Welcome back everyone. I am Caspian Sea.
I'm joined as usual with my partner in crime Bennett Tomlin.
How are you today? I'm doing well.
Cass, how are you? I'm fighting internet problems
but other than that, I'm great. We're joined by an extra-special
guest again today. Travis Kimmel, how are you?
I'm good. Thanks for having me on.
What's the preferred title? Right now that you're going By
Barrel or it, right? That's the Twitter moniker
Twitter sign me that and I just rolled with it.
If you want to go by bear Lord, we can jump right into it on,
that note, really? Yeah.
Let's do it. Yeah.
So obviously, I think all three of us are very skeptical of all
things cryptocurrency, but really what?
I enjoy about your feed. Our, your macro takes because I
don't understand macro markets as well as you do and Given
where we're at right now with the economy with everyone,
really, I guess livid with Jerome, Powell and Janet Yellen,
and the government in general, it might be good to hear.
Kind of like your understanding of what's going on with the
dollar. What's going on with bonds?
What's, you know, with yields and all this stuff.
So let's start with your dollar takes, which you're pretty
famous for, what's your, what's your current take on the, the US
dollar Well, I am sort of of the opinion that the dollar holds
this really interesting place in the financial system.
You know, it's the reserve currency and if you look back
historically at what the de facto Reserve, currency is at
any point in time. It just has a lot of impact on
kind of everything. And we, you know, in the
previous like big cycle, people talk about these like big, like
the biggest macro cycles of these big debt cycles and, you
know, all that good stuff in the previous cycle, the reserve
currency was arguably go. Old because everything was sort
of, everyone's sort of measured the value of currencies against
gold. And there's a long tradition of
gold. Of course, being used as a
reserve asset, and then over the course of the last, you know,
100 150 years. There's been this slow migration
away from gold as the reserve asset which started with
everybody saying, Well what we'll do is we'll just be we'll
just say we'll be able to exchange the dollar for gold and
then we'll measure everything against the dollar and all was
well and good in the land and then That caused some problems
which like, you know, historians like to dig deep on basically
hard currencies, you know, you go through these phases where
the economy and the population will grow and there's like kind
of not enough money to go around and sometimes that was fixed by
like a gold rush. Like you would just literally go
out into the world and discover more collateral and that was
really useful. This most recent time we
basically just sort of ditched gold and the dollar became the
thing that everybody measured things against.
And so if you look at how we've All you Sovereign currency is a
lot of that is kind of their access to dollars, right?
So like it destroy people store. Treasuries treasuries, are these
large actors arbitraging. Their future need four dollars.
And so I like to look at the at the dollar as if it's this big
commodity market. Like if you think about how
loyal works, the reason we have oil Futures is because these big
producers can go ARB their their production.
They can say, I'm going to sell December contracts right now.
For Delivery because I know we're going to have predictable
production in December and I want to lock in the price right
now and so they go and they basically sell December oil for
delivery and they plan to just deliver it like they're not
traitors, they're just trying to run their PL in a way you know
it's really disciplined and so these commodity markets, allow
producers 2D risk their delivery and they allow people who like a
Refinery. You needs to buy it. 2D risk the
future costs and that's all very useful.
And in the currency markets you see big actors are effectively
able to D risk their entire UDP. So like a sovereign can have a
weird Delta in their balance of trade and they'll be they'll
need dollars. They'll be or they'll have extra
dollars in the use the treasury market to do that because the
treasury market is the price of forward.
Money, I find all this stuff. Super fascinating, you know,
like effectively the dollar and treasuries hold the position in
the current economic system that gold used to historically and
that's kind of the basis. For all of my funny little macro
takes on Twitter is this notion that the Keystone to all of
Economics right now is the dollar and when you see the
dollar strengthening, that is an interesting thing to look at.
In the perspective of these stable coins, be a stable coins
have have made this claim that they're worth a dollar and it's
actually very hard to be worth a dollar.
If you don't just like have a dollar, right?
They haven't proven that they do.
I mean, what one might imagine that they would have, you know,
short-dated debt which would be fine.
This is a common way to do it. You have like, you know, cash
equivalents are like very short dated debt safe.
Three months, right? So you're not taking a lot of
risk on the duration of these things and they're very liquid.
And you can exchange them for dollars whenever you need if
people come in and have a bunch of redemptions on your stable
coin and they're like, yeah, we want dollars short-dated debt is
really effective way to do that, that's very low risk.
In the treasuries, treasuries are considered to have no
default risk at all, right? Governments?
Don't default, that's just sort of the end of that government.
It's so treasuries, we assume the United States is not going
to just end their default free. And then there is duration risk.
The farther out, you go because the base value of these things
can change. And if you are in a situation
where your for seller because people come in and they want
their money back, you don't want to be a force seller on
something with long duration, because it might not be worth as
much as you think it is, depending on where rates are and
all that good stuff. And so I'm sort of a dollar
fatalist rather than a maximalist.
I just think it's inevitable whenever we take on a bunch of
dollar-denominated debt, you have to pay all that debt back
at the base value. Plus a little bit, like,
whatever the interest is. And so there's this constant
sort of insolvency grind that happens across all of the
economy, not specific to stable coins.
