Welcome back everyone. I am Caspian Sea and I'm here as
usual with my partner in crime Bennett Tomlin.
How are you today? I'm doing well.
Cass, how are you? I'm doing good today.
We are joined by a very special guest, Mike Green portfolio,
manager and chief strategist for simplify Asset Management.
Mike how are you? I'm doing well Cass.
So so glad to be here and share Airing in the crime of crypto
its partners in crime. Exactly.
I have two partners today, Bennett, would you mind starting
starting us out today. Sure, I'll start it off mic.
What risks do you think are under appreciated by most
cryptocurrency investors? Well I think the core risk is
one that's actually been exposed by Canada today right?
Which is that governments actually serious governments
decide to get serious about crypto and And you know, this
has been one of the frustrating Dynamics is since I first became
involved in the space or discussing the space.
I've tried to emphasize the people that as far as I can tell
the primary mechanism or primary feature of Bitcoin in
particular, and also, you know, a lot of the other Dynamics
around. It participation exchanges, Etc,
says that whether it is intentional or not, people are
functionally raising their hands and saying we want to engage in
what's perceived as seditious. T.
We want to, you know, do things that our government doesn't
necessarily want us to do if you're in Venezuela or Lebanon.
That's not that big of a deal, right?
I mean, the government's are not capable of tracking you down.
In those Citrus, they certainly can come to your door with
jackbooted thugs and beat down your door and subject you to
torture that you may not experience in the developed
world but the realistic risks of being tracked down as a money
launderer or as a unlicensed distributor and Money Transfer
service are Low in those regimes.
Which is why you see those regimes being the center of
money, laundering activity and Drug distribution and everything
else right in the developed world, what you've largely seen
as governments, ignoring the problems and issues associated
with crypto to this point and that feels like it's changing
very rapidly and and just in all seriousness, that feels like the
biggest underappreciated risk and the second component that
I'd tie to that is the Narrative that exists around that, which
is people in this space saying, well, that's completely
unreasonable, that the government would do that.
If the government does that, then there, you know, truly, you
know, I love Aya thin. That is, you know, evil and they
should be resisted, right? Like, I'm sorry that's just not
true. Most of the regulations that
were put in place across the financial system were put there
to protect participants. They weren't there, to try to,
you know, stamp, you down and pray.
Be you from investing in lucrative investment
opportunities, you know, things like accredited investors who
have to have a certain level of income, or wealth before they're
able to invest in speculative, a certain types of speculative
activities. So that's a private Equity Fund,
or venture capital or various other things that's not being
done because people who have money hate you, right is being
done because there's just so much evidence of Fraud and scams
that there, isn't that a line was drawn, you may disagree.
Free with that line, you can certainly Lobby to have that
changed and I applaud people who are willing to do that, but it's
not that people were that these restrictions were put in place
to keep people down. They were there because the
incidents of fraud in the with the lack of Regulation tends to
be so high, that it was just expedient to say, let's cut it
out, let's not do it right? I mean it's fantastic that you
can use Bitcoin for transferring I had a discussion with somebody
today like I use Bitcoin to transfer ten thousand dollars
you know in. Real estate transaction that
cost me less than 50 Cent's and it took no time whatsoever.
I transferred it from one of my accounts, to another account,
and it was, you know, much, much, much easier than doing a
bank wire transfer. And my reaction to them was
like, okay, well, wait a second one.
Why do you think that number was 10,000 to you transferred money
from one of your accounts to another account?
Like, you know, that's not that impressive.
If you try doing that with a hundred million dollars, under
the framework that you Describe you just broke any number of
laws, right? And the reason why a bank wire
transfer has all the problems of know your customer.
And you know, did you really mean to transfer this hundred
million dollars and we're not entirely sure.
You should be allowed to transfer this hundred million
dollars. What are the uses and purposes
of it? All the things that make people
say, what the hell is it your business, right?
That's there because they don't want arms merchants and drug
dealers. Everybody else doing it, right?
It's just It's you know if your Citibank transferring a hundred
million dollars is not hard for a very simple reason, you do it
all the time. So we had this world where
unfortunately the language of lack of trust of Institutions
has created conditions under, which people are uniquely
exposed to an actual crack down and it feels like that's
starting to happen. Well, your your answer uniquely
segwayed us into one of my questions which was I was Only,
I saw you chatting about it earlier the, the Canadian
trucker Convoy situation and for anyone who isn't paying
attention to it, I, the idea is that there's a lot of truckers
in Canada. Who, who can't they have to get
vaccinated basically is what the government is telling them.
They have to get vaccinated for Corona for Coronavirus and they
don't want to. And so they put up essentially a
protest, they've gone into Ottawa and they've they've
They've gone on to Bridges and stopped traffic between Canada,
and the US. And and they've made a lot of
noise about this. And there's a lot of people, it
seems like there's a lot of people who agree agree with them
and think they shouldn't have to do this.
Regardless. I'm not trying to touch on on
that part of this story. What, what I am trying to talk
about though is that they tried to have a go fund me, that got
shut down, and then they tried a different funding mechanism that
also got shut down. Now, they Sorted to utilizing
funding through Bitcoin. And now what was it?
20 wallets or so got blacklisted by the Canadian government.
