Lyn Alden: Why Your Money is Worthless and What This Expert is Doing About it

In this riveting discussion, we delve into the complexities of the global financial landscape and the potential pitfalls of traditional monetary systems with Lyn Alden, Founder of Lyn Alden Investment Strategy. We explore the implications of structural inflation, the rise of new monetary technologies like Bitcoin and stablecoins, and the potential future scenarios for developed and emerging economies.

Topics Discussed

  • Examination of the role of Bitcoin, stablecoins, and other new technologies in creating a global marketplace for money
  • Exploration of the potential for money to move across jurisdictions, bypassing traditional banking systems
  • Insight into the financial firewalls and the increasing porosity due to technologies like Bitcoin
  • Analysis of the potential problems major currencies like the dollar, euro, and yen might face due to increasing public debt
  • Discussion on the bubbles and cycles associated with monetary technologies
  • Consideration of the potential risks and benefits of Bitcoin, including the concentration of wealth and the potential for it to act as a hedge against currency devaluation
  • Examination of the potential future scenarios for developed and emerging economies in the face of a potential debt and monetary crisis
  • Discussion on the potential impact of a fiscal reckoning on the asset bubble and consumer spending in developed economies
  • Discussion on the structural inflation in countries like Egypt and Argentina, and the impact on their currencies
  • Insight into potential strategies for managing the risks associated with a potential fiscal reckoning, including investment in bonds, equities, and Bitcoin

This episode offers a deep dive into the intricacies of the global financial landscape, providing valuable insights for anyone interested in understanding the potential future scenarios for our monetary systems. It’s a must-listen for anyone seeking to navigate the complexities of the financial world and understand why traditional money might be losing its value.

This is “ReSolve Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

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Summary

In emerging markets like Egypt and Argentina, high levels of structural inflation and limited acceptance of the local currency internationally lead individuals to seek protection in dollars on the gray market. New technologies such as Bitcoin and stablecoins offer a potential solution for these individuals. These technologies are decentralized and scarce, offering an alternative to the centralized and credit-based ledgers that currently dominate the financial system. The use of such technologies can be particularly useful in countries with financial restrictions. However, there are challenges such as potential government surveillance and privacy concerns to overcome. As public debt continues to rise, major currencies like the dollar, euro, and yen could face potential devaluation and financial oppression, similar to what is observed in emerging markets. As such, assets like Bitcoin, gold, real estate, and equities become increasingly attractive for people seeking protection against longer periods of inflation. Bitcoin has additional advantages due to its decentralized nature and global accessibility, offering financial security and independence to its users. However, it’s important to note that the adoption of these new technologies may lead to financial bubbles and fraud, though the technology itself continues to evolve and remains powerful. Government surveillance and pushback against central bank digital currencies (CBDCs) are key concerns. The launch of CBDCs may face competition from alternative assets, particularly in weaker jurisdictions. Despite governmental attempts to control cryptocurrencies, people can still find ways to use peer-to-peer transactions, demonstrating the resilience of these new monetary technologies. In a world with ongoing fiscal and sovereign debt situations, and rising public debt contributing to asset bubbles, scarce assets like Bitcoin become increasingly attractive. They offer an advantageous way to protect individuals from inflation and currency devaluation. Meanwhile, the strength of the dollar and the Federal Reserve’s ability to remain tight despite fiscal deficits have significant impacts on the performance of assets like gold. However, a changing regime may see a weakening dollar leading to a surge in the value of gold and other assets. In conclusion, the global marketplace is being reshaped by new financial technologies like Bitcoin and stablecoins, which offer a more globalized monetary system. Despite potential challenges like government surveillance and privacy concerns, these technologies offer greater access to financial services and protection against inflation. With the increasing public debt and potential inflationary pressures, assets like Bitcoin are likely to become even more attractive. Overall, the emergence of these new technologies provides hope for a more decentralized and efficient financial system.

Topic Summaries

1. Structural inflation and limited currency acceptance

In countries like Egypt and Argentina, high levels of structural inflation and limited acceptance of the local currency outside of the country lead to people seeking out dollars on the gray market. This is because these countries experience significant money supply growth per year, resulting in higher levels of inflation. As a result, the local currency is not widely accepted outside of the country. This creates a challenge for individuals in these countries who need to protect themselves from inflation. In developed countries, there are more subtle ways to protect against inflation, such as stablecoins or other assets. However, individuals in sanctioned jurisdictions may have difficulty accessing certain stablecoins. Bitcoin is another option for protection against inflation, as it is fully decentralized and scarce. As public debt increases, major currencies like the dollar, euro, and yen may face problems similar to emerging market currencies. This could lead to major currency devaluations and the implementation of financial oppression and capital controls. To protect against a longer period of inflation, individuals can use various assets like gold, real estate with a fixed rate mortgage, equities, or Bitcoin. While these problems may seem distant to individuals in developed countries, it is important to recognize that developed world currencies may also face similar challenges in the future.

2. The impact of new technologies on the global marketplace

New technologies like Bitcoin and stablecoins have the potential to bring money back to having a global marketplace, allowing for cross-jurisdictional transactions. These technologies provide an alternative to the centralized and credit-based ledgers that currently dominate the financial system. In the past, people were trapped in these centralized arrangements, but now there is hope for a more decentralized and efficient system. For example, in emerging market countries like Argentina, where there are limited ways to bring money in or out, these new technologies offer a solution. Instead of relying on ports of entry or the local banking system, individuals can now send and receive money through digital means. Bitcoin, in particular, is a fully decentralized form of currency that exists everywhere and can be used for transactions without the need for a jurisdictional hub. This opens up opportunities for individuals to transact globally, regardless of their location or the restrictions imposed by their local banking system. However, there are challenges to overcome, such as privacy concerns and the potential for government surveillance. Additionally, the adoption of these new technologies may lead to financial bubbles and fraud, but the underlying technology remains powerful and continues to evolve. As major currencies face similar problems to emerging markets, the demand for scarce assets like Bitcoin is likely to increase. Overall, the emergence of new technologies in the financial sector is reshaping the global marketplace and providing individuals with greater access to financial services.

3. The importance of access to foreign assets and decentralized currencies in the global marketplace

Access to foreign assets and decentralized currencies is becoming increasingly important in the global marketplace. In the past, people were trapped in centralized arrangements, relying on different ledgers and IOUs. However, new technologies are now offering hope for a more globalized monetary system. Bitcoin and stablecoins, for example, have the potential to pierce across jurisdictions and create a more interconnected marketplace. This is particularly beneficial for emerging market countries like Argentina, which have limited options for bringing money in or out. Traditionally, they relied on ports of entry for gold and cash, but these methods were not efficient and often faced inflation problems. Now, with decentralized currencies, such as Bitcoin, individuals can send money to each other easily, bypassing the local banking system. This is a significant development as it allows for greater financial inclusion and access to foreign assets. Additionally, decentralized currencies like Bitcoin are not subject to the same jurisdictional restrictions as traditional fiat currencies. This means that individuals in sanctioned jurisdictions, for example, can still access Bitcoin and use it as a store of value or for transactions. As we enter an era of increasing public debt and potential inflationary pressures, the appeal of scarce assets like Bitcoin grows. Its decentralized nature and global accessibility make it an attractive option for individuals seeking financial security and independence.

4. Challenges of accessing stablecoins

Accessing stablecoins can present challenges, particularly in sanctioned jurisdictions. These jurisdictions may restrict individuals from utilizing certain stablecoins, limiting their ability to protect themselves from inflation. In contrast, individuals in countries like Argentina have more freedom to use stablecoins as an alternative to their local currency. The conversation highlights the increasing accessibility of stablecoins through digital platforms. With the use of QR codes and online transactions, individuals can bypass their local banking systems and directly send and receive money using stablecoins. This decentralization of financial transactions is exemplified by cryptocurrencies like Bitcoin, which exist everywhere and do not require a centralized hub. However, the discussion also acknowledges the potential difficulties faced by individuals in sanctioned jurisdictions, where accessing stablecoins may be more challenging due to geopolitical restrictions. The conversation concludes by suggesting that as public debt increases, major currencies like the dollar, euro, and yen may face similar inflationary problems as emerging market currencies. Overall, the discussion emphasizes the importance of stablecoins as a means of protecting against inflation, while acknowledging the varying accessibility of these assets in different jurisdictions.

5. Bitcoin as a decentralized and scarce asset

Bitcoin is seen as a decentralized and scarce asset that can be accessed globally. Unlike developing market currencies that experience inflation, Bitcoin offers a solution to the problem of structural inflation. In countries like Egypt and Argentina, where the money supply grows rapidly, people seek out dollars on the gray market. However, with Bitcoin and stablecoins, individuals can transact across jurisdictions in a way that was not possible before. This global marketplace for money allows for peer-to-peer transactions without relying on centralized arrangements. Bitcoin’s decentralized nature also provides a level of privacy and control over one’s own money. It can be accessed through an internet connection, making it a viable option for individuals in countries with financial restrictions. While there may be concerns about the concentration of wealth within the Bitcoin space, the technology itself remains powerful and continues to attract institutional adoption. As major currencies face similar problems to emerging markets, the demand for scarce assets like Bitcoin is increasing. In a world with problematic fiscal and sovereign debt situations, Bitcoin and other alternative currencies offer individuals a way to protect themselves from inflation and currency devaluation.

6. Inflationary pressures and potential currency problems in the next decade

Inflationary pressures and potential currency problems are expected to arise in the next decade as public debt continues to increase. Major currencies like the dollar, euro, and yen may face similar challenges to emerging markets. This is due to the fact that as more debt accumulates on the public balance sheet, the power of these currencies weakens. The guest predicts that the next decade will be more inflationary on average, as the growth of broad money supply decreases. As a result, assets like Bitcoin, which are fully decentralized and have a limited supply, can serve as a hedge against currency devaluation. The guest also highlights the importance of stablecoins for individuals in sanctioned jurisdictions, as they provide a means to protect against inflation. However, access to stablecoins may be limited for individuals in certain countries due to sanctions. The value of gold is also discussed, with its price in yen, euro, and emerging market currencies reaching new highs. The guest attributes this to the weakening of the dollar and the monetary premium placed on it. Overall, the expectation is that the dollar will face a weakening cycle, which could lead to a significant increase in the value of gold.