But in regulated markets, There are rules about how you say, you
have something worth a dollar. It basically has to be backed
by, you know, a level of these short data, treasuries or cash.
And I think that there is a an open question as to whether the
stable coins are doing at and so I The main reason I pay so much
attention to the dollar in the context of crypto specifically
is that, you know if the dollar appreciates by 5% as has
recently, you kind of Wonder like how are they how are they
be risking that like how are these claims that we see on the
screen that Bitcoin is worth X? Widgets worth a dollar being
backed and so I'm continually fascinated by that aspect of of
crypto markets and expect that we will see a big insolvency
grind both in in like the regular markets.
And you know the yield curve is sort of hinting at that.
I can t keep Laughing which predates recessions and then if
it turns out these claims are not adequately back by dollars,
you would expect to see some know, some pretty impressive
fireworks. One thing you mentioned there
that strike out to me, was how difficult it is to create
something that reliably mimics the dollar and this is true.
Even for more regulated entities like money market funds.
Like in 2008, the prime money market fund broke the buck and
basically blew up when Lehman Brothers was unable to roll
their commercial paper. / after all that went.
Yeah and I think it's plausible that at least the largest stable
coin probably has paper and things on its books that are
meaningfully riskier than Lehman Brothers appeared, before they
were unable to roll their paper. And so it has always struck me
as they are. They're in a very tenuous
position that can get increasingly difficult.
Yeah. I think so.
And and part of the way to think through that is to think of the
incentives of, like, let's imagine we were to start a money
market fund. And we're going to do it in a
way that's totally non-regulated, because that's
awesome. So, we, so, we spin up some
account and, you know, some little island somewhere.
And we're like, okay, well we're going to take in.
We're going to issue these sort of like units of account worth a
dollar shares or whatever. I mean in with tokens it's
obviously a token and then we're going to take in money but we
our goal is to make a yield. So if we are if we are doing
that in sort of a safe regulated environment you know the the one
year we get it. Okay.
Yeah let's say we had A billion dollars and we're going to get
like one percent off of that because we're investing in, you
know, and treasury is that are they're offering us one percent,
that's not bad, but you can go out there and Source riskier
paper and get a fatter yield. And if you're in an unregulated
environment, there's just sort of this constant draw to go do
that, right? So, you could go get commercial
paper from some of these like big Chinese real estate
companies that are paying significantly more and then
Arbitrage the currency risk and Futures are, you know, currency
markets and there's This constant incentive to do that.
And so I suspect like the business model even if we assume
that this is a money market fund that is, you know, relatively
good actors, unless you have regulatory pressure to do this
in a super Safe Way with Regulators looking at and
saying, well we don't want the sir actually hurt the financial
system. And have you be in the position
where you have to liquidate a ton of debt really quickly
because that can get weird if you don't have that regulatory
impulse, I think there is a constant capitalist incentive To
get a little riskier, right to go out, get some paper even from
other sovereigns, perhaps, or paying higher yield, because
it's riskier paper and I would suspect that there's some of
that going on. I mean, of course, you know,
we're working in the dark here, like there's no there's no
actual proof. Either way what's happening here
but the incentives make me suspect that there's this lure
to go yield Farm particularly since that's a conversation that
always happens in crypto. Like how do we go out and farm a
little more yield and love to see that stuff?
Get It so that we could so that we can think about these stables
in a way where we're like, you know, what is the actual risk
you're taking on? If you're holding a bunch of
tether, even for trading purposes temporarily and in the
absence of an audit on that front, I think the best way to
look at this ecosystem is as if crypto and Stables all this as a
whole are almost a uniform singular entity and the thing
that will cause that to come under pressure is if there is a
dollar Redemption, impulse to comes along for whatever reason,
usually Conditions sighting in like people need their money
until people need to Source real dollars out of this ecosystem.
It's not clear to me that there's a problem like, you
know, there's a latent problem, but it doesn't really become an
active present problem until this entire ecosystem as a whole
has to go Source these dollars. And until that point, you can
sort of issue these as if dollars and allow people to
trade back and forth and and everything's kind of fine.
And I think this is the reason that people have a tendency to
call it a Ponzi scheme, I don't really know that that is a
strictly accurate definition. Like, we're being really
pedantic. It's probably not a Ponzi scheme
because it's a group of actors who were kind of all in it
together and there's no overriding entity like, you
know, scamming everyone. It's sort of like, people are
cold, are creating a distributed Collective belief that these
tokens are worth a dollar and investing in that idea and
trading them in an, as if fashion, that is probably not,
sufficiently found it, but You're so the discussion of
rates actually brings up a good point.
Because I remember, as rates were cratering out, that
everyone started talking about how this presented, a really
weird problem for stable coins in general, because they were no
longer especially, I don't even know.
Did rates actually hits zero in Europe.
Yeah, they depends on yes. It depends on where in the
curve, but yeah, like, for instance, there's Euro tethers,
right? And so, if all of those Euro,
two, others were held in, like, in some European bonds, ECB
related stuff or whatever. The yields they would be getting
would just be rock bottom and that presented it.