And so, I just want to hear your thoughts on that, in general, I
guess what, what it, what it means, why it does drive home
the points that you were mentioning before, but also what
that means for Bitcoin in general.
Well, so I think Bitcoin is actually an ancillary component
of that story, right? And so, I Like I want to
emphasize and I hopefully this has been clear on Twitter.
Like, I actually deeply support the Canadian truck drivers right
to protest. I deeply support.
The message that they're actually protesting the the
introduction of mandated vaccines of dubious utility in
an environment in which we are increasingly post pandemic,
right? This statistic came out today,
it's something like 75% of the United States is already Omicron
resistant and we Do the way these things work and it does
feel that this is excessive we don't have mandatory
vaccinations for the flu. We don't you know etcetera it
feels very arbitrary and that's one of the things that I think
is very clear in people's resistance to this behavior is
not actually that this is a principled stance that says, hey
you need to have your immunization against polio,
right? What they're actually saying is,
this does not seem rational to me that I'm being forced to do
this. One particular thing, I'm fully
supportive of that message and I'm fully supportive of Civil
Disobedience against the behavior of the Canadian
government but we got to be really clear about a couple of
things. One is, it is a commercial
driver's license, right? By definition, you actually have
to follow the rules that the state has set down in order to
be a commercial driver and to have a commercial driver's
license that allows you to do the Whatsoever.
They can change those rules so that you're required to be able
to stand on your head for 30 minutes at a time.
If they wanted to, it's a terrible policy choice.
I would not support it in the least, but they do actually have
that, right? And by virtue of having gotten
licensed in the first place, you've already seated that
authority to them, right? So like, I really think that's a
really critical component that people tend to forget on this.
The second component is if you decided as a commercial,
driver's license vehicle driver to park, your semi in the middle
of a bridge and walk away from it and say, hey I'm here to
protest. You would probably almost
certainly regardless of vaccination or anything else.
Have your CDL suspended or withdrawn, you're not allowed to
commit traffic violations as a commercial driver you know as a
commercial driver like so we're kind of in this silly place
where like They've already seated Authority by getting a
draw. A job that requires a certain
degree of license. Now, you can have a very
disciplined, as a civil disobedience.
That says, we refuse to take the test, we refuse to participate
in these jobs. Those create shortages and
that's going to force reform and I hope that's the direction that
this is heading. But so far, a lot of that has
been lost in the process. The second component around
Bitcoin itself. What is come out far more
clearly is that when the government Sides.
Hey this is actually something serious and then you try to use
the theoretical anonymity of Bitcoin, the speed and ease of
use the chaos that emerged around.
It is not dissimilar to the chaos that emerged in El
Salvador, when they pronounce Bitcoin, the official currency
and the chivo system went down in the ATMs. Couldn't be
accessed. And people basically, you know,
fraudulently withdrew money, stealing IDs and everything
else. Right?
All of this is completely predictable for a system that is
For more enamored of its theoretical potential than in,
developing any practical applications.
And I would just suggest that more than anything else is what
we've seen. Like, we saw printers busted out
where they're trying to hand out you know slips of paper that
have keys so that people can access the Bitcoin that was sent
to the trucker's, right? Like guys, we're 12 years into
this. There is not a usable user
interface for anyone who has not decided to do a deep dive into
the wallet and boy this Is super like your grandmother cannot use
this. That me feel like a feature set
to people who want to be part of a mystical priesthood of Bitcoin
and everything else. But it's not that's not the way
the world works and by the way, you're actually starting to see
like some of the people that you and I find amusing and I put
that in quotes because like Nick Carter Etc.
They're actually suddenly you're seeing elements of am a oculto
where they're saying, you know, geez maybe instead of, you know
an excuse my language jerking off, You know, the president of
El Salvador, we probably should have been thinking about ways to
improve the actual utility of this and we've under done it.
Well guess what you under did it and you compete?
You, you spent your time shouting from the rooftops that
the government couldn't stop you and your inevitable conquest of
the world. Congratulations, your
universally hated in. No one knows what to do with
your product. Sounds like a wonderful platform
to build it from one of the Striking things for me, that I
noticed in response to initially, when the Canadian
government use, Their emergency powers to get the banks to start
cutting off access from any of the trucker's is how many
Bitcoin Max, he's hailed it as like this major bullish event
for Bitcoin where it was going to increase in value is people
recognize the value of its censorship resistance, in
contrast to the banking system. And from what I've heard, many
of the trucker's don't have anything they can really spend
the Bitcoin on and Without access to the banking system and
the Fiat system. They're not able to convert the
Bitcoin into things they can actually spend.
And so because like you're talking about there was not the
work done to develop the ability to spend and use Bitcoin.
And I think this is partially due to like the narrative
around, Bitcoin is digital gold. You've ended up with this asset
that is censorship resistant in the sense that you can send it
to whoever you want. But it fails in the sense that
the receiver often can't actually use it to accomplish
much. And so I think that's a really
excellent point you're drawn there.
Well, I think that's important and I also I do think your
analogy, your identification of digital gold.
Like you know just for the sake of argument, imagine that I had
filled up a briefcase with Canadian maple leaves and you
know walked out into the the protest and started handing them
out, right? Like would people be happy to Of
them. Yeah, hey that's fantastic.
This guy's handing out, you know, Canadian maple leaves an
ounce of gold is worth 2,000 bucks.
