Regime Change, Macro for 2H23 | KBW2023

hello hello all right it's probably the most sober interview [ __ ] are going to be for the rest of the week all right so um are we there yet so when I was a kid I remember driving in the car I [ __ ] hate car rides um from Buffalo to Detroit and back and forth it's about a 5our car ride and you always invariably ask your parents like Are We There Yet right check in the clock you're bored out of your [ __ ] mind we didn't have Tik Tok back then so are we there yet and what am I actually talking about the thing that everybody in this room really cares about you know you open up your metamask and you've got that piece of dog [ __ ] coin that you bought in 2021 in November and you're like oh [ __ ] when's it going to get back up there like that Soul at $200 Bitcoin at 70,000 eth at 4,800 whatever you guys all know the things you don't want to talk about that's in your portfolio that you want to just get back up to the where it was at the end of 2021 and so essentially we've been in this sort of you know waiting game okay we bought them last year when you know the FTX debacle 15,000 in Bitcoin and like 700 on E or whatever it was and you know we're up somewhere double or 80% of whatever it is on a lot of these things and we're like okay well where's the bek where's the bull market when's it coming back when the [ __ ] is it party time again when are all these companies going to stop going bankrupt and actually make some [ __ ] money and so that's sort of the the title of this talk and it's obviously macro because it's what I'm passionate about so we'll have some chart porn for you guys and have a little discussion of um fed interest rate policy all right so I'm a bit of a Bitcoin Maxi but not really I I trade a lot of shitcoins as well um but again I'll bring it up to the Bitcoin level because I think it's informative for the rest of the complex so what is bitcoin and I've said this many times in many presentations and essays it's Fiat liquidity right and it's technology now obviously we're very passionate about the technology decentralization peer-to-peer cash blah blah blah blah blah right unfortunately it's very very hard to value that technology you only really value it until you are experiencing a situation where you don't have that right so imagine if you're somebody who all of a sudden loses access to their bank account or can't trade anymore and you're like oh [ __ ] now I get where these Bitcoin idiots are talking about how I have a you know a financial system that's not dependent on some bank or some you know insurance company or whatever saying yes you can access your financial wealth that's the technology aspect it's a very personal thing everybody has a different value for it it's very hard to quantify it's hard to predict when the market is going to Value the technology that is Bitcoin and a lot of the things that people in this room are building but what we can have a lot of confidence in by looking at economic Cycles is the Fiat liquidity part right we're in this Fiat regime a a global monetary regime that's backed by nothing than the word of a government or a central bank saying please trust me I'm going to do what's necessary to maintain the purchasing power of this piece of paper that you hold in your wallet probably now in your digital wallet and you know there's many many economists and thinkers and you know traders who spend all day all night thinking about the the Global Credit cycle and what that means is there more or less money flitting in the system do the assets that are in my portfolio are they going to perform well if there is more or less money in the system and obviously Bitcoin is a reaction to you know almost you know 80 years of Keynesian Economic Policy of just printing money to do stuff which you know started in 2008 obviously at the uh the end the start of the global financial crisis and so we have this very real part of the equation of what we value Bitcoin as is what's the denominator of Fiat stuff that's being pumped out into the world and because Central Banks and governments and companies publish statistics on you know how much credit they're allocating uh Global money supply we can you know form a very informed opinion about what the future of that is so I'm going to spend obviously the most of this presentation on the Fiat liquidity part of the equation right so I believe that this current bull market started on the 10th of March 2023 and for those of you who don't know what this date means it's the date the Friday before Silicon Valley Bank and Signature Bank were taken over by the um FDIC in the US um obviously the week before uh silvergate had gone into bankruptcy and this is you know Bitcoin was training around 20,000 that weekend and everyone was like oh [ __ ] right the tech Bros and the crypto Bros going to lose all their all their deposits in these two very important Banks um and so over the weekend everyone was like okay will they or won't they roll out some sort of bailout package because the FED had been talking big Federal Reserve that is have been talking big about okay we're going to reduce the amount of money in the system we're going to raise interest rates we're going to tighten monetary conditions and so bailing out you know two Banks you know bailing out the depositors of two banks that were heavily into you know speculative crypto and speculative technology