Is U.S. Debt Problem Imploding? Lyn Alden On 'Fiscal Spiral', 2024's Best Assets
Summary
TLDRIn this insightful discussion, Lyn Alden, founder of Linn Alden Investment Strategy, shares her views on the current market trends and asset classes for 2024. Alden expresses bullish sentiments on Bitcoin, gold, and energy, citing fiscal dominance and its impact on asset valuations. She also discusses the potential for inflation, the role of the Federal Reserve, and the structural shifts in the financial system brought about by cryptocurrencies. Alden's perspectives offer a nuanced understanding of the economic landscape and strategic investment insights.
Takeaways
- π The guest, Lyn Alden, is bullish on bitcoin, gold, and energy for the remainder of 2024 due to the fiscal backdrop and its impact on asset classes.
- πΉ Large cap growth equities may have valuation concerns, while energy, gold, and bitcoin do not seem overvalued and present attractive opportunities.
- π The rise in cryptocurrency hacking incidents highlights the importance of digital privacy and security, which is a key theme in the episode's sponsor segment on NordVPN.
- π Current market action shows stocks, gold, and Bitcoin moving up, but there are concerns about overextension of prices and potential economic slowdowns.
- π The guest expects sector-specific rotations within the market, with some areas showing weakness while others recover, influenced by the purchasing managers' index (PMI).
- π¦ Commercial real estate is considered a risky sector to invest in due to the ongoing challenges and potential losses in the market.
- π The concept of 'fiscal dominance' is introduced, where fiscal policies have a larger impact on the economy than monetary policies, affecting inflation and investment strategies.
- π The Federal Reserve's response to inflation is expected to be limited due to high public debt, potentially leading to a focus on curve steepening rather than aggressive rate hikes.
- π‘ The guest's book, 'Broken Money', discusses the structural changes in the monetary system, the impact of technology on finance, and the concept of fiscal dominance.
- π The guest's website, Linn Alden Investment Strategy, offers resources and research for investors looking to understand and navigate the current financial landscape.
Q & A
What is the primary reason for assets continuing to surprise to the upside according to Lyn Alden?
-The primary reason for assets continuing to surprise to the upside is the fiscal backdrop. In an environment with uncontrolled fiscal spending, assets denominated in a weakening currency perform well in local currency terms, even if they may not be doing great in real terms.
Which asset classes is Lyn Alden most bullish on for the remainder of 2024?
-Lyn Alden is most bullish on Bitcoin, gold, and energy for the remainder of 2024. These assets provide a good focus area due to their potential for growth and their role as alternatives to other investments like tech stocks and treasury bonds.
What are Lyn Alden's thoughts on the future of gold, Bitcoin, and stocks for the remainder of 2024 and into next year?
-Lyn Alden expects gold, Bitcoin, and certain stocks, particularly in the energy sector, to perform well for the remainder of 2024 and into the next year. She believes these assets will continue to be attractive due to their potential for growth and their ability to act as alternatives to more crowded or overvalued assets.
Why does Lyn Alden believe inflation may not come down to the Fed's 2% target anytime soon?
-Lyn Alden believes inflation may not come down to the Fed's 2% target anytime soon due to the current environment of fiscal dominance, where fiscal policies have a more significant impact on the economy than monetary policies. This dynamic makes it difficult for the Fed to control inflation effectively, especially when fiscal deficits are contributing to the inflationary pressure.
How does Lyn Alden think the Fed will respond to the new inflationary dynamic?
-Lyn Alden thinks the Fed might focus on managing expectations and maintaining relatively high interest rates rather than aggressively raising them further. She suggests that the Fed may also try to target curve steepening as a way to moderate government borrowing costs while keeping higher interest rate pressures on the private sector.
What does Lyn Alden mean by 'fiscal dominance' and why is it important?
-Fiscal dominance refers to a situation where fiscal policies, such as taxation and government spending, have a more significant impact on the economy than monetary policies like interest rates. It is important because it changes the effectiveness of central bank tools in controlling inflation and can lead to a new era of economic dynamics, where traditional monetary responses may not be as effective.
What is Lyn Alden's view on the current market action for stocks, gold, and Bitcoin?
-Lyn Alden has observed that stocks, gold, and Bitcoin have all moved up and she believes that this is largely due to the fiscal backdrop and improving liquidity. She also notes that while these assets have shown resilience, they may still experience periods of overbought conditions and subsequent consolidation.
How does Lyn Alden perceive the valuation concerns for various assets?
-Lyn Alden expresses valuation concerns for large-cap growth equities, as they are highly priced relative to their fundamentals. However, she does not have valuation concerns for energy, gold, and Bitcoin, although she advises watching out for periods of euphorically overbought conditions.
What are the implications of the fiscal spending as discussed by Lyn Alden?
-According to Lyn Alden, the implications of the fiscal spending include a continued increase in fiscal deficits, a potential slow-motion train wreck in commercial real estate, and an environment where certain investments become less attractive due to the dominance of fiscal policies. This also impacts the overall investment strategy and the attractiveness of various asset classes.
What does Lyn Alden suggest about the sector-specific nature of the market?
-Lyn Alden suggests that the market's performance is very sector-specific. While some sectors like tech and services have been recovering, others like commercial real estate have been in a depression-like state. She expects a rotation where some of the assets that have been doing well may show weakness, while those that have already gone through a down cycle could recover.
How does Lyn Alden view the role of energy in the future economy?
-Lyn Alden views energy as a critical component of the future economy. She anticipates increasing demand for energy due to technological advancements and the development of data centers. Additionally, she believes that energy supply will remain relatively constrained, leading to a potential rise in energy prices and making energy stocks an attractive investment.
Outlines
π Market Analysis and Asset Outlook
The paragraph discusses the reasons behind the surprising upside performance of certain assets in the context of a weak fiscal backdrop. It highlights the challenges of shorting assets in an emerging market with a weak local currency, which is rapidly increasing in supply. The speaker, Lyn Alden, shares her bullish views on various asset classes for the remainder of 2024 and beyond, including gold, Bitcoin, and energy stocks. She also delves into the potential for inflation to remain above the Federal Reserve's 2% target and how the Fed might respond to new inflationary dynamics. The importance of fiscal dominance in the current economic climate is emphasized, along with the implications of substantial government spending.