Each, you know how lucky am I? Are they going to take the maple
leaf to the local convenience store and get a, you know,
super-sized Slurpee and a slim jim to tide them over as they
wait for the opportunity to use the bathroom?
Like no, they can't do that. It's not useful.
So, you know, I don't think this is actually a necessarily a
Bitcoin versus gold as much as it is a like, Eating is not a
currency. It cannot be used for all the
reasons that you said, but guess what?
Hey, fantastic, those those truckers now, you know,
potentially have Bitcoin and without access to their banking
system. Their wealth will be preserved,
wonderful, great system. Well it's funny.
It's funny that you're even mentioning this because I feel
like the idea of having Bitcoin be a useful currency, they gave
up on that a long time. Ago.
Of course, that's been a reality that any of them perceive or
want or desire like the Maxis. They do, they they pivoted to
digital gold or whatever, but store of value it, they stopped
thinking it should be a way to move money.
And as you're saying now, if you get rid of that part of the
usefulness, just kind of gets destroyed along with it.
Yeah, I mean, I think that's, I think, that's right.
I would take issue with the idea of the ability to move money.
Because I do think that's actually exactly what it's used
for, right? It is, it's a phenomenal tool.
If you happen to reside, outside of a functional government, a
functioning government, and you want to ship 10 million dollars
worth of proceeds, you know, into a banking system where
you've paid off a local bank clerk, that allows your money to
slip in a variety of ways, or you can use a wall, you know,
coin washer and an exchange to launder your Bitcoin into tether
and then subsequently make a withdrawal.
All in the hopes that your that You're not going to get caught
in the process if you're outside the United States or outside
Canada or outside, you know, a lot of functioning regimes.
Yeah, it can actually do that pretty well, I'm not sure why
that matters to you, as the vast majority of US citizens, or
Canadian citizens for that matter.
That brings up another good point though.
Because you and I what we generally would talk about
before when we were talking regularly was a was China and
Bitcoin. And I think That has changed
drastically and it does have to do with something you're talking
about right now which is functional governments can make
decisive, they can take decisive action when they so please.
So, when we were talking, it seemed like China was happy to
have all this hash rate there that hash rate is now gone.
Right? So what is your take on all of
that? Well, as I'm going to actually
push back, I mean, this is, this is one of the wonderful things
that has happened and continues to happen in places.
It's almost like a Joe great only in the land of Bitcoin
could this sort of stuff happen, right?
So this the hash rate that you're referring to is
effectively the processing capability of the network.
You know, we just the other day we saw an unexplainable jump of
give or take 25% of the total network capacity suddenly showed
up. How does that happen?
Is that happening? Because there's a massively
decentralized series of pools that come on.
Is it because China? Anna actually is running
processing capacity. We know that.
That's, you know, again, if I look at the Cambridge official
studies, they say there's zero hash rate in China, we know
that's not true, right? So, this transition that
supposedly occurred from China Banning, it has not actually
fully happened. Russia just came on and said,
hey, we're licensing. We're going to have an official
Bitcoin. Like, do we think this is
because Russia has suddenly decided to embrace freedom and,
and the importance. Of, you know, they're the
ability for individuals to access a global banking system.
Of course not. They're worried that they're
going to be cut off in one form or another if Ukraine situation
accelerates and gets worse and guess what?
They can use the Bitcoin Network in lieu of the Swift system for
whatever purposes they would like to I just keep coming back
to the dynamic of. This is not a system that is
built for banking. The unbagged it is a system that
has unique characteristics. Is that are super useful for
people who want to engage in bad behavior and I can't emphasize
enough. I'm not suggesting that, every
individual, the roughly 100 million people that are actively
involved in crypto. I'm willing to bet that 99
million of them. Plus a sizable fraction of the
remaining million are actually good players and they feed their
families properly. And they're looking for a
solution to various problems that they're dealing with in
their life whether that's access to banking system.
So that's access To appropriately volatile
speculative activities to give them the opportunity to
participate in hope for a better life.
Like those are all important features but that's not the vast
majority of what's actually happening there.
That's not why the network was built.
It's built to serve that 0.2% that are actually engaged in the
vast majority of bad behavior. I'm gonna go on a bit of a
different direction here because I was reading some of your
writings from last year in preparation for this call.
And so I would love it. If you could describe what you
see, as some of the differences between inflation now and the
inflation that occurred during the 1970s.
Yeah. Okay, so this is one of these
really interesting Dynamics, right?
Because and people ask me it's like well what causes inflation?
And the reason why inflation is hard is because there is no
single one cause of inflation and inflation, that occurs in
the aftermath of the loss of capacity in a war.
Like we had in the 1920s in Germany where they lost
significant productive capacity. Had fixed obligations, they
needed to meet outside in terms of reparations and at the same
time somehow or another needed to put enough money into the
hands of people so that they could actually buy food and try
and engage in that sort of stuff.
We hear this over and over again in environments that enter into
hyperinflationary Dynamics. The money printing is actually a
solution. Shinto, nothing.
And, you know to something that just doesn't exist, right?
People don't have the money to buy bread, food, Etc.
And so it needs to be printed, right?
It is a bandage in the hope that things get better.