probably isn't the thing that the FED wants to do uh to engender this belief that they actually care about the purchasing power of of a dollar now obviously on the the Sunday night uh across by Bloomberg screen you know fed and the treasury have agreed to they called it the bank term funding program uh btfd or by the [ __ ] dip right um and you should have done it uh as of as we stand here right now bitcoin's up about 35% uh since that date uh and why I say that the bull market really started on that date it's because it's just another example of the leading Central Bank bank and I'm going to spend most of the time talking about the FED even though we're sitting here in in South Korea every other Global Central Bank follows what the FED does I don't care if you're you know a communist Nation like China or you're a capitalist Nation like the United States or Korea whatever right we're all intertwined in this global system the dollar sits at the Apex what the FED does influences what every other Central Bank does so I spend most of my time talking about the fed and the American economic and political situation because everywhere else just a derivative of that and so if we focus there we can make some informed guesses about what's going to happen around the rest of the world right so the I say the 12th or of March or whatever they rule out this program and I think I penned an essay the next week basically saying that this was you know unlimited money Printing and in a different name because essentially what they did was they backstopped the entire banking system by saying please give me your underwater dog [ __ ] bonds and I'll give you fresh dollars you know they'll charge your rate for it but again I can tender what's on my portfolio and I can get dollars to solve my my funding crisis and I can do it in an unlimited quantity and so me and the rest of the market I think rightly saw through this as basically them admitting that they've caused this problem the structure of the banking system and this is one of the ways they can fix it which is print more money and and Bitcoin is up you can take a look you know tech stocks are up since that day gold has been up since that day so this is when I believe that the bull market started we have basically ditched this whole facade that we care about the value of the dollar or the value of any fiat currency and we've admitted that okay when [ __ ] really [ __ ] up in the banking system we're going to print more money now obviously you know ever since probably the 1970s 1980s we as investors have been heavily trained into how to respond to injections of liquidity now this is a chart that I like to post a lot now the white line is the Federal Reserve balance sheet um and the yellow line is Bitcoin and I've indexed them to uh 100 uh starting on uh in March 2020 you know that was obviously you very wild month coid month Bitcoin went down 50% then rallied S&P was crashing 10year treasury hit 33 basis points um in day and then again more money printing came about and what has been the return since then Bitcoin has out performed essentially the global leading Central Bank by 137% right so it has done well over and above the amount of Fiat that has been sloshing around in the world which leads everyone to say to think okay well if the global central banks are printing money then I should own Bitcoin or some other assets that have a fixed Supply because the denominator is expanding in an infinite fashion and therefore I should make more money right and so the follow on to that is okay every time I think that they're going to loosen Financial conditions I should go along stuff like Bitcoin and we're like okay and so now we're in a bare market so we're kind of think okay so when is the Fed going to switch when are they going to do another March 2020 a a March 2023 turn the Taps back on bitcoin goes Moon everybody's Rich everybody's happy again Lambos blah blah blah right that's what we're all thinking we're all trained to do this and so we're all looking for the when are they going to cut when are they going to cut when are they going to cut and we you know every Market analyst is saying what are they going to cut when are they going to cut you know they'll point out this economic indicator that e economic indicator everybody in the entire industry of money managing money globally is focused on when is a Fed going to cut rates and can we focus on some particular economic variable that we believe leads their actions to printing more money so that our portfolio goes up in value right so we're trained to think this way because that's how it's been done for the past 30 or 40 years however and so I've argued this I've written so many [ __ ] essays about fed policy and this and that economic indicator say that us is [ __ ] therefore they're going to print money so I like well I want to give a more interesting presentation than just presenting the same thing I've said 15,000 times so I asked myself this question I was like well how about I take the other side of the argument and try to stress test my portfolio and say what if I'm wrong what if there is no Fed rate cut what if there's no rate cut of the ECB you know European Central Bank no rate cut at the bank of Korea no rate cut at the RBA the the central banks just keep raising rates because inflation is sticky or is now now on the upscreen due to Energy prices what if there's