π Global Economic Sectors and Fiscal Policies
This paragraph examines the purchasing managers' index (PMI) and its implications for various industries, noting that certain sectors have experienced recession-like conditions. Lyn Alden discusses the contrasting performance of different business areas, such as commercial real estate and tech sectors, and predicts a sector-specific rotation in the market. She also addresses the concept of risk-on sentiment and fiscal dominance, suggesting that the perception of investable areas may broaden, leading to shifts in market focus.
π Inflation Trends and Central Bank Policies
The discussion in this paragraph centers around the stabilization of inflation and the potential for it to re-accelerate, with a focus on the role of energy markets. Lyn Alden shares her view that the decade will be more inflationary than the previous one, with inflation coming in waves. She also talks about the Federal Reserve's challenge in managing inflation in the context of fiscal dominance, where fiscal policies have a more significant impact on the economy than monetary policies. The conversation touches on the Fed's likely response to inflation stabilization and the implications for interest rates and bond markets.
π° Fiscal Spending and its Macroeconomic Effects
This paragraph explores the concept of fiscal dominance in depth, explaining its impact on the economy and the limitations it places on central banks' ability to control inflation. Lyn Alden discusses the structural shift in the economy due to high public debt and fiscal deficits, and how this has led to a new era of fiscal influence. The conversation also covers the potential consequences of continued fiscal spending and the challenges of managing fiscal policy in a financialized economy with high public debt.
π The Impact of Deficits on Asset Classes
The paragraph examines the relationship between government spending, deficits, and their effects on various asset classes. Lyn Alden argues that while large deficits have historically boosted stock markets, the sustainability of this trend is questioned due to the increasing interest expenses associated with high public debt. She also discusses the potential for inflation to manifest in asset prices and the importance of investing in assets that can provide a positive carry, such as energy stocks, in the face of uncertain inflation outcomes.
π Energy Sector Outlook and AI's Role
In this paragraph, the focus is on the energy sector, with Lyn Alden expressing a bullish outlook due to increasing demand and constrained supply. She highlights the lack of investment in new production and the potential for energy prices to rise. The discussion also touches on the energy-intensive nature of technological advancements like AI and data centers, and the need for increased electrical grid capacity. Lyn Alden sees energy stocks as attractive investments, given their strong balance sheets and shareholder-friendly policies.
π‘ Bitcoin's Role in the Energy Market
This paragraph explores the role of Bitcoin mining in the energy market, particularly its ability to absorb stranded energy and provide flexibility in times of supply and demand fluctuations. Lyn Alden discusses the potential for Bitcoin to become an embedded part of the grid, utilizing excess energy that would otherwise be wasted. The conversation also touches on the World Bank's estimates of natural gas flaring and methane leaks, highlighting the significant amount of untapped energy that could be used for Bitcoin mining.
π Performance of Bitcoin, Gold, and Stocks
The paragraph discusses the performance of Bitcoin, gold, and stocks in relation to fiscal policies and liquidity. Lyn Alden explains that while these assets have been rising, the reasons for their performance are not identical but are influenced by fiscal issues and liquidity. She notes that gold has historically been negatively correlated with real interest rates, but the recent divergence suggests a change in this dynamic. The conversation also includes the impact of Bitcoin ETFs on the price of Bitcoin and the anticipation of the having on the market.
π Lyn Alden's Book: Broken Money
In this final paragraph, Lyn Alden discusses her book, 'Broken Money,' which focuses on the themes of fiscal dominance and the structural changes brought by Bitcoin and stablecoins to the monetary system. The book examines the historical context of money and the evolution of financial systems, particularly the shift from slow transactions and settlements to a modern era of fast transactions and settlements. Lyn Alden emphasizes the long-term implications of these technologies on the global financial landscape and the potential for reduced reliance on middlemen in finance.
Mindmap
Keywords
π‘Fiscal Backdrop
π‘Asset Classes
π‘Inflation
π‘FED Response
π‘Valuation Concerns
π‘Bitcoin ETF
π‘Commercial Real Estate
π‘Sector-Specific
π‘Risk-On Sentiment
π‘Yield Curve
π‘Fiscal Dominance
Highlights
The fiscal backdrop is a key factor in the surprising upside performance of certain assets.
Inζ°ε ΄εΈεΊ, local currency weakness creates headwinds for shorting assets.
Lyn Alden, founder of Linn Alden investment, shares her views on asset classes for the remainder of 2024.
Bitcoin, gold, and energy are the assets Lyn Alden is most bullish on for the near future.
Inflation may not decrease to the Fed's 2% target anytime soon due to fiscal dominance.
The Fed's response to new inflationary dynamics may be limited due to fiscal policies.
Government spending has significant consequences on the economy and asset classes.
Large cap growth equities have valuation concerns, but energy and smaller value spectrum companies do not.
Earnings results have been disappointing, leading to a drop in the stock market indices.
Sector-specific analysis is crucial for understanding market trends and potential slowdowns.
Risk-on sentiment may reverse over the course of the year, affecting market performance.
Fiscal dominance is a key factor in the current investment environment, affecting asset classes and market outlook.
Bitcoin and gold have moved up due to improving liquidity, which is fiscally driven.
The anticipation of Bitcoin ETF and the actual having can impact Bitcoin's price and demand.
Gold's rally is influenced by real interest rates and fiscal dominance, potentially signaling a higher trend in the coming years.
Lyn Alden's book, Broken Money, discusses the failure of the financial system and ways to improve it, focusing on fiscal dominance and the impact of Bitcoin and stablecoins.
