Rising Liquidity Is Fueling A Bull Market In Gold & Bitcoin (Part 2/2) | Lyn Alden & Luke Gromen
Summary
TLDRThis transcript from a podcast episode dives into discussions on macroeconomic trends, focusing particularly on inflation, federal debt sustainability, and the impacts on assets like Bitcoin and gold. The speakers explore the theory of a secular inflationary environment driven by the necessity of sustained negative real rates for the reserve currency issuer's debt. They analyze mid-cycle indicators for Bitcoin and bullish prospects for both gold and Bitcoin, anticipating significant price movements within the next 18 months. The conversation also touches on geopolitical factors affecting oil prices and the broader implications for the financial markets, including fiscal dominance influencing investment strategies.
Takeaways
- đ The discussion suggests we are in a secular inflationary environment, primarily due to unsustainable federal debt of the reserve currency issuer, requiring sustained negative real rates.
- đ Bitcoin is considered to be mid-cycle in its bull run, with expectations of reaching six figures in the next 18 months, reflecting a bullish outlook on cryptocurrency.
- đ The episode is sponsored by Mantra, a security-first, compliance-focused L1 blockchain, emphasizing its role in onboarding financial institutions into Web3.
- đąïž There's an ongoing debate about whether we are in a secular regime of inflation or a disinflationary regime, with significant attention on the role of oil prices in this context.
- đ° The potential refilling of the Strategic Petroleum Reserve (SPR) by the end of the year and its impact on oil prices and inflation rates was highlighted.
- đ The interview explores tactical investment recommendations over the next 12 months, particularly focusing on the expected performance of gold and Bitcoin.
- đ There's a detailed analysis on the price trajectory of crude oil, noting its recent rebound and discussing factors that could influence its future pricing.
- đ” Discussions about the U.S. dollar suggest it might remain range-bound or slightly depreciate over the next year, impacting global liquidity and investment strategies.
- đŻ The dialogue transitions into the potential effects of fiscal policies on market conditions, emphasizing the shift from monetary to fiscal dominance in economic planning.
- đ The conversation ends with a focus on how different asset classes might perform in response to inflationary pressures and fiscal policy changes.
Q & A
What is the primary reason mentioned for the secular inflationary environment?
-The primary reason mentioned for the secular inflationary environment is the federal debt of the reserve currency issuer not being sustainable unless real rates are sustained negative for some period of time.
What does the speaker predict about Bitcoin over the next 18 months?
-The speaker predicts that Bitcoin will continue to perform favorably over the next 18 months and would be surprised not to see six-figure Bitcoin values during this period.
How does the speaker view the future of oil prices and their impact on inflation?
-The speaker expects oil prices to be range-bound between $70 and $90, and believes that any significant movement in oil prices will have a substantial impact on inflation rates.
What is the speaker's opinion on the U.S. Strategic Petroleum Reserve (SPR) and its refilling?
-The speaker highlights the difficulty in refilling the SPR, especially during an ongoing war, and mentions that the U.S. has stopped trying to refill it, which could impact oil prices and energy markets.
What is the speaker's stance on gold and Bitcoin as investments over a 12-month time horizon?
-The speaker is bullish on both gold and Bitcoin over a 12-month time horizon, expecting their values to increase significantly.
How does the speaker describe the current state of the dollar and its future movement?
-The speaker views the dollar as range-bound and expects it to be sideways to down over the next 12 months, influenced heavily by the euro and other currency pairs.
What is the significance of the relationship between oil, gold, and Bitcoin as discussed in the transcript?
-The speaker suggests that gold and Bitcoin are linked to oil through energy costs and fiscal pressures, indicating that as the world requires higher oil prices to sustain economic growth and debt servicing, the relative value of gold and Bitcoin, which are energy-intensive, is likely to increase.
What does the speaker mean by 'fiscal dominance' in the context of the economy?
-The term 'fiscal dominance' refers to a period where fiscal policy, government spending and taxation, has a more significant impact on the economy than monetary policy, such as interest rates set by central banks.
How does the speaker view the role of the Federal Reserve in the current economic climate?
-The speaker believes that the Federal Reserve's influence on the economy is diminishing in the face of 'fiscal dominance'. They suggest that large structural fiscal deficits and decisions around government spending and taxation are more critical factors currently driving the economy.
What is the speaker's perspective on bonds as an investment?
-The speaker refers to bonds as a 'blood sport', implying that investing in bonds currently is challenging and may not yield significant returns. They suggest that other asset classes like gold, Bitcoin, and energy stocks may provide better returns and serve as more effective hedges against economic risks.
What is the speaker's forecast regarding a potential recession and its impact on inflation?
-The speaker expects higher inflation before a recession, but does not have high conviction on the exact timing or dynamics of a recession. They suggest that any potential recession in the current fiscal climate might look different from past experiences, potentially being more sector-specific and less globally impactful.
