’s going to be boring. But I can tell you this, that’s where it’s going because once it gets institutionally adopted, they’re going to be all over that space. And that’s when you know, just the momentum is just too great. And I think that we’re already at… So to answer your question succinctly, I truly believe Preston that momentum is just too great to stop. The problems are just too great to solve. And that merging is what absolutely makes Bitcoin win.

James Lavish: (42:03)
We are going to have a fight and we’ve got to make sure that we clarify it, but I think that is just about the length of time it takes to get there versus the whether or not it does.

Preston Pysh: (42:16)
Yeah. I totally agree with that. Does it happen quickly because people come to their senses and realize, “Oh, the solution is literally smacking me in the face?” Or do they battle it and fight it and end up losing anyway in the long run.

James Lavish: (42:31)
Yeah, it’s coming. The momentum is already there. We’ve seen Fidelity, BlackRock, JP Morgan. Jamie Dimon is talking about it. They have experts on their desks that are working on this and creating the ability for their high net worth portfolios to own it. I mean, the momentum is there. It’s not going away.

Preston Pysh: (42:56)
Yeah, they’re working on the merge.

James Lavish: (42:57)
They’re working on the merge. Got it.

Preston Pysh: (42:58)
There’s a couple cheap shots here. So I think we already covered this earlier, when we were talking about the debt spiral, but I just want to highlight this question because this is something that I think a lot of people have this question online and Lynn has done an outstanding job explaining why we haven’t seen inflation actually materialize after 2008 when we were doing QE. And in her article and a couple different article that she’s highlighted, she’s saying, “Hey, it really needs to be the FED and the treasury acting together, monetizing the debt and doing QE simultaneously for it to actually start spilling over into what everybody would see when they’re checking out at the grocery store to see inflation actually making its way to the consumer.”

Preston Pysh: (43:50)
So this was the question that the person posed. They said what changed in 2020 that wasn’t happening from 2008 to 2020 that got the treasury also working with the FED to cause the basement and these inflationary prints to start manifesting themselves.

James Lavish: (44:08)
I think the simplest thing is we just sent checks directly to consumers. I mean, we sent trillions of dollars into people’s bank accounts. So it immediately caused a demand for goods, number one. Number two, our supply chains were broken. We were in lockdowns everywhere. Things weren’t being made. They weren’t being shipped. You couldn’t find certain things. I mean the used car market, you would’ve done better if you had a used car than I think if you had bought silver at that point.

James Lavish: (44:47)
I think just that combination, that has been a major driver where you just saw it immediately. And then it just got exacerbated with the energy crisis. The fact that we don’t have enough refineries to keep up with demand here in America, I mean, we can be energy independent without a blank, obviously. But right now the refineries get to a capacity pretty quickly. We’re draining our emergency reserves, our special reserves. So there are a lot of different… I just think that exacerbated the issue.

Preston Pysh: (45:30)
So let me ask this because it piggybacks on that. And so is your opinion that a lot of this disruption and a lot of this inflation is hanging around because of those factors, but moving from time now forward, because we’re now in this debt spiral and they have to monetize the debt because you’re in this spiral type situation that the interest expense is now exceeding what we can absolutely handle.

James Lavish: (45:58)
Absolutely. It’s pure math. It’s pure math. And so inflation where people have to understand is… I was talking to my wife about it and she’s like, “Well, when do you think the prices will come down for some of these goods that we’ve seen just rise so exponentially?” I’m like, “They’re not.”

Preston Pysh: (46:14)
You gave her the Anakin Skywalker smirk to Natalie Portman. Right?

James Lavish: (46:21)
She’s super smart.

Preston Pysh: (46:22)
They’re not.

James Lavish: (46:23)
But people, it’s really hard to get your head around the prices of things now. Just anything. Name anything. It’s really hard to get your head around the prices. And so people are like, “Well, when are we going to see these prices come down?” It’s like, “We’re not.” You’re just going to see them go up a little bit slower. I think it’s sticky and it’s because of all the underlying issues that you laid out. No question.

Preston Pysh: (46:49)
Yeah, because we didn’t have this debt spiral scenario prior to 2020. It was getting bad. You could see it moving in that direction. But now-

James Lavish: (46:59)
That’s when it got out of control. That was kind of the tip off.

Preston Pysh: (47:01)
Yeah. But now it’s just pure 11th grade math as Greg would say.

James Lavish: (47:08)
That’s right.

Preston Pysh: (47:09)
What’s caused the Japanese credit markets to calm down a little bit from the last time we talked? Because I remember we threw up a chart and we were looking at the volatility across the whole duration of their curve and it was looking like somebody was trying to blow through the yield curve control. And it looks like whoever that was, or whatever was causing that has-

James Lavish: (47:30)
They backed off.

Preston Pysh: (47:31)
Yeah, had backed off.

James Lavish: (47:33)
Those are huge hedge fund trades where they were selling JGB’s. So what they’re trying to do is take the opposite position. So they were like short swap positions by hedge funds as they go the short JGB’s and long yen. Right?

