openpolitics.com

What Structural Issues Are Being Exposed By This Financial Crisis

Transcript

00:00

all right I think we are going live so

00:06

god I am at the New York City and

00:09

Caitlyn is in Wyoming normally I only do

00:14

the podcast live in person but Caitlyn

00:18

has been kind enough to on a Sunday jump

00:21

on this livestream and we’re gonna try

00:23

to figure this out because we may be

00:24

doing more remote live cast for for a

00:26

while now yeah I’m afraid that’s true a

00:31

lot of people are gonna have to have a

00:32

lot of patience about logistics in the

00:36

next few weeks of remote working and

00:39

remote conversations but thank God for

00:41

the engineers who can figure this out

00:44

salute you Allison

00:46

so guys just bear with us here a second

00:49

as we take another 30 seconds or so

00:51

we’re gonna get some some more folks in

00:53

on on the livestream and then we’re also

00:56

going to tweet out the the youtube link

01:00

so that folks can can get in here too

01:04

and watch let’s see so we actually out

01:09

the the youtube link which is good news

01:14

Caitlyn I’m gonna send you to take now

01:16

let’s yeah let’s go ahead and we’ll

01:19

tweet out this will tweet out the

01:23

YouTube like and then we’ll get started

01:24

here at the conversation yep Joe just

01:28

sent it to you so I think we should we

01:30

should be good let’s tweet this link out

01:32

then we’ll go ahead and get this good

01:36

bought the cup what they start leaked

01:40

leaked that does Caitlyn justice for all

01:42

of the amazing work she’s about to

01:46

livestream

01:47

conversation with Caitlyn

01:55

[Music]