Transcripts
overall the reason that those assets
continue to surprise to the upside is
because of that fiscal backdrop you know
if you were trying to short Assets in an
Emerging Market in the local currency
you're going to continually get
headwinds from the fact that that
currency is so weak right it's just it's
just that currency is going up in Supply
so quickly that the assets that you're
denominating them in might not be doing
great in real terms but they're
certainly doing fine in that local
currency term fan favor Lyn Alden
founder of Linn Alden investment
strategy returns to the show to share
with us the asset classes that she's
most bullish on for the remainder of
2024 what she thinks will happen to Gold
Bitcoin and stocks for the remainder of
the year and into next year why she
thinks inflation may not come down to
the fed's 2% Target anytime soon how the
FED will likely respond to this new
inflationary Dynamic and why fiscal
dominance is so important right now and
we'll discuss exactly what this means
and why the government is spending so
much money and the consequences of all
this fiscal spending first a from our
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welcome back to the show always good to
see you always happy to be back on
thanks for having me felt like yesterday
when we last spoke but really it was
November so lots has happened since 4
months ago I like to start with current
market action stocks gold and Bitcoin
have all moved up I think investors
would first and foremost like to ask you
which assets you think would be um
something that should be overweighted
for the remainder of the year um so for
this year I mean I I'm bullish on
bitcoin gold energy uh that's kind of
the big areas of focus uh for me at this
time uh you know a lot bitcoin's already
had a lot of powerful price action
obviously earlier this year um so I
think now it's consolidating a little
bit but you know over this year and next
year I I'm bullish on all those assets
that I mentioned uh and of course it
depends on what their Capital mandate is
so you know energy is cheap and
profitable and has good balance sheets
generally um gold and Bitcoin are kind
of um alternatives to treasury bonds or
alternatives to tech stocks for example
they can they can fit in a portfolio in
that context um and so those are kind of
the assets that I I find attractive at
the current time would you say that
valuation are a concern for you at
current levels for all these
assets uh so I think that um large cap
uh growth equities have valuation
concerns so for example large profitable
tech companies even companies like
Costco for example they're very highly
priced relative to their fundamentals
relative to their growth um basically
it's not a problem necessarily with the
companies themselves I mean Costco is
doing amazing it's just that investors
are are really crowded and really kind
of piling into them so I do have
valuations concerns uh for those um I
don't really have valuation concerns for
energy uh for certain ends of the value
Spectrum for some of these smaller
companies um nor do I have valuation
concerns for gold and Bitcoin inste it's
just a matter of that sometimes they can
get um euphorically overbought in the
intermediate sense um so that that's
something I look out for um but other
than that I think that those errors are
still not very crowded in terms of
overall investor portfolio positioning
just today as we're speaking on Tuesday
uh this week earnings are starting to
come in um some of the results have been
disappointing indeed the Dow is dropping
uh stocks are dropping today as we speak
uh the S&P is down 1% the nasdaq's down
1.3% the Dow's down 400 points um some
have told me that weak earnings are to
be expected as we head into what may be
an economic slowdown or some sort of
contraction do you agree with that view
so I think you have to be sector
specific I think that's been the
challenge so over the past
call it 18 months you know we've had a
we've had a PMI a purchasing managers
index below 50 for like a year and a
half um and so that's already been
recession like conditions for certain
industries and of course commercial real
estate's been in a depression like um uh
context whereas uh some of the more
service oriented um business out there
Tech there's other areas that have been
in recovery mode um and so I I think
that some of that could rotate in the
sense that some of the things that have
been doing really really well um could
increasingly show some weakness uh ahead
whereas some of the things that have
already gone through that down cycle and
if anything I I think some of them are
recovering I expect probably Higher pmis
by the end of this year than than we
started the year at um and I think some
of those more cyclical things could
follow that so I think that that that
question of slowdown versus not slow
down is is very sector specific I think
instead it's more of a rotation a re
acceleration some of those things even
as some of those those bigger Tech
things um you know do slow down I think
the slow down may or may not affect
sentiment what do you think do you think
risk on sentiment which has obviously
been the case for the last 6 months
could reverse over the course of the
year uh so I I do but I think that even
some of the action we've seen is
indicative of not super bullish
sentiment you know people don't pile
into cost 50 times earnings necessarily
purely out of bullishness some of that
is because it's it's actually a form of
defensiveness it's saying you know I
don't really want to own bonds per se I
want to buy a really Blue Chip company
and I'll crowd into that rather than
owning any of the things that are more
cyclical the energy names the banks uh
you know that's the the the capital
flight out of there I think has been
indicative of riskof behavior um and so
I don't I don't view that the current
period we've been in as super risk on um
and instead it's more indicative of
fiscal dominance
um indicative of how many other areas
are perceived as not investable um and I
I think what we could see is a
broadening out of what is perceived as
investable right so some some of those
some of the risk uh sentiment could
actually increase for some of the things
that have been considered too risky
whereas some of those things that people
crowded into um I think people could get
quite concerned with the level of
valuation there relative to the growth
numbers that are coming in um you know
if you've seen for example apple and
Tesla just not putting up amazing
numbers and the problem is that
investors had
overpaid uh for relatively spectacular
results that they're not they're not
getting in the fundamental data yeah so
sector specific then well the obvious
followup question is which sectors are
you most bullish on and least bullish on
uh so I generally like um Industrials I
like um energy energy I think is the the
more attractive risk reward and I think
with financials um as long as you kind
of avoid the commercial real estate
concentration I think most of that is is
at the current time um I I think those
are I think even like for example the
Midstream energy sector for example
that's been showing signs of breaking
out it's it's it's kind of new uh post-
pandemic highs let's call it uh and they
pay you very high yields while you own
them as well um and so I I think that
there are a bunch of investable areas um
and that the market has largely not
wanted to touch those and that those are
even at the current time presenting
opportunity now when you get kind of
overall riskof sentiment bad days you
can get Capital pulling out of those as
well um but basically by being cheap and
having good fundamentals they they
somewhat limit the downside um and then
they pay to own them so even if the
upside takes longer to come to fruition
it's still a positive carry asset for
many of these while while you own it uh
you mentioned commercial real estate
something we should stay away from uh
even today in April 2024 why is that
well so it's I think it if if someone is
a professional commercial real estate