You had to look at it as like, okay.
So they do have to go find yield somewhere.
What are they going to do? But now, with everyone talking
again about the fed and now hiking rates at some point is
the Assumption with them. The Assumption being that these,
these stable coins did go out and find riskier.
Assets during that period, where rates were so low is is the
running idea that they would just unwind those positions and
then go to something less risk on as rates increase or
something? I wonder, I wonder what the
possible problems could be with the rate hikes occurring.
This stuff ends up being financed is hard and it's part
of why we regulate it so that there are there's a good
framework for actors who want to be good actors.
Space. I mean I you know I'll take the
sort of bull case on stable coins here for a minute and say
I think it's entirely possible to run a really really smart and
disciplined stable Point like that seems totally possible to
me. It's basically just like a money
market on different rails and I think you can make the argument
that those rails might even be better.
And I think, what we're really missing here is a regulatory
framework to ensure that that's the case.
And when we think about like what is the natural effect of
your braids going up, while when rates go up, you get More yield
but the base value that paper goes down.
So as rates, go up the amount that you can sell that debt for
in the moment goes down. And so this is how you get this
sort of like run on the bank type of thing with debt.
We're like, let's say you bought a bunch of paper for a million
dollars and you're getting one percent and all of a sudden that
papers yielding two percent. Well, depending on the duration
of it, it's going to be worth a lot less, right?
Like if you're buying 10-year paper, it's going to be worth
somewhere in the neighborhood of 10 percent less.
The math is a little more subtle than that and so if a bunch of
people come in for redemptions, you're going to need to sell
more of that paper. You're going to sell 110,
percent of what you bought when that when those redemptions come
in and at a certain point you just run out like you don't have
sufficient backing to do all these redemptions.
Now if we imagine an actor in that position, the thing that
you would want to do is really encourage people not to redeem
so that this insolvency stays hidden and And you'll note that
this, you know, the whole little behavior in crypto is this is
the sort of mechanized cultural reinforcement that you never
sell. And if you get enough people to
believe that, the insolvency could remain invisible for a
very, very long time. I mean, arguably forever, like
there is a scenario in which this just never becomes a
problem. I don't really believe in that
because these things have a way of working themselves out, but
it's really about the fluctuation of that, the base
value of of those bonds at a time when you would effectively,
Be a for seller because people are demanding their their money
back and you see this even in being, you know, public
companies or anybody who's running a treasury, really?
There's a limit to how far out the risk curve.
They'll go even on very safe risk freaked out because they
don't want to be in a position where they need that money and
they don't have it. And so, if you're a corporation
and you have say a five year plan on your PML, there's
probably an argument where you ought to go ladder your bonds
outright lie, consider storing, a treasury entirely.
And Us. Treasuries, you could
theoretically project, your Capital needs out 5 years for
all the cash that you have and then go into a bond ladder, over
five years and get a little more yield in the five-year, right?
Because you're essentially making it back, like we won't
need that cash and I think that's probably okay if you're
right, but, if you get caught out and you need to redeem that
like you're going to show a loss because you found yourself in a
solvency crisis at a time when you didn't anticipate it.
And so I think, you know, when we look at crypto, there's this
question of how risky are Are these treasuries these big pools
being with their Capital allocation again if we just
presume that they're good actors which is not at all.
Given, how risky are they being with that Capital allocation and
how much finesse do they have with deploying it?
I mean, theoretically to your question.
Yeah. They could start to go more into
these safer assets, that yield a little bit more, as rates go up.
But that presumes that they were able to time the other debt that
they were holding when it was cheap.
Hold cash for a while, right? I mean like If they can do that
then sure it's all gravy but that's a fairly sophisticated
level of Finance. I mean, I know, you know, you
look around Twitter and like a lot of people did not get the
moves and rates all that correct.
I mean just people running normal, you know, basic funds,
people who are really good at trading fixed income and so you
have to look at these tablecloths, you look how their
staff and it's like do we really think they have a full
complement of staff there that are experts and fixed income and
trading that better? Or than a lot of these big
fixed-income shops and I just I think that's strains.
The bounds of reason at a certain point.
We don't the other things you mentioned.
That is one of the most striking things about Tethered to me at
this point is the incentive to go out and find higher yields,
Zeke Fox and his reporting for Bloomberg.
Businessweek mentioned that John bets told him that Juan Carlo
Davis. Any back in 2017 said he was
interested in going out and finding ways to earn a bunch
more on the tether reserves. We've now seen their ass.
Breakdowns, which give us limited but some information
that suggests they've found ways to increase their yield, but one
of the inexplicable things is that the advantage?
If you're trying to maintain as it to a dollar of going after
higher heel is that you can generate more dollars?
And keep them. So that when your risk your debt
starts to decrease in value, you've still got some dollars to
cover that. However, the tether like assets
over liabilities, that cushion that they should be getting from
the increase yield their Rating does not ever go up.
And so yeah, these stable coins were at least bi-stable coin has
put itself in a position where they're exposed to this higher
risk debt, but do not have the benefit of the additional
dollars generated from it to protect their principle which
seems to enhance the risk of things going, south totally.