02:02

okay so I think that that tweet should

02:07

have just gone out and we’ll see how how

02:11

that goes

02:13

all right Caitlin let’s let’s jump right

02:15

in for those that don’t know you the

02:17

small few maybe just give us kind of a

02:19

quick two minutes on your background and

02:22

and what you’ve done previously in terms

02:25

of career-wise before getting into a

02:27

Bitcoin sure I’ve grew up in Wyoming

02:32

trained lawyer spent 22 years on Wall

02:36

Street working in the traditional

02:37

financial services industry managing

02:40

director at a couple of different places

02:42

and in my career my Wall Street career

02:44

at Morgan Stanley where I was running

02:46

the pension solutions business and got

02:49

into Bitcoin in 2012 which was before I

02:53

left Morgan Stanley in 2016 and I

02:56

spotted it as something that would

02:58

actually help solve some of the issues

03:01

that I’ve identified in the traditional

03:03

financial services industry

03:07

left in 2016 to work on blockchain

03:09

technology full-time did a detour

03:12

through an enterprise blockchain

03:14

technology company before coming back to

03:16

the decent decentralized protocols and

03:20

worked as a volunteer for the last two

03:22

years unpaid helping in my native state

03:25

of Wyoming where I just returned to

03:27

after 29 years to create a legal and

03:31

regulatory regime to welcome the digital

03:33

and I just announced last month I’m

03:36

gonna start a new type of special here

03:39

in Wyoming to help provide 100% reserved

03:42

no rehypothecation full strong balance

03:45

sheets financial services to the digital

03:48

asset industry I love it so before we

03:52

get into how we’re doing now let’s start

03:55

from the beginning you’d mention that

03:58

you had identified a bunch of issues

04:00

that were kind of persisting in the

04:03

legacy world maybe walk us through what

04:05

those issues were and how they kind of

04:07

led into what we’ve seen over the last

04:09

two weeks or so yeah I in 2008 during

04:16

the financial crisis I got very curious

04:18

because the mainstream explanation for

04:20

things stopped making sense and frankly

04:22

I think a lot of more people are

04:24

figuring out in the last couple of weeks

04:26

that that same thing is true and

04:29

arriving at the same conclusion probably

04:31

that’s why a lot of people are here they

04:33

want to hear a different view and

04:36

understand that maybe the mainstream

04:40

explanation doesn’t quite make sense

04:42

anymore and I think that’s right I had

04:45

that experience in 2008 a lot of people

04:47

who taught me had that experience in

04:49

1999 or even before so what it was in

04:54

2008 that didn’t make sense is they is

04:57

Treasury Secretary Tim Geithner at the

04:59

time said interest rates were too low he

05:01

acknowledged on Charlie Rose’s show I

05:03

think that the that that that was what

05:07

caused the mortgage crisis and then a

05:09

couple days later I heard him give an

05:11

interview where he was job owning the

05:13

Fed to interest rates lower interest

05:15

rates even still and obviously that was

05:17

a logical disconnect that I just got

05:20

very curious

05:20

and started digging and intuitively knew

05:23

something was wrong and it really I did

05:27

I dug deep I I actually and and and what

05:31

brought at the same time I read a lot of

05:33

alternative schools of economic thought

05:35

read a lot of history and started

05:37

putting puzzle pieces together that what

05:40

I have learned in school and what I paid

05:41

a fortune for my education for wasn’t

05:45

really the way the world worked and the

05:48

way the world worked is actually

05:50

something that falls squarely in the

05:53

school of common sense but not squarely

05:56

in the school of what what most

05:58

mainstream economists think about the

06:01

world and and so again I think that’s

06:03

probably why a lot of folks are here

06:04

because there’s an understanding that

06:07

something’s wrong and they’re not

06:09

getting the real story yeah I think it’s

06:13

a great way to put it in so this past

06:15

week we’ve seen what I’ll call very high

06:18

levels of volatility across a number of

06:20

different markets we’ve seen what I’ve

06:23

categorized as kind of this liquidity

06:24

crisis where everyone’s running to the

06:26

door and selling as much of these liquid

06:28

assets as they can to try to get dollars

06:30

and then we saw obviously over the last

06:33

couple of weeks the emergency interest

06:36

rate cut and then this monetary stimulus

06:38

announcement of the this past week may

06:41

be kind of helped us make sense of like

06:43

what is happening and then we can tie it

06:45

through that like how we’ve gotten here

06:47

but just in your sense like what is

06:49

actually happening right now well we’re

having some pretty severe dislocations

in financial markets the so-called

risk-free asset which is US Treasury has

had a pretty crazy week there were

07:03

bid-offer spreads of as wide as a

07:06

hundred basis points in the 30 or

07:07

Treasury this past week which is really

07:09

scary but because that’s how the US

07:12

government funds itself and that’s how

07:14

the big banks also increasingly fund

07:16

themselves for the less when I say

07:18

increasingly for the last 15 years

07:20

that’s how the big banks have funded

07:23

themselves is through what’s called the

07:24

repo market and repo is essentially

07:27

you’re just posting collateral typically

07:29

a US Treasury in return for cash

07:31

financing and so when the US Treasury

07:33

market starts to

07:34

some pretty severe dislocations you know

07:36

that something’s really wrong and in

07:38

fact actually the feds bazooka that was

07:41

introduced the one and a half trillion

07:42

dollar stimulus came right before a

07:45

troubled 30-year Treasury auction I’ve

07:48

said for years for those of you who’ve

07:49

been following me that that’s the thing

07:51

that I’m most worried about is a failed

07:53

Treasury auction and you know if we have

07:56

challenges with that that starts to that

08:01

basically that’s how the US government

08:02

funds its deficits by issuing Treasury

08:05

bonds you know that that is that is how

08:08

if god forbid there are problems with

08:10

the FDIC and the FDIC insurance fund

08:13

which I would invite you to go and look

08:15

at how big that is relative to the size

08:17

of the banking sector hint-hint it’s

08:19

very small and if the FDIC needs more

08:21

money they have to go to the US Treasury

08:23

which would have to issue Treasury bonds

08:25

we start having problems with Treasury

08:27

bond issuance it’s a challenge now that

08:29

said they did get the auction off and

08:30

and and the Fed it clearly helped but

08:33

it’s the kind of thing that you know the

08:36

stock market gets the headlines but the

08:38

real action is in the fixed income

08:39

market and I’ve been watching indicators

08:43

in the fixed income market which have

08:45

been flashing really loud red sirens if

08:48

you knew where to look since last fall

08:50

and even frankly for the last couple

08:53

years it’s been obvious that we’re in

08:55

the fourth such financial system

08:58

disruption since 2008 and this is this

09:03

is definitely the worst one since 2008

09:05

if not worse than 2008 we don’t know yet

09:09

okay so let’s kind of take this one

09:11

piece at a time so I think there’s a lot

09:13

of people who have no clue about the

09:15

Treasury markets about how the auctions

09:17

work and why that’s so important maybe

09:19

explain how do these auctions work and

09:22

then also why that they’re so crucial

09:26

each other what kind of funding for the

09:28

government etc if you can explain both

09:30

how the auctions work and then why

09:32

that’s the thing to pay attention to I

09:34

think a lot of people kind of get it a

09:35

little bit better

09:37

yeah the auctions are really the nerve

09:39

center of capital markets and like I

09:42

said the Treasury bond US Treasury is

09:44

considered so-called risk-free asset I

09:46

put that deliberately and

09:47

air quotes but but there are a number of

09:51

so-called primary dealers that are

09:52

required to step up and bid on on those

09:55

auctions and then they turn around and

09:57

resell the Treasuries but effectively

09:59

they’re guaranteeing that the Treasury

10:01

Treasuries get sold but to the extent

10:03

that the banks have challenges with with

10:06

their own funding keep in mind that’s

10:08

sort of a loop right because the banks

10:09

actually need those Treasuries at the

10:11

same time for them to get funding in the

10:13

repo market so I probably won’t go into

10:17

more details than that but let’s step

10:19

back and understand about the auction

10:21

specifically but but the big picture is

10:23

what does it mean the US Treasury is

10:25

essentially the reserve asset of the

10:28

securities industry just like the so

10:31

called monetary base is the reserve

10:33

asset of the traditional banking

10:35

industry and what happens is that a huge

10:38

amount of debt gets piled on on top of

10:41

those so-called reserve assets again

10:44

Treasuries in the securities industry

10:45

and monetary base in the banking sector

10:48

most of you if you studied economics in

10:50

school understand how fractional reserve

10:53

banking works that you take a dollar of

10:55

so called monetary base and then

10:57

typically the bank’s issue out ten

11:00

dollars worth of loans through

11:02

fractional reserve multipliers that you

11:05

turn one dollar of monetary base into

11:08

ten dollars of credit that’s the way the

11:09

traditional banking system works but

11:11

that’s not where most of the credit has

11:13

been issued in the economy or in the

11:15

financial system in the last couple of

11:17

decades most of it has been issued in

11:19

the so called shadow banking system

11:21

which is really the securities markets

11:23

where Treasury bonds which are I owe use

11:26

of the US government just like or

11:28

analogous to the monetary base being an

11:31

IOU or the Federal Reserve again both of

11:33

these I owe use they’re a really

11:34

important point we’re gonna pile even

11:37

more IOUs on top of that and there’s

11:39

actually a lot more leverage than ten to

11:42

one in the in the securities industry

11:43

and so when you think about the fact

11:46

that a lot more leverage got piled on

11:48

those Treasuries that the next question

11:51

is alright what happens if we get into a

11:53

deleveraging environment you usually see

11:55

a run to to safety and and again the

11:59

risk-free risk-free in quote air quotes

12:01

that is is the Treasury bond and we see

12:04

the rush to safety we certainly saw that

12:06

Treasury yields collapsed which meant

12:09

that the price went up because yield and

12:10

a price move in opposite directions

12:12

you saw them hit record lows across the

12:14

entire interest rate curve US Treasury

12:17

interest rate curve this past week and