7. Monetary technology and its resilience in the face of bubbles and economic crises

Monetary technology, such as Bitcoin, has the potential for bubbles and retracements. However, unlike normal technologies, monetary technology needs to be resilient and agnostic to economic crises. This is because once a monetary technology is adopted, it becomes difficult for people to go back to the previous system. For example, people rarely go back to using flip phones after experiencing the convenience of smartphones. Similarly, once people have access to electricity, they rarely choose to live without it. However, financial systems are prone to bubbles due to the leverage and fraud that can occur. When a bubble bursts, some people may sell their Bitcoin, but the technology itself remains powerful and continues to evolve. Developers are constantly building new things on top of it, such as new wallets and layers. This allows the technology to rebuild for the next cycle. Unlike normal technologies, the unit of account in monetary technology only needs to be updated once a generation, whereas other technologies encounter problems every few generations. In addition, the current fiscal and sovereign debt situations, as well as geopolitical escalation, make scarce assets like Bitcoin attractive. Bitcoin offers the advantage of being accessible in any internet-connected country by memorizing 12 words or using a hardware wallet. Overall, Bitcoin represents the next era of monetary technology and its resilience makes it a promising asset in an uncertain financial landscape.

8. Government surveillance and pushback against central bank digital currencies

Government surveillance and pushback against central bank digital currencies (CBDCs) are key themes discussed in the conversation. The launch of CBDCs may face competition and pushback from other assets, as individuals seek alternative options instead of their country’s CBDC. This is particularly true for weaker jurisdictions, where people clamor for different assets. Privacy concerns also play a significant role in the pushback against CBDCs. The idea of the government having surveillance of every transaction raises concerns about personal privacy. The issue of government surveillance is politically polarizing, with strong opinions on both sides. While some countries may try to launch CBDCs, they will increasingly face competition from the market and pushback from individuals who prefer other assets. Despite attempts to regulate and control the use of cryptocurrencies, such as shutting off crypto from banking, people still find ways to use peer-to-peer transactions and remittances. The government’s efforts to slow down the adoption of cryptocurrencies may include making it harder or more regulatory-onerous to self-custody Bitcoin. However, these measures may not be entirely effective, as companies and individuals can simply migrate to other countries that are more welcoming to cryptocurrencies. Countries like Singapore, Dubai, El Salvador, and Switzerland may become hubs for cryptocurrency activities. Overall, the discussion highlights the challenges and complexities surrounding government surveillance, pushback against CBDCs, and the competition from alternative assets.

9. Interest rates, debt, and asset bubbles

The low interest rate environment and rising public debt have contributed to asset bubbles. This is a concern as a fiscal reckoning may lead to a collapse in asset prices. In countries like Egypt and Argentina, where there is high money supply growth and structural inflation, people seek out stablecoins and dollars on the gray market to protect themselves from inflation. Bitcoin is also used as a decentralized alternative. Major currencies like the dollar, euro, and yen may eventually face similar problems to emerging markets due to increasing public debt. The adoption of financial technology, like Bitcoin, can lead to bubbles and retracements, but the technology itself remains powerful. As we enter a more inflationary decade, having scarce assets like Bitcoin becomes attractive. In the developed world, there is a growing concern about currency devaluation and the long-term debt cycle. Scarce assets like gold, real estate, equities, and Bitcoin are seen as ways to protect against inflation and currency devaluation. TIPS (Treasury Inflation-Protected Securities) are also considered interesting investment options in this environment. The dollar’s strength is partly due to its monetary premium and the Fed’s ability to remain tight despite fiscal deficits. However, if the Fed is no longer able to tighten and faces fiscal dominance, there may be a bounce in emerging markets, gold, and Bitcoin. A breakout in gold in dollar terms could be a sign of a changing regime.

10. Dollar strength and gold as a hedge

The strength of the dollar and the ability of the Federal Reserve to remain tight in the face of fiscal deficits impact the performance of assets like gold. Gold priced in other currencies, such as the yen or euro, has broken out to new highs, indicating a potential shift in the market. The dollar’s strength is relevant because it affects the monetary premium placed on the dollar, with some individuals even choosing to store cash under their mattresses. However, if the dollar weakens, gold could experience a significant increase in value. The market is now divided between assets like gold, silver, and Bitcoin, which has taken some market share. This fragmentation of capital has contributed to the dollar’s resilience, as has the immense tightening cycle of the Federal Reserve. The rate of change in their tightening has been substantial, and it is the first time in decades that they have raised rates higher than the previous cycle. As long as the Federal Reserve remains able to tighten and avoid being overrun by fiscal dominance, the dollar can remain strong. However, if this scenario changes, emerging markets, gold, Bitcoin, and similar assets could experience a significant bounce. The Treasury’s decision to issue more bills than duration has also impacted the global financial system, depriving it of pristine collateral and contributing to the bid for shorter-term rates.

11. Range-bound regime and potential future scenarios

The current market regime is characterized by a downward or range-bound trend. This is due to several factors, including the Federal Reserve’s tightening cycle and the fractured capital allocation between assets like gold, silver, and Bitcoin. The Fed’s immense tightening cycle, which is the first of its kind in decades, has contributed to the current state of the market. Additionally, the market has seen a shift in capital allocation, with some investors diversifying their investments into assets like Bitcoin. This has led to a fragmentation of capital that would have otherwise been invested in gold and silver. Another factor that has influenced the market is the strength of the dollar. The dollar’s strength has been supported by the monetary premium placed on it by individuals, such as those in Egypt who hold American dollars as a savings option. However, if the Fed is no longer able to tighten and fiscal dominance takes over, the dollar may weaken, leading to a potential surge in emerging markets, gold, Bitcoin, and other similar assets. The Treasury’s decision to issue more bills than duration has also impacted the market, as it has deprived the global financial system of pristine collateral. This has resulted in a bid for shorter-term rates and has prevented longer-term rates from rising significantly. Overall, the current range-bound regime may continue until certain factors become messier, potentially leading to a new market regime.

Lyn Alden Schwartzer
Founder, Lyn Alden Investment Strategy

Lyn Alden Schwartzer provides analysis on select large, mid and small-cap stocks within our Stock Waves service. With a background blending engineering and finance, Lyn uses a dispassionate long-term quantitative and qualitative approach to filter through the noise and find value in stocks and markets around the world.

Lyn has a Bachelor’s degree in electrical & electronics engineering and a Master’s degree in engineering management with a focus on financial modeling and engineering economics. She has worked for over a decade in the aviation industry in a range of roles, starting as an electronics engineer and moving into project and facility management, and engineering finance.

Founder of Lyn Alden Investment Strategy and a popular contributor on Seeking Alpha, Lyn provides market research to tens of thousands of individual investors and financial professionals per month. Her specialties include monitoring developments in the business cycle, analyzing various approaches to asset allocation, and covering stocks and international ETFs.

She focuses strongly on valuation, and regularly employs the use of cash-secured puts, covered calls, and normal buy-and-hold positions, depending on market conditions and available opportunities.

Lyn’s work has been featured or cited on Forbes, Business Insider, CNBC, MarketWatch, Time’s Money Magazine, Kiplinger, The Street, US News and World Report, the Telegraph, Fidelity Investments, Morningstar, and other financial media.

TRANSCRIPT

[00:00:00]Mike Philbrick: All right, welcome. Today, we’ve got Lyn Alden joining us talking The Fourth Turning, the long term debt cycle, fiscal dominance, and her new book, Broken Money. Let’s get into it.

[00:00:12]Richard Laterman: Welcome Lyn. Yeah. Welcome Lyn.

[00:00:13]Lyn Alden: Thanks for having me back.

[00:00:15]Mike Philbrick: Yeah, it’s great to have you back. Just as a reminder, before we get started too, I want to remind everybody, LynAlden.com and you can tune in for Lyn Alden’s various investment strategies that she proposes and puts out there for the world to consume.

She’s also a fantastic resource on Twitter and has a new book we’re going to talk about today. Also I’d like to suggest that I welcome my colleagues, Richard Laterman and Adam Butler, myself, all from InvestReSolve.com. And I will emphasize, none of this is investment advice. It’s just good, clean fun on a Friday afternoon.

So with that… where shall we start?

Broken Money

[00:00:50]Richard Laterman: Broken Money. Let’s do it.

[00:00:52]Adam Butler: Yeah. What motivated you to, let’s start with the classic question about, for somebody who just newly published a book, which is in itself a Herculean achievement. We speak from experience. Yeah, why this book? Why now? And why do you think you are the right person to write on these themes?

[00:01:09]Lyn Alden: So this culminates a lot of the research I’ve been doing over the past five years. I read a lot of long-form articles but ironically, some of them are not long enough because every time I, you know, money is a very, money is a very in depth subject.

It’s something that you have to start from first principles and build up. And so what I wanted to do was to really put a lot of my content that is spread out in all the different silos and all these different pieces into one coherent package for people. And so I wanted to just put all that together.

I have a background that blends engineering and finance, and so in this world of talking about the current macro state that we’re going through, the book explores the history of money through the lens of technology. And then it explores some of the future technologies or the present technologies that are now available to us, and a couple different forks in the road.

So that kind of technical plus financial background comes in handy. And then lastly, I live between the United States and Egypt every year. And so I, I have a boots on the ground experience of both a developed country and a developing country, and Broken Money takes a global look at money.

It tries to remind people that we’re not all in the United States or Europe even though that might be a lot, a big chunk of our audience, it basically says, okay let’s look at money from a global perspective. And so I bring that perspective to the book.

[00:02:26]Adam Butler: Yeah, that’s great.

[00:02:27]Richard Laterman: I don’t want to gloss over the fact that you spend a good chunk of your year in Egypt. Two of my grandparents were born in Egypt. So I wanted to ask you, what are some of the starkest contrasts when you, how long do you spend per year? Like a few months of the year, and what are some of the sharpest and starkest contrasts when you spend that time there?