I mean one of the most interesting studies you know a
lot of stuff is going on here is like it's stuff that happens in
other markets, right? So If you look at these
peer-to-peer lending platforms, they're fascinating.
I mean, a lot of them are offering peer-to-peer unsecured
Consumer Debt. So unsecured Consumer Debt is
nothing new, I mean, you know, happens in goodbye, credit cards
do this. And part of the reason the rates
on credit cards are high is that they're offering enough padding
their to account for default and still make a profit.
So if you have a pool of loans that the default that's like you
know, risky risky landing and defaults at a 10% rate, but you
can charge that pool of loans. It's 12%, then there's profit to
be made there in aggregate, right?
And this is the kind of stuff that lenders think about.
And it's why, when rates get pushed really low, you see this
become a wealth disparity accentuate, ER, because the
lower rates, are the less room lenders have to Arbitrage these
big pools. And so they're like, well, we're
only going to lend the most solvent of borrowers.
So the lower rates are the more you want to focus on solvency
because you really don't have to your point this cushion to
absorb defaults. So In a, in a low rate rate
World, which were largely in eat, encourages lending to hyper
solving people who don't really need the data's much.
And if we look at the, what happens on these peer-to-peer
platforms, you can decide who you want to lend to, and you can
get really high yields. Make you get, twelve fifteen
percent. But the reason you're getting
this high yields is your lending to really risky borrowers.
And over time, even this sort of peer-to-peer lending, there's
like a proper rate of return. There you build a basket.
You want me to watch? Boob different people with
different Traits. But when you figure in the
default rate and everything else, everybody ends up getting
about the same amount of yield. And if you go, too far out that
risk curve, even with a big Diversified pool, the default
rate goes high enough that it's not a winning proposition that
people just stop paying their, their loans down.
And I think Americans live in a very Equity Centric mindset,
which is very much all about the upside Equity.
Is this funny, little beast where it is?
There it is. A remainder that is left over
after all the debts are settled. So, if you have a really
Profitable business that doesn't have much debt then and they're
generating a lot of money than the equity is worth a lot.
Because you're getting a lot of excess after all this debt stuff
is considered. And if you have a business that
is this really debt-laden in the equity is going up.
That's awesome, unless that business finds itself in a place
where it becomes insolvent and then that equities with nothing.
So Equity values whip around but they're very much.
A bet Equity generally is a very much a bat on the upside, right?
And Dead people. People invest largely in fixed
income, live in a world where they're obsessed with the
downside because the number one thing you want to prevent is
alone defaulting that you try and get as many good loans as
possible and minimize the ones that default.
Because if you're making five percent yield on the pool, one
of those loans going to 0, we have really kind of just as he
leaves a huge hole in your book, right?
So I think that the headset that people think about crypto with
is very much this Equity mindset, right?
The things gone up Bonkers, like everyone is sort of thinking
about the upside more than the potential downside.
But if, if underneath all of that interesting, you know,
remainder upside there is this Iceberg of solvency the desert.
It's an open question. I think you could see the value
of these these tokens go to zero very very quickly because
they're effectively a remainder on all of these implicit
contracts, which are A promise to deliver dollars, right?
Like tether when you're trading in tether or trading in USD, see
your any one of these stable coins, there's an implied
promise buried in there. Did that tether can be redeemed
for a dollar. It's a death and everything,
everything in finance, sort of rests on this notion of debt
because their exchanges that happen, they're not necessarily
in real time. So, like, yes, a Bitcoin is
always worth a Bitcoin, but before the aggregate Bitcoin
ecosystem can settle that. Bitcoin value.
It may need to redeem a bunch of these stable coins at some point
for people who want their money out.
And like, I'm not sure how much money is in that ecosystem.
Yeah, you and dubourg both mentioned that and I think it's
interesting but I also I don't know I hearken back to the
beginning of our conversation about dollars where if you look
at dollars and you go back far enough, it's backed by gold and
at some point the government's like a it's not backed by gold
anymore. And the dollar It can carries on
being like essentially a great way to move value, right?
And so I guess in my mind I continued to wonder so like the
only people involved. First of all you have like be
your own bank as soon as you even enter into cryptocurrency
at also like if you're buying Bitcoin or aetherium or like the
main cryptocurrencies, that's the whole concept is be your own
bank and then on top of that now we've got D Phi, which
decentralized finances attempting to be you know,
essentially Ali lending. Like this is all lending this is
all borrowing lending liquidity pools and to me incredibly
complex things that most people not only don't understand but
aren't interested in ever necessarily understanding.
So you not only do you have now complexity but you have a very
closed system where the amount of people who have any clue
what's actually going on. Is very small and then those
people don't intend on destroying The system that has
created all this wealth. So it's like what you said at
the beginning about tether like I can see a picture where they
just know like oh yeah, they already know.
We're never going to get a dollar from tether ever, but
we're able to utilize together in such a way that that doesn't,
it doesn't even matter to them. Yeah, it did.
That could be the case. I mean, you know, if people
don't want their Fiat back, I guess, maybe there's no problem
but I think everyone sort of does Does because that's how you
buy stuff. That's how you buy the lambo,
it's how you buy, you know, whatever it is.