12:20

so there was a rush to rush to quality

12:22

but then you start to get the the

12:24

reality that in fact actually liquidity

12:27

has kind of disappeared from these

12:29

markets and it took a Fed bazooka to get

12:31

a 30-year Treasury auction done the

12:33

auction was done at a relatively good

12:35

yield it was only a couple basis points

12:37

wide but but the what’s called the bid

12:39

to cover the it the internals of that

12:41

auction we’re really challenging so it

12:43

just is it it’s indicative that we’re in

12:45

a pretty severe dislocation and the

12:47

financial markets even more so in fixed

12:50

income than in equities got it and so

12:54

when you say that that auction was in

12:56

trouble and the Fed steps in with you

12:59

know the 1.5 trillion dollar

13:00

announcement explain kind of the

13:02

mechanisms of they say hey we’re going

13:04

to inject this liquidity but what

13:07

exactly is happening there from a

13:10

mechanism standpoint so that people

13:12

understand kind of how they quote say

13:16

yeah so so the the injection of

13:20

liquidity is literally injecting

13:21

reserves into the banking system

13:23

injecting cash into the banking system

13:25

the Fed’s balance sheet increases some

13:27

people call that printing money that’s a

13:29

that’s an outdated term but it’s still a

13:31

term that describes what’s going on

13:33

you’re literally creating the feds

13:34

writing a cheque on itself they’re

13:36

creating assets out of thin air

13:39

and expanding their balance sheet and in

13:41

the last crisis in 2008 the Fed’s

13:43

balance sheet was about 800 million and

13:45

then it swelled up to well over 4

13:49

trillion and then the Fed started to

13:51

reduce its balance sheets it threw

13:55

through as it was raising interest rates

13:57

and and letting some of the assets that

13:59

it had purchased run off but now that’s

14:03

reverse course and now the feds

14:04

increasing its balance sheet again and

14:06

and so from the Fed perspective we’re

14:10

north of four trillion I think around

14:12

4.2 4.3 trillion of

14:15

of fed balance-sheet right now again up

14:17

from 800 million in the last financial

14:19

crisis one of the analysts who I must

14:22

take my hat off to Doug Nolan who really

14:24

got this whole thing right and has been

14:26

chronicling what was coming in the in

14:30

the credit markets it he predicted that

14:33

the Fed’s balance sheet would swell to

14:34

10 trillion in this next crisis which I

14:37

think is here he predicted that by the

14:39

way he’s been predicting that all along

14:41

so that’s not a new prediction and and

14:44

at the time and she thought last fall

14:46

when he published it most recently it

14:49

struck me as way too low and in fact

14:51

actually I think it’s going to turn out

14:52

to be way too low so everyone from my

14:55

perspective and again I should step back

14:57

and say none of this is advice you’re

14:59

getting what you’re paying for here this

15:01

is just one person’s perspective and you

15:04

can’t rely on it but hopefully it’ll

15:07

just help make you think that’s the only

15:08

thing I want to want and what would like

15:11

for you all to take away from this is

15:12

just one person’s perspective to help

15:14

make you think it’s just it’s a

15:15

different perspective than you’re gonna

15:17

read in the mainstream press but anyway

15:20

coming back to that is the 10 trillion

15:22

dollar number that much you know I back

15:24

it back in last fall I think a lot of

15:26

people were shocked by that prediction

15:28

and at the time I said no way that’s way

15:30

too low the Fed’s balance sheet is

15:32

actually going to be a it end up being a

15:34

lot bigger than that now what’s the

15:36

impact it means that the banking system

15:38

is very liquid from the traditional

15:42

banking system they’ve got all kinds of

15:43

cash the problem is that cash is in the

15:45

wrong place it doesn’t help the

15:47

securities markets because the banking

15:49

industry in the securities industry are

15:50

really pretty separate there are a few

15:52

of the gigantic banks the money center

15:55

banks that are in both sides there are

15:57

traditional banks and their and their

16:00

Securities Dealers primary dealers that

16:02

that handle Treasury auctions for the US

16:04

Treasury and but but even there they

16:08

actually the balance sheets are

16:09

typically not even in the same legal

16:11

entity so there’s some there’s that the

16:15

cash is going into the traditional

16:16

banking industry but not into the

16:18

securities industry and and that’s part

16:21

of the reason why you see these

16:22

dislocations that don’t totally make

16:24

sense but in fact actually if you

16:26

understand the plumbing it

16:28

makes sense yeah and so help us

16:32

understand right when we talk about this

16:34

kind of expansion of the balance sheet

16:37

one of the things that I saw on Twitter

16:39

recently is I think Ben Bernanke on a 60

16:42

minutes episode somebody said to him you

16:44

know what exactly like where is this

16:46

money coming from are using taxpayer

16:48

money and he you know kind of

16:49

nonchalantly said no we just go in and

16:52

we just edit the account number so they

16:54

need to talk a little bit about that

16:55

expansion of balance sheets and the fact

16:57

that the number really is backed by

17:00

nothing and is kind of at will can be

17:03

expanded without any kind of logic bond

17:08

well you just laid out exactly the way

17:10

who works the Fed is literally writing a

17:12

check on itself it’s the only

17:13

institution only bank it’s illegal it’s

17:16

legally a bank it’s the only bank that’s

17:18

allowed to do that to literally create

17:21

money out of thin air and then it’s it’s

17:24

monetary base like I said gets

17:26

multiplied by other banks who are

17:28

allowed to create a different type of

17:30

money out of thin air but all this is

17:32

coming out of thin air now if what’s the

17:35

what’s the real impact of it it’s all

17:36

debt it’s right it’s all an IOU actually

17:39

in fact even the dollar is an IOU

17:43

everything’s in IOU go look at the

17:44

dollar in your wallet if you have one it

17:46

says Federal Reserve Note pay to the

17:48

order of it is it is a debt instrument

17:52

the dollar itself is a debt instrument

17:54

so everything everything is an IOU piled

17:57

on top of an IOU piled on top of an IOU

17:59

that’s a really important point I think

18:00

to some for some listeners that’s going

18:03

to be news most of you probably

18:05

understand that the the banking system

18:07

is an IOU we don’t legally own the

18:10

deposits in our bank account that’s a

18:13

promise to pay from our banks so

18:15

effectively we’ve lent them the dollars

18:17

we’ve deposited in the bank

18:18

the the piece that very few people

18:20

understand in my experience though is

18:21

that the same is true in the securities

18:23

industry we think we own the shares in

18:25

our brokerage account in fact we don’t

18:27

they are IOUs the same way that the

18:30

deposits in our bank account are io

18:31

u–‘s we’re actually taking an

18:33

obligation from our counterparty to

18:35

deliver us the asset and they have an

18:38

obligation from a different counterparty

18:39

to deliver them the asset and they have

18:41

enough

18:41

locations from a different counterparty

18:43

to deliver them the asset and there’s a

18:45

huge daisy-chain of IOUs in the

18:47

securities and banking industries

18:49

respectively they both work the same way

18:51

and so but at the end of the day the

18:54

bottom remember I talked about the base

18:56

asset in each of the two types of

18:59

financial industries the banking

19:00

industry and the securities industry the

19:03

base asset in and of itself is an IOU to

19:06

your point yeah and so let’s talk a

19:09

little bit about kind of how we’ve

19:11

gotten here right because this is not

19:13

something where nobody saw it coming

19:15

there’s actually quite a few people

19:17

who’ve been publicly saying there’s

19:19

issues there’s issues and I don’t want

19:22

to say that anybody was like you know

19:23

it’s gonna happen in January or February

19:26

or March 2020 I think it was more of

19:29

just these problems can’t persist

19:31

forever and I think one of the first

19:33

things is the coronavirus or covet 19

19:37

now there’s a lot people are saying oh

19:38

this is all because of the virus I think

19:41

you and I are in the boy these foods

19:43

we’re gonna happen anyways the virus is

19:45

likely the accelerant the thing that

19:48

causes an economic slowdown and exposes

19:50

these structural flaws maybe talk a

19:52

little bit about the relationship to the

19:54

virus and also what those structural

19:56

flaws yeah the virus is just the pin

20:00

that’s pricking the bubble and the

20:01

bubble the the the the credit bubble is

20:04

by far the bigger issue the virus will

20:07

definitely be a problem for everybody

20:09

right you know everybody’s holed up at

20:13

home or if you’re not you should be to

20:15

try to reduce the spread Balan Tara Lee

20:18

you should be to try to protect the

20:21

elderly and and and the and the folks

20:23

that are more susceptible to it because

20:25

it is so contagious and we can come back

20:28

and talk about that I’ve actually worked

20:29

on pandemic bonds earlier in my career

20:31

so I was I was pretty sensitive to this

20:33

and and to your point that not a lot of

20:35

people predicted the timing something

20:37

like this you couldn’t predict right a

20:38

virus coming out but I will say those of

20:41

us who were worried about who we’re

20:43

looking for what would be the catalyst

20:45

of a problem in the financial industry

20:47

we were pretty focused on this pretty

20:49

early on and again I got a dig give Doug

20:51

Nolan credit and it was his credit

20:54

bubble bullets

20:55

on Saturday January 25th I started

20:57

tweeting out about it and said oh my

20:58

gosh this might be the the thing that

21:01

pricks the credit bubble and maybe

21:03

that’s part of the lens I was looking

21:04

through because I was worried that there

21:15

you

21:29

as you spend their lives studying these

21:32

these sorts of things one of the things

21:34

they were worried about the number one

21:36

net calamities would of course be you

21:39

know a nuclear war or a supervolcano

21:41

going off but but you know the a

21:44

sustained power grid downtime is also

21:49

right up there in terms of severity of a

21:53

disaster but but the next one on that

21:56

list is a pandemic it always was and

21:58

this was always have been worried about

21:59

is a flu we because it’s so contagious

22:02

and by the way I did post on my Twitter

22:04

account a couple of days ago there’s a

22:06

prospectus from the World Bank’s

22:08

pandemic bond which is the most recent

22:10

one the ones I worked on paid off a long

22:12

time ago and and and they didn’t trigger

22:14

but this World Bank pandemic bomb did

22:16