Outlines
đž Inflation, Bitcoin, and Market Predictions
The speaker discusses the inevitability of sustained negative real rates due to the unsustainable federal debt of the reserve currency issuer, predicting a bullish future for both gold and Bitcoin. Amidst a mid-cycle market assessment, the speaker anticipates a significant rise in Bitcoin's value within the next 18 months. The dialogue shifts to a broader economic outlook over varying time horizons, emphasizing the uncertainty surrounding inflation rates and market responses to geopolitical and economic developments. The mention of strategic petroleum reserves and oil prices highlights the intricacies of inflation pressures. The speaker remains optimistic about investment opportunities in Bitcoin and gold due to favorable market conditions.
đąïž Oil Market Dynamics and Investment Strategies
The conversation focuses on the fluctuations in the oil market, particularly the effects of the Strategic Petroleum Reserve on oil prices. The speakers discuss the impact of geopolitical factors and U.S. shale production on the oil market's stability, suggesting a probable range-bound scenario for oil prices between $70 and $90. The dialogue explores the challenges and strategies associated with buying back oil, especially in the context of ongoing geopolitical tensions and U.S. energy independence. Emphasis is placed on the investment approach towards oil-producing equities as a way to hedge against the unpredictable movements in oil prices, highlighting the interconnectedness of market forces and geopolitical dynamics.
đ Global Economic Trends and Energy Market Insights
This section delves into the global economic shifts, particularly focusing on U.S. and China's roles in shaping energy demand and supply. The discussion underscores the evolution of U.S. shale production and its integration into the global market, reducing the likelihood of significant supply-side surprises. Additionally, the speakers analyze China's economic policies and their impact on the global energy demand. The broader economic context sets the stage for discussing potential market scenarios, including the effects of political actions on commodity markets and the strategic positioning of major economies in response to these dynamics.
đ° Gold and Bitcoin Market Prospects
The discussion pivots to the potential for significant price movements in gold and Bitcoin markets, linking these assets to global liquidity conditions and investment cycles. The speakers articulate a strong case for a bullish outlook on both gold and Bitcoin, citing indicators that suggest we are mid-cycle in a bull market for Bitcoin. They anticipate major price milestones for Bitcoin in the near term and discuss the strategic merits of investing in gold as a stable asset during economic fluctuations. The conversation also contrasts Bitcoin and gold as investment options in different economic scenarios, providing a nuanced view of how these assets might perform in stagflationary versus high-growth environments.
đ Predicting Fiscal and Monetary Policy Outcomes
The final section explores the implications of fiscal and monetary policies on bond yields and broader market conditions. The speakers discuss the role of the Federal Reserve and Treasury in navigating fiscal challenges, suggesting that traditional fiscal and monetary levers might be less effective in current economic conditions. They argue that larger structural issues, such as the size of fiscal deficits and the strategic management of treasury maturities, will play more crucial roles in shaping economic outcomes. The dialogue culminates in a critical examination of how fiscal dominance might redefine traditional asset allocation strategies, particularly the effectiveness of bonds in offsetting equity market volatility.
Mindmap
Keywords
đĄSecular Inflation
đĄFederal Debt
đĄBitcoin
đĄGold
đĄBull Run
đĄStrategic Petroleum Reserve (SPR)
đĄFiscal Deficit
đĄReal Rates
đĄPurchasing Managers Index (PMI)
đĄEnergy Markets
đĄMonetary Policy
Highlights
The discussion begins with an analysis of the current economic environment, highlighting the secular inflationary concerns due to the federal debt of the reserve currency issuer.
Bitcoin is expected to remain favorable in the asset market over the next 18 months, with the speaker surprised if it doesn't reach six-figure values in that timeframe.
The conversation shifts to the broader economic themes, questioning whether we are in a disinflationary or inflationary regime, with a focus on the price of oil and its impact on inflation.
The speakers discuss the strategic petroleum reserve (SPR) and its role in oil price stabilization, noting recent reports about refilling goals and their potential underreporting.
The expectation of higher highs and higher lows of inflation compared to the previous decade is expressed, due to the unsustainable nature of federal debt unless real rates remain negative.
The speakers consider the role of productivity and energy in the inflationary environment, with a focus on the link between oil prices and inflation break-evens.
The view that oil prices will range-bound between $70 to $90 is presented, considering the challenges of refilling the SPR and the impact of geopolitical factors.
The conversation includes the impact of US and Chinese demand on oil prices, and the expectation of a range-bound oil market in the next 6 to 12 months.
The speakers discuss the potential for a shift in the global oil market due to the rise of shale oil and the disruption of global energy markets.
The discussion touches on the outlook for the US dollar, with expectations of it being range-bound or moving sideways to down in the next 12 months.
The speakers express bullish views on both gold and Bitcoin, expecting significant value increases over the next 12 months.
The unique period of time where the reserve currency issuer has a fiscal problem, necessitating negative real rates, is highlighted.
The conversation concludes with a discussion on the potential for inflation to exceed 5% before a recession occurs, given the current fiscal and monetary policies.