[00:02:44]Lyn Alden: It’s usually a month or two each year. And so I think the biggest contrast is probably the traffic. Egypt certainly has the craziest traffic I’ve seen in any country. And I’ve been to a bunch of different countries. Cairo. Yes. But I’ve been to other ones too. Cairo’s the craziest.

If you’re in a city environment, basically if, one thing about Egypt is they’ve, it’s very few traffic lights. It’s, the traffic patterns are just a very different philosophy. And so you’re, you can be in like a city the size of New York and you can drive for half an hour and see one traffic light.

So instead it’s more like just, bumper cars have to sort it out on their own. Apart from that, it’s, I go to a number of different countries, some developed, some developing and it has a lot of characteristics of a developing country. It’s less than $4,000 GDP per capita.

And every country is unique and it’s just, it’s a very ancient culture and it’s a very, it’s one with, it’s arguably the most history or what a top tier, in terms of how much history and continuity is there. And so you get to see all of the, it’s almost like tree rings, on a tree.

It’s like you can go back in Egypt’s history and there’s just, there’s so many changing of power structures, changing of their place in the world. And of course I explore a lot the monetary situation of U.S…. Oh no, you go ahead…

[00:03:57]Richard Laterman: No, I’m just curious if Lyn was there and was already visiting regularly during the Arab Spring, and everything that was going on in the last couple of years.

[00:04:06]Lyn Alden: So I started going after that. I started going five years ago. My husband’s originally from Cairo. He was there during the Arab Spring. And he eventually moved here, and then, we now live in both, the majority of the United States, but both every year. And yeah he directly, he was there. He was in Cairo and participated in parts of it while it was happening.

[00:04:27]Mike Philbrick: Can you maybe highlight some of the differences for those in the developed North American world, with the convenience of the currencies that we possess in making purchases, and contrast that maybe to how much more difficult that is in a country like Egypt. Maybe that’s a good place to start to frame a discussion around the money and how it develops and how it functions in different areas of the world.

[00:04:52]Lyn Alden: Sure. So one thing to realize that there are 160 plus different currency areas in the world. And each one has this kind of local monopoly. And because they control the financial borders pretty well, at least up until pretty recently, with some of the newer technologies that are available, people are stuck in whatever monetary environment they find themselves in.

In the long tail, the majority of currencies are not very good. And so in a developed country, we’re used to something like 7 percent annual broad money supply growth, on average. Obviously, there’s some particularly crazy years where that can be different, but the long-term average is around 7% in the developed world.

Whereas when you go into the developing world, you’re going to be firmly in the double digits. Many of them have experienced hyperinflation, or nearly hyperinflation within a generation or two. Like, dozens of countries have experienced it in my lifetime and if I add my parents’ lifetime, it’s a tremendous number of them.

In a country like Egypt, you’re looking at about 20 percent money supply growth per year. And so you’re dealing with much higher levels of structural inflation. Your currency is not accepted outside of your country almost at all. People seek out dollars on like, the gray market. The same thing happens in Argentina and many other countries.

So people will literally the, a challenge that we have, so in developed countries, we have these things that are more subtle. And so we say, okay, we’re going to take our savings and we’re going to invest in the stock market or things like that, 40’(k)’s. Whereas in Egypt even the capital markets are just not very attractive.

They don’t just go up and to the right, in like real purchasing power terms. Many decades, we’re accustomed to in the United States and other parts and so most people invest heavily in real estate. They invest in literally physical cash dollars, like the classic under the mattress cash dollars.

A significant percentage of the population is still unbanked. Because it basically, banking has a certain overhead attached to it. And so if someone has like $200 in cash to their name equivalent, it’s just not profitable to bank them. And so there’s like a large cash economy among the bottom half of the population.

Whereas if you’re middle class, upper middle class, wealthy, you generally have banking access and it’s, it looks similar to what we have here, with the exception that everything’s just way more inflationary, and what people don’t often realize is that in addition to inflation constantly eating away at your savings, especially if you lack things like deep capital markets to reinvest them into, it’s also every year is a fight for your wages or your business income.

Because if you’re not growing your wages by 20 percent a year, you’re getting diluted. Your share of the pie is getting diluted. So it’s not just your savings. It’s that you have to aggressively renegotiate your things every year. And of course that’s really hard. So if you’re a landlord, many people feel bad about raising their rents 20 percent a year.

And people will balk at that and it’s, and so people end up getting their share of the network, their monetary network, constantly diluted by the powers that be. And so that’s, it’s a quintessential example of why I say that money’s broken because it’s been fractured into 160 different currency bubbles and the best ones have downsides, but most of them have pretty, pretty stark downsides.

[00:07:56]Mike Philbrick: And there seems to be a socioeconomic kind of fault line or minimal terminal velocity, where the majority or some part of the population almost has no hope to even get to the ability to be banked, to potentially have some access to loans, which then would allow them to lever businesses and things like that. So there’s a structural impediment to the haves and the have nots, if you will.

[00:08:22]Lyn Alden: Yeah, being poor has a significant financial cost to it. So unless you have some luck or exception that allows you to break out of that, it’s not impossible, but it’s so many frictions there to break out and achieve escape velocity.

And that’s also true on the global stage. So for example, if you look over the past 50 years and we ask how many developing countries have developed, the number you can count on roughly one hand. It’s mostly a number of kind of small and medium sized countries in Asia. So it’s like Singapore, South Korea, according to most metrics, Taiwan according to most metrics, some of these are actually still classified as emerging markets, even though functionally, we can say not really. China is going in that direction. It’s a more complicated one. But basically out of the kind of the hundred plus countries in the world that are not in the developed country status, there’s a single digit percentage that have become developed in the past 50 years.

And one of the ways to measure that, basically from a financial perspective, there’s a lot of different metrics that use GDP per capita, and like, capital markets. There’s all sorts of details. And that’s, for example, why MSCI and FTSE will debate whether or not South Korea is developed or not, which is, in my view, silly because they have better internet than I do here.

But the way that you can, if there’s one delineating factor from a financial perspective, it’s whether or not they can finance themselves in their own currency. So in the United States, in Canada, in Japan, in Europe you can finance yourself in your own currency. China, then there’s a spectrum there.

So some of the high tier emerging markets, China and countries like that, Taiwan, South Korea, they’ve, as they’ve reached that threshold, they can mostly do it in their own currency. Whereas an emerging market is getting a lot of financing in dollar terms or sometimes zero terms.

And this actually feeds back on itself because it’s harder. It’s like your currency is more volatile when you have external debt. But because your currency is so volatile, it’s hard to get any. That’s why you have external debt in another currency. And so it’s a chicken and egg problem. And other than like very exceptional cases, like the handful of ones I mentioned in, mostly in East Asia, very few countries ever transition to being able to go from relying on this kind of international dollar standard to relying on their own currencies.

And then the ones that, and then basically there’s a two tiers of money. So the leaders, the corporations in those countries, they can get offshore accounts. They can access foreign capital markets. They’re, they can get, they get, they deal with the IMF, they deal with global financers, whereas if you’re the bottom 90 percent in those countries, you’re basically stuck in this like fiat matrix, it’s like, you’re, this is your currency.

You’re constantly getting diluted. You have to run on a treadmill just to keep your savings and your wages and your business income. from not getting diluted and all that comes with frictions.

[00:11:10]Mike Philbrick: Awesome. I just want to remind everybody, hey, we’re here with Lyn Alden talking on her, about her new book, Broken Money. LynAlden.com is where you can find a lot of her fantastic research. Very good on Twitter as well. I’m accompanied by my colleagues, Richard Laterman and Adam Butler, InvestReSolve Riffs with Lyn. So Lyn, getting back into it. You do give some hope in the book. How can we make it better? And then there’s a technological angle.

We used to use seashells on the seashore to trade currency. Maybe you could walk us through how it gets better and what your technological angle was through the book for everyone.

[00:11:45]Lyn Alden: Yeah, so a lot of money books, especially monetary history books, focus on politics of the day. What did this president do with money or what did this, what was this, these cultural movements doing the money?

Whereas I take a more technological view because that’s what tends to matter on a global scale. What is, why does money change from seashells to gold to banknotes to banks, globally? And it’s largely due to technology. So we can put that in the three eras. So the first era is the commodity era, where as our technology got better, we would increasingly rule out certain types of commodities as money.

So shells, beads, copper, cocoa, tobacco, these things were all used as money and were increasingly, just became untenable in the face of industrialization to the point where really only gold and silver had, could maintain high enough stock-to-flow ratios. It’s very hard to rapidly increase the existing supply of gold and silver compared to other commodities.

So that was era one. And then during that time, because gold and silver have divisibility limitations, portability limitations, verifying limitations, we had increasing banking structures built on top of those, and the invention of papyrus, the invention of paper, the invention of even just simple things like book binding.

It’s trivial today, but there, there was a paper technology at the time, not just to invent paper, but then how to actually bind paper together and use it better and make it cheaper to use. Then there was, of course, the printing press. And you had different levels of banking, like physical technology that enabled new types of banking arrangements or moving money.

But the second era really began with the invention of the telegraph and specifically the deployment of the telegraph, which happened throughout the second half of the 1800s. Because from that point, people could transmit information at the speed of light, globally, while the physical money could still only move at the speed of matter.

And if you can transmit information, you can transmit transactions, but you can’t settle those transactions. And so for the past 150 plus years, the world has increasingly relied on centralization and abstraction in order to send money long distances. Basically any long distance transfer is really a type of credit.

You’re using various ledgers, you’re using different intermediaries to send someone money. You’re not actually sending them like, a bare asset. You’re not just like teleporting gold to them. or teleporting a dollar to them. You’re just hopping through different ledgers that are all based, they’re all IOUs, they’re centralized, they’re credit based which has, it’s efficient, but of course, going back to the prior discussion around 160 different currency silos, people get trapped in these kind of centralized arrangements.

The third era I would define as, and that’s where the hope comes from, is the current new technologies that potentially bring money back to having a global marketplace. So instead of 160 different fiat currencies, now there’s things like Bitcoin, stablecoins, that can pierce across jurisdictions in a way that prior technologies couldn’t.