no us recession or a global recession for that matter that everything's just fine we've we've solved the you know the the economy we pred our way back into to report uh Prosperity what if inflation doesn't fall you know I'm sure you've been reading if you're attuned to financial um media everybody's talking about inflation is over we' the global central banks have killed it you know it's going down it's going to stay down it's going to go back down to 0% and therefore they should start stimulating by printing money that's what we all want them to do what if there's no Financial system meltdown obviously I've been talking a lot about different strains in the global banking system that could cause the fed and other central banks to rush to print money to save the real constituency that they only care about which is the Fiat banking system and so therefore any of these wh ifs actually happen then there are no rate Cuts what does that actually mean for my portfolio and I deluding myself by being long all this crypto and continuing to buy dips as as they occur to to thinking that in you know 12 to 24 months time because all these things this bad stuff's going to happen fed's going to print more money and then bitcoin's G to outperform again like it did in the last cycle now obviously you know tldr I think that will still do well but I wanted to explore this and see what happens if we take the other side of the argument and say that okay well the FED just continues raising rates what actually happens at a very high macroeconomic level so the first thing that I think about is you know real interest rates and I Define real interest rates as the government bond yield and wherever you are based minus nominal GDP growth right and so I don't want to get into you know GDP deflators and real what what's the actual real inflation rate because every government manipulates what they tell you is the inflation rate because they don't want you to be pissed off because inflation pisses off 100% of the electorate you so you better manage this Pro uh this this feature of the economy or else you'll be out of power and there's very many examples of regimes that have fallen due to rampant inflation amongst the people so real yields are how much is the economy growing for all the money that we're pumping into it now if the government bond yields are above the growth in actual economy then it's restrictive right because if I'm borrowing money my business or my Venture needs to be that much better than just the average growth rate of the economy where I am to pay back my loan so I better have a very very good idea or a very profitable um future deployment of this Capital now I argue that this is the real rate not some you know Treasury and inflation protected security or some other manipulated Government Bond statistic but real rates across the curve are negative and again I we're going to focus on the US for for this presentation so I did a very crude graph so this is the uh us 2-year note um the reason why I use the the two-year note is if you you know for those of you have Bloomberg if you go treasury active curves you take a look at the US Treasury yield curve you'll see that um it's kind of like a spike at the top and and that's the twoe yield um Sorry probably the six Monon point point is the highest yield and the twoe is probably the most traded um instrument to gauge where short-term rates are and the tiu has spiked heavily it's around I think 490 basis points when I checked this morning something something around there so it's one of the highest points on the curve right and I took a look at um this is backwards uh but uh the US nominal uh GDP growth is from Bloomberg and I graphed it and if you take a look here it's been quite negative um since the fedus started hiking in March of 2022 and we've recently went barely positive in last quarter so if you think about you know what's happened since the fed this is where the FED started they had a problem real rates were very very negative they tried to do something about it raising rates are the fastest clip in you know modern US economic history and yet we're barely above zero on the only bond that has a very very high yield if you took a look at the 10 year yield or the 30-year yield this chart would be purely negative since March of 2022 so then I thought okay well that's the past we don't care about the past the past has been priced into the market what's the future um so the Federal Reserve of Atlanta published this thing called nowcast and they try to estimate what is the current real GDP rate given all the data that we have currently right and so for third quarter of 2023 I took this data from I think Sunday is when I made this chart uh the Atlanta fed nowcast GDP was positive 5.6% that's [ __ ] massive right that's like China kind of GDP and this is the largest economy in the world then I made up a bit of a fudge here uh 3.7% of real GDP deflator I basically just took the difference between real and nominal for the past five quarters and just averaged them out being a bit lazy here so we get a sort of a 9.3% nominal GDP growth estimate for the third quarter of 2023 so put a plus or minus 2% on that of an air rate it's still [ __ ] huge for you know the trillions of dollars that the US economy represents and so then we take a look at you know the twoe yield as of this weekend 4.9% minus this nominal GDP we get a minus 4.