Preston Pysh: (47:54)
Mm-hmm.

James Lavish: (47:54)
Which is a counterforce to what Japan is trying to do, the Bank of Japan. Well, then when it looked like the FED was already becoming dovish and they’re going to pivot, this is one of the… I believe that Japan is they’re playing a game of chicken with the FED. They’re hoping that the FED blinks before they do and they pause. Its simple search for yield is a major driver of currencies. So when you own a 10-year treasury in Japan, and to catch your listeners up for those who hadn’t heard this before, the Bank of Japan has instituted what they call yield curve control, where they are buying every single 10-year treasury to keep the interest rate at 25 basis points, 0.25%.

James Lavish: (48:54)
So they’ll buy endless treasuries to do that. Well, they’ve proven that as now the Bank of Japan owns more than 50% of all outstanding Japanese government debt, which is just insane. But this is what they’re doing. And that reverse trade of the hedge funds were betting that they wouldn’t be able to hold on. My guess, and I haven’t done scientific work on this, but it just points to this is that the traders, those same traders, they saw Powell come out the few weeks ago and sound kind of dovish that meeting and they thought the FED is going to blink first.

James Lavish: (49:38)
And so they unwound a lot of those trades and the pressure came off. But you saw in the last few days you saw the yen spike lower again to just under 140. So we talked about the fact that for your listeners, if investors want to sell Japanese bonds and there’s yield curve control there, so they sell the bonds to the government and the government is standing there and the open market buying them. So then they get yen for those bonds.

James Lavish: (50:13)
Well, they’re in search of yield, and the best yield in the world right now for the major countries, and the major currencies is the US dollar is the US Treasury and we’re at 3%. Instead of getting 0.25% for the Japanese yield, they can take those yen, sell them and buy US dollars to get the 10-year treasury at 3% instead of getting 0.25%.

James Lavish: (50:41)
Now, if they want to hedge out the currency, they’re going to have to make a currency bet or they’ll hedge out the currency and that’s actually been a driver negative driver for US treasuries recently. But the long short of it is that’s kind of the pressure and that’s-

Preston Pysh: (50:57)
So James after you hedge out that currency risk, you have to make up the 3.5%, which I think is what makes that so hard to do and why you’re not necessarily seeing it happen.

James Lavish: (51:07)
Exactly.

Preston Pysh: (51:07)
Yeah, okay.

James Lavish: (51:08)
Exactly. So there’s got to be a release valve somewhere. So that’s what’s happening. It’s back to where it was a few weeks ago where there’s pressure on the yen and there’s pressure on those treasuries. And if the Bank of Japan stands there and buys the treasuries, well, the release valve is the end, period. That’s simple as that.

Preston Pysh: (51:32)
This was an interesting question and this relates to what we’re talking about there. Dr. Anton, “Help explain why advanced economies can’t get away,” and he used that in quotations, get away, “with doing what Japan does at least for a few more years with the low inflation yield curve control and big debt to GDP ratio. How are they able to do what they’re doing over there, but no one else can get away with it?

James Lavish: (51:57)
Yeah, that’s a good question. I think it has to do with the fact that Japan, they’re actually a net exporter.

Preston Pysh: (52:09)
Exporter.

James Lavish: (52:09)
Yeah. And the US is a net importer. I mean, most economies are, right?

Preston Pysh: (52:15)
Yeah.

James Lavish: (52:16)
So most of the major ones. So the question is we can’t get away with it because we don’t have the same-

Preston Pysh: (52:26)
Surplus.

James Lavish: (52:27)
… trade balance surplus in order to do… And so it just won’t work. They’ve had low interest rates for so long and their current account surplus is what I’m trying to say. I’m fumbling around with my words here, because we took so long to get up and running here. Preston, I’m sorry. We look tired.

Preston Pysh: (52:47)
I look at it, almost like a company with retained earnings. Is the company making money or is it not making money from a country kind of level, right?

James Lavish: (52:56)
Yeah. The international investments in there, it’s a net positive. They’ve got low wealth concentration. Actually, these are points that Lyn made. I read something from a long time ago. It feels like a long time ago. Might have been last week. But she basically said US is in the exact opposite. Lyn Alden for your listeners, sorry. The US is in the exact opposite position. They’ve got a current account deficit. They have-

Preston Pysh: (53:33)
It’s getting wider.

James Lavish: (53:35)
Yeah. Their international investment position is negative and it’s far more negative. We have a super high concentration of wealth in this country. And then the other thing is that Japan was doing it during a period that we were having global deflation up until now. So I don’t know what’s going to happen with them now. I think they’re in it. They have a problem. But that’s why the US can’t get away with it. It just doesn’t work. It’s just not going to work.

Preston Pysh: (54:06)
So last question I got for you, James, you have a awesome thread where you lay out 25 years in finance. What you learned, your top five things, they were, and I’m going to read these off quickly, don’t be the smartest guy in the room. Fortunes are made in fear. Don’t get killed. Eat what you kill. And banks work for us. Talk to us about your favorite one of those five and maybe give us a story or something to leave folks with.

