Lyn Alden’s 2024 Investment Thesis: “Nothing Stops This Train”
Summary
TLDRThe video script discusses the concept of 'fiscal dominance' in financial markets, contrasting it with the 'monetary dominance' that has characterized trading for the past 40 years. Monetary dominance refers to the central bank's control over economic growth and inflation through interest rate adjustments, which influence bank lending and credit creation. In contrast, fiscal dominance occurs when large public debts and fiscal deficits become the primary drivers of economic indicators, constraining the central bank's options and pushing it to a secondary role. The script uses a meme to illustrate this shift, likening it to a train that cannot be stopped. It suggests that the era of declining interest rates, which has benefited certain asset classes, is ending, and a new environment characterized by fiscal dominance is emerging. This transition, which has been gradual and began around 2019, is expected to lead to a more inflationary environment where stocks and bonds may become more correlated and capital controls could rise, affecting investment strategies and the financial industry.
Takeaways
- 🚌 The meme illustrates the transition from a market environment dominated by monetary policy (the bus) to one dominated by fiscal policy (the train).
- 📈 Over the past 40 years, markets have operated under monetary dominance, where central bank policies like interest rate adjustments were key drivers of economic activity.
- 🚂 The concept of fiscal dominance suggests that large public debts and fiscal deficits become the primary drivers of economic factors like inflation and growth, reducing the impact of monetary policy.
- 💵 In a fiscal dominance scenario, central banks like the Federal Reserve have fewer options as their actions may not significantly influence fiscal policy.
- 🔄 The inverse correlation between stocks and bonds, which was prevalent during monetary dominance, may become less relevant as fiscal dominance takes hold.
- ⏳ The era of declining interest rates, which has benefited various asset classes, is ending, and this shift could lead to a new market structure unfamiliar to many investors.
- 🌐 The developed world has not experienced fiscal dominance since the 1940s, making this a significant transition with potential implications for investment strategies.
- 📉 The rise of fiscal dominance often coincides with increased capital controls and potential restrictions on financial privacy and self-custody in the crypto industry.
- 🚨 The meme serves as a warning that the long-standing investment strategies based on monetary dominance may no longer be effective in a fiscally dominated market.
- ⛓ The transfer of private debt to public entities, as seen in responses to crises like the pandemic, contributes to the rise of fiscal dominance and potential currency debasement.
- 📊 The shift from monetary to fiscal dominance is not a sudden event but a gradual process, with the U.S. having experienced periods of fiscal dominance since 2019.
Q & A
What is the main theme of the meme discussed in the transcript?
-The meme illustrates the concept of 'fiscal dominance', which is a shift from the 'monetary dominance' that has characterized market trading for the past 40 years. It suggests an impending change in economic paradigms, where fiscal policies and government actions will have a more significant impact on the economy than monetary policy.
What is 'monetary dominance'?
-Monetary dominance refers to a period where monetary policy, primarily controlled by the central bank, is the dominant force influencing economic growth, inflation, and interest rates. It involves the central bank's actions, such as adjusting interest rates and influencing credit creation through the banking system.
What is 'fiscal dominance'?
-Fiscal dominance is a situation where large public debts and fiscal deficits become the primary drivers of economic outcomes, such as inflation or disinflation, and nominal economic growth rates. In this scenario, the central bank's power is constrained by fiscal policies, and its ability to influence the economy through interest rates is diminished.
How does the concept of 'fiscal dominance' relate to the current economic environment?
-The concept of 'fiscal dominance' suggests that we are moving into an era where government spending and fiscal policies will play a more significant role in the economy. This is due to factors such as high public debt and persistent fiscal deficits, which are becoming more influential than monetary policy in shaping economic outcomes.
What are the implications of 'fiscal dominance' for investors?
-In a fiscal dominance scenario, traditional investment strategies that worked well during monetary dominance may no longer be as effective. Investors may need to adjust their strategies to account for the new economic dynamics, which could include higher inflation, different asset correlations, and potential capital controls.
How does the speaker describe the transition from 'monetary dominance' to 'fiscal dominance'?
-The speaker describes the transition as a multi-year process rather than a sudden shift. Since around 2019, the U.S. has been moving towards fiscal dominance, with periods where it briefly moves away before returning. The transition has been more persistent since early 2023.
What is the significance of the declining interest rate environment in the context of 'monetary dominance'?
-The declining interest rate environment has been a key feature of monetary dominance, providing a tailwind for various asset classes. Lower interest rates have allowed for more debt accumulation, which has fed into itself and pushed interest rates down further, creating a cycle that has defined the investment landscape for the past several decades.