Transcripts
I think we're in a secular inflationary
environment for a simple reason the
federal debt of the reserve currency
issuer is not sustainable unless its
real rates are sustained negative for
some period of time Bitcoin most of the
indicators that I tracks uh point to
being fairly midcycle in terms of the
Bull Run um and so I you know I still
think the next 18 months look look
favorable for the asset I would be
surprised not to see six figure Bitcoin
over the next 18 months obviously
anything's POS possible but but I'm I'm
bullish on both gold and Bitcoin in that
in that time frame hey everyone this
episode is brought to you by Mantra the
security first compliance focused L1
which is onboarding the next wave of
financial institutions you're going to
be hearing all about them later in the
show but for now Mantra thanks for
making this episode possible so I I got
one final question for you here and
maybe some longer term stuff and then um
I'd actually love to zoom in on this
next year or like six to 12 months or
something like I think one of the things
that's it's sometimes hard to parse out
as a listener here are you know when
we're talking about these these big
themes are we talking on a 5 to 10 year
time Horizon are we talking on a 6 to 12
month time Horizon and I'd love to get
uh into some more of the your Tactical
recommendations um over the next 12
months but before we do you know we've
got um the I think one interesting
element would here on the long term
would be do you guys see us being in a
secular infl uh regime of inflation or
are we still in this sort of
disinflationary regime that we've seen
for the last uh 40 some odd years and
you know one one thing that's been sort
of of interesting to watch is the price
of oil you know has steadily crept back
up uh I there was a there was an article
I saw in Reuters about a month ago that
there's a goal to refill the spr which
is some 230 million barrels of oil by
the end of the year which I thought was
a little bit under reported on if
they're actually going to try to do that
um but I I would be curious to get your
both your takes on you know where do we
go in in terms of oil from here how much
is that playing into inflation and you
know are we going to ever get back to 2%
or you know this has been historically
sort of a heretical opinion but are we
going to settle more towards you know
somewhere in the range of three or 4%
and the the FED is eventually going to
adjust their target I think we're in a
secular inflationary
environment for a simple reason the the
federal debt of the reserve currency
issuer is not sustainable unless its
real rates are sustainably sustained
negative for some period of time uh and
that can kind of go back and forth
but that is what needs to happen again
barring some massive productivity
Miracle
um that's like I think I think a lot of
all the other inputs to
inflation are secondary or tertiary to
that simple mathematical reality
um I think that's that's I mean that's
the key to me so I I think we're going
to have higher highs and higher lows of
inflation than we had in in the prior
decade that that's how I would describe
a secular inflation um and you know kind
of a a a a major thing I've been
pointing out is so questions I got over
the past couple years were are they
going to get inflation back down to 2%
and my answer has generally been I don't
know but I I'm I don't think that's the
right question I think the right
question is what's going to happen with
inflation the next time we have an
upcycle in pmis for example purch like
manufacturing purchasing managers index
um because I think that's the real test
you can you can get inflation down
temporarily if you're willing to have a
recession if you're willing to
disinflate enough and that's that's kind
of the pseudo cycle we've been on it's
obviously been offset by fiscal as we've
been talking about so they they've not
gotten it down to 2% but they have they
have muted it significantly we're
starting to see early signs of of PMI re
acceleration um you know kind of
rotation and what sectors are doing well
and so I think the big test is if we get
an upcycle in PMI what does inflation do
my my expectation is that inflation goes
up or stays sticky when we get that next
PMI Rise um and so it's not a matter of
you know could could they touch 2% uh
sometime this decade sure um you know
but the question is can you sustain
there and have like another cycle of
growth while still sustaining there and
I think that's that's the much harder
thing and so because I think this is
going to be more energy intensive cycle
um I I think we're going to be more
linked to what happens with energy uh
than we have been in in say the the
prior uh 10 years or so um and so I I
think my expectations higher highs and
higher lows compared to what we had in
say the 2010's
decade and so what are what are both of
your thoughts on where let's say the
price of crude oil goes from here I
think today we're sitting around just
under $90 um something in that something
in that region and there was a period of
time back in 2022 when it looks like
when it looked like energy was really
taking off then you could speculate on
whether or not this was political it
sort of looks like it was the US started
to sell off the Strategic petroleum
Reserve uh prices went down and sort of
stayed there and it moved out of the the
public linelight but it's it's really
started to rebound pretty dramatically
and I guess my question especially if
they're building back the spr up do you
think it takes off from here stays flat
like what do you think on maybe like a
six to 12 month time Horizon like what's
going to happen with energy well last
week they came out and said they've
they've stopped trying to refill it
which is oh really I missed that trading
trading is hard short squeezes are hard
dumping it when you have the supply is
pretty easy especially into a war but
buying it back is a little trickier
especially if the war is still going on
um my view on oil has been and over the
last call it I don't know four to six
months maybe uh and it still is is it
for the moment at least is is oils range
bound like you know below 70 US Shale