4% so what the [ __ ] is happening here we've the FED has raised rates and briefly got them real rates positive uh at the two-year bucket and then all of a sudden the US economy is accelerating and real rates are going NE negative again because this this shouldn't happen if I'm restricting credit growth in a highly credit dependent economy I shouldn't be growing at 99.3% GDP growth so what's going on so we have to take a look at the how the US government funds itself now a big thing in America is capital gains taxes right it's a very finan America exports finance and so rich people make money on capital gains they pay a lot of taxes on them so if you take a look at this chart and I didn't put the the um index here because it doesn't really matter so I basically took from the start of start of 2022 till today index at 100 I took a look at the S&P 500 the NASDAQ 100 Russell 200000 and then the uh Bloomberg uh us Global aggregate Bond index totally returns I said well has anybody made any money since 2021 and the answer is no so obviously everyone paid a [ __ ] ton of taxes for 2021 bull market returns and then after the FED SED raising rates everything [ __ ] [ __ ] the bed nobody's making any money nobody's paying capital gains taxes and capital gains taxes uh estimated I think 2021 represented about 8.7% of of GDP so it's a big [ __ ] amount of money that is not being paid into the government coffers because the FED is busy fighting inflation and so what does that mean us is running massive deficits and this is the US deficit as a percentage of nominal GDP and it's something around 8% here um you see it go super super negative for coid right they had the different stimulus method uh stimulus checks now if we take a look at us versus every other major developed country in the world the US stimulated their economy to essentially lock everybody in their homes for for the lockdowns for Co more than any other country in the world which is why we saw this humongous boom of capital that went into Robin Hood accounts to nfts to crypto all this stuff everybody did as a v a variant of that just not as big as the US and they ran these massive deficits biggest deficits since World War II ran in the US but after sort of peing at like minus four where we're back down again there's no more money they need to print print more print more money spend more money to keep the economy afloat and they're losing Revenue because the one arm of the government the FED that is Raising interest rates is causing all these rich people not to pay taxes now what happens when the government runs a deficit then the other arm of the government the US Treasury has to borrow money right and so they're borrowing records amount of money by the end of this year the US Trey still has to issue $ 1.85 trillion worth of debt that has to be funded and bought by the glal Marketplace um what does that mean I'm increasing the amount of debt that I have to number one repay and roll over and issue to fund record government deficits at the same time the other arm of the US government the FED is raising rates so what does that mean that means the US Treasury is giving out you know close to annualize that last quarter a trillion dollars a year in interest payments now the majority of people who own treasury bonds are wealthy savers on an individual level right so you park your money in your money market fund or some sort of bond fund if you're not an American and you essentially are earning five and a half 6% um and it keeps creeping higher as the FED keeps raising rates because they're trying to be restrictive on interest rate policy so what happens when you know a wealthy person receives more stimulus in the form of Interest right they didn't do anything you just put your money in the bank and boom you know every day it just keeps acre great they go up and they spend money right so this is an anecdotal chart it's um one5 Americans say they plan to travel abroad this uh sometime in the near future uh I was in Europe this summer there are a lot of [ __ ] Americans around right it's it's people are going out they're spending money they're spending money on Services it's one reason why the it's confounding that crude oil um demand in the US is skyrocketing because people are traveling they're out they're doing things people are going to restaurants you know they're going everywhere and people spending money because every day tick tick tick tick tick tick tick I'm getting paid by the fed by the US Treasury more than I've ever gotten paid in the last you know 25 years in terms of interest and the amount continues to grow so then I thought okay well let's put this all together right and we'll we'll step through this in a bit so again the FED has to fight inflation US president sat Jerome PA down in the Oval Office a few years ago and he said you're going to fight inflation Jerome PA's yeah yeah yeah yeah yeah I'm going to do that and so they've been raising raising rates every single meeting Paul starts off we are aimed to get you know growth to 2% right 2% 2% 2% and inflation is still three and a half 4% on core inflation we are not done yet we keep saying this message over and over and over again so they're reducing their balance sheet quantitative tightening by by letting bonds and their out balance sheet mature and they're raising rates because they need to fight inflation because again inflation impacts 100% of the electorate if you are a president and there is inflation you are not getting reelected so therefore you care about this but Financial prices fall I I showed that chart earlier that showed that since 2021 with end of 2021 once the FED started raising rates nobody's made any money everything's down Financial assets go down capital gains taxes go down government has less Revenue however the government is still spending money now in the case of the US I don't know how it is in Korea and other places the the biggest contributors to um expenses are healthc care and defense