You're in it for what, you know, the funny thing about crypto is
the implicit promise of the number going up forever.
I mean, like what people want is basic income, that's the Promise
You by a thing. It's sort of like an annuity.
You buy a thing that goes up forever and people are
essentially seeking passive income, right?
It's sort of this like it's yield farming and disguised
Under the Umbrella of cap. Appreciation.
And that's all well and good if it works.
I think the thing that people don't recognize, there's always
this discussion in the crypto sphere of like well what backs
the dollar and people like, oh well maybe it's backed by the
military and whatever else. And at the end of the day, the
thing that backs it is a rule of law and that's why you don't see
a lot of this in crypto because like that's not part of it.
Ultimately, what backs the dollar is this idea that you
have money is sort of this, this, it's a tradition gold was
a tradition and now the new tradition is the dollar.
And it is a subset of a tradition of the rule of law.
And it's why the person with the most powerful military is
typically the reserve currency. It's not about bullying people.
It's about, at the end of the day, if something went down, who
would adjudicate that? Like, who's the biggest dog in
the room who would say, no, this is actually how it goes.
So, if we go back, you know, and we think about like when Rome
was the was effectively the reserve currency.
Well, they had all the roads and that old soldiers who control
the roads If there was a dispute eventually that bubbles up into
use of force, it doesn't always get there.
But like, if you're going to store your accrued Val wealth in
a currency, you want to store it in the currency that is going to
decide what has value, right? It's like the rule of law is
this is this primary thing comes before money?
Even enters the table, right? So if you're if you're a
nation-state and you're like, well I might get into a dispute
with another nation state about trade having a bunch of Dollars
in that scenario and transacting in dollars is good.
Because at the end of the day like the US Navy is going to
blockade the loser like they're just going to be sanctions.
There's going to be there's always a biggest dog on the
world stage and the reason that that tends to be the reserve
currency is like you kind of have to go with their decision
anyway. So why would you store money in
some little like, off-brand currency, who doesn't really
have the sort of global rule of law backing that eventually
comes down to kind of Might makes right?
I mean I'm not, I'm not a proponent of it.
I'm more of an observer of the idea that, like, Whoever has the
biggest armies, or police force or whatever it is, they kind of
decide how things go. And in a benevolent regime, the
way things go, is communicated in advance.
There is if there's a dispute, you know that this large
powerful actor will say, hey, here's how we think this is
going to resolve because that's conducive to trade like trade
happens, best in a stable environment and so if we all To
prosper. Then this big actor needs to
basically be more or less benevolent and say, here are the
rules that we're going to enforce on the global stage in
there is a an incentive that comes out of that to just sort
of like go with whatever they call currency because if it ever
comes down to a ruling, that's what they're going to say.
It is a known predictable, quantity, you know, this, this
El Salvador things, fascinating. I don't know how that's going to
go, nobody knows how that's going to go.
And so, how can you as a business in El Salvador has An
option to transact between dollars in Bitcoin.
Say yeah, I'm going to hold it all in Bitcoin because I'm
banking that this small country is going to sort of like win out
in an international dispute. I mean it's just seems nuts to
me. The IMF is already flagging in
the spirit of saying. If practically saying like we
don't think this is going to go well that it might not go well
and so if you're holding Bitcoin as your, is the way that you
store, the value you gain from your your labor or whatever.
There is Material risk that that could undergo some some real
price impact just from things like sanctions or a country
legalizing it. And so I think that the implied
value of the dollar is the fact that it is backed up by a legal
and Regulatory framework. That is a known quantity.
You see this play on other fields, too.
Like when we started our business originally we thought
we were going to be really clever and so we incorporated as
a Colorado LLC we're like Yay, Colorado Colorado, spaz, right?
And that works for a little while.
We got real investors who were like now you're actually going
to be a Delaware LLC because Delaware c-corporation have a
body of case law that is just really well known.
If we were to if there were ever to be a dispute in Colorado we
just don't know how that would go now.
It's not like they were anticipating a dispute but they
were unwilling to invest if the Specter of a future dispute you
know legal framework that nobody understands was part of the deal
and so we had to reincorporate as a Delaware LLC and then it
was weedy risk that potential legal challenge in an unknown
environment, right? And so a lot of what you see
with this with this Reserve currency discussion is literally
just like what is the most known environment?
Where do we go to be operating within a set of knowns so that
we can focus on our business which is what we're good at my
next question is a bit of a transition away from this topic
but I'm curious how you came to bitcoin and crypto and how your
views on it have evolved over time.
Look, it's been a long road. I mean I think I first found I
bought my first big point it was like 10 cents or something.
So, it was a long time ago. I think I initially got
infatuated with the idea that I could, like justify buying an
expensive video card because I was mining Bitcoin and so I did
that for a while as I don't even know in this was this would have
been like 2011-2013, you know, and then you find out that it's
just like cool little weird World near like looking on.
And I remember the Silk Road a as we're like everyone I knew
was like buying drugs online I'm like, this is crazy.
So there was I think early there was this, there's this sort of
kind of rebellious libertarian in.