starts to roll off uh or starts to have
uh you below 70 you start to get below
us Shale Break Even points and that
doesn't mean you're going to immediately
shut down Shale but like the the world
of
20145 um or the world of covid you know
barring some sort of new pandemic
shutdown where oil goes to you know 25
like it did in early 15 like that is not
that is not sustainable for Shale and I
think
critically on the downside we saw like
us Shale production just finally
returned and surpassed 2019 Peaks like
late last year so it took us four years
to get back after that shut down it took
like a year and a half two years in the
in the 145 down cycle to get back to
Prior highs my point here is that if you
get oil low enough for long enough and I
think that's below 70 maybe it's 60
maybe it's 50 but I definitely it's
below 50 um you're that you start
shutting down us Shale production and
taking it offline uh you are effectively
seeding the global oil Market to Russia
and Saudi Arabia for the next two to
four years uh and so I think
geopolitically there is no interest in
the United States in doing that so I
think 70 is is like floor the flip side
is we saw last fall is once oil gets to
85 90 the treasury market starts to has
Pro have problems uh and once again you
know oil gets to 85 and the 10 year
takes off like scalded Cat last week so
um you know you're starting to see
inflation break evens pick up the
correlation between between oil prices
and inflation break evens are actually
pretty good so uh I think the US and
right on course last week the Biden
Administration comes out and goes well
we're not GNA buy back all that oil as
soon as oil gets over 85 right so I I
think oil will be range bound $70 to $90
um the challenge is we've already sort
of shot our shot in terms of running
down the spr and managing that uh we've
talked about why slowing down the
economy is is not good China you know
Chinese demand appears to actually be
pretty good despite all sort of
commentary about you know what the
weakness in commercial real estate there
might mean for the broader economy
um and so I I think we'll be 70 to
90 I am I have had raised to me the view
that look neither PU or NBS want Biden
reelected and both are acutely aware
that uh higher oil will help that happen
um and so maybe you see something
geopolitically that to me is the wild
card where you could see oil higher uh
but failing that I I think will continue
to be range B sort of 70 to 90 on
oil that's generally how I view it I
think the upside breakout risk is is
higher than the than the downside
breakout risk um and one one reason i'
I've lik to play this Base by owning say
oil producing equities and other energy
related equities is that they've already
been priced so that this oil level is is
good for a lot of them their their
valuations their balance sheets their
profitability works pretty well at at
current prices and so um rather than
have a View kind of in the near term of
what happens with old prices I've been
preferring to focus on those equities um
my expectation is that this this is kind
of the new range but that in some point
in in the years ahead I do think we'll
break out of this range um wouldn't uh
that that's something I'm less um
confident on the timing on than say
fiscal dominance but I do think that
eventually we break out of this range
but in the meantime I think we're we're
range-bound um and that that that's
that's basically a disinflationary
offset that doesn't exist anymore so
from 2015 to 2020 the rise of shale oil
very much um disrupted Global energy
markets uh because Supply came online
faster than demand and a lot of that
Supply was unprofitable um so even the
ones bringing it to Market weren't
really making money from it at least
their investors weren't um and so as we
kind of go forward um I do think that
that that glut is behind us now that
doesn't mean that us Shale oil is going
to necessarily go down quickly or you
know even go down at all but I think the
Delta the the rate of change um over say
a fiveyear period is not going to be as
significant as it was back then and I
think the the global market now has this
Shale built into it um and so I think
there's there's fewer positive surprises
to the upside in terms of Supply um over
the past year and a half China's demand
has been kind of consolidating for for a
while because they were you know they're
going through that commercial real
estate deleveraging they had a lot of
weak domestic um indicators even though
their their output was still good uh in
terms of exports and things like that um
there were early signs that they might
be bottoming they might be stabil like
stabilizing and kind of going back up in
terms of of domestic consumption and so
it's not just the us and the spr that is
held down oil it's also you know China
as also one of the biggest consumers uh
what what's happening there and I think
that their their politics have gotten to
the point where support in the equity
Market support in the real estate market
are probably starting to take a higher
precedent um than they were 12 months
ago um and so my expectation is that
both the US and China uh probably are
going to be relatively constructive for
demand uh for for energy over the next
12 months um but I I don't necessarily
expect fireworks but it's just that
that's not something I I try necessarily
predict other than um I I I I would be a
buyer of dips um and I'm I'm
structurally pretty bullish on the
energy
space let's do the same thing for maybe
we can this can be sort of our mini
lightning round here where I just ask
you about a whole bunch of different
assets on a six to 12 month time Horizon
but what do you think about the dollar
which has been relatively U also range
bound here for the last couple of years
in between like kind of 100 to 108 sort
of level I know um Luke you've talked
about the dollar being lower as an
important lever for injecting liquidity
uh into the system where do you guys see
the dollar moving uh the next on like a
12mth Time Horizon lower in a uh orderly
manner my view would be sideways to down
so I I don't significant disagree with
that it'd be another fairly low