What happened in the 1970s is something that is very unique,
the 1960s and 1970s is something that was really, really unique
on a global basis, which is the aftermath of World War Two,
which had devastated populations.
And to a certain extent, World War 1 and the Spanish Flu had
created the conditions under which Global population had
slowed significantly. The reproductive Dynamics,
particularly in regions of the world that were caught up in the
global conflict had fallen. And in the aftermath of this, we
saw baby booms around the world, right.
Those baby booms were very unique in their features because
government spent money to lower the cost of people having
families and children subsidized Transportation Systems to the
suburbs and the exurbs that made available significantly more.
And for people to raise their families in a housing market
that was facilitated by Innovations in mortgage Finance.
The introduction of things like Fannie, Mae and Freddie Mac the
facilitated borrowing by the average American who
historically would have had to save 50% down.
Suddenly could get by with 20% down with standardized fix 30
year mortgage, the Dynamics of the GI bill that facilitated,
many of these components of all, right?
So lots of stuff happened to basically create a conditions
under, which people had a lot of kids.
And at the same time, the Innovations in healthcare
Particularly sterilization that happened in the late 19th
century and the introduction of antibiotics, which people tend
to forget, kill, you know, you had a very high probability of
dying of some random disease when you hit your mid-30s
because you contracted tuberculosis or whatever, right?
Antibiotics took all that away. And so we had a baby, boom.
It became the boomer generation on a global basis because we had
more kids and those kids survived.
So, we ended up having this This fantastic shift in population
that happened, not just in the United States but across the
developed world and then we further drove those Dynamics
through the Green Revolution. Then in a malthusian framework
lowered, the cost of feeding a family raised in comes around
the developing world and created conditions under which
populations exploded, right? So, if you just think about that
in your simplest economic textbook, that outward shift in
population that outward shift in economically active, Rules
because civil rights introduce women into the labor force.
The pill suddenly created conditions under which they
could maintain their own households and engage in
activity that they previously hadn't.
If you're a 22 year old woman and you want to have sex and you
don't want your parents to see it because you're still living
at home, you want your own apartment, right?
That had never happened before in history.
So we have this fantastic outward shift in the aggregate
demand curve that it just never happened before in history,
right? And it was that outward shift in
the aggregate demand. Man, curve the power, the rising
prices of the 1960s and 1970s. That's what that inflation was
all about. What we're seeing this time
around is radically different. We effectively put the global
economy to sleep, with the exception of China.
We tried to effectively facilitate all the material
goods and, you know, durable products that people could
possibly want and try to get them through the two narrow
entrance points points of the Port of Los Angeles and the
point or two. Long Beach, right?
And we effectively tried to sustain this for a period of
time and what we're experiencing now is something that you guys
are still young enough that you don't fully appreciate.
But you know, as you get older you go to bed.
You fall asleep, you wake up in the morning and you're well
rested, but then you go to get out of bed and oh my God, Like
You Creek and it hurts, and you've got arthritis.
And if you're smart, you'll stretch and you'll do various
things to get your body moving. What we're going through right
now or the frictional aspects of that getting out of Abed the
stretching Dynamics, the rebuilding of Global Supply
chains and that's showing up a shortages, all over the place.
What's frightening about what's happening right now is that the
response to those shortages, which are a byproduct of a
poorly planned entrance and exit from that overnight nap,
effectively that going to bed for the global economy.
We're beginning to see policymakers decide that they
either have to accommodate it by doing.
Big things like removing the gasoline tax which lowers the
effective price of gasoline allowing demand to be sustained.
At the same time, the supply is still challenged, right?
This the free market solution to that is price of gasoline, goes
really high people cut back on the consumption of gasoline.
And guess what it resolves itself.
But at a higher price at the same time it stimulates Supply,
right? Instead, we're trying to smooth
this path in a variety of policy choices that creates a really
interesting wrinkle where we Just subsidized developed Market
consumption of gasoline and so we can complain about it as
Californians or Ben. Are you there in Southern
California as well? No I'm not an Illinois here in
Illinois. Okay.
Not none of us live in rational States but the the simple
reality is that we're subsidizing developed Market
consumption were all ridiculously rich on a relative
Global basis. Not within the United States
necessarily sound, I'm focused on but relative to elsewhere
around the world. If you tell us that, hey, guess
what, it's no problem. We're going to subsidize your
gasoline capacity that makes less available to the rest of
the world. And so I would just focus people
on as much as it sucks to live in California and deal with five
dollar plus gallon for gasoline. Imagine being in Malawi, right?
Or who's Becca stand, where they tried removing subsidies because
it's going to drain the treasury of Uzbekistan who's Becca Stan.
Generates a significant portion of its foreign currency by
exporting. Fossil fuels and has been forced
to actually Retreat from its ability to earn hard currency in
a global economy. That is largely shut down and
again as we are trying to restart it, they're being forced
to service their domestic environment in a you know
preferred manner. That's what the that's what
subsidies are. We see this in the Middle East
for example if you're in a place like Malawi you're not getting
gas. You're a farmer.
You can't get your crops to Market your a resident of a
major city. In Malawi, that relies on those
crops being brought to Market so that you can feed your family,
you're going to starve. That is what is underway?
We here in the developed world are shielded and protected from.