Like the benign kind of like all drugs should be legal way which
like, you know, that's an interesting concept.
I mean, a few years later, we legalize weed and Colorado and
like Society didn't fall apart and it seems like it's been
generally, good thing. We were paying for elementary
schools with it, you just go to a store and get it.
And so there's this really sort of upside Narrative of like like
weed is harmless. We should be able to buy it and
by God we're going to do it. I thought that was interesting.
You know, I think it's still a compelling for many people.
I think there's something compelling about that about
crypto and like I get that and I think I'm some of that stuff
that I had mind and it's just sitting around at one point.
I saw it go to like 300 bucks and I was a starving
entrepreneur at the time and I was like, dang.
Yeah, we're like so poor right now.
I can I can sell this for whatever it was like, I didn't
have that much extra Grand or something and put food on the
table for a month. I would like this awesome.
So, sold all of it and then didn't pay.
Attention to it for a while. And then in I think I have the
big March crash. I had sort of thought that the
narrative around the having and all that was going to pick up
steam. So I actually do traded Bitcoin
long in 2020 because I thought it was like this interesting
height trade that was fairly benign and then went on Twitter
and, you know, start talking to people on Twitter which is of
course, an apocalyptic hellscape and a bunch of people.
Say, yeah, I basically as a sort of contrarian by Nature I
started kind of Taking the opposite side of that while
having crypto cell just to poke around and see if I could like
get a read on what the counter case is because all these Smart
Finance people saying, you know, maybe it's not a good idea to
have a lot of it. I'm like, well, screw you, I'll
fight you. Right?
And then in the course of that and getting told to like do the
research someone pointed me at tether and after digging into
the whole stable coin thing, I kind of realized that my a lot
of my fundamental assumptions around Bitcoin, we're basically
just false I like it looks to me like it ended up looking to be
like the Bitcoin ecosystem which at the time was largely Bitcoin.
Now there's all these new tokens and whatever but like Bitcoin
was the dominant token of the time it looked like it had been
infested with this sort of shadowy debt like figure that
was just injecting debt into the crypto ecosystem in a way that
was very disingenuous. I still hold that view.
I think that there is a lot of defacto debt being pushed into
crypto. Is responsible for a huge part
of its value. And this was the moment where I
sort of turned into a crypto are basically unloaded the position
realizing that I didn't understand it.
It wasn't that I was like bearish, but I was deeply
skeptical. I don't like having investments
in things. I understand it's generally gone
poorly and so from that moment, I began to think of crypto as
this as an ecosystem that was creating the thing that it was
worried about. So if you, you know, the
paranoia they cryptos trying to address is this.
Like, why am I are hyperinflation thing.
And if you think about crypto as its own, as a non territory
country, like this sort of this country, which is crypto and a
bunch of people opt into being citizens of that country, right?
Then I think that it is the volume our Republic, like you
have a series of actors in there who were printing funny money
that has not been proven to be backed and running all the
numbers up. And I think what we're seeing
with these crypto price explosions is a Wheelbarrow full
of cash needed to buy a loaf of bread.
He said for Bitcoin is the loaf of bread and that's really only
happening within that country like when the whole
hyperinflation thing happened, it wasn't like why I'm are
hyperinflation cause hyperinflation in the u.s.
It was very localized to the people who are transacting in
that currency, that was being spun up without any real ability
to back it. So I think this is what this is
my view. And what's happening in crypto
is that there is a sort of Weimar Republic style scenario.
Learning where the goods traded in the Crypt of ecosystem, which
are all these tokens are hyper inflating inside that country in
a way that will not work out well.
Like just because you paid a loaf of cash, or sorry, a
wheelbarrow full cash for a loaf of bread in Germany, doesn't
mean, you can go take that loaf of bread, go to the United
States and get a wheelbarrow full of dollars.
Like, that's just doesn't work. So, I think that the end of all
this, what we'll see, is a very similar scenario where the
claimed value Spin the crypto ecosystem is not portable.
It's not portable into an economy that has regulations and
controls. I'm not entirely sure how that
unwinds. But boy, am I here for it.
I think it's going to be fascinating, to watch to be
fair. It's not the, it's not the first
time that that has happened in crypto currency either.
Like, Michael patran, just came up again recently with this hold
Abracadabra Wonderland, magic internet money thing.
And quadriga CX is super famous for Gerald cotton, having
something called, I think quadriga bucks.
They were essentially tether on quadriga but there was nothing.
There is absolutely nothing backing, quadriga bucks and
people just traded like they were dollars it's not something
that's new to crypto either and I suspect that eight I suspect,
this is why there's always certain you know like Bitcoin
maximalist talk about what is it like key day or something.
Where All supposed to, like they never had, like, they never, I
don't know what the rate is, but it's not like it ever does what
it's supposed to do. But the idea is that everyone is
supposed to withdraw their cryptocurrency funds from the
crypto currency exchanges on the same day.
It's not a bad idea and it's a good stress test.
It's a good idea. If you want to possibly not
ever, see your funds again because you have no idea what's
going on. That's great, the currency
exchange. Yeah, we'll just try a run on
the bank, try it out. See what happens.