conviction I have pretty high conviction
that the the high we saw uh in recent
years is probably the high water Mark
we're going to see for a very long time
um a challenging thing is that the
dollar Index is so tied to the euro um
that you know that that that particular
currency pair weighs very very heavily
um so I I I have more interested on a
currency by currency basis like I think
I think some of the Latin American
currencies are you know less weak than
than people are maybe accustomed to uh
at the current time um so I think that I
think that the worst the dollar move is
probably behind us which should be
somewhat beneficial for all these
entities that have these dollar based
debts that are you know maybe the most
Dire Straits but that are kind of
teetering I I think a lot of them have
gotten through the worst of it hey
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maybe we can bucket these two together
but we just talked about gold breaking
out to new all-time highs Bitcoin as of
today sits at around I think just under
72,000 which is you know very near it's
it's uh it's recent all-time high um how
do you guys view gold and Bitcoin on a
12mon Time
Horizon a lot higher
both my view as well I I think um I
think as long as so we've been in like a
consolidating liquidity range for quite
a while my expectation is that over call
it 18 months um we break out of that um
you know watching this kind of gold
consolidation kind of it kept banging
its head around the all-time highs of
like you know 2,000 and change um you
know my view was I don't know when it's
going to break out but once it breaks
out I think it's going to have legs to
it um I think I think we're in the
middle of that move now um and I think
it's you know it's one of those things
you don't want to overthink it like it
can get near-term overbought and people
are GNA be like you know it's going to
correct and you know it absolutely might
but it's like it's it's been you know
it's been in a bare Market since like
2011 it's it's been in a consolidation
for three years um so you know I I do
expect a pretty significant run here um
for Bitcoin most of the indicators that
I tracks uh point to being fairly
midcycle in terms of the Bull Run uh um
and so I you know I still think the next
18 months look look favorable for the
asset again it it tracks Global
liquidity pretty well you know the
onchain indicators can you know show us
for example how much long-term holders
are selling into current strength
because even though obviously Bitcoin
Supply is constrained if the price goes
up you know 3x or 5x in a fairly short
period of time you generally see some of
those older coins start to come to
Market and start meeting that new demand
and we've seen some of that but so far
we've seen less of that in this cycle
than in Prior Cycles um and so I I still
think my expectation is there's room to
run both from the uh liquidity side
being fairly constructive so that that
should help demand and I still think
that there's there has to be a higher
price to unlock some of these older
coins to meet that demand um and so I
you know I would be surprised not to see
six figure Bitcoin over the next 18
months obviously anything's possible but
but I'm I'm bullish on both gold and
Bitcoin in that in that time frame yeah
so maybe to just dive one one layer
deeper here I'd be curious for the two
of you do do you see you know Bitcoin
and gold as being expressions of the
same trade I I heard Stanley Dr and
Miller gave a pretty interesting
framework in terms of how to think about
gold versus Bitcoin where you know one
environment where maybe currency
debasement is sort of the the core
underlying driver for both but in a high
growth environment maybe you prefer
Bitcoin as sort of this fastest horse
and in a stagflationary environment
maybe you'd rather hold gold where where
growth is a little bit more challenging
um and then uh so Lynn you just kind of
gave us our level here I I mean Luke I'd
be curious maybe if I could poker you to
say a little bit more than than higher
here like what are we expecting here in
terms of orders of magnit because this
is around the time right to it's that's
my read as well in that we're maybe you
know in inning five or something or five
or six maybe of this of this cycle and
this is around the time where the
increased calls for 500k Bitcoin sort of
come and annoying skeptical me kind of
like I don't know about that that that
was a little Rich for the next 18 months
so I would just love to get your sort of
sense of magnitude here about where we
where we end
up you know I think some of it depends
you know how how high depends on how
cute things get on the fiscal side um
and then there's a geopolitical overlay
that you have to think about
um I I
think I I am very fascinated
by gold rebe becoming an oil currency
like I think a lot of the Frameworks I
see on gold Focus strictly on real rates
still now we we started the show showing
that gold and real rates have broken
decisively
completely and for going on two
years and yet most people talking about
gold only talk about real rates
there's another and there's always been
another component to Gold it's oil it's
energy and
so to me and this goes for Bitcoin
too we are in this very unique period of
time or again the reserve currency
issuer um has a fiscal problem they need
negative real rates you cannot store
your surpluses in their debt and not
expect to lose money relative to oil
right so we have this problem of peak
cheap oil where we need higher and
higher oil
prices
to uh to to make sure that we continue
to bring on enough oil supplies to
offset the depletion rate in Shale which
is estimated still somewhere 20 30%
annually uh and which Saudi aramco just
said or the Saudi oil Minister said at
the end of December was 7% globally
right so you if the ramco guys right you
need 7even million barrels a day and
change more new online every year just
to stay
flat and you're only going to do that
given what's going on with the geology
of it with higher prices okay so oil
prices have to go higher to keep energy
supplies at a level where economic
growth can continue to pay the interest
on the debt and prevent the whole debt