This is one of the incredible ironies of the nonsense around
the crypto of, you know, banking the unbanked and helping people
around the world. You look at what's happening in
places like Malawi, or you look at what's happening in
Madagascar or you look at what's happening in many of these very
poor regions around the world. We are literally going to see a
replay of the 1870s not from the standpoint of a sustained,
inflation of the developed world, but from the standpoint
of the famines they brought, you know, Sally Struthers to our
common, you know, mind. We're we're like watching people
die in Ethiopia that is underway right now, obviously.
And I think we're probably all on the same page with this.
I don't, I don't suspect. The cryptocurrency is the answer
for this, but it also doesn't sound like you're necessarily
pessimistic about this. You're not one to be And the end
is near Isis, I suppose. But I do want to understand what
you think will be ultra, how this will ultimately play out, I
guess. Well, so, all right, so first, I
don't know that I could get much more alarmist and saying people
are going to die, right? So like I just want to be clear.
The fact that I'm not saying Caspian saying Bennett Tomlin
are going to die. May feel like I'm D escalating
the situation, but like I really want to emphasize that we are
watching a human catastrophe unfold Beyond And the nonsense
of the pandemic and inevitably, it is the least privileged
around the world that are going to suffer through this.
The least privileged in the United States are suffering more
than those who are among the most privileged that we consider
all of us to be relatively privileged in that Dynamic.
And so, you know, am I going to be frustrated when my kid comes
home and says, Hey Dad, I had, I need a hundred bucks to fill up
the gas tank and the car. I'm not going to be happy about
it, but I'm also not going to panic.
Right? There are places around the
world where people You're panicking in terms of crypto,
like, I just want to emphasize very broadly.
I am super supportive of the broader implications of the
introduction of secure, digital transmission of value, the
Dynamics of transparency that could potentially be introduced
the ability to introduce smart contracts and a manner that
takes products, that sounds super mysterious things like a
structured, note or RMB. Yes, you know, Structured
Products, that take millions of mortgages and slice them and
dice them to create products that have unique stochastic
characteristics, that truly can be democratized through the
Dynamics of digitally native Securities.
And I like, I really want to emphasize.
I couldn't be more excited, I wish I was 20 years younger so
that I could spend a significant fraction of my time not managing
traditional aspects of business, but exploring the potential to
do that in this new world of digital.
Julie native Securities right like that would be an amazing
opportunity, it's coming, it's super, super important, but with
that said, that's going to happen in digitally native
Securities and I want to emphasize why I'm saying the
word security is because it's a regulated business.
It is a regulated business. And you reason you hear a crypto
proponents running around saying, well they're not
Securities and they should be treated differently and we
should have, you know, different rules for tokens and and I see
you should it's because they don't want the restrictions on
getting any scam across that they possibly want.
Some of them again, are doing it for the best possible
intentions. I genuinely believe that our
project is going to change the world and we want to be able to
access funding. And isn't it frustrating that we
have to follow the rules like everybody else had to follow?
Like that's like the commercial driver's license.
Dynamic. You want to raise money for a
business opportunity. There Are Rules around it, are
the rules. Perfect are the rules overly
intrusive, they're definitely not perfect and there possibly
too intrusive but deciding that you're going to engage in
criminality because you don't like the rules that changes the
parameter and introductory. Introduces, this risk that we
started at the very beginning of governments spooling up.
Turning the battleships saying here's a threat and you're
hearing it, the FBI is targeting it.
Now the Department of Defense is targeting it now the state
department is targeting it. Now the These Regulators are
targeting it now. Guess what?
Guys, you stood up and you shouted from the top of your of
your lungs. You can't stop us.
Here they come. So sorry, let me just
re-emphasize this part though. Obviously, we have inflation
here, it has arrived. Everybody's experiencing it.
Like you said, there's places in the world where that is life and
death. It isn't life and death here.
How does that play out over the negatives on how we respond,
right? And and unfortunately what's
happening is that the Federal Reserve feels backed into a
corner because Adopted, the language of, we believe this is
transitory. We believe that this is people
waking up overnight dealing with the arthritic conditions of
trying to restart this. Give me some stretching, it's
going to be slower to get itself back up, etcetera.
And did we make our condition worse by?
Keeping financing rates. Very low enabling excess demand
punching through a crazy amount of stimulus into the system and
did much of that stimulus. We're going to pour see these
headlines emerge where there was fraud and there were those who
Closest to the money that were able to get it first and all
sorts of bad behavior occurred as always does, right?
But what we're engaged in is is that we've gotten to the point
that it is unacceptable for the central bank's to sit there and
not do something. They can't say the near the
transitory narrative has been lost right where that transitory
narrative. I think people again, I'm never
entirely sure if it was willful misunderstanding or if it's
intentional, the transitory narrative was To inflationary
rates, right? So the seven and a half percent
that we're seeing in my view very clearly should naturally
Retreat back towards below 2% the conditions of the 1970s that
outward shift in the population that outward shift in aggregate
demand think just don't exist. Today.
People are over-indebted, the population is not growing
rapidly. The labor force is not growing
rapidly. The population is older, which
tends not to use credit to nearly the same degree.