So for example, if we picture a classic emerging market country, let’s say Argentina, there’s really two ways to bring money in or out of it, right? There’s ports of entry, so gold and cash through an airport, obviously you can. Very limited amounts. And then wire transfers in or out of the country. Which means that if you’re an Argentinian that wants cash dollars, it’s going to be pretty challenging to get your hands on them. It’s, you’re going to go into the gray market to get it. You’re going to pay a big markup for it. And then you’re not going to want to trust a bank to hold it for you. So you’re going to be holding cash under your mattress here in the 21st century.

And that’s, basically that’s what a lot of people do there. They seek out alternatives. What stablecoins do, let’s start with stablecoins, is that you can have, they’re basically offshore bank accounts for the middle class, right? So instead of just the rich people in these countries having offshore accounts, things like stablecoins say, okay, here’s this issuer. They hurt, they hold collateral, they hold T-bills, whatever they hold. They’re based in, you can have a gold backed stablecoin in Switzerland, which exists. You can have a dollar based stablecoin. There’s a bunch of them. They exist. You can put, you can even have ones that pay interest, like a T-bill token.

These can exist in various kind of safer hubs, like jurisdictions. And they can be accessible, peer to people in these emerging markets. So now there’s more choice for people that are, that achieve a certain level of tech savviness, internet connected cultures. So countries like Argentina have no problem increasingly accessing these things because it’s a very sophisticated culture, even though they have massive inflation problems.

And this applies to a lot of different emerging markets. And so they can access foreign assets in a way that, you can send someone money over an email. If there’s a video call like this, someone can hold up a QR code and the other person can send money to them. And it goes around their local banking system.

So those, that prior financial firewall is now more porous. And then of course there’s things like Bitcoin that are completely decentralized, or about as decentralized as you can make something. And so it doesn’t even need a specific jurisdictional hub. It’s just a form that exists everywhere.

And it’s now something that again, you can, I can hire a Nigerian graphic designer and pay her over a video call or over an email or a DM or just any, as long as we have internet connection, we can pay each other in a way that I can go around the Nigerian banking system, right? That obviously brings up challenges from, for some power structures, government of Nigeria on one hand, they should like it because it’s a way for money to go into the country. It allows their people to access global markets. On the other hand, it takes away some of their power over there.

[00:17:09]Mike Philbrick: No one likes to give up their monopoly.

[00:17:10]Lyn Alden: And so, that technology is out of the bag now. And the more liquid, accessible, robust it gets, the more it starts chipping away at all these different financial borders.

[00:17:20]Mike Philbrick: Oh you’re muted, Adam, I think.

[00:17:21]Adam Butler: I really like that explanation and I think it’ll connect with many people who haven’t given this a lot of thought, and who also are adjacent to the whole digital assets phenomenon. I wanted to probe a little bit about, the use case for stablecoins seems airtight.

Thank you. I’m a little bit more fuzzy on what the merits, the relative merits of, for example, of Bitcoin might be, in this context of being able to access more stable stores of value. And as you say, there’s a variety of different stores of value that you can access, via these sort of distributed offshore bank accounts.

So maybe help bridge the gap for me between the use case for stablecoins and the relative merits of a Bitcoin or another coin like that.

[00:18:06]Lyn Alden: Sure. So yeah, go ahead…

[00:18:07]Richard Laterman: If we can just differentiate within the stablecoins, those that are backed by either fiat, or you mentioned a gold-backed digital currency in Switzerland.

I wasn’t even aware of that one versus the algorithmic ones. I believe Luna was the one that precipitated a large collapse, last year. And I think that was part of the domino effect that ended up bringing FTX to its knees. So I wonder if you might differentiate between the two, because I think there, there can be some confusion between them.

[00:18:39]Lyn Alden: Yeah, algorithmic stablecoins try to create artificial dollars. I specifically wrote about and warned about Luna before it blew up. And so that, that’s been a, that’s been a known kind of challenge in the space. A lot of the crypto air is just filled with fraud. So with any powerful technology, especially if a gatekeeper is brought down, there’s going to be a flood of scams and frauds until the industry sorts itself out. So for example, when equities became more accessible to a retail audience, penny stock boiler rooms became like a big thing, right? And so we’re in that era right now of this industry where the gatekeepers are down.

People, there’s like a learning process that people have to sort through scams. So yeah, I specifically refer to assets where the issuer is collateralized, and they hold the asset and they have redeemable tokens that can trade for that asset. And you can only redeem it if you’re a big entity, but if you’re a small entity, you can trade it with other small entities or those big entities.

And they generally have various, they can monitor on chain where it’s being used and they can free certain tokens that are associated with criminal activity and stuff like that. So there’s some degree of regulation on them. That’s really the main difference between stable coins and Bitcoins is that Bitcoins are fully decentralized.

And so unless someone can gain half of the network’s hash rate, there’s no way to censor transactions. And so it’s just a fully decentralized model. In addition, at the end of the day, stablecoins are just, they’re basically just extensions of the current system. They’re IOUs, right? So if you have this token, there’s this, there’s this entity in a jurisdiction that has collateral that they can redeem them for. You have to rely on them being solvent. You have to rely on their auditors being legitimate. You have to rely on their government not wanting to sanction your government because then you can get cut off from your own stablecoins. So stablecoins, if you’re just a person in Iran trying to protect yourself from inflation, you might have more trouble with certain stablecoins because you’re in a sanctioned jurisdiction.

For example, so through no fault of your own, just because of where you’re born, this is an asset that’s hard for you to access than say someone in Argentina, where the United States doesn’t really mind Argentinians using stablecoins, right? So Bitcoin is one where it’s just fully decentralized.

And of course it’s scarce in the sense that even the dollar’s inflationary, just more slowly than some of these developing market currencies. And two, I would point out that as we get more and more debt on the public balance sheet, I eventually expect major currencies, the dollar, the euro, the yen, to face, I would say, directionally similar problems to emerging markets.

I think we’re entering a more, on average, inflationary decade. The more public debt you get, the less powerful inflate interest rates are as a tool of inflation fighting. And we shouldn’t, the past 40 years have been a remarkable period of currency stability among the major powers.

And I don’t think we’re going to repeat that as cleanly for the next 40 years. And so even in these major jurisdictions, Bitcoin is a powerful savings asset. You can,  it’s an emerging monetary network. And so for people that have the kind of capacity to look past the volatility and see how that is developing, I think it’s a very powerful asset.

[00:21:47]Richard Laterman: Let me push back a little bit on this premise of Bitcoin being a potential savings vehicle or a potential store of value. Our friend Bob Elliott, friend of the show, been on the show recently. He tweeted out something that I thought was relevant and I wanted to point it out. He said, Bitcoin reinforcing recent days that is not only driven by rising geopolitical conflict, macrodynamics, or rising banking stresses, huge street moves on idiosyncratic news.

I guess he was referring to the ETF. News that is potentially going to be launched. So he said a lack of clear, fundamental economic return properties undermines its inclusion as a portfolio asset. How would you respond to that? How do you think about the last year and a half with the debacle of FTX and then this crypto winter. Would you just say that’s a normal course for a new technology? Or is there more to it?

[00:22:36]Lyn Alden: Yeah. So what I would respond to his, is that his entire remark is based on price. He never actually talked about the fundamentals of the network, proof of work versus proof of stake or what utilities Bitcoins actually do for people. I generally find a lot of kind of Wall Street analysts when they look at Bitcoin, they’ll, if I say, okay, what are your thoughts on SegWit, Taproot, basically various things that are fundamental to solution with that network, that’s off their radar. They’re just looking at it as like a, basically a line on a price chart.

And so Bitcoin being like a half a trillion dollar asset is still a rather idiosyncratic asset. It’s actually heavily correlated with global liquidity. So if you look at global broad money supply in dollar terms, Bitcoin’s heavily correlated with that. So that’s actually a very clear function that it serves. If you wanted to protect yourself from monetary inflation, which is different than CPI inflation, because CPI comes with a lag and is, by the time CPI inflation emerges, central banks are usually, but basically, Bitcoin is a, has a clear role in a portfolio as, if you have a view on monetary inflation, it’s the closest asset I know that correlates with that in terms of price.

In addition, as someone who focuses a lot of the fundamentals, the fact that you have an asset network that allows for global transfer, you can literally memorize 12 words and you can travel anywhere with an internet connection and be able to re-access your Bitcoin. And unlike a stablecoin, it can’t just be frozen.

And so I basically, I view it as that digital gold narrative has a lot of merit to it. But because it’s less than a 15 year old technology and a lot of technologies can go up in a smooth pace. People rarely get a smartphone and then go back to a flip phone, or they rarely get electricity and go back to not have electricity.

But a financial thing is inherently going to have bubbles with it because if something just starts smoothly adopting, of course people are going to leverage it up, and they’re going to make paper versions of it, and they’re going to commit fraud, and then it’s going to blow up, and then it’s going to retrace.

And then unlike a normal technology, some people will say, you know what, this is a bad technology. I’m selling my Bitcoin, and then they get out. And then, but the technology is actually still there. It’s still powerful. There are still developers building new things on top of it, new wallets, new layers, things like that.

And then it rebuilds for the next cycle. And so unlike a normal technology, a monetary technology has to, especially the unit of account itself, has to go through these cycles. Imagine if you could, if when the internet was being built, if there were somehow like, shares of the internet, and you could own a piece of the internet that would have, add a lot of volatility to it, because as soon as it started rapidly growing, people would leverage it and cause problems. Just like we saw with some of the internet companies that were built on top of it. And so that’s the pattern that I think it’s, that it’s going through.

And so I focus a lot on the fundamentals and I’m also advantaged in the sense that I do some work in Bitcoin venture capital. And so I see the pipeline of development years out, and I see all the people building on top of it. So generally when I see an analyst that talks about price, it doesn’t mention the fundamentals, I’m like, it’s like I respect his analysis elsewhere, but it’s just not, it’s not something I can, I really take into account for the Bitcoin market itself.

[00:25:44]Adam Butler: Can you share some of those venture projects?

[00:25:46]Lyn Alden: So I work with ego death capital. Yeah.

[00:25:50]Mike Philbrick: Is it a name? I like that name.