edifice from
fall at the same time debt continues to
rise accelerate ated pressure by the
interest rate hikes at the FED elsewhere
around the world and the secularly
inflationary impacts we talked about
before and so as debt Rises and rates
rise and secular secularly inflationary
impulses rise the amount of the price of
oil that the world can afford before
blowing up the
debt is coming down we know 5% real
rates and or 5% excuse me tenure rates
in the US things start to get really
weird that that that the treasury market
starts to dysfunction that they have to
come in you know inject all liquidity so
you've got the world has been in this
I'm GNA try to scrap so we've got the
price
of it's backwards here anyway you get
the point we're in a a converg I'm
really enjoying these sort of balloon
animal
type feel like M and in 1990 um the
um you've got this reduced operating as
we're going up right so as you're going
along the debt the price of oil that the
world can afford is coming down the
price of oil we need to keep growing oil
supplies to support the debt keeps going
up and at some point and I think we
might already be past the point what
you'll start to see is the world say
okay the only way this makes sense is if
we keep oil range
bound at whatever range works you know
slowly but then we let the release valve
be gold the price of gold so the price
of gold relative to oil goes up now
that's interesting because the price of
gold relative to oil has nearly
quadrupled since 2008 since Putin began
basically buying lots of gold uh the oil
Market globally is 12 to 15 times the
size of the global gold market in annual
fiscal production dollar terms so you
should start to see as this problem of
we can't afford oil price X we need oil
price y to find more oil gets more acute
you should start to see more and more
Nations Reserve gold instead of bonds
which has been happening which should
continue to drive gold up relative to
oil secularly I think that is a secular
driver of gold that like three people
are talking about right now and I think
by the time this cycle is done gold will
have a different number number in front
of it it may have a different it may
have an additional zero on the back of
it and everyone will be talking about it
uh and I think Bitcoin
is as a new as an as the proof of work
as the expenditure of energy which is
still by most observers called a waste
and why Bitcoin will fail and it's
anti-environmental I think all those
people saying those things will be on
the other side saying it's not a flaw
it's a feature Bitcoin is a neutral
Reserve asset with an energy link more
volatility than gold more upside than
gold to what I just described over time
do I think it's gonna happen the next 18
months I don't could it sure but like I
don't care I'm unlevered um and and I
think that's important to highlight to
people like you need to stay on lever
because like these Cycles are going be
vable but I think that energy linked to
gold and Bitcoin is still so so
underappreciated in the context of the
combination of peak cheap energy and in
particular Peak cheap oil
and the debt load which already can't
afford Energy prices here and that's
only going to get worse as debt goes up
and rates go
up just one note on that so the energy
uh energy currency link is super
critical I would be curious why we
haven't seen why we haven't seen these
AI any AI energy linking demonizing type
articles they're I mean these h100s are
running on something presumably you know
and that's they're running on nuke power
right I mean you seen you've seen
Microsoft come out and buying talk about
buying a new a new nuclear power plant
Amazon just did spend I think $600
million to buy a nuclear power plant
like really no I miss that that's so
like yeah I mean all of a sudden like oh
nuclear like that went right away like
the Overton Windows shifted really fast
I ignore nuclear is good now and it like
I've always thought it's good but like
amongst the nuclear's bad crowd nuclear
suddenly good oh that's good I think
that's a positive that would be
absolutely absolutely yeah
all right last question for the two of
you here maybe we could just talk about
bonds here and where you see like let's
let's say year yield on let's say the
10year and the two-year ending this year
I'd be very curious because you know one
thing that I think going into this year
there were something like six maybe
seven uh rate cuts that were priced into
markets I think at the the time of
recording there are there are three and
I actually saw I saw guys like Larry
McDonald uh calling for maybe rate hikes
actually um is is what is needed here
and so I would just love to get a sense
of you know just this age-old sort of
perennial questions about are we getting
rate Cuts rate hikes how many if so and
where the yields on sort of the 10 and
twoyear end um maybe towards the end of
this year I I think the funny thing is
that because we are you know kind of
largely in fiscal dominance now I think
that the the the emphasis on the FED is
in many cases like backward looking that
the FED has been a bigger source for
markets for a long time um but as we
kind of enter this fiscal dominant
environment I'm increasingly less
interested in what the FED does around
the basis point margin uh and more
interested in what's happening with the
treasury market more more interest in
what's happening with the size of fiscal
deficits um and those kind of more
structural things um so to the extent
that the fed you know cut rates a little
bit um or if they even add some industry
rate hikes to it um it's not really the
answer in my view I think basically that
the large structural fiscal deficits are
a bigger factor and ironically if they
try to get down inflation by increasing
interest rates they're going to blow out
the fiscal deficit even more um and so
that that's that's the lever that's
different from the 70s but but closer to
the 40s um and so for me it's looking at
you know what are tax receipts going to
be like so for example now because 2023
assets were pretty good asset prices we
should expect decent tax receipts here
which ironically could narrow the
deficit a little bit which could give us