trigger if you’re interested in the

22:19

history you should go take a look at

22:20

that because that is that’s based on

22:22

hard math it’s actuarial science and and

22:25

a lot of study of exactly what happens

22:29

in the 1918 Spanish flu which is still

22:32

to this day the worst flu that has hit

22:35

in recorded times it was actually even

22:38

though it’s called the Spanish flu Spain

22:40

got a bad rap because they were just the

22:43

first one to step up and admit that it

22:45

was happening it does the actuaries dou

22:48

X dou accept the the the alternative

22:52

story which is that it actually started

22:53

in the United States started it looks

22:55

like on pig farms in the Oklahoma

22:57

Colorado border in 1918 it went all

23:00

throughout the world

23:02

it was extremely contagious in fact it

23:04

looks like this corona virus we’re

23:06

facing now is even more contagious than

23:08

that was but luckily the death rate from

23:10

from the corona virus is a lot lower

23:13

than

23:16

in the 25 to 45 year old age group this

23:19

way is not this one is

23:20

disproportionately hitting hitting

23:22

elderly so I went off top again and

23:24

completely forgot that Kristin you asked

23:26

me sorry about that but know that you

23:29

should read about that yeah I think one

23:33

of the key pieces to this whole thing is

23:34

when you talk about popping this credit

23:36

bubble what essentially happens here is

23:38

the virus starts to spread there is very

23:41

serious health concerns with that so

23:44

whether it is fear induced or actually

23:46

that the true health concerns what

23:48

eventually occurs is everyone has to

23:50

stay inside right and so you get a

23:53

complete drop off and travel we’re

23:55

seeing across the United States

23:57

these reservation apps are reporting 50

23:59

percent or more in some cases drops in

24:02

restaurant visits the airline industry

24:04

is completely being decimated rosing

24:08

as if millions of dollars Cruise Line’s

24:11

hotels Airbnb etc and that slow trickle

24:15

across the economy is not just on the

24:17

consumer side it also happens on the

24:18

corporate side and so in a world where

24:20

everyone has been levering up with debt

24:22

you know for years now all of a sudden

24:25

they get a slowdown in revenue and EBIT

24:27

uh in in true cash flow they can’t pay

24:30

the interest on that debt and you get

24:33

this kind of trickle effect across the

24:35

economy these mini blow ups of that debt

24:37

and I think that’s really what you’re

24:39

talking about here in terms of as that

24:41

domino effect starts we don’t know how

24:44

big it is and how long it will last and

24:46

that’s kind of the big concern if I

24:47

understand where you’re coming from is

24:49

that anga yeah you Fred you phrase it so

24:52

well yeah I’ve forgotten to come back

24:54

around to you know those of us who were

24:56

who were looking for the who realized we

25:00

were in an incredible debt bubble saw a

25:02

blow off top Lee I was tweeting out

25:04

yesterday looking at the updating of fed

25:06

numbers in my own spreadsheet we had a

25:10

ten percent increase in the total amount

25:13

of debt outstanding in the just the last

25:16

two years in the United States that’s a

25:18

huge acceleration and increase in debt

25:21

we certainly didn’t grow GDP 10 percent

25:24

over the last two years let’s put it

25:25

that way so we were we just let him in a

25:28

drunken stupor and so we were those of

25:30

us who were looking at that kind of

25:31

those kind of statistics were sensitive

25:33

to what could pop the credit bubble and

25:35

then when the coronavirus came around

25:37

that that’s you know there again Doug

25:40

Nolan was the first person that I saw

25:42

who called it back on

25:44

gerrae back then no none of us were how

25:46

how big of an issue this was going to be

25:48

but let me make this clear the

25:49

coronavirus is going to blow over flues

25:51

blow over the 1918 flu lat it had three

25:54

different waves but it it only lasted 15

25:58

months and it killed several hundred

26:01

million people in the world but it

26:03

burned itself out in 15 months this too

26:05

shall pass the bigger issue is exactly

26:07

what you talked about which is that

26:09

there are a lot of leveraged businesses

26:11

who were not set up to have a to

26:14

withstand a shock like this and it turns

26:16

out with the debt bubble that we’ve had

26:17

in the US economy that the US economy is

26:20

actually really vulnerable to this and

26:22

as I was tweeting out back in January in

26:25

with after reading Doug’s post I’m

26:28

worried about China’s economy as well

26:30

because China has accumulated debt it

26:34

only took them 15 years to accumulate

26:36

the same amount of debt that it took the

26:38

United States more than 50 years to

26:40

accumulate so there the acceleration of

26:43

debt in China has has also been

26:45

something that that you know a lot of us

26:47

have been watching as well and so that

26:49

you’ve got certainly the the Western

26:52

world the Americas and Europe having

26:55

been heavily leveraged going into this

26:58

coronavirus event but you also have to

27:00

have heavily leveraged as well so what’s

27:03

interesting is that it really is global

27:05

with the exception of a couple

27:12

severa they might have wanted to if they

27:15

had access to the financial system but

27:17

ironically you know they’re coming into

27:20

the coronavirus with stronger balance

27:22

sheets and as a result I think they’ll

27:25

bounce back quicker because they just

27:27

don’t have all these debt defaults that

27:28

are going to be triggered because we

27:31

were you know operating at the edge from

27:34

a leverage perspective in in these

27:37

leveraged economies including that of

27:39

the u.s. doe there’s this weird dynamic

27:43

of like there’s a bunch of people right

27:45

now they’re like holy I can’t

27:46

believe that we’ve gotten ourselves in

27:48

this position at the same time there’s a

27:49

bunch of other people that are like

27:50

hello welcome to market cycles right

27:52

2008 occurs everyone gets kind of super

27:55

everyone talks about cash flow and

27:57

strong balance sheets and all this stuff

27:59

over time we get access to chief capital

28:01

people start to take on a little bit

28:03

more risk than a little bit more risk

28:04

and a little bit more debt and and it

28:06

kind of balloon

28:10

through that bear market and now you get

28:12

into the raging bull market the longest

28:14

in history and where you end up is

28:16

basically right back where you were

28:18

maybe it shifted a little bit in terms

28:20

of the industries it’s affecting except

28:22

sure but it’s still just classic market

28:24

cycle stuff so one of the things you’ve

28:26

talked a lot about is kind of the debt

28:28

that the banks have taken on and though

28:30

the lack of the strong balance sheets

28:33

and maybe even the need for them to go

28:34

raise equity capital kind of give us an

28:36

understanding of the banks specifically

28:38

how do they fit into this how should I

28:40

adamant about them go and raise equity

28:43

yeah I started really banging this drum

28:46

in June of last year that I could

28:49

because I could I was watching these

28:51

these the repo market signals clear that

28:56

there something was really wrong in in

28:58

the in the market that the big banks

29:00

rely upon in order to fund themselves

29:02

and you know we saw in 2008 the repo

29:05

market totally seized up and then the

29:07

banks needed

29:12

first molar situation now and and and

29:16

and the thing that shocked me was that

29:18

when the Fed did its stress tests for

29:20

the big banks it

29:21

said everybody passed and allowed them

29:24

to go start buying back stock well boy

29:27

does that in history look like it it was

29:29

a decision that did an age very well

29:32

shall we say and then things got a lot

29:34

worse in in in the fall and I wasn’t

29:39

alone in editing but look you raise

29:41

capital if you’re a bank when you can

29:44

and when it’s abundant and you don’t

29:46

wait until things the wheels start

29:50

coming off because then you’re going to

29:51

dilute your shareholder so massively

29:53

when you do and but but actually

29:57

probably the skeptic in me says they’ve

29:59

been bailed out so many times why would

30:01

they dilute their own equity they should

30:03

you know they’ll just wait for for for

30:06

either the Fed to bail them out

30:07

indirectly or in the case of 2008 the US

30:11

government directly bailed them out by

30:13

investing in them and a skeptic in me

30:15

says maybe that’s what they were

30:17

thinking

30:17

I don’t know needless to say the banks

30:20

are way to leverage that was a very

30:22

contrarian view I remember a lot of

30:25

people calling me nuts for saying that

30:27

but what but I was watching the income

30:29

markets and it was very clear that the

30:32

situation was really getting to be

30:34

unstable and you know and then then we

30:38

saw the Fed reverse it’s it’s it’s it’s

30:41

interest rate increases and now we’ve

30:44

seen them even starts to cut rates again

30:46

and it was just obvious to those who

30:50

were

30:51

being of the fixed-income indicators in

30:54

particular the liquidity in the repo

30:56

market it was just obvious that this

30:58

this was a problem and now that said if

31:02

the banks are over leveraged what does

31:03

that mean it means the economy is over

31:05

leveraged plain and simple

31:07

we’d like to blame the banks but the

31:09

banks are just the financial industry is

31:11

just a pass-through of debt to the real

31:13

economy when when I talked about the 10%

31:16

increase in debt in the last two years

31:19

between twenty and twenty seventeen and

31:22

twenty nineteen that was households

31:25

businesses and government and just to be

31:28

clear that I’m not being political here

31:29

boy

31:30

the government debt has ballooned a lot

31:32

since 2008 it’s been both political

31:34

parties there doesn’t seem to be anybody

31:36

who is concerned about this both both

31:40

politically but it’s not just the

31:41

government sector it’s been the

31:42

corporate sector in the household sector

31:44

as well so the financial sector is

31:47

literally just a mirror of what’s going

31:49

on in the real economy that the

31:51

households businesses and government

31:53

sectors and all three of those have been

31:55

petals of the metal

31:57

on on borrowing really for the last 50

32:01

years this is just to be clear we I’m

32:03

talking a lot about 2008 but we’ve had

32:06

so many attempts by the free market to

32:08

assert itself

32:12

was 1968 we did have one year during the

32:15

financial crisis during which we saved

32:17

more than we borrowed but every other

32:19

year since then we’ve borrowed more than

32:21

we saved what does that mean it means

32:23

that we’re consuming more than we

32:25

produced it’s pretty simple and so if

32:29

you go back in history why did the u.s.