James Lavish: (54:33)
That’s a good question. Let’s see. That’s funny. That’s the first thread I ever wrote.

Preston Pysh: (54:41)
Oh, no way. I love it. It’s an awesome thread.

James Lavish: (54:46)
Thank you. I think the one that I come back to, and I keep coming back to, especially with Bitcoin is you eat what you kill, but really the underlying thing with that one is your conviction in a long term investment. As an investor, all the other things that are in there, risk measures or using the leverage for your balance sheet intelligently, but having a conviction, some people, they get tied up with the emotion of something and people are really emotional about Bitcoin.

James Lavish: (55:22)
I’ve seen this in some pretty amazing and pretty negative ways. Sometimes they get so confident that they’ll take leverage. They’ll take out, leverage on it and they use Bitcoin as a collateral. It’s a leverage on a volatile asset to margin their trade and then they just get wiped out. You see that. Okay. So having conviction really for me has to do with a long-term investment. You look at it and you’ve got probability analysis on it.

James Lavish: (55:54)
You’re looking for the low risk, the high reward versus a super high conviction in your analysis of an investment that you want to take a long-term position in. And that’s where you’ll hear Warren Buffett or Charlie Munger as much as they don’t understand Bitcoin, you’ll hear them talk about taking these opportunities where there’s a mispriced opportunity in the market because they have such high conviction in it. They have no problem with buying it all the way down and just sitting on it for years.

Preston Pysh: (56:31)
They know what they own.

James Lavish: (56:33)
Yeah. That’s the one that honestly I keep coming back to over and over again.

Preston Pysh: (56:39)
Yeah, I love that.

James Lavish: (56:41)
Excuse me, I had to cough. That’s what’s driven me in Bitcoin. I don’t care that it’s down at $20,000. I know that there are extraneous forces on it that there’s a lot of noise around this as an emerging asset class and an emerging money, Hard money. And so for me having the conviction and understanding it and understanding why it’s different from the Fiat currency we have now, how it’s decentralized, how it’s scarce, how it’s trustless, these are things that not having counterparty risk in something that I own is incredible. I mean-

Preston Pysh: (57:24)
Insane.

James Lavish: (57:25)
You would say it’s no different than having gold in a vault in your house. Except if I’m in the Ukraine or if I’m in Venezuela and I need to flee my country because it’s dissolving.

Preston Pysh: (57:42)
It’s an imaginary vault.

James Lavish: (57:43)
You saw the woman who was stopped at the border trying to get across the border with suitcases full of money. Well, she just had 12 words in her head. She could have gotten across the border with all her money. And so that’s just something that… And I just have such high conviction in it, but that’s the one I just keep coming back to.

Preston Pysh: (58:06)
Yeah, love it. James, thank you so much for having this discussion. I just want to tell folks, so your newsletter, phenomenal. It’s so easy to sign up for it. I’ll have a link in the show notes to the newsletter and also your Twitter feed, but for people just go to James’s Twitter feed and there’s a button right there under his name and you just click subscribe and you’ll start getting his newsletter. I mean, he is putting out phenomenal high value add just like what you heard today. His comments are just so valuable. So I would highly encourage people to check that out. I know I’m a subscriber to it and just really look forward to anything that you put out.

James Lavish: (58:47)
And it’s free

Preston Pysh: (58:48)
And it’s completely free. He’s not selling anything.

James Lavish: (58:53)
What I do is every single week I sit down on a Saturday morning, I put on premier league soccer and I just write. I write about one financial concept that I can simplify for people. Preston, I got tired of people saying, “Your business is so opaque. Wall Street is so opaque. They’re trying to hide things from us.” And I think that they’re just not incentivized to tell people what’s going on. Well, I’m going to tell you what’s going on. I’m going to give it to you in layman’s terms so you can understand it. It’s not that difficult. These concepts are not that difficult. The terms may sound crazy, yield curve control, credit default swap. I mean, the repo and reverse repo. I mean, it’s not that difficult. And so I appreciate it. I appreciate you sharing that.

Preston Pysh: (59:43)
It’s a no brainer, man.

James Lavish: (59:44)
It’s something that I have a passion for. Thank you.

Preston Pysh: (59:47)
So we’ll have a link to that in the show notes. We’ll have a link to your Twitter. Is there anything else that you wanted to highlight for folks?

James Lavish: (59:52)
No, this is awesome. I appreciate it. I always appreciate having an evening chat with Preston about macro.

Preston Pysh: (59:58)
We need to have some bourbon next time we do this.

James Lavish: (01:00:01)
Yeah, definitely. That’s a deal. All right.

Preston Pysh: (01:00:06)
All right. Thank you so much for your time. Always a blast. And thanks for coming on.

James Lavish: (01:00:11)
Yeah. Thank you, Preston.

Preston Pysh: (01:00:13)
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. 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.

Outro: (01:00:46)
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