you know kind of a Nar like a a a
somewhat weaker performance in 2024 for
least at least some of these like say
mega cap assets um I think those factors
matter more I think also we've seen for
example some of the treasury decision
decisions to shorten the average
duration of their treasuries um have had
bigger effects on the market than what
the FED does in a given meeting so some
of these quarterly treasure releases
have been bigger factors than the FED
obviously during kind of acute liquidity
things like for example the early 2023
banking issue that was both a treasury
and fed uh issue together um but in
general I think that overall liquidity
overall fiscal is actually a bigger
Force than the Fed so I I don't really
have a firm view let's say a a minus
three Cuts or or plus a a couple hikes
that that range is largely um Irrelevant
for my investment decisions obviously if
you if we were to get major moves
outside of that range I would start to
care again um but as long as
expectations or or my expectations are
fairly somewhere in the middle I I think
that's not the biggest lever to be
focused on compared to what's happening
in fiscal compared to what's happening
in say supply and demand of oil um those
I think are the the bigger
forces I I agree with everything Lynn
just said and I I would just add briefly
you know I think one one of my best
relationships on the stre has has called
bonds a blood sport now like it's
it's like it's it's if you want to jump
in the ring and get bloodied up and kind
of you know like exert a lot of effort
for not a lot of progress like knock
yourself out there's a lot of ways that
can sort of you know we know from the
fall if the tenure goes to 5% it creates
problems and that those problems in
terms of Treasury dysfunction aren't
going to be allowed liquidity is
supplied okay so kind of there we go um
on the downside like they could cut yes
I think they probably have to cut
because of the fiscal situation and
there's still not I think that is still
a minority view that that's why they're
going to do it I don't think that's been
internalized uh amongst a number of
Market participants and then if you go
to things like the SLR exemption um you
know if ISTA gets their permanent
exemption on treasuries for the SLR well
now you're talking about a de facto uh
0% funding rate for the US banking
system to buy treasuries that are
yielding between five and 38 of the
short end or whatever they are and four
and a quarter or 4.4% at the long end
and so you know how many treasuries if
I'm a bank would I buy if I could fund
it zero and buy
4.2% um probably a lot right and so that
probably can keep if that is allowed
which I suspect eventually it will be um
the they could get yields to go down
right so you could could you make money
on bounds sure like like but I think the
key is on a real
basis you know if slash when that
happens like Bitcoin gold stocks
particularly more industrial stocks but
I think stocks broadly are going to be
orders of magnitude higher right so I
mean if you look across to me if you
look across a set of charts of S&P 500
over TLT long Bond
you can see boom it's like up and to the
right over the last two years uh pave
over TLT an industrial infrastructure
same chart gold over TLT same chart
Bitcoin over TLT is a little more vable
but kind of same chart more recently um
S&P Industrials over TLT like it's to me
the big trade is on a real basis the
only way the US government's debt which
again I pick on they are the reserve
Curren the issuer the only way that debt
is sustainable on a nominal basis is if
real rates are kept negative uh for a
very either very negative for a brief
period of time very negative or quite
negative for a sustained period of time
and and that's what I think the message
of those charts are and that's why you
know I think my friend's
characterization of bonds as Blood Sport
great yeah you can make some money in
bonds 10 year could go you know they
pass SLR exemptions and 10 year goes
from 44 to for great you make some money
whatever when they do that Gold's going
up way more than bonds and stocks and
Bitcoin Etc so it's
like yeah you know for me it's just
there's nothing I don't have that that
strong a view on sort of where rides go
because again Lynn has made crystal
clear I agree with her I don't know that
it matters that much one thing I would
add to that if if if a go Investor's
goal is to um offset an equity portfolio
so whether you're an institution or a
retail investor the obviously the 6040
stock Bond portfolio the Bonds are there
mainly to smooth out volatility in the
in the equity Market uh and that works
fairly well in monetary dominance um but
when you're in fiscal dominance
generally other asset classes tend to be
better at offsetting the equity so for
example um one like you can kind of
Imagine two two directional risks you're
worried about one is obviously recession
um that's where for example shorter
duration treasuries could be helpful
kind of cash equivalence or up up to the
maybe the 2-year or a little higher than
that uh kind of you know shorter end of
the curve uh basically protection
against just kind of earnings
disappointing and and all these things
like that on the other hand if you're
worried about um inflation reemerging
yields going up then owning things like
energy stocks for example or you know
direct oil exposure or gold or Bitcoin
um these are the types of assets that I
find more interesting to match with my
equities in this environment because the
entire 6040 port folio is kind of
designed around that structural
disinflation structural declining
interest rates and as we go to a new
period I I think these other assets
offset and kind of smooth out an equity
portfolio better than just long duration
bonds which is I kind of I think blood
Sports a good you know um phrasing for
it I kind of just I call it the two hard
pile I put Bonds in the two hard pile
because if if bond yields go up I
there's other classes asset classes that
I think would be more affected and if
bond yields go down as as Luke said I
mean i' I'd want to own things like gold
and Bitcoin I wouldn't want to own you
know whatever move I could get in that