How does the speaker characterize the investment strategy of the past 40 years?
-The speaker characterizes the investment strategy of the past 40 years as primarily focused on the debasement of currency, particularly the U.S. dollar. This has involved investing in assets that benefit from inflation and currency devaluation, with all other investments being downstream of this primary trade.
What are the potential challenges of operating in a 'fiscal dominance' environment?
-In a fiscal dominance environment, there may be challenges such as rising inflation, changes in the correlation between stocks and bonds, potential capital controls, and attacks on privacy tools and self-custody. These factors can make the investment environment more complex and less predictable.
How does the speaker suggest that the era of declining interest rates and structural disinflation is ending?
-The speaker suggests that the era of declining interest rates and structural disinflation is ending due to the rise of public debt levels, which are not being offset by declining interest rates as they have been in the past. This shift is leading to a new economic environment characterized by fiscal dominance.
What does the speaker mean when they say that fiscal dominance can lead to 'currency debasement'?
-Currency debasement refers to the decline in the value of currency, often due to the increase in the money supply without a corresponding increase in goods or services. In the context of fiscal dominance, high public debt and persistent deficits can lead to currency debasement as governments may resort to printing money to finance their debts, thereby reducing the currency's value.
How does the speaker view the role of central banks in a 'fiscal dominance' environment?
-In a fiscal dominance environment, the role of central banks becomes more constrained. Their ability to influence the economy through interest rate adjustments is limited by the fiscal policies of the government. The central bank takes a backseat as fiscal policies become the primary drivers of economic outcomes.
Outlines
🚂 Introduction to Fiscal Dominance
The first paragraph introduces the concept of 'fiscal dominance' through a meme that Lynn posted on Twitter. The meme illustrates a bus going over a train track with a train about to hit it, symbolizing the unstoppable force of fiscal dominance. The discussion explains that for the past 40 years, markets have been under 'monetary dominance', where central bank policies have been the primary drivers of economic growth and inflation. However, the conversation suggests that we are transitioning to an era of 'fiscal dominance', where public debt and fiscal deficits become the main influences on inflation and economic growth. This shift means that the Federal Reserve's ability to impact the economy is reduced, as its actions on interest rates have less effect on the fiscal side. The meme and discussion imply a significant change in market dynamics, with past strategies becoming less relevant in this new environment.
📉 The End of Monetary Dominance and the Rise of Fiscal Dominance
The second paragraph delves deeper into the transition from monetary to fiscal dominance. It discusses how the past 40 years have been characterized by the debasement of currency and declining interest rates, which have influenced investment strategies. The speaker suggests that this era is coming to a close, with fiscal dominance taking over. This new era is marked by higher public debts and deficits, which will lead to different economic dynamics. The speaker notes that during fiscal dominance, there is often an increase in capital controls and potential challenges to privacy and self-custody in financial markets. The paragraph also touches on the historical context of debt cycles and how the current situation is reminiscent of post-World War II economic conditions, which are not familiar to many current market participants. The speaker asserts that since 2019, the U.S. has been experiencing fiscal dominance, and this trend has become more pronounced since early 2023.
📧 Sign Up for the Bankless Newsletter
The third paragraph is a call to action for viewers to sign up for the Bankless newsletter, which is described as the world's most popular crypto email. The paragraph is a promotional break from the discussion on fiscal and monetary dominance, offering viewers a free resource to continue leveling up their understanding and involvement in the cryptocurrency space.
Mindmap
Keywords
💡Monetary Dominance
💡Fiscal Dominance
💡Inflation
💡Interest Rates
💡Debt to GDP Ratio
💡Central Bank
💡Credit Creation
💡Asset Correlation
💡Currency Debasement
💡Investment Strategy
💡Capital Controls
Highlights
The meme illustrates a shift from 'monetary dominance' to 'fiscal dominance' in market trading.
Monetary dominance is characterized by effective monetary policy influencing the economy and inflation.
Fiscal dominance is marked by large public debts and fiscal deficits driving inflation or disinflation.
Central banks like the FED take a backseat during fiscal dominance, with options constrained by fiscal policies.
Stocks and bonds have been inversely correlated during monetary dominance eras.
The meme suggests that the era of monetary dominance is ending, and fiscal dominance is taking over.
Monetary dominance involves the central bank and commercial banks' lending activities.
Fiscal dominance involves government actions, including tax cuts and subsidies.