32:31

have why why did we become the strongest

32:34

economy in the world especially coming

32:37

off World War two and the answer is we

32:40

had the strongest balance sheet we were

32:41

an equity financed economy and what I

32:44

mean by that is if you looked at the

32:46

amount of money saved every year and the

32:49

amount of money borrowed every year it

32:50

was essentially equal year in year out

32:53

the borrowing that people did in the

32:56

United States was from every from

32:59

somebody else’s savings within the

33:01

United States so we were what I would

33:03

call an equity finance economy we were

33:05

not borrowing against our future in

33:07

order to consume more today and we

33:10

started doing exactly that in 1968

33:13

that’s when the guns and butter programs

33:17

so to speak were where we’re taking

33:20

effect and so a lot of people point to

33:22

1971 as the problem I actually point to

33:24

1968 that’s the year in which we started

33:27

really out living our means and every

33:29

year since then except for 2009 the

33:32

United States has outlived our means and

33:34

so how are we able to sustain it for 50

33:36

years I think a lot of people are are

33:40

saying well gosh we don’t have to care

33:42

about the debt this is a this something

33:45

you’ll read in mainstream media we don’t

33:47

have to care about the debt because we

33:49

owe it to ourselves or we can just print

33:51

money and therefore you know we can just

33:54

push pedal to the metal and keep

33:56

printing money and borrowing and to

33:58

respond to these crises with monetary

34:00

and fiscal policy respectively it used

34:03

to be one or

34:05

now it’s both and now neither one of

34:08

them seems to be working very well the

34:09

quantity of stimulus that we’re having

34:11

to throw at this most recent crisis is

34:13

staggering because the size of the

34:15

bubble is that much more staggering

34:17

because we’ve had so much debt issued

34:19

that’s non-productive in in especially

34:22

the last decade but even especially the

34:24

last two years and so what I would say

34:26

to those folks is you got lucky the ones

34:28

who think that that debt doesn’t matter

34:30

you got lucky because for 50 years we

34:32

were able to do this in the United

34:34

States because our parents and

34:35

grandparents and their parents and

34:37

grandparents bequeathed us with an

34:39

unbelievable balance sheet we net debt

34:41

on our balance sheet up until 1968 in

34:44

the United States we were we were we

34:47

were all the borrowing that that people

34:50

did in the United States was was out of

34:52

somebody’s savings and so that net debt

34:55

was zero for decades and then we started

34:59

going to town in 1968 and you know

35:02

unfortunately

35:06

if you look at the balance sheet of the

35:07

United States right now it’s kind of an

35:09

ugly situation we have 83 points three

35:12

trillion of non financial sector debt

35:15

outstanding again that’s the that’s

35:17

households businesses and governments

35:20

together I would also add the Fed’s

35:21

balance sheet is is should be added to

35:24

that as well so we’re really north of 87

35:26

trillion of debt and I looked it up last

35:28

night the net wealth of the United

35:31

States is 104 trillion as of year-end

35:35

2019 so we’ve got right and that’s

35:37

that’s not fleeting the debt is

35:39

contractual that’s that’s somebody’s

35:42

debt you know real obligation that’s

35:43

real whereas some of the assets backing

35:47

that hundred four trillion dollar number

35:49

are not real they’re fleeting right we

35:51

just saw 20 trillion come off the stock

35:53

market so if we’ve got eighty eighty

35:55

seven trillion of debt and 104 trillion

35:57

of net wealth to satisfy that and we

35:59

just took twenty trillion of value off

36:01

financial assets last week you do the

36:04

math this is why people I think are not

36:06

on are not irrational to be to be

36:11

nervous about the situation and start

36:13

questioning whether the things they’ve

36:14

been taught are really right yes so you

36:18

bring up a great point about this idea

36:20

of kind of the net debt right I always

36:22

think of it as sure your local your

36:25

family household is if you save more

36:28

than you spend then you’re usually in a

36:30

good spot you’ve got kind of a strong

36:32

balance sheet and you can continue

36:35

forever

36:36

if you start to get in a little bit of

36:38

debt well you can kind of catch back up

36:40

you can pay it off if you make a little

36:42

bit more money or approved it put

36:44

together a plan right we see that with

36:45

student loans for example etc that yeah

36:47

it’s a big number for a lot of people

36:49

but they eventually pay it off over time

36:50

but if you keep increasing the debt and

36:54

you don’t necessarily match that with

36:58

growth and GDP etc it’s a little bit

37:01

harder to kind of catch up so it feels

37:02

like you’re always kind of falling

37:03

farther and farther behind where do I

37:06

mean what is the the point at which

37:08

either the day can’t be paid back

37:11

there’s some other solution maybe

37:14

there’s not a solution you need a

37:15

massive correction like how do you think

37:17

about where this all ends whether that

37:19

happened

37:19

you know in 2020 or in 2050 whenever it

37:23

actually happens don’t worry about the

37:24

timing but like what is that end point

37:26

that this all kind of is yeah that I’ve

37:33

spent the last since 2008 reading about

37:35

this and thinking about this and

37:36

debating about it in my own head are we

37:38

gonna end in a deflationary crash are we

37:40

gonna end in a hyperinflationary melt up

37:43

and and the answer is we’ll probably

37:45

have a little bit of both in sequence

37:47

yeah yes sir well but just explain what

37:51

both of those are for those that don’t

37:52

know the deflationary and also the

37:53

hyperinflation explain those before you

37:55

kind of get into what what you think

38:04

you

38:08

okay Linda Lou

38:21

hold on one second guys let’s see what

38:23

happened here

38:39

we might have lost her hold on see if we

38:42

can get this back get her back in here

38:56

Oh Caitlin says she’s gonna join us

39:03

right back here in a second she just had

39:04

a power glitch I think so let’s uh let’s

39:07

just give her a second she should be

39:08

getting right back in see what happens

39:38

while we’re waiting for Kaitlyn to get

39:41

back in though if you guys want when

39:44

we’re done with recording this we’re

39:46

gonna rip the audio and we’re gonna put

39:48

up as a podcast and then also try to get

39:50

it on on Twitter as well

39:53

Kaitlyn is texting me right now and she

39:55

said the power just went out so stick

39:57

with us here for a second

39:59

and let’s see what we can do here okay

40:06

try

40:14

as want once we finish obviously

40:17

subscribe to the YouTube channel

40:19

and go ahead and share this link

40:22

Caitlin’s power just went out and she’s

40:25

gonna try to tether to get back in here

40:28

so just bear with us and I think we’ll

40:30

uh we ought to get her back in finish

40:32

talking a little bit about the repo

40:33

markets and then also she’s going to

40:36

give us a good understanding of how

40:39

everything what the Federer is I think

40:44

Haley can you hey I’m back

40:47

I’m tethering I’m on yeah sorry about

40:49

that oh my god all good we got I

40:53

covered for you while you were gone I

40:54

told them that you were doing important

40:56

things like trying to get the internet

40:57

back on oh yeah sorry about that you

41:01

know what actually I’m that I can tell

41:03

my connections not very good because I’m

41:06

just untethering on an iPhone so well

41:10

the power is out I don’t have I don’t

41:11

have my good Wi-Fi so I don’t have video

41:16

why don’t I turn the video off hopefully

41:18

everybody yeah that’ll that’ll allow us

41:21

to have less interference is that okay

41:23

pump new it yeah that’s that’s perfectly

41:26

fine

41:26

so what let’s um let’s just jump right

41:29

back in about you were talking about a

41:35

lot of the balance sheet with the bank

41:41

can you hear me okay oops did I lose you

41:51

nope I’m so here can you hear me did I

41:53

lose you can you hear me

41:59

Kaitlyn Kaitlyn okay can you hear me

42:12

you cool I’m just gonna I’m just gonna

42:16

talk oh it looks like the power just

42:18

came back on so chaos here a little bit

42:21

I don’t know what’s going on anyway

42:23

I just forgot where we were maybe let’s

42:32

change gears and talk about the real

42:34

commutes right here you can you uh can

42:40

you reap romp the question yeah I just

42:43

sent you if you can talk about the repo

42:44

markets

43:07

kaitlin just go ahead if you can hear us

43:08

and just go ahead and talk about the

43:10

repo market

43:41

let’s see if we can get her back on to

43:47

the power alright I think she’s gonna

43:48

try to reconnect not on tether but on

43:50

her on her actual computer here let’s

43:56

just give her a second but if you guys

44:00

want I think that after this we’re gonna

44:03

try to answer some questions as well on

44:06

on Twitter so if you run over there and

44:09

just tag Kaitlyn and on your questions

44:13

so we get done recording we will go

44:15

ahead and try to do our best to answer

44:17

as many of them as we can

44:18

she is resetting all of her internet and

44:24

connections so hopefully we can we can

44:27

get her on here shortly and she could

44:31

talk about the repo markets and then

44:33

kind of the government responds to a lot

44:35

of this all right are you back

44:38

Wow sorry about that and power went off

44:40

and all right about that and know your

44:43

life we’re all hearing glitches in the

44:46

next couple weeks that haven’t happened

44:48

before so sorry about that but now the

44:50

lights are not on behind me anyway

44:53

you’re all good maybe let’s just jump

44:56

into the repo markets you kind of

44:57

explain what the issues are there and

45:00

what you’ve seen and kind of why that’s

45:01

important for people to continue paying

45:02

attention to yeah well as I mentioned

45:07

the repo market is is essentially how

45:09

the big banks fund themselves

45:13

when we had traditional banks it was

45:15

literally yours and my deposits at our

45:19

corner bank that that funded the banks

45:21

and then of course the monetary base

45:23

when the Fed either expanded or reduced

45:27

its balance sheet respectively would add

45:28

or reduce funding for the for the bank

45:31

so that’s the way the traditional

45:32

banking system works increasingly in the

45:34

last especially the last 20 years the

45:36

repo market is how the big banks fund

45:38

themselves I make a big distinction

45:40

between the big banks on the corner

45:42

though thirds there they’re really well

45:45

funded not a hundred percent but they’re

45:48

much better funded than than they were

45:49

in 2008 the big banks are where the

45:51

problems are in my humble opinion

45:53

because they’re so reliant on what’s

45:55

called wholesale funding which is the

45:57

repo market and what that is is

45:59

basically they’re just they’re just

46:00

posting securities as collateral for

46:03

financing typically overnight but you’ve

46:07

noticed that the Fed has started to

46:09

actually expand to what’s called turn

46:10

repo which is something over

46:13

and then you know longer than overnight

46:15

loans but there’s an enormous amount of

46:19

leverage in the repo market there’s a

46:24

mainstream economist whose work I have

46:26

tremendous respect for who’s been doing

46:28

a lot of work on just how leveraged the

46:30

securities industry is and and and he

46:35

uses the year-end financial statement

46:39

filings which actually are are shall we

46:43

say window dressed because everybody at

46:46

quarterly financial period reporting or

46:49

year-end financial period reporting

46:50

brings their leverage down it’s it’s

46:53

really obvious in the market that this

46:54

is this happens so take these numbers

46:57

with a grain of salt but he estimated

46:59

how basically that what he called

47:02

collateral velocity which is how much

47:04

collateral there is that the big banks

47:07

can use to fund themselves and then

47:09

reuse and reuse and reuse and reuse that

47:11

code

47:15

piece of collateral is reused three