Yeah, I mean it's a good idea if you want to.
Yeah, I don't know. It's it's, there's something
theoretically right about like many things in crypto.
Right. There's an element of
theoretical correctness there. Yeah.
Which I think if I think a proper stress says there would
be disastrous especially since historically, we know many
exchanges have ended up running like partial reserves on their
cryptocurrencies, quadriga btc-e.
Yeah, so there's just a bunch of crypto currency exchanges that
have done that. Asked including other ones who
currently forgetting. And so it makes sense why they'd
want to try that. But I think the idea of the idea
fractional Reserve as well gets played with a lot.
Like there's this funny pattern matching thing that happens
where the crypto ecosystem will say.
Well look, fractional Reserve is happening over there.
It's the fact that it's happening over here is not a
problem and it's like, you know, I entirely reject that is if it
is very thin understanding of how this fractional Reserve
stuff works. You know, that the way that it
works in the banking system is There's a level that Banks need
to maintain in case, there's a wave of redemptions, right?
In case. Like, in the real economy,
people decided to have key day and go in and be like, I want to
go home a cash under my mattress.
And, and the bank's take on risk.
When they engage in this, right? Like the risk, when you, when
you make a loan as a bank, you make people post collateral.
You know, they're posting our house and they're signing a
personal guarantee and like they are on the hook for that and the
bank needs to believe. That in the event of a default,
they're okay with actually receiving that set of assets.
So they got like, look out in the world and say, like yeah,
this house is valued, fairly like, if you roll into a bank
and you're like, you just buy your house for five hundred
thousand dollars and you're like, I want to take a two
million dollar loan out against my house.
They're going to be like there's no there's no way we're going to
do that. They are effectively buying your
house like that's what I'm worried.
The bank is buying your house from you.
Handing you the cash and then allowing you to buy it back
slowly. And so the all this stuff is
backed like this Dia that, you know, Fiat has not backed by
real assets? I'm like, of course it is.
It's backed by all the real assets.
Like it is Fiat is backed by nothing but hard assets.
It's backed by claims on real assets.
That's why we have collateral. That's why we have personal
guarantees. And when you see these sort of
like bad copies ported over the crypto ecosystem, you know, one
another one is this over collateralization thing it's
like yeah well these loans are over over collateralized.
I'm like yeah they're over collateralized by an asset.
That just lost half its value in a month.
I mean it's not I think if you would have a hard time saying
that if thing is over collateralized by something that
volatile, without limiting that to a very specific moment in
time because it could change by five to ten percent had a
Francis Coppola talk to us about, you know, a haircut and
and all of that stuff and how a lot of these things would
essentially need 100% haircut to be properly collateralized which
is yeah. Yeah nuts I mean yeah and even
that's a Trade because if you get a you get a selling cycle
there's a there's the potential for a self reinforced
self-reinforcing selling cycle where because the collateral is
lowered. It forces a liquidation, which
if that happens enough in aggregate like the whole thing
just implodes, that's what a deflationary crisis.
Is this with the feds always trying to prevent with their
little, you know, their interventions and stuff, but the
specific thing you're describing was that you one of the things I
discussed when make redoubt first came out, because back
when died was A collateralized by Ether.
If it got sufficiently large enough, it was at risk of that.
Yeah. And so that their own
liquidations selling off, their collateral would further
liquidate people further down and you just get into a cycle.
Yeah, and cats to your point, the bank of international
settlements recommended haircut, for crypto is 100% yet, they
don't recommend banks. Allow anyone to collateralize
alone with crypto because of what we're talking about here,
it's bullet old and the likelihood of a margin call is
pretty high. Yeah, I mean you look at the
Some things that are in the, in the banking system, there is a
whole set of how much you can land against things.
Like there's the, I mean, the regulations that are very
complex like you get different haircuts for different assets,
right? And this is how the whole thing
hangs together today is that we have a set of norms that the
basically say, yeah. Be somebody brings in a gold bar
like you can, if you're lending against gold like, yeah, it's
pretty good. If you're lending against
treasuries, it's great. And I think that the failure in
the crypto because I'm ecosystem to respect the evolved
complexity. There is really kind of at the
core of like what's, what's wrong in crypto is it's a, you
know, it's a bunch of upstarts who want to reinvent a banking
system out of whole cloth and I'm not entirely sure that can
be done. I mean, I think of it like like
Esperanto, you know, languages don't just get interested down
with a piece of paper and like invented language because
there's no nobody knows how to talk to one another that way.
Like it's in its Involved Trope, taking evolved incremental human
trouble, like government and money is one of those.
I'm fascinated to see how the stuff plays out.
You know. I certainly don't wish anyone in
crypto ill like I hope everyone prospers and you know
everything's great. And I'll add, you know, take
small bats, whenever gambling is fine, think I'm not against
gambling, it seems like a fun gambling ecosystem, but you know
that I see people on Twitter who like, they are, like, you take a
mortgage out on your House and you put it all in crypto and
their up 100% And it's like they got a free house.
I feel like that's a very tenuous situation.