The past 40 years of investment strategy has been influenced by currency debasement and the dilution of the US dollar.
Fiscal dominance may lead to a rise in capital controls and potential attacks on privacy tools and self-custody.
The shift from monetary to fiscal dominance is not a sudden change but a gradual transition.
Since 2019, the US has been experiencing more fiscal dominance, especially since early 2023.
In fiscal dominance, stocks and bonds tend to be more correlated rather than inversely correlated.
The developed world has not seen an environment like the one described since the 1940s.
The era of declining interest rates and rising debt levels is coming to a close.
The new environment will be more inflationary, and the relationship between different asset classes will change.
The multi-year transition towards fiscal dominance has implications for investment strategies and market participants.
Transcripts
[Music]
so so Lynn I think D and I want to
explore this topic by way of meme if
that works for you so this is a a meme
I'm showing it on screen right now that
um you posted on Twitter I don't know if
you created this meme or you sort of
seated around and really popularized it
and so if people haven't seen this
before it's kind of the classic um
there's a bus it's a like going over a
train track and there's a train so the
the top frame is the bus uh like going
over the train track and there's a train
sort of like in the like just about to
hit it and the second of course is where
the train just plows right into it and
the first frame with the bus going over
the train track says how markets trade
for the past 40 years uh and the second
the train is called fiscal dominance and
Nothing Stops this train so this is like
the imagery of we are about to get hit
by a train and we have to get out of the
way so Lynn can you explain this meme
because I think the the framing of this
entire conversation is is based on a
train that's about to hit us this train
of fiscal dominance so what is this
train what is fiscal dominance sure so
you know Market regimes go through these
long periods of time where they trade a
certain way and there's certain forces
that impact them and so over the past 40
years um the United States and much of
the rest of the developed world has been
in monetary dominance and the kind of
the simple way to put that is that a
monetary policy is is very effective at
either kind of re accelerating or
slowing down an economy uh and impacting
inflation and most of the money creation
is coming from Bank lending basically
credit creation or credit contraction
which is why those monetary levels
levers are are powerful but in fiscal
dominance um that situation becomes
reversed which is that very large debts
and and and fiscal deficits uh
specifically public debts and then and
then fiscal deficits those are bigger
drivers of inflation or disinflation or
rate of rate of nominal economic growth
and those sort of things and the Central
Bank in this case the FED in the United
States starts taking a backseat their
options become constrained by what's
going on on the fiscal side because when
they raise or lower interest rates it
doesn't impact the fiscal side in the
same way that it impacts Bank lending
credit creation that kind of thing and
so you know a lot of people they have
these back tests they have you know
here's what happened over the past 20 30
40 years for example that stocks and
bonds are often inversely correlated for
example um but going forward people that
were looking at those metrics that were
super important during a monetary
dominant era are less likely to be um
those metrics are less relevant is is
what that kind of that Meme means that
basically all these kind of ways of
doing things all these expectations that
people developed they made sense over a
period of time but if it's true that we
are entering a different type of Market
environment and developed countries have
been in this in the past just not in
anyone's current trading Lifetime and
Emerging Markets go through this on a
more regular basis you know kind of more
frequently but developed countries have
not been in this for a long time and so
a lot of people's Mentor mental models
are kind of tuned around monetary
dominance and not around fiscal
dominance so that's what the meme means
and that's and we we can unpack what
some of that means to put it in its most
simple terms is it accurate to say that
monetary dominance is simply the fed the
Federal Reserve uh interest rates
whether we're cutting or increasing them
just like what whatever the FED is doing
and then fiscal dominance is whatever
the government is doing whatever like
more top down control about like who
should get what who should get tax cuts
who should get uh subsidies and so like
one is one is the Fed one is the central
bank that's monetary dominance and the
other is the government is that like a
simple way of understanding this yeah
pretty much and I guess the one thing I
would add is that monetary dominance is
the combination of the central bank and
then the broader banking system the
commercial Banks um their rate of
lending or or not lending as well as
different things the central bank is
doing to try to accelerate the amount of
lending that's happening or trying to
slow down the rate of of lending that's
happening that's all monetary dominance
and then as you said basically all the
fiscal side all those different things
um that's fiscal dominance and fiscal uh
you know when deficits are lower when
public debts are smaller monetary
dominance tends to be occurring that
basically all those monetary forces are
bigger whereas when you build up 100% or
more Deb of GDP uh on the on the
specifically on The Sovereign level um
and you're running above Target deficits
that are not really onetime things
they're more structural um that starts
to override the power of that whole