[00:25:51]Lyn Alden: And of course, there’s regulatory limits on what you can say. Our portfolio is public if you check out the website. But for example some of the companies that we publicly invested in are, for example, Breez, which is building out lightning network infrastructure, to make it easier for, if you’re a, an app that wants to integrate the Bitcoin … network into your app, but you don’t want to reinvent the wheel, you don’t want to like, figure out how to do that from scratch, they have an SDK that lets you just plug right into it pretty easily.

It’s, you just have to customize the final pieces, Fedi, a company that allows communities around the world to build their own automated community bank. And then you can have different kind of modules, so different communities can build their own types of banks. They can customize it for their own needs.

There’s Synota, which is basically trying to make energy payments settle in more real time. And other investments like that, that are basically building on top of the network or using the network to solve real world problems.

Bitcoin

[00:26:46]Mike Philbrick: I love all that. I wonder, guys, can we maybe switch to the world of global macro and long term debt cycle, and…

[00:26:54]Adam Butler: I’ve got a neat segue on that actually, because what’s interesting to me and what’s actually, this is just crystallizing now for me, but we run diversified, effectively globally market neutral quant strategies that are effectively designed to weather crises, or be agnostic to what happens to the general economy. I think we all tend to be a little bit more on the pessimistic side about fiscal, the fiscal situation in many developed economies, the housing markets, especially in certain economies, et cetera. And we’ve taken steps, like all 3 of us, but as a company as well to position for that.

But we’ve done it in this diversified way, and I’m just realizing that maybe my resistance to embracing Bitcoin for the same reasons is that, and I could be wrong here, but I do understand that there’s a huge concentration of existing wealth within the Bitcoin space, right?

There’s whatever, some fraction, 10 percent or 20 percent or whatever, own some incredible proportion of all of the bitcoins. That’s one thing. The hard money aspect is another thing that we can get into and probably segues well into the next segment. That’s one thing that really troubles me.

Does that trouble you at all that, if Bitcoin does take off, there’s going to be a small cadre of multi-hundred billionaires who are going to be insanely wealthy? And we’re going to have a set of oligarchs like we had in Russia who are broadly distributed around the world and can have their way in whatever way they want.

[00:28:35]Lyn Alden: Yeah. So generally I look at it in a startup except that this one is not a security. So it did not raise capital. Basically it was a software that was just put out there. And people found it at whatever pace that they found it. And you look at, Bitcoin is, every bull and bear cycle, it gets more wildly distributed. Because if you bought Bitcoin and it was worth like 10 cents and it goes up to 80, and you now have enough money to buy a house or a mansion, you say okay, I’m going to, I’m going to get out of it now, or I’m going to get out half of it, or I’m going to, or just, I have a life event.

I want to buy a house now, and this is my wealth, so I’m going to do that. So you generally see distributive action during bull markets, and sometimes you see re-accumulation during bear markets. And if we look at the ownership structure of a startup company, it usually starts out quite concentrated.

And then over time, as it gets to higher rounds of capital raising, and then as it goes public, and then as the initial founder steps aside, and over the course of years and decades, it eventually becomes a rather highly distributed asset. And I think Bitcoin’s going through the same trajectory.

There are like companies like Worldcoin that try to like circumvent that, and they say, okay, we’re going to scan everybody’s eyeballs and give them like an equal amount. But then you just, you don’t really have a network effect and you’re basically a security, or security-like. And then they give a percentage to insiders, for example, whereas Bitcoin is interesting because one, the founder of it never spent his own coins.

They’ve just been locked away for 15 years and all the volatility cycles, it’s assumed that they’ve been, private keys are burned or it’s not even clear if he’s still alive anymore. In addition, a lot of the biggest addresses are custodian addresses. For example, something like Coinbase, has a lot of Bitcoin, but they hold that for millions of customers.

And it’s a little bit more distributed than just some of the simple analysis that media will do of oh, this tiny percentage of addresses control this many coins. But I do think that it does, if Bitcoin becomes very large, that does result in a wealth shift. It’s, it probably, there’s good things that come from that.

There’s bad things that can come from that. I think one thing I’d point out is that so far, this current generational cycle has held on to power and wealth for longer than prior ones, probably partially just because lifetimes are longer. So in this, in similar age brackets from the prior generation, more wealth had transferred intergenerationally.

Whereas here, a lot of the wealth is still very firmly in older investors’ hands. And Bitcoin is actually one of the distribution methods. If Bitcoin is successful, it’s, the average demographic for owning it is younger. It’s a different distribution, but I think it’s following the path of a startup.

[00:31:11]Richard Laterman: Yeah. The generational tussle is a great point there because the boomer generation has held onto the levers of power. No offense to any boomers here or watching, but I wonder if you could, I wanted to circle back actually. You mentioned proof of work, proof of stake .Maybe you could give us a little bit of an update.

That’s something that I haven’t kept up with so much. I know that Ethereum was going through a little bit of a move to proof of stake. Is that something that you think adds to the network, or adds value to that network. And is that something that you see perhaps happening to Bitcoin as well, because some of the criticism around it has been the expenditure of energy, towards mining.

[00:31:52]Lyn Alden: Yeah, so I find the proof of work model to be important if security is what you’re trying to maximize for. So the challenge with proof of stake is that it becomes a circular reference. So the coin holders determine the state of the ledger. And the state of the ledger is determined by who holds the coins. And so it’s basically, there’s low fault tolerance, because if a proof of stake network goes offline, which a number of them did, Solana did, Binance Chain did, they have to manually restart it. And whereas if proof of work is basically self-correcting, basically that the longest chain speaks for itself, the energy input acts as an external source that makes it so it’s not like circular logic.

That doesn’t mean necessarily that there’s not a use for proof of stake. If you’re, if your role is trying to have this like efficient kind of network for tokenizing assets or something, and you don’t care about the fact that it’s a little bit more centralized, it can, it has some advantages to it, like it increases the cost of brute force attacking it if you’re a smaller network, which is important.

But for something like money itself, I think proof of work is just a far more robust system. And I generally view the kind of, the energy narrative to be overblown because Bitcoin uses a small percentage of global energy. And this is another area that I focus on. Like the amount of innovation coming out of that is remarkable because mostly Bitcoin uses energy at, it’s like the most flexible energy buyer.

And people underestimate what percentage of our electricity production is just literally curtailed. We have a hydro dam that 40 percent of it’s unused, or we have solar production that puts, outputs in the day. And then it’s like, a lot of it’s free because they literally can’t find buyers ,and then it goes off and then there’s like a shortage of it.

And what I don’t want is… yeah. natural gas flaring. Yeah. Natural gas flaring. You literally find gas with your oil. It’s not enough to build a pipeline or, so you just burn it away. And so Bitcoin miners, especially as the market becomes more efficient over time, like as long as they’re in an environment where it’s allowed for them to operate, they go and basically fill in all these little nooks and crannies for energy that’s being misused. Even a new one, which is landfills emit a lot of methane and methane is a more potent greenhouse gas than carbon dioxide, and there’s for most of these, especially smaller or medium sized landfills, there’s not a really good capture. So it’s, what are you going to do with the energy on site?

And so there’s actually companies like Vespene Energy that now go out there and are increasingly using landfill gas. And that’s actually over the long term kind of net carbon negative, like greenhouse negative, because they’re converting methane to carbon dioxide and doing something, I would argue, useful with it, which is actually less greenhouse gassing.

Same thing’s true for basically flaring. You convert more of it to carbon dioxide than you would just from burning it. In addition, Bitcoin, almost all the energy goes out as heat. And so I think at the next cycles, we’re going to see more and more things using that heat for productive purposes.

If you use the heat, you’re double counting your energy. So if you happen to like perform calculations while you heat, that energy is actually not really wasted. And so I think that’s it’s more efficient than people think. And it actually uses the higher percentages of renewables than any other industry that I’m aware of.

[00:35:07]Adam Butler: That makes sense. Before we leave this, and I think this again might be a good segue, because I, and I recently attended a presentation by a representative, what are you observing in that space and how do you expect central banks to compete with some of the decentralized offerings or create their own stablecoins, for example. How do you see that whole ecosystem evolving?

[00:35:28]Lyn Alden: Nigeria has been an interesting case study because, so they cut off crypto exchanges from their banking system. It’s still legal to own them, but they just basically said, okay, banks can’t send money to them. So they purposely added frictions. You see a lot of this in emerging markets. They introduced CBDC, and yet Nigeria has much higher adoption of cryptocurrency than it does of its own CBDC among the public.

It shows the challenge of trying to launch something that people don’t particularly want and that it exists alongside these other things, and especially if the ledger itself is unreliable. If you’re living in Nigeria and the currency is losing its value pretty quickly, people are clamoring for stablecoins or Bitcoin and things like that.

And so it’s, especially the weaker jurisdictions, it’s very hard for them to do it. And then, of course, in other jurisdictions, it brings up privacy concerns. Should the government have surveillance of every transaction, for example. There’s pushback on that. It’s a very politically polarizing issue.

And so I do think, that is the fork in the road going forward, is that a number of countries are probably increasingly going to try to launch central bank digital currencies. But then they’re increasingly competing with pushback against them and they’re competing, especially if they’re one of the weaker jurisdictions with people that clamor for other assets instead.

And, it’s, they’re basically competing with the market at that point. And even when they use the government lever to do things like shut off crypto from banking, if it’s a big enough divide in quality, people still find a way to, they use peer to peer, they get remittances, they, like I said it, it’s, you can send it over email, you can send it over a video call, right?

And so it just gets around a lot of these restrictions. And so it’s actually pretty hard to insert a CBDC that people don’t particularly want. So it’s only if people want it, are they going to be successful.

[00:37:13]Adam Butler: Nigeria strikes me as a bit of an edge case given its history of diluting its currency and decades of massive inflation. What are the potential knockoff effects of the U.S. taking a more hostile stand against decentralized businesses, as they, for example, may try to rule out their own CBDC?

[00:37:33]Lyn Alden: So I think, if you look at Latin America and Africa, to  touch on the earlier point, most of them have literally hyperinflated in our lifetimes, right? So it’s, I’d actually consider when you look at the broad sample, I don’t consider Nigeria an edge case.