long duration treasury yield there's
other assets that i' I'd probably want
to own and it also depends on what
reason it was for those moves uh and so
I I've just not been really using long
duration bonds as a portfolio segment
even though I am acutely aware of things
like recession risk or inflation risk I
just I find that other assets work work
better with the equities hello hello
listeners of on the margin I've got good
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see you out there actually there was a
great so I tweeted out that I was
interviewing you guys today and there
were anyone has any questions and there
were a bunch of great ones some of which
we've covered but here was here was just
an interesting one and maybe we can
close on this because I know we're in
our last couple minutes here but um if
you had to say which comes first
inflation going back over 5% or a
recession which of you which of those
would you say we get first my guess
would be inflation um the other way I've
been putting it is I I think recession
and no recession is now more sector
specific when when when you have this
big of a gap between fiscal and monetary
you can get sharply Divergent sector
performance so for example commercial
real estate's in a depression uh whereas
you know other areas are are in an
expansion right and so I I think that we
could see a rotation for example um we
are starting to see some weakness in the
labor market you know you're up from
3.4% of unemployment to 3.8 um you know
the margins um some of that's getting
weaker perhaps even as we see re
acceleration and some of the harder
stuff like manufacturing pmis um so I I
would have not super high conviction on
that because I think even if we do get a
recession it looks different when you're
pre- stimulating by $1.6 trillion dollar
in deficits I think you get you enter a
type of recession that looks like a
fiscally dominant recession so my view
is even somewhat divorced from the
business cycle even though you know
every two weeks I'm kind of trying to
aggressively map out you know whether
whether the econom is expanding or
Contracting um but I think that overall
there's when people ask about recession
they often think it's going to look like
Global financial crisis it's going to
look like Co it's G to be this big
disinflationary uh recession whereas my
expectation is it looks more like a 2001
recession or it looks more like you know
1970s uh recession there's different
magnitudes it can look like but I think
it looks more like there's other types
of recessions even if you were to get
one but yeah my answer would probably be
I I would expect higher inflation before
recession but not not super high
conviction if I can add add to that
that's a great Point L and and and you
know in terms of how things look
different um you know you have a
recession the last three recessions in
the US the deficit is risen by 600 800
and 1,200 basis points of GDP right so
we're running call it seven right now
the deficit in the recession goes to
133% of GDP 15 % of
GDP Co at 12 is I think a bit of a
oneoff but just for you know the math
19% of GDP so now let's take the covid
case off since it was a pandemic you
just sort of a 01 to you know 08 type
scenario you're looking at six to eight%
of GDP deficit added on top of all of
this uh 7% so you're looking at 13 to
15% of GDP
deficits at a time you know that
probably pushes the dollar up so
foreigners are going to be selling
treasuries to uh to finance uh their
current account defend the
currencies banks are going to be taking
reserving losses and they've been you
know encouraged regulated into buying
treasuries as their loan loss reserves
for the last 10 years so they in theory
would be selling at some point that
cycle and you quickly
go okay you could easily have net
supplies of treasuries needed to be
bought
15 to 20% of GDP which is on nearly
World War II levels which was highly
inflationary
um and in a world where we know they
know they're not going to let the
treasury market dysfunction for long so
to me I think there's a real possibility
that even if we got a
recession treasury yields would go up
and you would see what we see in
emerging markets in a recession which is
the price of stuff goes up right like we
I just saw an article two weeks ago um
in Egypt stocks are up 38% on the year
in local and they're down 13% in dollars
okay let's bring that to America the S&P
is whatever it's up I don't know 10% 4%
of the year I don't know uh what is it
in Bitcoin down what is it in Gold down
um so I think very much it's important
once you get into these fiscal
situations like just because we're the
us if we have a fiscal situation a debt
situation like an em maybe we get an
outcome of like a similar where stocks
go down in hard currencies but they go
up in the
dollar guys you both have been uh just
super super generous of your time here I
know we've got to wind down maybe just
to um give both uh plug both of you a
little bit you know Luke I think you've
been done such a good job listeners of
forest for the trees one know drawing
this connection in between the energy
and currency markets like you were just
light years head on that and Lynn you
can go back to interviews and
newsletters that you were putting out
back in 2020 talking about the shift
from monetary to fiscal dominance and uh
you also just released the book uh this
your first book uh broken money um which
is phenomenal so um guys obviously I'm
sure most of you will know uh Lyn and
Luke at this point you should follow
them subscribe to their work uh all that
stuff but uh Lyn and Luke what is the
best way for listeners um who aren't
current subscribers already or who
aren't following you what's the best way
to get more information on the
information that you put out
uh so people can check out linen.com uh
that's where I I post most of my
research and also they can check out
broken money on Amazon or or elsewhere
thanks for having us on I'm at fftt
dlc.com and uh luk growman on Twitter or
X
sorry um guys this was uh such a
pleasure thank you so much for coming on
we'll have to uh do it again
soon
[Music]
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