monetary side both the central banks and
then even the broader banking system so
that that bus that Ryan described in the
meme how markets trade for the past 40
years I've heard this take from a number
of different people that really the
whole entire investment strategy over
the last 40 Years or or so has just
really been one trade which is uh the
debasement of currency the the um
dilution of the US dollar and really
it's a matter of like how fast or slow
the FED is doing that all all other
Investments have really been Downstream
of that and this is what you're saying
is actually coming to a close this is
like the market structure that has
defined the last era of anyone's like
trading memory uh and you're saying that
this this era is is likely coming to a
close soonish because fiscal dominance
is coming to replace it because
something about fiscal dominance is not
stopping this train that train is not
stopping this is kind of like the
summation of this meme uh yeah po last I
think the thing I would add is that it's
not just de basement per se because de
basement happens under fiscal dominance
as well um it it's really about that
kind of 40 Years of of declining
interest rates uh and and then the
Tailwinds that that provides to a number
of different asset classes so uh we kind
of started from this high point in this
in this current ERA of very high
interest rates and then you go through
40 years of every time there's a
recession you can cut rates um generally
inflation is is on you know even though
it's it's still positive it's it's
declining from what used to be a high
level to eventually by the 2010 you got
to a pretty low level at least for
Consumer Price inflation there's
obviously different ways to measure
inflation but declining inflation rates
declining interest rates and basically
all that was offset by Rising debt to
GDP so you know over time more and more
debt piled up on households more and
more debt piled up on the public Ledger
and that was offset by the fact that
indust rates were declining and it kind
of fed on itself because lower indust
rates allow more debt to accumulate um
and then higher debt levels tend to slow
down economic growth and kind of put
pressure in a lot of things which which
ends up kind of pushing interest rates
down uh that that's kind of one of those
tools that they use to kind of Kickstart
the next um expansion out recession and
the problem is when you run into zero
and then you kind of start going
sideways to up in terms of interest
rates um you no longer have offset for
all those debt levels and private debt
levels peaked around or shortly after
the global financial crisis um whereas
public debt levels are still going up
and when you look at history of how
these kind of really long-term debt
Cycles play out so not just the cyclical
debt Cycles but these kind of more
generational debt Cycles when they play
out it does tend to happen in that onew
punch where first you kind of hit some
private sector maximum and then you
start rotating that onto the public
sector uh the debt starts getting
transferred so for example you know you
bail out the banks you kind of
recapitalize them and and push a lot of
the debt more on The Sovereign level and
then same thing with with the response
during during and after the the pandemic
and lockdowns a lot of the more private
debt was kind of indirectly transferred
to the public level so you have a little
bit of deleveraging on the private side
but that gets pushed up to the public
level and that eventually comes out in
currency debasement and fiscal dominance
issues and so basically I think what the
era that's behind us is that ever lower
rate environment the structural
disinflation uh from a high level
environment and now we kind of go
forward in an environment that really
hasn't been seen in the in the developed
world since the 1940s um Japan's been in
it kind of first in this cycle among the
developed world you see it occasionally
or or pretty frequently actually in the
emerging world but it's it's not
something that a lot of developed Market
um participants have a lot of experience
with at the you know in kind of their
their current careers because it's all
it's all been one trade which is indust
rates keep going down valuations of both
bonds and stocks keep going up and they
tend to be counter cyclical you know
they tend to be inversely correlated
with each other um but that environment
is is Messier going forward in in more
inflationary environments stocks and
bonds tend to be more correlated um and
also you start to get generally during
fiscal dominance you get a rise of
capital controls and other issues like
that um which can manifest for example
in this industry it can manifest in in
attacks on privacy tools rules or self-
custody or basically the ways to move
around Capital so there's there's
overlap there um and that's just a it's
a it's a environment to be aware of and
I would argue that there's not a a
moment in time per se where you go from
monetary dominance to fiscal dominance
like you're not in 100% of one and zero
and the other it's this kind of change
over that happens and I would say
there's there's different ways to
analyze it but I would say at least
since
2019 the US has been in uh fiscal
dominance more or less and when starts
to you know go over there's like you
know a year or two where you're kind of
in fiscal dominance and maybe you're
briefly out of it again then you're back
in it until until it gets so strong that
you're more persistently in it so ever
since early 2023 we we've been in it
probably more persistently but kind of
this whole covid era and and even just a
little bit before it um this was kind of
this is has been a multi-year kind of
transition toward fiscal dominance to
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[Music]
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