47:18

times at your end down from four times

47:21

before the financial crisis so we have

47:23

de leverage but since the financial

47:26

crisis but there’s still a tremendous

47:27

amount of leverage and again these are

47:29

the year-end numbers for my experience

47:31

and I did do some work in the repo

47:33

market earlier in my career for my

47:35

experience that the the intra period

47:38

repo is probably two to three times that

47:41

size so what does that mean that means

47:44

then if we have a quickly think of runs

47:47

on the bank as being like in the movie

47:49

It’s a Wonderful Life that’s the

47:51

traditional banking system where

47:53

everybody goes and wants to withdraw

47:54

their deposits we can have runs on the

47:56

bank in the in the wholesale financial

47:58

system that the securities or shadow

48:00

banking system that’s all different

48:04

terms for the same thing which is

48:05

basically the the it’s it’s it’s secured

48:09

financing where where people are posting

48:11

security

48:16

as collateral for secured loans and

48:19

that’s the way that those those firms

48:21

financed themselves and so when you get

48:24

a run on the shadow system the challenge

48:27

is that nobody’s printing anymore

48:29

Treasury bonds out of thin air right if

48:31

they have to be issued the Fed can

48:33

always print more money out of thin air

48:35

but Treasury bonds have to be issued by

48:37

the US Treasury and of course we have

48:38

debt ceiling limits and things like that

48:40

so that’s that’s kind of a fly in the

48:43

ointment of that system it so it’s much

48:44

more leveraged and it’s actually much

48:46

more I’m than the traditional banking

48:48

system is and that’s partly what you’re

48:50

seeing here now we saw this past week

48:53

some very interesting announcements

48:54

Boeing and Wynn Resorts and a couple of

48:57

other you know big-name companies did

48:59

something called drawing on their

49:01

revolvers the revolving loans are issued

49:04

by these big banks to the big companies

49:06

and they provide backup liquidity and

49:09

nobody ever draws on these revolvers

49:12

they’re not

49:14

drop but Boeing drew thirteen and a half

49:19

billion on its revolver this past week

49:21

that is a staggering number and the

49:23

banks don’t keep that kind of liquidity

49:25

around so what that does is basically

49:27

kind of trigger a rung on this I’m a

49:29

shadow financing system because the

49:31

banks then have to go and find the

49:34

liquidity to do that which means they

49:35

have to post more collateral in order to

49:37

get get get more repo financing and it

49:42

just causes the the market to seize up

49:45

this isn’t Boeing’s fault that what I’m

49:47

laying out here is that the market was

49:49

inherently unstable

49:52

you know you would have understood why

49:54

giving the the green light to the big

49:55

banks to buy back their stock which is

49:58

reducing their equity was the exact

50:00

opposite last June of what what the

50:03

regulator should have been doing they

50:04

should have been actually making them

50:06

increase their equity and that’s the but

50:10

that’s the drum that a few a very small

50:12

number of

50:16

but it’s definitely falling on deaf ears

50:20

yeah so I recently had Raul Paul come on

50:22

and one of the things that he really

50:24

highlighted was kind of this twofold

50:27

problem that is Part A the debt fueled

50:31

stock buybacks that are happening across

50:33

the market right so the whole idea is a

50:35

corporation is issuing debt they’re then

50:38

getting that cash they’re doing stock

50:39

buybacks they increase their earnings

50:41

per share because they’re literally you

50:43

know changing the denominator there and

50:46

what the shareholders to some degree but

50:49

it’s also really enriching the executive

50:51

teams who a lot of their compensation is

50:52

tied to a stock price and options etc

50:56

part of that is one if they can’t issue

51:00

the debt anymore than they can’t buy

51:02

back their stock and if they can’t buy

51:04

back their stock then it’s can be

51:05

propped up the way that it has been over

51:07

the last few years but that’s all

51:09

centered on part two which is well who’s

51:11

buying that corporate debt or that crap

51:14

and right now it’s a lot of the pensions

51:17

across the u.s. it’s been buying that

51:19

and so if all of a sudden they’re left

51:22

holding credit that may or may not be

51:24

good do you actually have a two-part

51:27

problem which is one stock buybacks no

51:29

longer work and can’t prop up prices but

51:31

then to now you have a bunch of pensions

51:33

that are holding stuff that ends up

51:34

being worth less than they bought and

51:35

they get themselves in trouble so how do

51:38

you think about the stock buybacks and

51:40

that pension problem oh did we just lose

51:43

her again all right let’s wait a second

51:48

here Kaitlyn she had the power go out

51:50

earlier guys so just bear with us a

51:53

second she should be back in the in a

51:55

minute

51:56

she yep she just she just texted me and

51:59

said that the power just went out a

52:00

second time so uh and then it just came

52:03

back on so just give her a second and

52:05

she’ll show come back but what I said

52:06

when she went last time is if you guys

52:09

have questions for Kaitlyn and I just go

52:11

ahead and tag both of us on Twitter and

52:13

then when we get done with alive

52:17

any of those as we can but that’s why

52:19

you kind of asked questions about

52:21

anything that she’s talking about and

52:24

let’s see hey try cutting the video

52:26

everyone in the YouTube chat is asking

52:29

ok Katelyn is logging back in yeah it’s

52:35

it’s not so much the the video problem

52:37

with the power of where she is is

52:40

actually going out so she’s losing

52:43

complete power so give her a second here

52:45

um and we’ll be be back in business here

52:49

in a second but what one of the things

52:51

that I want people to kind of be aware

52:53

of is the fact that the stock buybacks

52:57

are obviously really positive for the

53:00

people who are holding the stock and for

53:02

executives who are getting paid either

53:04

based on stock performance or paid in

53:07

stock options but there’s two part

53:09

problem one is you know 50-plus percent

53:11

of Americans can’t afford the four

53:14

hundred dollar emergency

53:17

therefore they don’t really hold any

53:19

assets other than cash so that’s not

53:21

super helpful to them but then the

53:24

second piece of this is also where the

53:26

money to do the stock buybacks are

53:28

coming from a lot of times is they’re

53:30

issuing debt to as being bought by

53:32

pension funds which can cause a big

53:35

problem as well so let’s let’s wait here

53:38

at another second or two for uh for

53:41

Kaitlyn to come back into the chat and

53:44

like I said if you guys want go have I’m

53:47

happy to answer them after the live

53:49

stream and then this week also I should

53:53

mention we are going to be writing a

53:55

whole bunch about what’s going on the

53:58

more macro economy in different asset

54:00

markets etc so if you’re interested go

54:03

to pump dotsub STATCOM and you can

54:06

subscribe to the newsletter we’re going

54:09

to be cranking out a bunch of content

54:10

there it’s really just trying to help

54:12

people understand one what’s going on to

54:14

what they should be paying it

54:19

and then three kind of how we think the

54:22

solutions will uh what will kind of come

54:24

to fruition here so let’s wait another

54:27

second or two and hopefully Kaitlyn can

54:29

get back in once once the power comes

54:32

back on

54:33

she is currently in Wyoming and I have

54:36

no clue what’s going on with their power

54:38

but uh she has lost power twice now so

54:41

hopefully will be a will be good to go

54:44

in a second when she when she gets back

54:46

in so maybe if you want also Joe is

54:48

helping us to the live stream if there’s

54:50

any good questions from this let me see

54:53

if I can log in real quick and and find

54:57

some questions from the YouTube channel

55:01

I can answer a couple of those were

55:03

waiting here liquidity yes a lot of

55:20

people are asking about liquidity I’ll

55:22

speak for myself and Caitlin can come in

55:28

and if we get her back in she can she

55:30

can speak for herself but basically the

55:32

the big thing around liquidity I think

55:35

is in times of liquidity crisis no

55:38

matter what the asset is people are

55:39

gonna go oh we got killing back I think

55:41

it’s is unbelievable I’m sorry this was

55:44

not happened before we got it looks like

55:47

it’s a god it looks like it’s a whole

55:51

neighborhood I don’t know what’s going

55:52

on normally pretty stable here there

55:57

you’re good we left off I was asking you

55:59

about come the debt-fueled stock

56:01

buybacks and how a lot of people that

56:03

are buying net debt from corporations is

56:05

to pension funds and kind of pension

56:06

crisis maybe talk a little think through

56:09

that situation and what people should

56:11

pay attention to well I ran the pension

56:20

the business of corporate pension funds

56:24

purchasing annuities to settle their

56:27

pension obligations so transferring the

56:29

risk to the insurance industry which is

56:31

really where pension risk belongs

56:32

because they can manage it a lot better

56:34

than a corporation can and by the way

56:37

the companies that actually did settle

56:40

their pension obligations a lot of them

56:43

got done in 2012 to 2016 2017 period a

56:48

lot of smart companies did that tinners

56:51

they they funded their pensions and paid

56:54

off the obligations that the ones that

56:57

that that the one that I would highlight

57:01

one is bristol-myers Squibb go look at

57:04

the evolution of bristol-myers balance

57:06

sheet and he hats off to them they

57:09

understood that the risk of a big

57:12

decline in interest rates was was

57:14

potentially going to balloon

57:19

and so it was better for them to pay off

57:23

that obligation when they did and so a

57:26

lot of other companies did partial

57:29

transactions GM Motorola Verizon etc a

57:36

lot of others but it but anyway those

57:39

those finance officers of those

57:41

companies look smart but oh they did

57:43

issue debt because they had the ability

57:46

to cheaply as we’ve alluded to but

57:49

haven’t really dug into yet interest

57:50

rates have been are held artificially

57:52

low and that has caused all kinds of

57:55

massive misallocation of capital you

57:57

were alluding to what you talked about

57:59

with roll on companies issuing debt at

58:02

artificially low rates to buy back their

58:04

stock at high stock prices boy history’s

58:07

not going to view those decisions very

58:09

well at all in fact a lot of that debt

58:12

that got issued is literally capital

58:13

that was destroyed right because what

58:15

did it get invested in it got invested

58:17

in

58:20

docks at the peak of a stock market and

58:23

companies would have been better off in

58:25

retrospect not having done it at all and

58:27

instead just either paying out dividends

58:29

or holding on to their own cash and some

58:34

I put the fault for a lot of this

58:36

actually squarely in Congress’s at

58:38

Congress’s doorstep because they created

58:41

a situation that made it easy or that

58:45

that favored stock purchase stock

58:48

buybacks over dividends because

58:50

dividends taxed at higher interest

58:52

income tax rates and stock buybacks are

58:56

capital gains tax that’s that capital

58:59

gains tax rates which have been lower so

59:01

this is Congress’s fault that it

59:02

happened and again an August part and

59:05

parcel with the whole notion of just

59:08

basically encourage America to lever up

59:11

for the last 50 years we’ve been doing

59:13

this but the bigger picture aspect of

59:17

what happened here is that you know when

59:21

the debt is issue is invested in

59:23

something productive something that

59:25

earns a real return over the real cost

59:27

of that debt I’m not talking about the

59:28

market subsidized cost of that debt we

59:31

all acknowledge that that interest rates

59:33

were held too low and so so people

59:37

thought their cost of capital was a lot

59:38

lower than it really was

59:39

and now it’s whip sighing and the cost