I feel like maybe you should take pay off the mortgage at
that point and let the rest ride totally.
And that's it reminds me of someone taking out a bunch of
corporate debt to buy Bitcoin for their company.
You know, and it makes you wonder, it makes you wonder if
the thought process was just fully conceived.
Actually, you know, the freest you can be is when you don't
have any debts if you live in a house.
It has paid off. It's hard to become a Force
seller. So even if your goal is to
rival, encrypt is going up and it's going to go through these
big trough sand like, you know, spikes and it's going to be
really great ride like having a house paid off, so that you
don't become a for seller of this asset that you really.
Like, when it goes through these really volatile times, it's a
great idea, it's a great way to be bullish on.
Things is to be like defensive in a way where you never become
a for seller. I mean, we think about my story
they were with Bitcoin, I was effectively for cellar.
Like I was a poor entrepreneur that's why I didn't hang on to
my my coins, right? And like continue forgetting
about them. I found this asset in the time
when I when having that money, then was more important to me.
And I think that this is another interesting thing about cryptos.
You have that Dynamic is not really price in.
It's the same reason. Gold can go down fairly quickly
is because people just need the, you can't eat gold.
You gotta go trade that for for food to feed your family in the
real economy, even if you're bullish on gold, so you can
remain bullish. On an asset and still find
yourself in this position where like you got to sell some.
So anyway, I think everyone should just play safe and like
stop repeating these things about how you should be levered
to the gills on debt and it's just a very poisonous idea.
Yeah. I think that I think that whole
concept is going to start start getting renounced very quickly.
If rates start to go up because rates don't have to go up much
from near zero for people to freak the hell out.
Yeah, we're already seeing it to my mind, the front-end rates.
Almost the most interesting because that's the stuff that's
used on a day-to-day basis, by business.
Like, when you're running a business, you basically, you can
do things like factoring your invoices, so you have a million
dollars in receivables. You can go get a million dollars
worth of debt pretty easily, but if front-end rates go up, it's
all short-term debt. So front-end rates go up.
It's more expensive to do that. You pay a little bit more, so
there's less appetite for it. It impacts profitability.
I think we're starting to see some of that and especially in
earnings are coming on now. Like, you're seeing some hits to
profitability across sport. Last thing I want to ask about
this is this is it. I promise is just a lot of talk
about inflation right now. You're a dollar.
I don't know if you want to call yourself a dollar bill but you
like the dollar, I think all of us here enjoy using the dollar.
So I don't have I don't take issue with it in that regard at
all. What are your expectations in
regard to inflation and this next year, too?
So, well, first of all, let's bucket this into two categories.
One is supply chain and sort of like the economy being in a
tough spot with regard to just general mobility of people
moving stuff and that causes some inflation.
Like there's less stuff on the shelves.
So people charge more, and then the other side is monetary
inflation. And I think that, you know, this
is the one that's least understood.
I think the thing to know about monetary inflation is that when
is that money is really about duration money.
There's not a just a quantity of money, there's a quantity of
money now and forward through time and what we've been doing
some With this Q. 8qe staff is pulling the duration of money
forward. So imagine you take a CD out a
CD to pay is like 1% and that's locked up for five years.
And then all of a sudden, the economy gets in a tough spot and
the bank comes to you and says, hey we're going to allow you to
liquidate the CD Now with no penalty.
Typically, this penalty. Well, it's not like, there's
more aggregate value there, there's just more liquid now.
Money is money, that was locked up, sort of saved for the
future, paying a little bit. Is now all available.
Double in your checking account immediately and is Flowing
around really fast and it's like hot money.
I do think we're seeing a little bit of monetary inflation from
that where it's like there was a bunch of money future money that
was pulled forward into now it's like sloshing around a lot more.
It is not an aggregate increase in the wrong amount of money.
In the incentive structure, there is changing as rates.
Go up, it gives people an incentive to ghosts or some of
that money. So you know, like one and
two-year rates are paying like, you know, relative to recent
history. Decent.
So there's an incentive to go by these treasuries and lock that
money up. And I think that those
incentives are, what kind of rebalance the inflationary
impulse. So typically what you see after
a supply shock like we're having is you see a pretty nasty
deflationary hit and I still think we're going to go through
that and it's going to suck because everyone's offsides,
like everyone is betting on inflation.
You know, it's been a good bad and I think the natural
consequence of that is that it incentivizes a lot of
production, incentivizes people to get all these supplies.
Change back online. And when they come back online,
we're going to find that. People have already bought a lot
of things, they wanted peloton's and all these things that are
not recurring purchases and that's going to hit earnings and
it's going to hit consumer spending and that results in
recessions obviously. So so I think we are teeing up a
kind of a double-dip recession here.
That's still my read. Sweet.
Well that's a scary note to end on but let's go ahead and run
with it scary know from the barrel or take.
What was wonderful. Having you On, thank you for
joining us. Do you were the first one to
have me on a podcast. So I also thank you so much for
for joining us. It's been a real pleasure.
You can let people know where to find you if you want them to
find you. Yeah, that's like sweater is
Colorado. Travis.
I mean, look, I'll take all comers on Twitter if you enjoyed
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