investor I think that there are going to
be opportunities right there's obviously
going to be bargain hunting like super
cheap opportunities um but in general I
think we're seeing just an ongoing slow
motion train wreck in commercial real
estate um I think there are more losses
coming I think that lenders that are
heavily Expos their commercial real
estate or likely continue having problem
um I would say a lot of that's already
priced in a lot of that you know a lot
of those things are already super cheap
Capital it's a it's a it's a very
wellknown theme at this point that
commercial real estates in trouble um
and I think that you know a theme I've
been making is that so many people keep
saying that commercial real estate is
going to drive the next recession
whereas what I've been pointing out is
even even the bearish assumptions are
looking at say like 1.5 trillion in
equity wiped out of commercial real
estate um whereas if you look at fiscal
deficits you know they're over one and a
half trillion per year um and overall
household net worth is something like
like 140 trillion and and rising at
all-time highs right so there are these
Pockets that can do really badly and
that you know if you're if you're
exposed to a bank that has a
disproportion amount of lending to
commercial real estate for example there
still could be more shoes to drop there
but that if you're in areas that are not
really in that area if you're in energy
if you're in other types of Finance if
you're in um you know other Assets in
general even certain Emerging Markets um
those can can I think continue to re
accelerate out of their kind of pandemic
lows uh while these other things
continue to suffer because we're in this
environment of kind of structural fiscal
dominance you know it's very hard to
have a uh recession when you're pre-
stimulating to the tune of you know one
and a half or two trillion dollars a
year in fiscal deficits and it doesn't
mean that's not necessarily a good thing
um but that's just it's a different
reality on the ground a lot of it is
kind of like an Emerging Market where
you have to separate nominal
expectations from real expectations
because you have that underlying kind of
fiscal unsustainable backdrop and that
just changes what investments make sense
uh in a nominal sense I do want to come
uh come back to your fiscal um dominance
Theory uh as well as some of the asset
classes that you mentioned in particular
uh specifically uh but first let's sum
up your overall Market Outlook before we
move on to that so bottom line are you
expecting some form of a broad Market in
equities at least correction later on
this year whether it be a result of an
overextension of prices or a result of
um some sort of
recession uh so I I'm not the answer is
I'm not sure but I would say that I
would expect some rotation which is to
say that to to the extent that I want to
protect myself from that risk I would
not want to own the over owned things or
at least I would not want to be
overweight the things that other people
are overweight I would either want to
avoid them or downweight them compared
to other things that people have already
written off that that people are not
crowded into because even if we do get
that correction I'm not sure that it
would impact those other assets I'm I'm
referring to okay and uh speaking of
rotation are you expecting any more
Capital to rotate into the fixed income
Market in other words um how do you
think interest rates uh will affect uh
the broad fixed income or Bond um
portfolio so I'm I'm neutral on those I
I do eventually expect to see curve
steepening either because the front
end's cut or because the long end Rises
a little bit or a mix of both and so the
overall risk reward of the long end is
is still not super attractive to me um
to the extent that I like bonds I either
like t- bills or I like intermediate
term tips for example um I don't
particularly like the long duration
bonds which is not to say that I don't
think that they will you know it's not
that I even if they squeak out gains for
the year for example there are much
other there much better other assets
that I'd prefer to own from a risk
reward standpoint I refer I prefer to
own things that I view as asymmetric
meaning that the downside is relatively
contained um whereas the upside has a
lot of room to go where and I don't view
the bond market in that situation I
wouldn't be surprised if we see yields
higher or lower um by the end of this
year but it it doesn't feel like it's
weighted toward a a kind of a strong
long outcome so it's just an era that I
kind of put into the too hard pile and
say that it's just it's not a lot of
opportunity for the amount of risk I
take on so if you expect the yield curve
to steepen I'm assuming then you expect
the long end of the curve to continue
going up even if the FED cuts which
would bring down the uh short end of the
curve is that correct yeah or or it
stays sideways while while the FED cuts
the short end there's a couple different
yeah ways and magnitudes that could
happen and to the extent that long end
yields stay higher than expected that
could put pressure on some of those
highly valued equities that we just
talked about right so I think the Bond
markets already um a little worried
about re accelerating inflation but we
haven't really seen that in the large
cap equities yet um I think that they've
still discounted the possibility of
reaccelerating inflation and so some of
that's potentially not priced in um and
so th those crowded areas might not they
might be they might correct or at least
stagnate for a period of time if they
come to fully realize that that the long
end yields are maybe not going down as
quickly as some investors expect are we
having reaccelerating inflation Lynn uh
I mean the latest CPI numbers have not
Fallen at all since the previous months
um however they haven't um substantially
re accelerated at least on paper yet so
please elaborate on what you mean by
that so I I think we're seeing
stabilization of inflation and the and
the the step before re acceleration is
stabilization so if it if it's not going
down that's that's a sign of a potential
bottom um and you know one of my themes
for a while is that this decade will be
more inflationary than the past decade
but it won't be a straight line it'll
come in waves as most inflationary
decades do and that those ways will
generally be correlated with um economic
acceleration or deceleration especially
some of the more energy intensive areas
and so for example uh you know pmis like
we just talked about have been falling
in for a while they they then have been
stabilizing for a while and they're
they're actually showing earlier signs
of of recovery and reacceleration and I
I think inflation could follow that with
somewhat of a lag I do think if we see a
continued PMI Up Cycle um that could
come with a little bit of inflation so
it's not like I'm forecasting inflation
to quickly retest the highs we saw you
know a couple years ago but I do think
that the fed's it's going to be sticky
it's going to be basically inflation's
not going to go down to the fed's Target
as quickly as they'd want it to um and
that inflation I think is going to hover
3% or higher most likely um and and I
think the key thing to watch to see if
it can go much higher than that is
energy um you know I I expect rent
inflation to kind of stabilize not
really Trend lower but not necessarily
explode higher either because there's a
lot of Supply coming online but it's
really the energy markets that I think
um are worth watching to see if we end
up having above like inflation that's
even above kind of current levels that
are already elevated relative to targets
so the FED how would they respond to
this stabilization of inflation you
think I think neutrally I I think that
they they already kind of realized that
um their tools are not
necessarily um well positioned to deal
with this so when I talk about fiscal
dominance what I refer to is when we
look over the let's call it I did charts
on this
like for example the past 70 years if
you look at where most um credit