They’re not in the stronger camp, but there’s literally a hundred countries out there like Nigeria. And so the, basically the total adjustable market for areas where people are going to clamor for external assets rather than their country’s own CBDC is, we’re talking about billions of people.

So it’s, I consider it, it’s one of those cases. Now, I do think the United States is practically the only jurisdiction that has the firepower to really give Bitcoin a problem. But actually, if anything, we’re seeing it go in the opposite direction. We’re seeing institutions start to embrace it more.

I think we’re seeing a two part divide. I think on one hand, the ETFs and stuff. Basically, we have some degree of rule of law. An interesting precedent was the 1990s. Phil Zimmerman, he invented open source cryptography. PGP, pretty good privacy. And the federal government went after him criminally for exporting arms.

That’s how they said, we don’t like the fact that you can make peer to peer encryption. You’ve exported military grade arms to the world. So he said, okay, I see your point. So he wrote the code in a book and said ,now it’s the First Amendment. It’s just code. It’s just math and words. And also people, like there’s another encryption technique and actually one of the people who was actually the guy that invented proof of work, he went and made T shirts with the code on it and said, hey this, you can’t export this T shirt.

This is military grade arms, right? It’s like a, it’s logic, it’s like an argument to show how, if you’re at the point where certain T shirts are dangerous, maybe the law is actually the problem. And so the point is, Phil Zimmerman won the case. Actually the U.S. just withdrew. They said, okay, checkmate, First Amendment. And they had to change how they do that. And that opened up, the whole reason why we feel comfortable with paying with credit cards online is because of end to end encryption that basically let e-commerce flourish because they didn’t try to overly control it.

And today, there’s similar pushback where, on one hand, the government doesn’t really care if there’s certain big silos of KYC. They care about these privacy techniques. They care about self custodial Bitcoin. And I think we’re seeing a two front thing where it’s increasingly accepted as an asset.

They also are bound by their own rule of law and a similar thing against Phil Zimmerman, where they try to block Spot ETFs and the SEC gets, they were called arbitrary and capricious by one of the appeals courts. Basically their argument just lacked merit. And so because we have an independent judiciary, at least for the most part it’s hard to, it’s hard to do whatever unless you have just a sweeping majority that, kind of like in the FDR environment of the past.

And so I think that there’s multiple, it’s like a bunch of paper cuts can make it really hard for them. There’s all these friction points that they want to slow this down. But I think the part that they’re probably going to be pretty aggressive on is privacy techniques on Bitcoin, making harder or more regulatory onerous to self custody Bitcoin.

And I think that’ll, they can slow things down. But I think also a lot of it, the companies and stuff will just migrate to other countries. And we’ve already seen that to some degree. There are other countries that say okay, we’re going to be a hub for it then. So if you’re Singapore or Dubai or El Salvador, you say come here, or Switzerland even, and they say, build here instead. And so we just see a dispersion.

[00:40:55]Adam Butler: Okay. Let’s set aside the potential use case for Bitcoin as a nihilistic speculation and let’s assume that there’s, that a core motivation of even people in the developed world to be interested in Bitcoin or other alternative kinds of hard currencies, or hedges against currency devaluation. Why are people in the developed world suddenly becoming more concerned about that.

[00:41:21]Lyn Alden: So I think, and Ray Dalio has talked a lot about this, the long term debt cycle. When a lot of this discussion, I think rightfully, was on emerging markets going through their crises, but what a lot of people forget is that the developed markets, the world, have gone through major currency crises in the past, especially when debts get well over a hundred percent debt-to-GDP.

And then you run into either war, or a big commodity bull market when you’re already that levered. That’s where major currency devaluations occur. And then when countries run into that problem, they often try to basically do financial repression and capital controls to recapitalize themselves with varying degrees of success.

And so things like, obviously, depending on how you see things, some people use gold to protect themselves. Some people use real estate with a fixed rate mortgage. Some people use equities. Some people use Bitcoin. Basically, various ways to protect yourself from a longer period of inflation that burns away some of that debt.

And in the developed world, we can be numb to some of these problems because we… we don’t, like people in emerging markets encounter them like either all the time, or at least like once a generation, whereas we encountered these problems historically, like every three generations or so. And so it’s like recency bias, off of our radar.

But I think going forward, we are getting increasingly problematic fiscal and sovereign debt situations. We also see increasing geopolitical escalation, which can be very expensive, depending on how certain things proliferate or break out. And having scarce assets is attractive. And with Bitcoin, like I said, you can memorize 12 words, and you can access your Bitcoin in any internet connected country in the world, basically.

Or write them down or, bring them on a little hardware wallet or split the keys up and have them on different locations. And I don’t really consider it nihilistic speculation. I think that I just view it as the next era of monetary technology, how things are pointing Bitcoin, stablecoins, basically just various ways to transmit value in either ways that are fully decentralized, or stablecoin’s case where the end points are bare assets. It’s tied to a centralized hub, and that these are just basically more optionality points for people to have control over their own money.

[00:43:31]Adam Butler: So who was it, I forget that said that these kinds of monetary crises happen slowly, and then all at once. So I think it’d be useful for you to take us down one or two, perhaps more likely trajectories that describe how this kind of, debt and then eventually monetary crisis may play out in the developed world.

[00:43:54]Mike Philbrick: Yeah. So before you do that, Lynn, I just want to remind everybody, we’ve got Lyn Alden, @LynAlden, contact at for Twitter, Richard Laterman’s here, @RLatterman on Twitter, @Gestalt U, Adam Butler, talking now into the global macro stage after talking lots and lots about Broken Money and Lyn’s new book. So if you’re just joining the show, that’s who’s on. And just about to dig into a couple of scenarios on a go forward basis. So Lyn back to you and Subscribe.

[00:44:21]Lyn Alden: Yeah. So generally what we see in public finances or monetary systems is that they’re metastable in the sense that they have a partial stability, but there’s usually an error function.

Something is slowly building up over time. And so over the past 40 years, we’ve had structurally falling interest rates, structurally rising public debts. But that’s been very manageable because even though your debt as a percentage of GDP is increasing, your interest expense is very well contained because of those falling interest rates.

And a big factor that allowed those interest rates to fall so much was globalization. 80s and accelerating the next two decades. Soviet Union fell in the early 90s. And so basically Western capital came together with Eastern labor and Eastern resources. And it was this big period of disinflationary globalization.

And the problem now is that geopolitically, that’s obviously, that’s been thrown into question a lot more recently. And then too, just mathematically we’ve used up a lot of that disinflationary resource. So we’ve gone all the way to zero interest rates, mildly negative in some countries.

We’ve bounced off of zero. We’ve done a lot of fiscal. And so now we no longer have that falling interest rate offset to our ever rising public debt as a percentage of GDP and our fiscal deficits. And so now, a lot of the concerns that people had 30 years ago and they couldn’t necessarily foresee the gigantic disinflationary period we’d have in front of us, but now it’s like the part two of that they’re saying, okay, now we have all these debts and deficits without the industry at offset.

And that’s an issue. Another way to describe it. And Ray Dalio has done work on this and I’ve really spent like the past four years studying how these things tend to recur. And generally, when you have falling interest rates and ever rising debt bubbles, usually you get a two stage crisis.

So the first stage is a private debt bubble popping, right? So 1929 and 2008 were examples of those. And those tend to be disinflationary or deflationary, depending on how they’re handled, which is that private sector leverage starts to collapse. And then to varying degrees, you get a bank recapitalization.

You get leverage shifted from the private sector up to the public sector. And the second stage of the crisis is what happens when the public debt itself becomes challenged. Because unlike the private sector, they’re not going to default and instead they tend to print the difference. And they run into a more inflationary type of crisis.

That’s usually the kind of the recapitalization that happens on the sovereign debt level. And so much like the, I would argue that, that 2008 was very similar to 1929. 2010s were very similar to 1930s, at least in terms of macro. There are obviously a lot of, differences. And the 2020s are shaping up a lot like the 1940s, which is when you have very large fiscal deposits, more inflation on average, more geopolitical conflict and then risks of financial repression and other try to, trying to find ways to basically recapitalize the sovereign balance sheet.

And that could be, in the past they would do it with like gold revaluations and things like that. And now a lot of it’s just basically done with QE and money printing and just this constant kind of pushing away of the problem. And the issue is that if, at a certain level, if you get very high public debt loads, interest rates become less of an offset for inflation.

Because if you go back to the 70s, public debt was 30 percent of GDP and most of the money creation was from the banking sector. So if you raise interest rates a lot, you push down loan creation, which slows down money supply growth. And although you do increase public deficits, it’s a much smaller amount than the amount of loan creation you’re pushing down.

But if you go up to 100 percent of debt-to-GDP, or if you’re in Japan’s case of 250 percent debt to GDP, if you increase interest rates, although you do push down private sector loan creation, you blow out the deficit as much or more as the bank lending that you’re slowing down. And so the further along that path you get, the less effective interest rates are as a tool.

And so the kind of, the potential snare is that if you run into a commodity bull market, like a, just a period of you did not do sufficient CapEx, now we need another CapEx cycle. So these tend to be roughly 15 year cycles. Or you encounter various wars or other kind of social things that can destabilize things.

And you’re at that very high debt load. Then you start to have, basically developing markets have emerging market-like characteristics where you get inflation that’s just persistent. It’s hard to control. And I think that’s the environment that the 2020s and the 2030s are shaping towards in a lot of these countries.

And people will hear that and say, that’s do me. But it’s, I just got back from a country that has 37 percent inflation and we, people go to restaurants, they’re going to resorts, they’re driving to work, they’re, the world has these kinds of cycles that can sound remarkable. And sometimes, but life goes on. And I basically think that the developed world currencies are going to have, maybe not to the same level, but directionally, functionally, similar problems that some of these emerging markets face.

[00:49:29]Richard Laterman: It seems like what a lot of people are concerned as this topic of fiscal reckoning comes into the forefront for a country like the U.S. is that the asset bubble that has propelled so much of the wealth effect and has driven so much of the economy. We just saw GDP figures beating already high expectations, largely driven by consumer spending. And so if we were to see this fiscal reckoning, which seems like at least the market to some extent is starting to price that in or has been, and we see that quite a bit at the long end of the curve, then we would have a deflation, or popping of that asset bubble.