59:41

of capital is being revealed to be a lot

59:43

higher than it really was and projects

59:45

that they should not have in that they

59:47

did invest in they should not have

59:48

invested in and would not have invested

59:51

in had they known that the real cost of

59:53

capital was a lot higher than what the

59:54

market is telling them and that’s the

59:56

big picture takeaway here is that the

59:59

BRIT the real problem of the debt bubble

60:00

is that it kept interest rates

60:02

artificially low and caused a ton of

60:05

misallocation of capital and as I noted

60:07

in the tweet storm yesterday that seven

60:10

and a half trillion of total debt that

60:12

got issued it got added to the United

60:14

States balance sheet collectively in the

60:16

last two years between the household

60:19

and businesses probably most of that

60:23

debt represents destroyed capital

60:25

there’s probably not much of that debt

60:28

that where the investment is actually

60:31

going to pay off in terms of real

60:33

economic returns and so now here here we

60:36

are seeing the banks which is where you

60:38

always see the the default probability

60:41

problem arise now we’re seeing the banks

60:44

having to to deal with the fact that

60:46

there are going to be mass defaults in

60:48

entire industries the biggest example of

60:51

which where you’ve seen just a real

60:52

collapse in stock prices in the last

60:55

week yeah and so I guess what that

60:59

really leads us to is this quiddity

61:02

crisis over the last week where people

61:05

literally just around the room and say

61:07

what do I own that’s got a liquid market

61:09

attached to it how can I sell it

61:10

immediately and I want that liquidity

61:12

and we see all of these assets whether

61:15

it’s gold Treasuries coin anything

61:20

correlations are spending Falls one

61:23

everything goes down because liquidity

61:25

crisis may be kind of talk through how

61:27

that works and then we can get into how

61:31

governments have to respond or the Fed

61:33

has to respond to those types of see

61:36

yeah so the leverage players always the

61:40

lenders always want collateral in the

61:43

financial markets and when they’re

61:46

making loans I guess been technically

61:47

not always but the vast vast majority of

61:50

leverage and the third buy financial

61:52

assets and so what happens in these

61:55

situations is that when you have an

61:57

investor who has to deal Everage they’re

62:00

getting a margin call they have to post

62:02

more collateral because the value of the

62:03

assets securing their loan just went

62:05

down just getting a giant margin call

62:07

and they’re going to sell whatever is

62:09

easy to sell now I talked about how

62:12

there were dislocations in the in the US

62:14

Treasury bond market of all markets last

62:17

week

62:21

I’m liquid and so people were selling

62:24

whatever haven’t whatever was liquid and

62:27

and and whatever hadn’t been nailed down

62:29

yet and when you see Gold’s go down I

62:32

learned this from watching the 2008

62:34

financial crisis Gold also plunged in

62:39

2008 it a lot of people would have said

62:41

oh that’s not a safe-haven asset because

62:43

it plunged well well oftentimes the

62:45

safe-haven assets are the first ones

62:47

that are actually sold precisely because

62:49

they aren’t somewhat tied up in some of

62:52

these crazy you know leveraged financial

62:55

structures always their leverage has

62:57

definitely got an impact on them alright

62:59

we can talk about the gold ETFs or talk

63:01

about all the leverage in the Bitcoin

63:03

market but at the at the bottom those

63:07

assets are nobodies IOU

63:09

they are assets that if you own the real

63:11

thing if you own the physical gold or

63:13

you own your your private keys for your

63:15

crypto assets they’re they’re yours you

63:18

have outright title to those assets

63:19

they’re nobodies IOU use and so

63:22

oftentimes because of that those assets

63:24

are the first ones that get sold and we

63:27

certainly saw that in 2008 we certainly

63:29

saw that last week we saw a huge

63:32

correction in Bitcoin a much lower

63:34

correction in gold but golden exactly

63:37

act like a supposed safe haven either

63:39

now all that said I don’t think that one

63:42

week matters for either one of those

63:44

assets and in fact actually we just

63:46

flushed out a lot of the leverage I

63:48

think in the in the crypto market I

63:50

wouldn’t be shocked if some of the

63:51

crypto financial institutions didn’t

63:55

survive last week and we just don’t know

63:56

it yet and by the way good riddance

63:59

the the the the amount of speculative

64:01

leverage that was taking place on an

64:03

asset that shouldn’t be leveraged has

64:05

been staggering and the faster we can

64:08

clear out that cruft from the market the

64:11

better off the market is I I think those

64:14

safe haven assets are true safe havens

64:16

but that doesn’t mean they’re gonna be

64:18

safe havens every day and they were they

64:22

were the easiest things sell laughy when

64:24

you see gold go down it means that we’re

64:27

really having serious liquidations yeah

64:31

and I think what you alluded to in 2008

64:33

I wrote this piece is past week that

64:35

I don’t know in 2008 kind of the mid

64:37

6-month liquidity crisis period kind of

64:39

over the summer goal actually went down

64:41

30% during that time period but if he

64:44

then zoom out to the entire crisis kind

64:46

of ended 2006 to end of 2011 it was up

64:49

3x so in there there is that liquidity

64:52

crisis you draw it out you know pretty

64:54

substantially for the quote-unquote safe

64:56

haven asset if you look at Treasuries

64:57

for example their season you know the

64:59

markets are seizing up again does that

65:02

that doesn’t mean that it’s not a safe

65:03

haven type asset or not something that

65:06

people want to to get I think Bitcoin

65:08

same thing right you see this massive

65:10

volatility the other thing that people

65:12

have to understand is the market cap of

65:14

an asset like Bitcoin it plays into this

65:17

it’s a smaller market cap it’s gonna be

65:18

much more volatile but the one data

65:21

point I thought was a hunter Horsley

65:22

from wise I was tweeting this I thought

65:24

was really interesting if you look at

65:26

the historical volatility of Bitcoin and

65:28

let’s say the SNP the SNP going down

65:32

nine and a half percent on a relative

65:34

basis is the equivalent of Bitcoin going

65:36

down 51 percent and so what you saw last

65:39

week was the sed went down 9 and then

65:41

went down 50 percent so on a relative

65:44

volatility basis they actually were just

65:45

as volatile as you know each one of them

65:48

which I thought was super interesting

65:50

now that leads us to ok we get the

65:53

liquidity crisis every asset trends

65:55

towards 1 on the correlation they all go

65:57

down obviously we’re going to see

66:00

monetary stimulus step in we saw some of

66:03

that last week the markets pricing in a

66:05

hundred percent likelihood of a rate cut

66:08

coming up here I think it’s this week

66:10

talk to us about how does the government

66:13

and the Fed respond to all of this and

66:16

then we can talk about kind of the

66:17

impact at all

66:19

these safe-haven assets are kind of

66:21

sound money properties yeah well let me

66:27

before we talk to how the government’s

66:28

going to respond you what you said

66:29

prompted a really important thought

66:31

again this is not advice but it’s just a

66:34

lens through which everybody should

66:36

think about their own financial

66:37

situation I would really encourage

66:40

everyone to start thinking not in

66:42

nominal terms but in real terms what do

66:45

I mean by that if the ass if we’re in a

66:48

deflationary environment and your assets

66:50

are going down by less than the index is

66:54

going down your cost of living then you

66:57

come out ahead

66:58

same thing if we’re in an inflationary

67:00

environment and your your personal

67:03

inflation rate is less than the

67:04

inflation rate of the economy or your

67:08

that’s our going up by more than that

67:10

you come out ahead so we’ve been in the

67:14

u.s. really lulled into complacency

67:18

because we don’t have to think about

67:20

foreign exchange rate risk since oils

67:22

priced in dollar commodities are priced

67:24

in dollars right the rest of the world

67:26

has to think about exchange rate risk

67:28

all the time it’s their norm and so this

67:30

whole notion of just because the

67:33

numerator is going up the nominal price

67:35

is changing that means that my personal

67:38

situation follows that uh-uh

67:40

we need to start realizing that and I’ve

67:42

been thinking about that for years that

67:44

the stock market going up just meant the

67:47

dollars value was actually going down

67:48

you need to start thinking about that

67:50

and and so you know literally the the

67:52

best stock market in the last few years

67:56

has been Venezuela

67:57

well that’s B’s because the denominator

67:59

was going down just think about the

68:01

algebra right if all you’re paying

68:03

attention to is the numerator you’re

68:04

missing the point you’ve got to pay

68:06

attention to the denominator and whether

68:07

the denominator is is changing value or

68:10

not so now let me get to answering

68:13

question about what what policymakers

68:15

are going to do what they should do is

68:17

what policymakers did in 1920 which is

68:20

nothing there was a depression in 1920

68:23

and most of you are probably surprised

68:25

to hear me talk about it because most of

68:27

you if you haven’t read economic history

68:28

didn’t know it happened because it

68:30

didn’t get all the attention why because

68:32

it was really short but it turns out it

68:35

was as nasty as the depression in the

68:38

Great Depression from 1929 to 36 and and

68:41

so the nineteen the depression of 1920

68:44

was literally one year and it was as

68:47

extreme we saw unemployment go to 12%

68:51

we saw GDP go down almost 20% and you

68:54

know what President Harding did he

68:57

overruled her Herbert Hoover who was his

68:59

Treasury secretary who wanted to

69:01

intervene and try to prop up industries

69:05

and try to keep companies in business

69:07

and you know what he did he overruled

69:10

Hoover and said let’s pay down the US

69:13

debt we’ve just been coming off World

69:15

War one and by the way that Spanish flu

69:17

of 1918 is an interesting parallel right

69:20

that we had a

69:21

global pandemic the war was over and and

69:25

the US president was confronted with a

69:28

depression where unemployment spiked

69:30

from 4 percent to 12 percent in a very

69:32

very short period of time GDP contracted

69:35

almost 20 percent and you know what he

69:37

did he paid down one third of the US

69:39

government’s debt and the Fed did

69:42

nothing and the reason why none of us

69:44

have ever heard of the depression of

69:46

1920 is precisely because it was only

69:49

one year and what gets all the attention

69:52

was the terrible experience of of the

69:56

greater depression in 1929

69:58

well what happened then the government

70:01

tried to prop up industries with fiscal

70:04

policy and and and the Fed got actively

70:08

involved and it

70:12

it just extended the duration of the

70:15

pain the balance sheet reconstruction

70:18

wasn’t allowed to happen fast and so

70:21

this is the one that we all think about

70:23

it and and we’ve read about it in

70:24

history books but the one we really

70:26

ought to be reading about is the Great

70:28

Depression of 1922 start there

70:34

so back now I’m pumped again to your

70:36

question what are people what are what

70:37

our governments going to do they’re

70:39

gonna make the same mistake they made in

70:41

1830 which is which is pedal to the

70:43

metal on the debt and actually make the

70:45

balance sheet in even worse condition

70:47

than that than it is today and prolong

70:52

the pain as opposed to just backing off

70:55

if I were a policy maker I would do

70:57

nothing I would let the chips fall where

70:59

they may

70:59

I would tell the banks get out there and

71:01

raise equity capital but you’re on your

71:03

own I’m not gonna force you to do it but

71:05

you’re on your own boy the boy they they

71:07

would rush to the market to raise equity