creation happens right mostly it's in
the private sector so for example if you
sum up net new bank loans and net new
corporate bond issuance in a given year
that sum is usually bigger than annual
fiscal deficits um so that that's kind
of private sector Main Street um credit
financing um and for the most part
that's bigger than annual fiscal
deficits but one thing we've seen in in
recent years is that fiscal deficits are
bigger than those combined right so
there there's more kind of you know
nominal power coming from the public
sector than the private sector and that
has a couple implications basically the
fed's main tools are around modulating
the speed of things like bank loans and
and credit issuance if they want to try
to slow down inflation they try to raise
rates or do quantitative tightening to
try to slow down that private sector
activity until they get you know either
recession or a near recession
and the problem is that in the current
ERA because the the deficits are mainly
you know it's mainly a fiscal driven
large deficit phenomenon that's where
the inflation's coming from there's only
so much that they can slow down that
private sector and a problem is that you
know back in the 70s for example or the
early 80s when they wanted to try to
control inflation they had very low
public debt and so if they raised rates
they could slow down that private sector
credit creation and that would have a
bigger negative impact than any sort
sort of increased public interest
expense they would have from those
policies but if you fast forward to the
current time instead of 30% at the GDP
there's 120% at the GDP and so when they
raise rates Super High um it does slow
down that private sector credit creation
moderately but then it completely blows
out the public um interest expense and
overall fiscal deficits by an even
larger number and so they're they're not
really able to slow it down to the
extent that they would be able to if
they were in a lower public debt
environment and where most of this was
coming from that private sector so it's
really about not having the right tools
to to address it directly and I think
that you know they're they've been kind
of been acknowledging that um even just
not directly so I think what you would
generally see is they'd probably stick
at relatively High indust rate levels
they probably would not aggressively
raise them more um they might focus more
on curve steepening because that's a
that's a way to you know moderate cost
for the government uh while keeping
higher industry pressures on the private
sector you know mortgage rates and and
corporate bond rates and things like
that so I do think that they might start
start targeting curve steepening um but
I think it's mostly about just
expectation management I think they're
going to be relatively
neutral even if inflation re accelerates
and I think it's going to be an ongoing
kind of narrative issue for them suppose
energy moves up um and accelerates there
and brings inflation up with it do you
think the Fed May respond by raising
rates again so it's possible um my base
case is they would first focus on higher
for longer rather than raising rates um
because I actually think that the
raising rates Beyond a certain point can
actually be stimulatory that's that's
the challenge you face in a fiscal
dominant environment so if if most of
the if most of the money creation was
happening because of the private sector
then higher rates would generally be uh
not stimulatory the opposite it would be
depression
but because a lot of this is fiscal
driven and that's interest rate it's not
sensitive to interest rate the spending
the taxation it's largely not sensitive
to interest rates and so by raising
rates they actually just increase the
deficit more and that's where a lot of
the stimulus is is coming from um and so
you know they might turn to Rising rates
but I think it would be ineffective if
they did uh instead they probably will
just kind of keep it high and we'll see
if they try to rotate the yield curve to
be steeper that that might be one of the
one of the more optimal approaches um
but really it's it's I'm less concerned
with what the fed's going to do because
I don't think they're in the driver's
seat um I think the fiscal side's more
in the driver's seat and I think that
the fed's going to kind of move around
whatever the fiscal side's doing let's
talk about uh this fiscal dominance that
you're referencing so uh first of all
what do you mean by that exactly and why
do you think there's so much fiscal
spending or just spending overall from
Congress right now so for the first one
fiscal dominance is basically when you
know B like so monetary policies things
like indust rates or central bank
balance sheet fiscal policy is like
taxing and spending Decisions by the
government and fiscal dominance is when
that latter has a much bigger impact on
the economy than the former and more
specifically it's when the former whose
tools are meant to control inflation are
no longer able to control inflation
because most of their tools are geared
toward the private sector whereas much
of this is happening from that fiscal
side from the public sector and Central
Bank tools don't really address the
fiscal side um another way of putting it
is that in in an era where there's no
fiscal dominance higher indust rates
should lower inflation because you're
you're you're softening private sector
credit creation and you're strengthening
the currency from the perspective of
forign investors um but in a in a a a
high public debt fiscal dominance regime
higher indust rates are not always
negative for inflation because although
they do put downward pressure on some of
the those private sector things they put
upward pressure on the fiscal deficit
due to higher interest expense and
that's that's partially what's fueling
inflation in the first place that
interest expense by the government is
someone else's income right so for
example if I use myself as example I
have I have a fixed lockin mortgage and
I have money markets if they increase
interest rates they increase my income
which I can spend right and I'm not the
only one like that there's many
corporations in that position there are
many um uh households in that position
ironically um and so if the private
sector termed out their debt and the
government has
not and specifically that those levels
are very high that's where it start to
get a a feedback loop that is not in
line with what the past 40 years have
been and to answer your second question
why why are they spending so much I
would say I mean a lot of it's locked in
it's demographics it's it's polit it's
it's a gridlocked congress it's it's
military spending it's geopolitical it's
all the above but I think the broader
more structural thing is that over the
past 4 years there's been constant
deficits uh for the most part um Rising
debt to GDP but that's been offs set by
40 Years of declining interest rates and
so interest expense was never really a
problem if you double your debt but you
cut your your interest rate in half then
your debt servicing costs are not really
a problem right and so it's been 40
Years of that math happening and the
problem is that if you um are are
continuing to rise public debts and
deficits but your interest rates go all
the way to zero and bounce off zero and
then start going sideways to up you no
longer have that offset anymore and so I
think that's the that's the bigger
factor for what's happening is that that
the the kind of the natural conclusion
of Decades of you know deficits and and
debt accumulation is that we kind of
enter this new period where interest
expense starts to actually matter and
they start to enter this kind of
long-term fiscal spiral which again
doesn't mean anything major happens this
year but it means that this this overall
kind of f schoal train is just is not
going to stop anytime soon and it's it's
this new background structure that as
investors uh or any of us operating in
the economy have to contend with that
it's a it's a different background
structure than than the prior decade