spending you are not going to win a re-election as a politici if you go out and you tell old people that they're going to you're going to cut their Healthcare you are not going to rent a re-election in a country that is geared to sell weapons if you come out and saying I am not going to spend money on defense it's just not going to happen so these are these entitlement spending in defense are almost you you can't cut them and so because they're such large uh parts of the budget and you have an aging population you're only going to spend more and more and more on this so you're spending more money yet the thing that drove the revenue side of the equation which is rising asset prices is faltering because you've told the Federal Reserve that they need to fight inflation and they're doing it by jacking rates and financial assets certain Financial assets are not performing so what happens you have big deficits and you have big deficits as far out as the I can see which again adds phenomenal GDP growth because when the government spends money people have jobs based on that spending and then they go and spend money themselves so the more money you spend as a government the more you're stimulating growth that's the whole Keynesian prescriptive for um for alien economy so if you have higher deficits the US Treasury has to issue more bonds I showed a chart earlier what happens when you issue more bonds you pay more money and interest right what do you do when you pay more money and interest rich people get more income what do they do with the income they spend on Services the US economy Services represent about 80% 77% of US GDP is Services who spends the most on Services people who are border out their mind with money in their bank account right they go out and they spend stuff again increases nominal GDP growth and so when nominal GD PR growth is consistently above the government bond yield inflation isn't going anywhere Goods prices have to go up right and then what happens if good prices go up well the FED has to fight inflation so they got to keep raising rates so you have this circle this Vicious Circle for the FED of okay well we have to be restrictive but the the mere Act of raising rates makes us have to raise rates more and so you have these negative real rates and so it requires a change in our thinking so if by fighting inflation the FED r raises rates and it increases economic growth and rates are negative across the curve why do I want to own things that don't have a finan supply I have a negative real interest rate real interest rate I need to do something to preserve my purchasing power that's the whole point of of Bitcoin right however this is completely different than how we've not been taught but been taught by the market to think of okay if interest rates go up Bitcoin must go down and we've been thinking this way and it's not Bitcoin you can replace it with S&P 500 with property prices with whatever right and as this continues to tick along in the background as we move out on this curve of just craziness in debt to GDP numbers and the amount of uh money that's being printed by gu handing interest payments to rich people what is that what's going to happen in the market is not going to going to be what we thought is going to happen and the Playbook is going to change it's going to happen slowly this is my prediction obviously that people's mindset is going to start to change hold on if rates are at 5 6% why is Bitcoin still 25,000 why is it not below 20 15 right what some people are calling like going back down to where it was during the FTX I thought that if the fed's going to be super restrictive in raising rates at the fastest Pace um since the 1980s that a speculative Financial asset like Bitcoin she could absolutely clobber why is gold still trading at 1950 why isn't it down at like 1600 1500 again rates are going up these things should be going down in price but when you move out on the absurdity of massive government deficits above 100% the nonlinearity of interest payments and debt growth changes what happens when you start raising rates and I've argued in a past essay that the FED is actually printing money money by the fact that the more money they hand out to Savers and investors in these things like the reverse repo and treasury bonds dwarfs any amount of bonds that they're letting mature on our portfolio and that this is actually simulative to the um to the economy and generally to financial asset prices so it's all about a mental shift right we see what's happening it's different than what's happened before the standard Playbook is starting to break down so the challenge then is well okay I'm seeing this the market isn't responding yet but give it 6 to 12 months and let's say that rates are at 7 8% because inflation hasn't come down and yet US economy is running 9 10 11% nominal GDP why the [ __ ] do I have money sitting in low yielding Bank deposits why do I have money in stocks that are credit dependent like the majority of the stock market apart from Nvidia you know Facebook Google Microsoft these are companies that need the banking system these are companies that need credit the FED is restricting credit obviously AI companies and crypto things we don't need the banking system the whole [ __ ] point is we don't want the banking system that's being choked with all these this debt that continues to rise because the FED has to fight inflation so the bull market started on 10th of March 2023 yeah Bitcoin could trade down at 25 maybe it goes goes down to 20 even if it goes down to 20,000 it's still flat from earlier in March this year and so that is my sort of for into thinking about well at this end of you know recklessness in terms of fiscal and monetary policy we're going to get the opposite effect by raising rates than what we think and therefore on both scenarios whether the FED raises or Cuts we are in a good position as a cryptocurrency industry and so I'll end there saying by the [ __ ] dip thank you