Like all of these Dynamics are radically different than what
you had in the 1970s. So I just don't see the
sustained inflation. But the great irony is, is it
has been sustained a long enough that the central bankers and
policymakers around the world are now undertaking, what might
actually be the single greatest austerity measures we've ever
seen. In our lifetimes, the 2011
Dynamics around, the Euro crisis pale in comparison to what I
think we're beginning to see here and that to me, says that
not only are we Facing transitory inflation but we're
likely to see a rapid rapid inward shift in aggregate demand
with the loss of credit that is going to very meaningfully
affect sectors of the economy that we tend to take for
granted. And I think it's very scary.
What we're engaged and and the great irony, of course and
others on Twitter, do a better job of doing this?
Like, Joey Paula Tano is all over this.
You know the only mechanism that exist for the FED to To use
interest rate policy to Target aggregate demand is to crash the
economy. That's all they can do.
They can't like raise interest rates and suddenly oil
production goes up. Like it does that doesn't work
that way. So we're asking them.
You know you can't raise interest rates and suddenly the
ports of Los Angeles clear? Because we got more productive
at it, right? Like that's just not the way.
The system works, the tools that were using are like, it's like a
machete to do surgery, right? Like, can you cut out the tumor?
Yeah. But you're going to take their
liver. It, you know, we're we're making
a terrible mistake, in my opinion.
And part of it is understandably being driven by the fact that
trust, in institutions has collapsed.
So, in an ideal world where you had control over the Federal
Reserve policy, what would be the path without the mistake
that you think they could follow?
Well, fortunately, I am in control of Federal Reserve
policy as as all of the Bitcoin community grows.
I also run the regulators and a largely responsible Responsible
for enforcement action busy day. Let's pretend that's not true,
and I'm limited to control of the FED, right?
The point that I would make is is that what we are?
Actually facing is a temporary phenomenon and as painful as it
is in many ways, the right thing to do is not change, the broad
pricing of money across the system and certainly not to
engage in changing multiple variables at the same time,
right? If you want to shrink the
balance sheet, fine, give that a shot.
Don't hike interest rates to the Your time, I let us, let's try
to isolate some variables for a change, right?
Let's not assume that we know exactly what we're doing here.
I just got off a call with Grant Williams and Bill.
Fleckenstein and Bill was very accurately bringing up this
issue of Central Bank. Hubris right now, I happen to
think that it's less hubris and more incompetence but the
broader point that I would just raise is like if you're trying
to change something you change one thing at a time, you don't
like turn all the dials on. You're on your stereo system
when you're trying to tune it into a particular radio system
or set a particular tone. That's so like, you don't change
things. All of the same time you
isolate. We've shown no desire to do that
and I feel the life of me. I can't figure out why the, the
second thing that I would suggest is that there are non
interest rate measures that you can engage in that are far more
effective. So, for example, if your concern
is that there is a A shortage of toilet paper or a shortage of
particular products, then you as the government can do exactly
what you would do in times of War, which is to suspend things
like a patent and say, you know what, you're going to have to
license. Somebody new to do this because
you've not met the capacity needs.
You can encourage a longer-term solution, recognizing that there
are short-term problems associated with it, you want to
keep cars on the road and reduce pressure on used autos suspend.
Auto emission standards for two years, right?
So that you're not yanking cars off, because guess what?
They have slightly more particulate matter coming out of
the tailpipe. But again, that's not the
Federal Reserve. So like what you're basically
saying is, you know, what can the waiter do to solve the
problems in the kitchen, nothing, right.
It can go back and yell a little bit and he can tell you yelled
at the chef and you can take something, you know, you can
subsidize your meal but he can actually cook Right.
He can't really speed up the kitchen in any meaningful way
and that sort of humility to me is what's lacking, right?
It's this need to stand up and say, hey, we're going to do
something and again, it's an Institutional framework that is
completely understandable. Because if Jay Powell were to
stand up and say, you know what, I'm really sorry.
I know this feels permanent, I know this feels disastrous but
we have to approach this from a degree of humility.
There's only so much we can do if they were to say that.
Most Americans be like, wow, he must have been taken over by
aliens, but that was remarkably prudent.
And about 15 minutes later he'd be fired and replaced.
By charlatans is like no I know the solution, right?
Because it's a politically unacceptable State, that's part
of the challenge that exists right now is nobody can stand up
and say, there's not really that much we can do about it.
I'm sorry. I know it's uncomfortable.
We did the best we could to smooth ourselves through this.
Did we make mistakes? Absolutely.
Like, I honestly believe that most Most Americans would really
like to hear that. But I also know that trial
lawyers would love it because every like trial lawyer on the
planet would start a civil or criminal lawsuit against, you
know, if Cuomo came form is like, you know what, like, I
made the best judgment available to me at the time, but in
hindsight, it clearly was a mistake to put old people into
nursing homes, with covid. Guess what?
He is getting sued forever, right?
It's like, it's never going. That's the society that we live
in. And so we're all very focused,
like the FED is screwing things up.
The politicians are screwing things up.
The really sad sober message. I have to send is we put him in
office, all right, we're screwing up.
We as a society need to do a much better job and that
involves every single one of us. And I know it's hard.
And I know it's lazy and I know, I'm sitting from a position of
privilege relative to 99.9% of the audience and offering a
lecture that nobody wants to hear.
They're like me. We have to do better.
This is a this is a little bit off topic and I hope I'm not
overstepping my bounds here but you and last bear standing had
some really great takes whenever Grand was deep in the muck but
they're still deep in the muck yesterday.