I've noticed just by looking at the
chart that uh the federal Surplus or
deficit in this case the deficit as a
percentage of GDP has continuously widen
over the last 40 years like you've like
you've mentioned Lynn but has
accelerated in its widen since 2008 and
so if you just look at the charts well
you would say to yourself since 2008 the
American Stock Market um has seen the
longest bull Rally or Market in history
correlation causation who knows but
certainly a deficit doesn't hurt the
stock markets in fact a whing deficit
has boosted the stock markets so just on
the surface and I may make the argument
that as an investor I may want the
government to spend more money money
stimulate more widen the deficit because
that's good for assets and nominal
values of assets would you agree or
disagree I mean from an investor
standpoint probably especially in
nominal terms I mean in Emerging Markets
when they go through issues usually
things go up in their local currency
term even if they do poorly in dollar or
gold terms and I think what we're
generally seeing is the some of these
developed markets especially the US have
certain Emerging Market characteristics
just to a less extreme degree um and so
the the you know if if I I had a view
that they were going to dramatically cut
the deficit tomorrow um then I would
invest differently I would own things
like I would own more uh bonds for
example um I would own more of those
types of assets and I would own less
equities and less of these other real
assets um so but because I don't expect
them to do that um I invest the way that
I do so yeah you could say it's it's
bullish on the assets that I want to own
if those deficits continue but that's
why I'm invested them in the first place
it's a high it's a higher nominal regime
overall um and it it can sometimes lead
to a higher real regime if if you know
you're kind of sucking monetary Capital
out of other countries like you know
places in Europe or places in Asia for
example if the US is running this
Playbook but investors are still fueling
it because they don't they don't they
don't know where else to invest the the
risk comes when they do feel like they
have Alternatives and this spending
still locked in and so if you get a
repudiation of the bonds while this is
still happening they don't really have a
way to slow it down that's where you
could get more obvious inflation risks
or things like that so it's one of those
things where in the early stages it does
feel pretty good and it's the later
stages where yeah you really get the
consequences from doing that um but yeah
I do think that overall um you know
investment dists have to take into
account the deficit and and part of why
I'm long certain assets is because of
that and the last point I would make is
that the challenge when they get to
these high debt levels in this
financialized of an economy is that even
if they try to do austerity even if they
try to say raise taxes and cut spending
um that would be be for a period of time
but then the problem is that tax
receipts are so heavily correlated to
asset prices now because you become so
financialized that by by cutting that
You' likely depress asset prices for a
period of time which would then
ironically increase the deficit again um
and so it's actually a very hard tail
spin get out of fiscally when you have
the combination of this High public debt
built on this financialized of an
economy if you had one of the other it's
easier to do if you have a financialized
economy but not highly indebted one you
can start to Def financialized gradually
um if you have a highly inded public
sector but it's built on a non-f
financialized economy then then
austerity might give you options to deal
with that um but if you have that
combination uh that's super hard to work
with especially when you you're you're
trying to work with it with a with a
gridlock Congress um there's really not
that many outcomes I see that that
change that which is which is why I
invest structurally the way that I do
okay uh is there a goldilock scenario in
which the government spends money and
perhaps widens the deficit but we don't
get inflation to run out of control in
other words mmt um in a scenario in
which we have stimulus which would be
good for Equity markets in nominal terms
but we don't get runaway inflation could
that happen so that would happen in in
the context where energy is abundant
right so a lot of new energy Supply is
coming online uh to kind of keep up with
that uh and two you have um deflationary
offsets from things like AI or other
Tech so for example if you ran very very
large deficits um but those uh for
example if you're if you ran very large
deficits but you used it to you know go
get copper mines and and build nuclear
plants and and data centers and and
things that were highly productive um
you know it might or might not be as I
as the private sector but at least would
it would you You' bring new Supply
online at the same time as you're
debasing your currency so you can you
can minimize how much uh on on a you
know kind of a per currency basis these
things are getting more expensive if at
all um the problem comes in when you
when you run this big fiscal deficit but
it doesn't go toward increasing the
supply of goods and services it goes
more toward consumption or more toward
locked in demographics or towards war or
things like that they're not really kind
of fueling that real GDP growth um and
so it it to the extent that AI or energy
abundance helps keep CPI down then it
but you're still running these big
deficits then that inflation will
generally show up in asset prices it'll
show up in things like gold and Bitcoin
and high quality equities and high
quality real estate that's that's where
that inflation will show up whereas if
it's if you do get energy bottlenecks or
AI does not um offset things as quickly
as some people expect then it's then
more of that would show up in CPI uh and
you'd be a little bit more careful of
some of those um you know High multiple
growth equities for example so if you're
if you're not sure about the two this
kind of the ratio of where that
inflation will end up then one thing you
can do is kind of invest in the middle
which is to say own things like gold and
Bitcoin and you know energy stocks for
example and and and kind of high quality
assets like that but still still be
cautious around the most highly valued
growth equities that that might get
punished if some of that inflation does
show up in in the CPI so let's talk
about energy first because you've
mentioned that several times throughout
the interview why is that you think
energy will um will uh will go up well
in other words why are you bullish on
energy this year so I I think that
overall we've got increasing demand for
energy um Supply is not terrible but
it's still relatively tight uh companies
are not heavily incentivized to invest
in new production
um and so um I think that overall Supply
is going to be kind of relatively con
constrained I think that um Shale oil is
going to grow more slowly in the coming
years than it did over the past decade
um and that there's be there's going to
be a price increase to bring in more
cacks to kind of bring in new Supply and
kind of incentivize that longer term
development of these energy resources I
also think that um you know over the
past o over the past 15 years the type
of tech we've had has been relatively
disinflationary so for example mobile
devices um social media these are not
particularly energy intensive things if
anything they they dematerialize a lot
of the other things we have to use
whereas Outsourcing a lot of high
computation thinking so making making
art making videos uh you know making
complex decisions that's actually pretty
energy intensive when we kind of put
that into the tech sphere uh it's more
of a combined software and Hardware
situation so I do think that we're going
to see more energy demand out of things
like data centers um and then that's
going to be challenging to meet and then
you need to do things like you need to
increase the electrical grid capacity