So if that were to happen, wouldn’t that, to some degree, bring on what Russell Napier has talked about quite a bit, and you just mentioned, which is this idea of financial repression. Wouldn’t that also entail, to some degree, a repression on digital assets that were not sanctioned by the Fed? So anything outside of a CBDC, but Bitcoin and some of the other ones. Wouldn’t that be a driving force to try and contain their adoption? Because they would be the natural hedge against monetary debasement in that case.

[00:50:38]Lyn Alden: So I think it’s a risk, but I think it’s important to keep in mind that especially in democracies and republics, there’s, the government’s not a monolith, right?

And for example, until very recently, the Acting Speaker of the House, he’s hosting the Bitcoin White Paper on Congress’s website. And of course they just elected a new one, so that, that’s, that era’s done. But yeah, for like weeks, the Acting Speaker of the House was doing that.

There’s a number of congressmen that are pro Bitcoin. There are presidential candidates that are. There are senators that like the asset. We have a very polarized political environment. We have independent judiciary, at least for the most part. One of the more independent ones like we said, the SEC, can lose against the private sector in the court of law.

And it takes, when you go back to say the FDR time, the last time that the world went through this, FDR had, 70 percent of Congress was in his party. They had a supermajority. They threatened to pack the court, for example. They had, basically all the levers of power were very centralized.

And that was one of the most centralized that the United States was ever was ,politically. So yeah, if you get a scenario like that, or close to it, you could have pretty substantial problems. And then even if you don’t get that, there’s still parts of the government, like FinCEN, for example, that can increasingly try to put pressure on it.

But basically, the defense there is that because of political polarization, because of independent judiciary there’s a lot of frictions actually, that prevent them from just saying, hey, we’re going to ban you memorizing 12 words and you have to use our CBDC instead. You have to get through like the Texas lawmakers and you have to get through the, basically it’s a messy situation to do that.

Maybe in China they can do that. One thing I would, you know, with Bitcoin, if China has trouble fully banning something, it might be a signal that it’s strong. And so it’s funny, China banned Bitcoin mining and they did it multiple times, and never really stuck.

They finally went harder at it in 2021. So half the network went offline because they were the biggest mining jurisdiction. And if you go to Amazon or Microsoft and you told them, okay, you have to move all your servers into half of your server infrastructure internationally next week, you can imagine the downtime they would have for months or up to a year or more, as they try to get their services back online.

The Bitcoin network just maintained 100 percent uptime, slowed down for a week or two until the automatic difficulty adjustment kicked in. Then their miners, just like a swarm, just reassembled elsewhere. Some of it went to Kazakhstan and Russia, a lot of it went to the United States and Canada.

It just dispersed. And then ironically, something like 20 percent of the network re-emerged in China. They’re still like the second biggest mining jurisdiction because it’s actually pretty hard to stamp it out. And let alone in a place like the United States that actually has these separate kind of sources of power and more pushback against kind of draconian laws.

I think it’s, it just comes down to this type of era, Fourth Turning era, geopolitical conflicts, sovereign debt crises. These are, they’re not easy to navigate and the political polarization or extreme outcomes are always risks on the table.

[00:53:45]Adam Butler: So, for somebody who wants to be a little bit more diversified in their approach to all of the various ways that this might play out, other than Bitcoin, what are some other approaches that people can take to manage these kinds of risks?

[00:54:00]Lyn Alden: So I’ve been a bond bearer for a few years, but after this big change in bonds, this big crash in bonds and the pretty high real yields that are available, I find TIPS to be pretty interesting at these levels. The way that I generally assume, like my base case expectation until I see things materializing otherwise is that, we’ve had 40 years of declining interest rates, higher equity valuations going forward.

If industries are choppy, sideways going forward, I think the equity market could be also choppy, sideways. Probably you’re starting from still pretty high valuations, potentially higher input costs from wages, or if we get another kind of commodity cycle. Real estate, I think is probably going to be range bound quite a bit.

And so I think a lot of these asset classes are going to probably not do great in real terms over, say, a 5, 10 year period. That’s not unusual in financial market history, especially with looking globally, but also in the United States. And if that’s the case, I think, there are other assets like TIPS that are I think, pretty interesting on a risk adjusted basis.

I think T-bills are interesting. I think gold is interesting. I think if it manages to break out, it can have a pretty big run for price discovery. If someone’s been fortunate enough to have a real estate with a fixed rate mortgage attached, I think you try to hold on to that if you can.

And I think there are certain emerging markets that are interesting, they’re cheap. And they add more risk in some ways, but they also diversify total risk. So I think that there are select emerging markets that are interesting. And that you just want to have some of your diversification because it’s, I think it’s going to be a bumpy ride. But a number of assets do look attractive.

[00:55:35]Mike Philbrick: You mentioned energy and the energy complex and the potential for some consternation in that area. Is that an area that you would also think or look to, given that at the moment, I think energy stocks are maybe 4 percent of the S&P. That feels low on a market cap weighted basis.

[00:55:50]Lyn Alden: But yeah, I’m structurally bullish on energy producers and the underlying commodities. I don’t really have a six month view because that, that’s going to depend on recession or lack thereof, what happens in the Middle East over the next several months potential for supply disruptions in some cases.

I wouldn’t try to do that, but I do think that the CapEx cycle, I think we need another CapEx cycle in energy. So I think basically it’s a tight supply side. Producers are profitable at current levels, up or down 15. They’re making good money. They, a lot of them have good balance sheets.

They’re paying good dividends. They’re buying back shares. They’re not being overly aggressive at just putting that money back into the ground to get more and more out of it. And so I think that that is very attractive. And I also think that it works well with the rest of our portfolio because in a structurally disinflationary environment, stocks and bonds are good at offsetting each other.

They’re inversely correlated. And if we do enter a more on average inflationary environment, stocks and bonds, as we’ve seen recently can be more correlated. And energy producers actually end up being one of the less correlated assets or inversely correlated, because in an environment where energy stays pretty cheap, stocks prefer disinflation order that, that’s what allows them to have kind of higher average equity valuations.

Less costs on their cost side. Whereas if you do get much higher energy prices, that could be very disruptive for some of the equity producers and of course, for bonds and things like that, but it’d be good if you’re owning the energy producers or the underlying commodity. So I do think that in this type of decade a commodity segment, particularly you know, diversifier for your stocks, bonds, TIPS, the rest of your portfolio.

[00:57:32]Mike Philbrick: Yes, I want to highlight that just it again, it’s 4 percent of the S&P. That just seems too low given all of the things you’ve mentioned and the geopolitical uncertainties that are around, notwithstanding the six month forecast.

[00:57:45]Lyn Alden: I would expect to see that back up. Yeah, I’d expect to see that it back up the double digits by the end of the decade. If it’s not above 10 percent at some point. I’d be somewhat surprised.

[00:57:54]Mike Philbrick: It might be some headline baiting, but Navellier said he thinks it’ll be at 25%, I think it was by 2025, which is a long way. But anyway, that’s a very big…

[00:58:04]Lyn Alden: That’s either a pretty big crash or pretty big energy…So that’s some rotation. Yeah. As I said,

[00:58:10]Adam Butler: Yeah, as I said, that’s…

[00:58:10]Mike Philbrick: It may have been a little bit of, some headline grabbing, but anyway.

[00:58:13]Lyn Alden: I can imagine more scenarios that lead to that, but outside of major war I would expect it to take longer. I’m not sure. I don’t know if 25 percent eventually would not be shocking to me. It’d be on the more aggressive side of my assumption. But I feel comfortable saying I, I’d be surprised if it doesn’t eventually reach double digits in many years ahead spaces. It’s an area that I certainly want to be overexposed to.

[00:58:37]Richard Laterman: I want to touch on gold. You mentioned gold earlier. That one has confounded a lot of people. And if I think, if you had told someone a couple of years ago that all these events would have taken place on a geopolitical level and that we would have rampant inflation, obviously the monetary tightening cycle and the rising of real interest rates hurts the demand for gold, but it still seems like gold might have been at a higher level at this point. Do you have an opinion there? Why it has not popped? Why it has not acted as the ballast that a lot of people expected it might?

[00:59:13]Lyn Alden: Yeah, it’s a good question. And I would have expected to be a little bit higher too, based on all that’s happened. On one hand, if you look at it compared to real rates, it’s held up a lot better than you’d expect.

And so it’s been in this middle ground where it could have been worse. But I think a lot of people rightly expected it to be higher. I think there’s a couple reasons for that. One is the market is now split between things like gold and Bitcoin. So Bitcoin has been taking some of the market share because instead of just one option, or instead of just gold and silver, now it’s like gold, silver, Bitcoin. And so some marginal capital is now fractured into more assets that kind of fill a similar role. That’s one.

Number two is that the Fed tightening cycle has been immense. They, it’s the first time in decades that they’ve raised higher than the prior cycle. The rate of change of their tightening has been huge.

It’s the first time in decades that you’ve had negative year over year broad money supply growth. And so all of that is putting downward pressure on the dollar. If you look at, on gold, if you look at gold priced in yen or euro or most emerging market currencies, it’s broken out to new highs and has….

It’s a dollar story, is what you’re saying. It’s mostly a dollar story. And that’s also relevant because like I said, I’ve, I know literally physicians in Egypt, so well-off people that have cash under their mattress, American Benjamins under their mattress for lack of a better savings option.

And there’s a certain monetary premium that’s put into the dollar. And if we go through a dollar weakening cycle, I think gold can catch a major bit, but basically as long as the dollar remains as, as long as the Fed’s able to remain tight in the face of these fiscal deficits, which I think has a clock to it.

Like you can only maintain this monetarily tight while you have that level of fiscal looseness. Eventually one of them’s got to move and it’s probably not going to be the Treasury, but we’ll see. And so when that comes, if you have a cutting cycle or even just you’re no longer hiking any more and those deficits are still happening, gold usually does pretty well in that type of less restrictive environment. So I do think it’s a matter of time until gold eventually breaks out in a way that gold’s already broken out against most other currencies. So I think, yeah, I think you phrased it well. It’s mostly a dollar story.