I think it was trying to court freezes 157 million of
evergrande assets over misconstruction payments.
I know where this is, this is far removed from everything else
we've talked about, but it does feel.
Terry when I was in China years and years ago, I showed a friend
The Big Short. And they were like, oh my God,
it's like here. And I was like, yeah, and so
this feels like that moment but maybe it isn't.
I don't know. I'd love, I just love to hear
what you're thinking these days after some of the drama has
subsided for now. Well, I think that's, you know,
again, the great irony and again, I'm repeating some of the
lines from my last discussion, but when you're constantly
fighting fires and putting out fires right, There's this
overwhelming desire to occasionally just say oh thank
God. I get an evening off.
Right? Like, you know, out my good
friend Alex curve. It's just recently wrote a book
called The trades of March that literally like walks through the
internal chats, from his trading, activity from March or
2020 which he navigated quite successfully.
And and it's a phenomenal book called The trades of March.
I encourage anyone who's at all interested in in trading to read
that book and the same time Alex collapsed on his bathroom floor.
Passed out in his wife had to call the doctor's right because
while he's navigating this extraordinarily, well he's like
just physically exhausted. The stress of not getting enough
sleep, everything else, the personal Dynamics, right?
Like everyone wants to imagine hedge fund managers or the
Masters of the Universe. Alex has two kids and a wife,
and he's dealing with a global pandemic.
And his kids are no longer in school.
And like, are they going to get deathly ill and they all going
to die of covid, all the stuff that everyone else is dealing
with and at the same time, he's trying to trade on a 24-hour
schedule. Jewel, right?
So like, and again, the world's smallest violin is now playing
for a hedge fund manager. Right?
I emphasize this but that's the same stuff that Jerome Powell is
dealing with when he's trying to navigate that if you think he
went to bed at 9:00 after, you know, casually drinking his
chamomile tea and then woke up at 7:00 in the morning.
And, you know, satin had orange juice and toast with his wife.
Like that was not what was happening to Jerome.
Powell in that time period, he was frantically trying to solve.
So that people were able to pay their bills deal with that those
Dynamics, right? And the minute things start to
calm down, people start screaming at them, like, oh, you
totally screwed this up and you did, he should have done this
better and etcetera, etcetera. And like, there's this
overwhelming, desire. Anyone who's been a parent or,
you know, has had to deal with this.
There is a point at which you're just like man could I just have
one night where I don't have to deal with some of this stuff
that temptation is somewhat overwhelming?
Being from a regulatory standpoint because when things
start going well, okay, now I get to take that vacation.
Now, I get to, you know, do the things that I feel that I am
entitled to as a relatively affluent successful member of
our society that people seem to think is completely unreasonable
for me to do. I mean let's let's be clear.
Jerome Powell is a cent, a millionaire And We complain when
he goes on vacation. Just think about that for a
second, right? Like if we had a hundred million
dollars, my guess is we'd like to go Vacations to, right?
Admittedly is a public servant etcetera.
I'm not an apologist for the fed.
I'm not an apologist for Jerome Powell, but like we have
ridiculously high standards. Unreasonable standards that we
apply. I would argue unfairly, they are
doing their best. They're being asked to do too,
large of a job, that is why. When you asked me, what would I
do? Is the fed, the answer is, say
to you honestly, there are things I can fix and there's
things I can't and the vast. Majority of things you're going
to ask me to do, all I can do is screw it up worse, right?
Like, I can put a bandage on it, but unless we actually get in
there with Bacitracin and cetera and clean it up, and you're
going to develop gangrene. So let's actually make the hard
choices. Let's deal with etcetera,
because that's politically unacceptable, we backed
ourselves into this corner, and it's also part of the reason why
you see the appeal of the crypto Dynamics, right?
Because every crypto fraud on the planet is out there saying,
here is the solution. And right from my mom's
basement. I've figured out the secrets of,
you know, Global finance and it's also totally clear.
That's just, it's just not true. What effect do you think the
increase in passive investing and indexing has had on the
market at large? So, is it going to be surprised
but none at all really? No, I'm joking.
So for your listeners are probably less exposed to my
Under traditional Finance theories, those few who are turn
it tuning in, to listen, to me specifically, may be familiar
with it, but just, just very quickly what I'm really well
known for is the work that I've done on the impact of passive
and systematic investing in traditional financial markets.
So things like Vanguard BlackRock, Etc, where you're
buying an index fund. The most important thing for
people to understand is that a market doesn't represent
information. It represents transactions.
So what you're seeing when you look at it, Screen for the price
of Apple, is inevitably whatever the last transaction was and
potentially what the bid and the ask our that are effectively
people waiting to come together and transact right across those
two. When you introduce passive
players, they're not actually passive because the definition
of passive requires you to never transact and Vanguard and
BlackRock transact every single day when you give them money.
For your 401k, they're forced to transact.
What you've actually signed up for is an active manager who has
the world's simplest algorithms. Did you give me cash if so, then
by, did you ask for cash, if so then sell, and what valuation,
doesn't matter how much cash should I hold?
None? Because that's not a choice that
you have available to you. So that change in ruleset as it
has become more and more. And on my estimates about 44% of
the US Equity markets are now passive about 27% of the u.s.
debt, markets are now passive in their construction terms of
these super simple algorithms. Did you give me cash if so?