which is ironically an energy intensive
thing to do uh a materially intensive
thing to do um and so I think that the
overall long-term demand is still up
Supply is mixed um and you know we've
generally seen energy kind of diff oil
prices and gasoline prices kind of
bounced off their lows a couple times
and head it up I think you know my guess
is that the lows are in maybe we retest
them again but overall I think there's
more upside potential than downside
potential but then the second part of
the investment thesis is that even if
Energy prices don't go up as quickly as
I think they will in the years ahead and
they're on the the more bare side of
kind of like sideways Trend a lot of
those companies are cheaply priced even
for current Energy prices and have good
balance sheets and spend most of their
capital on returning it to shareholders
um so they kind of keep keep their
current situation but they're not
aggressively trying to expand and
instead they you know they buy back
shares they pay dividends they they
improve their balance sheet you know
they they decrease their net debt um and
so that's basically a positive carry
Outlook which is to say that even in a
middle of the road scenario I think
those Investments are still attractive
compared to things like t- bills
basically compared to um you know mon
monetary Alternatives which which forms
of energy will likely benefit the most
from the rise of AI and the KN for more
energy so I would say across the board
oil gas and and uranium um basically um
I think that um with those types of
things variable energy sources don't
necessarily cut it uh you need
consistent energy sources and you need
an uh an uptick in overall grid capacity
which uses a lot of materials and is
built by machines using hydrocarbons um
and so I I think it's I think it's an
all the above situation I think we'll
see we will see you know more solar and
wind coming online but I think it's
those more um uh in control or base loow
types of energy sources that will also
continue to be in demand so I I think
across the board higher energy across
the board I I've heard the possibility
of Bitcoin mining producing energy that
could be sold to the grid is that
something that you're looking for well
so what what Bitcoin mining does is it
soaks up stranded energy so um when we
you know the supply of the grid is
fluctuating right it's some some if it's
solar and wind it's obviously
fluctuating based on on those conditions
if it's Hydro it's fluctuating based on
on rain uh if it's nuclear it's always
on so either way you have this kind of
always on or or fluctuating supply of
electricity and then on the demand side
you also have fluctuating demand so
during the day there different Cycles um
and then during the seasons there
different levels of temperature and
things like that and the problem is that
grids have to be designed for like the
hottest day of the year like when
everybody has their air conditions on
when everybody's using Peak electricity
they have to designed for that day to
hopefully not have brown outs which
means they have to overbuild for every
other day and so you have this kind of
you have these kind of two side waves of
supply and demand electricity and
they're always dealing with like a
potential mismatch and so sometimes
they're shutting off energy sources
sometimes they're you know they're
sometimes they're having brown outs it
depends on the grid we're talking about
and one thing that coin mining is is
it's a very flexible demand source so
you know they you know when energy
pricing is cheap they can be operating
at full speed but then as soon as energy
pricing gets expensive either because
some Supply went offline or because
there's been a surge in demand they can
throttle back their demand because
they're in the the most flexible
position to do that obviously if you're
a hospital you can't just you can't you
know change electricity based on pricing
and even if you're even if you're doing
something like you're a manufacturer or
you're running an office you know you
can't it's it's it's it's much more
disruptive to change your electricity
consumption based on grid pricing or
grid shortages compared to if you're a
Bitcoin minor and you structure your
contract to say look we're going to get
the lowest cost but we're going to be
the first in line to turn off whenever
there's a issue and that's how they
structure that or they sell it back to
the grid there's also things like you
know the World Bank estimates um you
know if look at their estimates for how
much natural gas is just flared into the
atmosphere every year uh it's something
like an amount of energy that can power
the Bitcoin Network eight times over um
or or how much methane leaks out from
landfills into the atmosphere right so
basically there's just there's a a
unfathomable amount of of distrained
energy out there and over time Bitcoin
kind of fills in those gaps it takes a
couple Cycles to do so but we've already
been seeing it do that and I think that
trend is going to continue I think it
just becomes an embedded part of the
grid and that anytime you have any sort
of variable power or fluctuating demand
relative to steady power um you're
leaving money in the table if you're not
if if you're you know if you're not
using some of that to mine Bitcoin
because if you're getting zero zero or
negative cost NE I mean negative revenue
for your energy then you're leaving
money on the table on that note let's
finish up on the Bitcoin and gold price
uh first of all do you think Bitcoin and
gold moved up for more or less the same
reason this year I generally think so I
think we've generally seen improving
liquidity a lot of its fiscal driven um
and and so I do think that they you know
they've resisted the fact that yields
are higher right so normally when you
see yields and especially real yields
this High you should see gold a lot
lower than it is um and so I think that
gold investors have been sniffing out
some of those fiscal problems that I've
been talking about uh and in addition
because of you know kind of uh Decisions
by central banks to diversify their
Reserve Holdings and have more gold in
their portfolios that's been another
huge Factor as well so especially from
that foreign component um there's been a
lot of demand and so you know bitcoin's
obviously had somewhat similar Catalyst
it's heavily tied to liquidity it's had
Catalyst from the ETFs and things like
that as well so the two the reasons that
both of them are rising I don't think
are perfectly um overlapping but I do
think that they are following liquidity
and which is large a fiscal driven
phenomenon if you were to add stocks to
that equation so stocks Bitcoin and gold
have all been rising to new highs this
year here uh would you look at that and
actually be concerned at the current
economic environment and say well maybe
this is not sustainable uh because this
is not something we see very often to
have you know counter assets rising in
tandem does that thought ever occur to
you yes but that's that's generally what
you see in Emerging Markets when they
have fiscal problems or currency
problems it's just it's just not to the
same magnitude you see in those
environments so it's a it's a byproduct
of fiscal problems not yeah I think what
we're seeing is the denominators going
down more so than some of those assets
are going up outside of the big bubble
ones um and you know I would be
concerned about some of the major stock
indices because of how concentrated they
are into some of the most expensive
growth names um and so I expect the
fundamentals of a lot of those growth
names that probably do pretty well it's
just the the question of how much you
pay for them and how much of of us
household net worth is already stuffed
into equities um so I do have concerns
about them all to rise together um but I
think that overall the reason that those
assets continue to surprise to the
upside is because of that fiscal
backdrop you know if you were trying to
short Assets in an Emerging Market in
the local currency you're going to
continually get headwinds from the fact