[01:01:29]Richard Laterman: So, let’s pull on that thread. Why has the dollar been this strong? It’s, it makes sense in some ways when you see what’s happened to Treasury yields and they’re more attractive on a relative basis. There’s also the fact that the dollar and Treasuries have been weaponized, since the breakout of the conflict in the Ukraine. What gives what do you attribute to this this strength in the dollar?

[01:01:52]Lyn Alden: So part of it is that it’s the global unit of account especially for debt. And so there’s over $13 trillion of dollars in debt overseas. And that’s mostly not even owed to the U.S. Brazil will owe dollars to China, or Argentina will owe dollars to Germany, right? It’s just, it’s the way that global financing works. Most of it’s owed from one country to another country and neither of those countries are America.

But all of that represents inflexible demand for dollars. It’s contractual demand because you have to eventually get dollars to service your debts or if you ever want to repay part of your debt. And so there’s like a kind of a, an extra bid for it. And then as just the most saleable currency among others like I said, there’s people in countries around the world that just hold cash dollars, and give that, it’s like a bunch of little micro bids for it to spread around the world, holding that in place of something else that they could be holding.

And in addition, just, we’ve had very strong fiscal looseness. And this goes back to like market wizards like Stanley Druckenmiller. If you have fiscal looseness, but monetary tightness, that’s usually pretty strong for a currency for as long as they can maintain that blend.

Now that’s not a, it’s not a mix you can usually maintain indefinitely. Because right now as tight as we are, the foreign sector is not really buying Treasuries. The Fed’s not buying Treasuries. Banks are not buying Treasuries. So it’s mostly domestic non-bank entities, have to absorb all this Treasury issuance, which is, it’s limited.

But as long as they can maintain that, that’s pretty dollar positive, especially when you add on all that foreign demand for dollars. That is again, it’s inflexible demand to service existing debts. And so I think that basically the dollar can remain strong until it becomes clear that the Fed is either no longer able to tighten and that they basically get run over by fiscal dominance.

I think that’s it. Basically until something like that happens, we’re stuck in this kind of more range-bound or kind of dollar-tight scenario. But if you do hit that scenario you, then you probably get a big bounce in emerging markets, gold, Bitcoin and various types of assets like that.

[01:03:55]Richard Laterman: Do you think part of it has to do with the Treasury having elected to issue more Bills than duration in their last several issuances and so it has deprived the global financial system from pristine collateral. And so, if you’re just printing bills, there remains to some degree a bid. It’s also partly one of the reasons why we haven’t seen longer-term rates rise as much as maybe they would otherwise have, but perhaps because they’ve issued only on the shorter end of the curve, that has retained some of the demand for US dollars. Does that make sense?

[01:04:35]Lyn Alden: I actually think that alleviates some of the demand because if, so that allowed them to tap into the reverse repo liquidity that existed and bring some of that back into the financial system. If they had not, if they had issued more coupons, I think that would actually, would have tightened rates and the dollar more.

And right now, I don’t think the world is lacking pristine collateral. The way I would describe it is that when the dollar’s strong or strengthening, usually countries are on defense mode, right? They’re not printing money to accumulate reserves. They’re either selling assets to backstop their own currency or they’re at least not really buying new ones. They might just be holding steady. And so usually you see an inverse relationship between dollar strength and foreign Treasury buying or selling. And basically, late last year as the Gilt market broke and as the U.S. Treasury market was getting quite wobbly, it was looking pretty weak, but then the Treasury started to do some of these unusual actions.

First, it started to rapidly draw down their Treasury General Account. Partially it was, alleviate some of that. And then of course, the debt ceiling extended that. And then when they got past the debt ceiling, the fact that they filled it up almost exclusively with T-bills, allow them to avoid a liquidity problem.

And now that they’ve reintroduced coupons, we’ve seen a surge in yields. And so I think it’s, if anything, that over issuance of T-bills has alleviated the problem and extended the duration that they can continue doing this. And basically, the reverse repo facility can be thought of as a pocket of excess demand for T-bills.

There’s a ton of demand for T-bills out there, which is not always the case. For example, 2019 had the opposite problem with the repo spike, but in this current environment, there’s so much excess demand for T-bills, and so that’s basically what they’ve been issuing. They’re saying, okay if there’s all this reverse repo facility liquidity buildup, we can issue extra T-bills to pull that, some of that back into markets.

[01:06:26] Adam Butler: So what would you say, what might be some of the more confident signals that we’re moving from this kind of unstable equilibrium, this kind of range-bound situation that we’re in now while central banks are able to drain liquidity from the system, Treasuries are able to issue debt and get bids, despite pretty wide deficits. What would signal to you that we’re moving to the next stage where the market is becoming aware of an imminent state of fiscal dominance and some of the other dominoes begin to fall?

[01:07:01]Lyn Alden: So a couple things. One is I would look towards the reverse repo facility. So that’s being drawn down. When that eventually gets close to or at zero, that’s a source of liquidity that has been entering the market, that is no longer there. So that’s when the rubber starts to hit the road in terms of who’s going to buy these deficits. That’s like a kind of a time clock I’m watching.

Another one would be I look at Treasury market liquidity and volatility. So the MOVE Index is what I look at, as well as the quality of Treasury auctions to look for tailing auctions or just overall kind of issues. So Treasury market, even though it’s been selling off lately, liquidity has still been reasonable.

It’s volatility and liquidity are not great compared to their historical average, but they’re not as bad as they were in like autumn 2022 when the Gilt market broke and the Treasury market was looking really wobbly. But if you start to have those conditions again, that would be a very negative sign.

And so I think those are the markets to watch. I think as long as you’re still liquidating the Treasury market and we can have, for example, some capital can rotate out of stocks and give Treasuries more of a bid, there’s still that reverse repo facility that is being drained by whatever percentage, continues to be T-bill issuance.

Those give some breathing room. But I think if we get to a point where they’re no longer there and it, rubber hits the road and that the Fed has to change their balance sheet tactic while inflation is still above target, I think that’s when we enter the next regime that we’ve been in, so we’ve been in, from 2020, 2021. It was a very accelerating regime. 2022, 2023, we’ve been in more of a downward or range-bound regime. And I think that’s probably set to continue for a period of time until some of these things get messier.

[01:08:40]Adam Butler: Yeah. Would you say gold also, a breakout of gold in dollar terms probably would be another canary in the coal mine?

[01:08:46]Lyn Alden: I agree. Yeah, I think that’s it’s probably correlated with some of these. I think it could probably, it potentially could come first, in very kind of rate-of-change method. I mean that, I don’t think you need to see some of this other stuff happen in order for gold to start slowly breaking out. But yeah, I think that’s another great variable to watch.

[01:09:02]Richard Laterman: How about the BOJ?

[01:09:03]Mike Philbrick: One last question that we’ve been on for an hour and 20. Lynn, you’ve been very kind with your time. So Richard, last question.

[01:09:09]Richard Laterman: Yeah, I know. I was just going to ask Lyn about the BOJ. They’re starting to hint at a possible normalization, at possibly removing yield curve control. Would that be a potential other catalyst for this next move?

[01:09:23]Lyn Alden: So I think so. That can repatriate some capital. The challenge is that, so we talked before about how the more public debt you get, the less useful interest rates are as a tool for fighting inflation. So ironically, if let’s say Japan goes up to 3 percent interest rates, there’s some degree of normalization that could actually be pro-inflationary for Japan, which is counterintuitive when you have 250 percent debt-to-GDP, and you’re paying fiscal dominance. Yeah. You’re, it’s fiscal dominance because they have very little money creation from loans, loan creation. Most of their money is from monetized fiscal deficits. And so if you blow out the deficit with interest expense you actually arguably accelerate money supply growth.

But you also can, help the yen stay up and you can pull some capital back. What makes Japan interesting and in many cases, the opposite of the U.S. is that they had decades of structural trade surpluses. So they build up a very positive net international investment position. And so, they can maintain this unusual policy for quite a long period of time if they choose to because they have so much firepower to keep the yen orderly, even as they do yield curve control. So basically, most central banks, the options would be balance sheet or interest rates.

But Japan, because they have quite a bit of reserves, they have a trillion of Treasuries, basically. They, any time yen shorts get too over their skis, they can just intervene and blow out all the shorts. And it just slows down the rate of yen devaluation, even as they maintain unusual policy, and then their equities do pretty well. Their exports get pretty competitive when they get like an orderly yen devaluation.

So they can, it depends on what they want to do. They actually have a lot of firepower to maintain the status quo for a while. And it comes down to if they choose to, that is no longer in their interest. So I’m not really, so some people are like Japan doomers. I’m not really in that camp.

Obviously they have demographics issues. I wouldn’t be long like their currency. But I think basically it’s just, it’s a, they have a lot of levers to pull to keep extending this to the extent that they want to. And then they also have a lot of social cohesion.

So unlike the United States and Europe that have kind of very high levels of political polarization, and many emerging markets similarly do as well, Japan has not really gone down that route yet, or even showing strong signs of it, relative to others. And so the combination of their positive net international investment position and their social cohesion actually gives them quite a long runway to make the yields what they want them to be, and the yen-to-dollar pair to be the range that they want it to be, or at least the pace of change that they want it to be. So I’ve just watching it out of interest.

[01:11:59]Mike Philbrick: Amazing. Lyn your knowledge is encyclopedic at times. It’s really amazing. Thanks so much for joining us. Richard always a pleasure to have you on Riffs. Adam as well. Go check out Lyn’s bestselling book, Broken Money, and you can find Lyn @LynAlden, contact on Twitter or LynAlden.com. Of course, this is sponsored by InvestReSolve and this is our Riffs.

And we look forward to seeing you next week. And I’ll just remind everyone to hang on so that we can make sure the recordings are uploaded. And cue the music. Thanks, Lyn.

[01:12:52]Richard Laterman: I did want to take a quick second to remind listeners, while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast, and we try to do this by providing cutting edge, globally diversified and systematic investment strategies that are designed to be broadly non correlated to traditional equity and bond portfolios.

So we actually manage private and public funds, as well as bespoke, separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we’ve been talking about put into practice, please do go ahead and check us out at InvestReSolve.com

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