Then why did you ask for cash if so then sell being the dominant
marginal player in the markets, if you simulate that change, if
you introduce that player who holds no cash and buys or sells
Cells simply on an instruction that's coming through with no
thought process to it. Other than that, underlying
Dynamic, you can get a sense for how it affects markets.
My analysis is that the growth of passive has significantly
inflated valuations and it has created conditions of
illiquidity that cause the extraordinary price movements
that we're seeing in markets, ranging from things, like meme
socks, like AMC or GameStop to the somewhat ridiculous.
Behavior where Facebook can make an earnings announcement into an
ostensibly efficient market and see 200 billion dollars of
market cap wiped away in a matter of seconds, right?
Nothing like that has ever happened before and I very
strongly believe and the evidence is increasingly in my
favor. Whether those are academics who
are now coming out and supporting my work or whether
that is the empirical data that we're ultimately seeing the fact
that we're within a few percentage points, nowhere close
to a really deep bear. Market and we're seeing degrees
of liquidity, vanish and the market that we've never seen
before. We're actually, by the way, at
levels of liquidity in the US Equity markets that are
approaching the depths of March twenty twenty even as we're way
above those levels, right? Like people cannot transact
efficiently right now as part of why you're seeing the extent of
the moves that you're seeing. So, I think the impact is quite
significant, and I think the evidence is very, very clear
that we have created a system that I like into driving a car
uphill with no Brakes right. Feels great.
As long as prices are going higher as they go down.
If the instructions are sent to the passive players cell, they
will not stop and say are you sure you want to do that?
Because prices seem pretty attractive now and that behavior
in an illiquid Market is potentially quite catastrophic
God that. Yeah, there's Maybe this is just
everyday in finance, but it sure feels like there's a lot of
scary shit going going on right now.
There is an element of that is the description of every day and
I want to emphasize this. And I've said this elsewhere and
I'll repeat it till I'm, you know, to my dying breath, maybe
it'll be my deathbed quote, right?
The bearish case, always, sounds more intelligent and part of the
reason why is because we are wired for that.
If I come to you, and I say, hey Cass, guess what?
There's berries in the bush over there.
You you'd say, oh, that's important, I'm To make a mental
note of that. I've got a map of the territory.
It has berries in that bush but I'm not hungry right now, but
I'm going to keep that in reserve.
Thank you for sharing that information with me like, but if
I say to you, hey Cass, there's a saber-toothed tiger in that
bush. You will immediately react right
now if we're in New York City and it's you know, 2022 or Los
Angeles and it's 2022. You'll almost immediately figure
out that I'm joking with you. But if you were and I were on a,
you know, Safari trip on the ice.
In Savannah, and we're walking along the way.
Holy shit cast. There is a lion in that bush.
You would freeze instantaneously, you would take
that as the most important possible message and I'll go a
step further and say, like I sound like a somewhat credible
guy. Your audience doesn't realize
that nothing I say should be taken, seriously.
But the point that I would make is, if I were to tell you that
there is actually a meteor storm coming tomorrow with an
extraordinarily heightened risk of meteorites, striking the
Earth in the vicinity of Los, Angela's You by and large will
dismiss it. You may do a Google search to
see if I'm full of crap. If it turns out that I've
managed to see the Google page at the Google search pages with
meteor storm incoming, highly, you know, elevated risk of
meteorites striking, passengers or pedestrians?
I guarantee you, when you walk out of your house and explore,
your luck off on the sky guarantee it because that's how
we're wired as human beings. And so I just always want to
caution people that like the bearish case, always sounds more
intelligent part of what is About what I'm saying also
though is because of the Dynamics of passive investing.
It's the same phenomenon that we see with houghtaling in crypto,
right? What you're talking about
actually is creating increased in elasticity.
If I tell you to hotle, hold on for dear life, don't respond to
price signals and sell. All I've done is raise the, in
elasticity and that's functionally.
What's happening in financial markets, the introduction of
passive players raises the elasticity, elasticity T of the
marketplace. Mike, is there anything else
that you that you think is important to let the listeners
now or? No, I think anyone who's made it
through this far. As is either listening for, you
know, shits and giggles queer, you know, in desperate need of
help. I will, I will let it go at that
point but honestly, it's I do want to offer a shout-out in the
opposite direction, right? I'm a tourist in this space
can't devote. The time and energy that you
guys have to trying to formulate, a clear and concise,
and informed view about the players and the various forms of
Fraud and the behaviors that are going on and what you guys have
done. I think it's actually an
incredible service for which you are highly unlikely to be to be
compensated. But is nonetheless a public
service that I think is underappreciated?
And I do want to emphasize that and I'm thrilled that you guys
invited me on to talk ah It means the world hearing that
from you Mike. So thank you very much and and
look forward to having you on again, sometime soon whenever
whenever always happy to hang out with you guys, hopefully you
enjoyed that episode but as a final point Have you ever just
thought about what does it all mean?
I know, I know that's a little meta.
I know, it might feel like it's a rhetorical question, but I
just want to say that. I think it all amounts to
ratings, ratings and reviews of podcasts.
So if you could leave a rating, leave a review positive one.
Hopefully, I think that kind of solves everything.
So, thank you for listening and we'll talk again soon.