that that currency is so weak right it's
just it's just that currency is going up
at Supply so quickly that the assets
you're denominating them in might not be
doing great in real terms but they're
certainly doing fine in that local
currency terms and you know we're not
anywhere near that level but it's
directionally a similar problem when you
have this kind of un unrestrained fiscal
spiral that's kind of just slow motion
background situation that just changes
how some of these assets are priced and
it doesn't mean you can buy things at
any price but it means that when in
doubt the the answer is that scarce
assets will go up in price relative to
currency units the Bitcoin having that
was not something you brought up was
that an part of the equation at all the
anticipation of the having or even
uh going back to early January when the
Bitcoin ETF was approved how much of uh
how much of a factor did those um did
those events play I think those are both
factors I think the ETF unlocks there's
there's pools of capital that are very
big that have not been able to access
Bitcoin um and and so those pools of
capital can increasingly access Bitcoin
and so that's kind of pan up demand for
exposure to the network uh that they now
have exposure to or at least and they
don't even all have yet sometimes it
takes months for those things to still
get approval to start moving in and
start to become normalized in those
environments so I think I think that is
a a a contributor to price um the having
uh certainly in a sentiment sense can
raise expectations um I think that
overall liquidity is a much bigger
impact on bitcoin price during bull
market than the having itself um because
you know if you if you do the math for
how much Supply the having takes off the
market per day it's relatively small
compared to what you can get from ETF
inflows or relatively small compared to
what you can get in one way kind of net
exchange volume in a given day um and so
the overall changes in external demand
for Bitcoin play a bigger role than just
the havs during bull markets I think
where the havs really matter the most is
during bare markets they play a pivotal
role in why each cycle gets higher highs
and higher lows than the one before it
but in terms of the timing of bull
market specifically I generally Point
more more toward liquidity and less so
toward the having even though the having
is a very relevant kind of longer term
factor and so putting everything
together do you anticipate Bitcoin to
continue to outperform the other assets
this year so for this year I'm less I'm
less certain I prefer a two-year view on
bitcoin so I think that bitcoin's likely
going to do well over the next call it
two years um it get it can get through
periods where it's overbought right
where where you could you could have a
pretty poor three-month period with
Bitcoin and it could underperform almost
everything um and then it could have
another 3 to six months of just of
spectacular gains um and so um my view
is generally looking back from late 2025
I'd be surprised if Bitcoin was not
higher than it is now notably uh and and
that probably outperformed other kind of
large large cap things you can own um
but you have to account for the
volatility and you have to kind of be
prepared for that really uneven path to
get there okay and on gold um similar
question on gold we've seen that gold
and the real interest rates have been
negatively correlated throughout history
obviously recently in recent months
there's been a huge Divergence and so
how how sustainable do you think this
gold rally given this historical
correlation has broken down so I I think
that because we're now in this kind of
fiscal dominance regime higher interest
rates fuel the deficit even more um
which which potentially fuels gold um I
think you know you could get liquidity
like temporary liquidity shocks if for
example um you run these big deficits
the FED tries not to monetize them uh
and you get kind of um like a temporary
liquidity problem in Treasure markets
that could certainly contribute to a
gold selloff uh temporarily um but I do
think the the the breakout has likes to
it um I think that the breakout is is
real I think that it's it's based on
fundamentals I think that there's a a
good reason that a lot of foreign
investors want to own gold more so than
treasuries um and that they want to
basically have a better ratio of gold to
treasuries um and I think that that's
that's probably going to be a longer
term story uh and I have no view on what
gold does and say a three-month period
um but I do think it it's it's now that
it's broken out I think that's a very
strong sign that I think it's probably
headed higher in the next few years okay
and before we go tell us about your book
a little bit um broken money came out um
late last year congratulations um which
theme or themes of the book would you
say are most relevant u in today's
economic
environment I would say two I would say
one of them does focus on this fiscal
dominance uh topic that I I've talked a
lot about here uh if you're confused by
by about some of the things I said as it
relates to fiscal dominance some of the
chapters in the book for example lay out
specifically what I mean and how those
um situations materialize over time um
so kind of that that long-term cycle of
of how fiia currencies work is a big
theme I think the other big theme um
touches on bitcoin and stable coins in
the sense that they show the structural
change that they brought to the monetary
system so what the book does is it
focuses on the past present and future
money through the lens of technology and
a a common theme you see in the book is
that almost every friction in money for
centuries has been solved by another
layer of centralization so when people
wanted to send money to each other
faster they would they would tie into a
bank and use that as the middleman if
banks wanted to send money to each other
they would tie into a central bank if
central banks want to tie into each
other they tie into even bigger Central
Bank like you know back in in 1800s it
would have been the UK now it's the US
um and and so you kind of have like just
centralization all the way down and what
basically the way to describe that is
ever since the telegraph was widely
deployed in called the 1860s you've had
this environment where before then
transactions were slow and settlements
were slow and so middlemen could only
really do so much whereas in the post
Telegraph environment you can send
information around the world and now you
have fast transactions but you're still
an environment of slow settlements you
know things like gold um you know that
that's like a slow form of settlement in
a in a telecom era and what Bitcoin and
stable coins do is now you have fast
settlement and fast transactions and so
the the power of middlemen potentially
diminishes back down to where was
ironically before the telegraph except
now the whole thing's faster um and so I
think that that's a that's a macro theme
that's relevant as we see the current
environment of 160 different currency
monopolies all trying to compete with
each other they've all been riant on
having pretty closed Capital borders and
these Technologies just break those
borders open allow people to bypass them
allow people to do Global settlements
and rely Less on middlemen and I think
that has long-term macro implications
for the structure of the financial
system uh and the strength of of some of
these currencies excellent well thank
you very much Lindberg else can we learn
about you and your work uh people can
check out linen.com uh that's why I have
a lot of free articles free newsletters
and a lowcost research service okay and
your book once again is called broken
money why our financial system is
failing Us and how we can make it better
we'll put a link um to the book and uh
and your website in the description down
below thank you very much for joining us
today Lyn we'll see you again soon thank
you thank you thank you for watching
don't forget to like And
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