71:08

capital like that if they knew they were

71:10

really truly on their own and would go

71:12

up if they did very counterintuitive

71:14

typically when you raise raise equity

71:16

capital you’re diluting the existing

71:18

shareholders except when the reason for

71:20

the stocks

71:23

which actually make the problem worse

71:25

and prolong the pain and so when they do

71:29

this

71:31

I guess there’s two repercussions to

71:35

that the first is do you think that it

71:38

will actually work and then two is what

71:42

will that do or what will the response

71:44

with gold Bitcoin other kind of safe

71:47

haven or sound money property type

71:49

assets what is the response to those

71:51

assets near

71:53

well actually they probably go down if

71:56

the if the policymakers did what they

71:59

should do but because they probably

72:02

won’t because politicians always want to

72:04

seem like they’re in control and always

72:06

want to promise left pain they’re there

72:10

they’re gonna try to prop up industries

72:12

I I turned on CDC for the first time in

72:14

quite a while last week just because

72:16

they’ve got really good you know minute

72:18

to minute coverage of what’s going on

72:19

with market circuit breakers and things

72:21

like that and I was listening to Jim

72:22

Cramer say we got to figure out which

72:24

industries were going to save that is

72:26

exactly the opposite thinking that we

72:29

should be having right now but

72:30

unfortunately you know he’s indicative

72:32

of how the powers that be think and

72:35

again it’s this is I’m not making a

72:37

political point we’ve had a string of

72:39

bad presidents and bad decision economic

72:43

decision-makers for 50 years in the

72:45

United States most of our natural lives

72:47

and and so he’s just reflecting that way

72:50

of thinking of the world which is we got

72:52

to figure out which industries to save

72:53

no we shouldn’t we should be letting

72:56

markets allocate capital to the to those

72:59

that will produce new capital from it as

73:02

opposed to those guess all worse off and

73:03

by saving industries that need to be

73:05

saved were we’re just throwing good

73:08

money after bad yeah I think this is a

73:12

really point because there there’s two

73:15

components and I’m generally aligned

73:17

with you on this which is one the whole

73:20

idea of what a lot of people now are

73:22

calling kind of corporate socialism

73:24

right I wrote about you know Kramer’s on

73:26

television literally begging the Fed to

73:27

step in begging for this stuff and you

73:30

know I said it’s hilarious it would be

73:33

hilarious if it wasn’t so sad to see the

73:35

critical catalyst begging for the

73:38

bailouts right and what ends up

73:40

happening is nobody want to have the

73:43

hard conversation right at David Sachs

73:45

actually just wrote about this from

73:47

Kraft Ventures he wrote about happy talk

73:49

versus hard talk and happy talk is

73:51

basically everyone’s saying you know hey

73:53

it’s gonna be okay gonna be okay it’s

73:54

going great but whatever at a company

73:56

and then only at the last second all of

73:58

a sudden the founder moves to hard talk

74:00

with the board and says hey we’re

74:02

running out of money we got to make hard

74:03

decisions and we need to do it fast but

74:06

the whole idea is that

74:07

end up being the most resilient they

74:08

have the hard talk from day one they’re

74:10

always super honest super job they’re

74:12

constantly questions and I think that’s

74:15

what needs to happen in the financial

74:16

system now your point is if there are

74:19

things that are going to fail it’s

74:21

probably because they are bad strategy I

74:23

don’t have sound down to begin with yes

74:25

there’s always that good the whole idea

74:30

is if you take a non-emotional

74:31

non-political view that would make sense

74:33

let the bad companies fail let the bad

74:36

industries fail let all of this occur

74:38

now the the kind of social aspect of

74:42

this I think is where people get really

74:43

uncomfortable right because logically

74:45

that makes sense if it’s a bad company

74:47

if its profitable if the economics don’t

74:49

make sense they’re over leveraged

74:50

whatever let that all fail people get

74:53

really hurt and when that happens though

74:55

right and I think that where the

74:56

trade-off comes in is people are gonna

74:59

lose their jobs their short-term pain

75:01

but what it does is it builds a

75:02

healthier system over a long period of

75:04

time kind of your point about that 19:20

75:07

depression that there is the short-term

75:10

pain but that’s the cleaning out of the

75:12

the market of the bad things instead

75:15

what ends up happening is we try to

75:16

prevent short-term pain but we actually

75:19

end up building a bigger and bigger

75:20

bubble and so 2008 was painful ah well

75:25

you see what happens next if they can’t

75:28

come over the top with this monetary

75:30

stimulus into your point going from a

75:32

four trillion dollar balance sheet to 10

75:33

trillion people think that’s a crazy

75:35

idea

75:36

I don’t think Rosie’s like they just

75:38

announced 1.5 trillion or Nothing so she

75:42

got a string yeah no exactly well that

75:45

is corporate welfare right there but but

75:48

to your point back in 1920 the the the

75:51

unemployment rate was I think 2 percent

75:53

and then it jumped to 12 and within one

75:58

year it was back down to 6 and then

76:00

within another year it was back down to

76:02

2 so it was a painful couple years but I

76:04

think everyone steeled themselves we’re

76:06

gonna have a painful couple years at

76:07

least of painful six months anyway just

76:09

simply because of the virus leaving all

76:11

the economics aside the virus is

76:12

definitely gonna cause a lot of

76:14

disruption we know that and a lot of

76:16

pain restaurants are gonna close you

76:18

know a lot of people who are

76:20

in the service industry are gonna are

76:21

really going to have a lot of pain this

76:23

is where you have to have your local

76:26

communities and families take care of

76:29

each other its local charities it’s

76:31

families it’s it’s your it’s your own

76:33

personal circle you know if you’ve got

76:35

an elderly neighbor check in on them

76:36

they might not want to go right now when

76:39

when you know tensions are high in the

76:41

grocery stores they might need and

76:44

really appreciate you helping them to

76:47

you know make sure their refrigerators

76:49

full so it I think this is where local

76:52

help is really going to matter and

76:54

because frankly I’m fortunately I just

76:56

don’t think people gonna be able to rely

76:57

on the government for help and it’s not

76:59

gonna be awful at some point yeah it’s

77:02

gonna be painful but the the people to

77:05

your point I think there’s a

77:06

psychological aspect of all this those

77:08

of us who’ve unfortunately understood

77:10

all this and been waiting for the credit

77:14

bubble to finally be pricked and a

77:18

paradigm shift to come we’re we’re over

77:21

the shock of it I think the vast

77:23

majority of Americans are in that shock

77:25

phase right now of oh my god something’s

77:27

really wrong now what do I do

77:30

there’s a good story that I can relay

77:33

from someone who worked in the airline

77:35

industry who investigated airline

77:38

crashes and he told me once that you

77:41

know when he gets to the crash site in a

77:47

Neal’s down says

77:49

throws up and then gets to gets to work

77:54

you know pulls out his folding table and

77:56

chair and sits down and starts working

77:58

and and I think that’s what people need

78:00

to need to do that’s sort of the the the

78:02

shock phase which is where a lot of

78:04

folks are those of us who have read the

78:07

history and expected this to come maybe

78:09

are not as shocked maybe we did start

78:11

hunkering down a little bit bit sooner I

78:13

did start telling my family I’m to the

78:16

grocery store I really started pounding

78:18

on that a few weeks ago and and and you

78:22

know we can we can think more clearly

78:24

there are going to be huge opportunities

78:26

the world is not going to end this is

78:28

just a restructuring and whether whether

78:31

the Fed is able to reinflates a system

78:33

or whether we really are in a paradigm

78:35

shift either in either case whenever

78:39

that paradigm shift comes because I’m

78:40

pretty confident that it is going to

78:42

come during my lifetime

78:46

yeah I know that I can start thinking

78:50

about what the world that emerges on the

78:52

other side is gonna look like and don’t

78:54

shoot the messenger right none of the

78:56

people it involved today none of the

78:58

policymakers created this situation we

79:01

really have to go back to the late 60s

79:04

and early 70s that was the seeds of the

79:07

the problems that we’re seeing today

79:10

every single politician every single

79:12

president every single banker every

79:16

single monetary policy maker is is in

79:19

part responsible for perpetuating the

79:21

system but none of them created it

79:23

because the people who created it are

79:24

long dead but but all that said you know

79:27

we if we can actually just be resilient

79:29

somebody actually have notice here

79:31

somebody actually gave a great tweet

79:34

response when I check my Twitter this

79:35

morning opportunity favors the prepared

79:37

mind to the person who said that thank

79:41

you that is such a positive way of

79:44

thinking about the situation that that

79:46

we’re here facing now if you prepare

79:49

yourselves for it that’s how you spot

79:51

opportunities there’s gonna be so many

79:53

opportunities for entrepreneurs to make

79:56

money in the new economy and I am

79:58

actually really optimistic that once we

80:01

get through this short term horrible

80:03

situation which is going to be awful and

80:05

it’s gonna affect everybody I think

80:06

everybody family is gonna be affected by

80:07

this virus it is that contagious but

80:10

more importantly everybody’s livelihood

80:12

is going to be impacted by by what’s

80:14

gonna happen in the financial system

80:15

once we get through the other side of

80:17

that man there’s this the hard work is

80:20

again going to truly be rewarded the

80:24

system is going to be a lot more fair

80:25

it’s going to be a lot more stable we’re

80:28

going to have a lot better visibility

80:30

into it the elites who have let us down

80:33

are not going to be in power in the same

80:37

to the same extent that they are today

80:39

this is actually a better world we’ve

80:41

just got to get from here to there and

80:42

and and take care of our families and

80:44

our neighbors in the meeting yeah and

80:50

and before we close I want to kind of

80:52

just touch on the idea that a lot of

80:54

people who are begging for the monetary

80:57

stimulus these are people who are

81:00

they are rich they own real assets they

81:02

are part of the Aliyah and the reason

81:05

that they want the monetary stimulus is

81:07

because the downside of the quantitative

81:10

easing the Fed expansion of their

81:12

balance sheet et cetera is it devalues

81:14

the currency hold the currency you don’t

81:16

care about that but the kind of

81:19

counter-argument those who say oh the

81:22

people are going to be hurt when their

81:24

company goes out of business etc there

81:26

are many many more people that end up

81:28

getting hurt from a wealth inequality

81:31

standpoint when we then go and just

81:33

print trillions of dollars and I don’t

81:35

think that people really understand that

81:38

right it’s more of a hey on the ground

81:40

somebody lost their job I can measure

81:41

that I can’t really see the systemic

81:44

damage that

81:48

you know if you go back and you look at

81:49

the ultimate quality from 2008 to today

81:52

it’s just an ever-expanding gap and and

81:56

I think that that’s part of this is that

81:58

people are saying oh here comes all this

82:01

monetary stimulus all I hear is the

82:04

50-plus percent of Americans that can’t

82:06

make a $400 emergency payment or about a

82:09

get even more of their wealth stolen

82:11

there’s got to be an acceleration what

82:13

of the theft of their wealth by that

82:16

currency that they all hold and what it

82:17

does is it’s going to shift even more

82:20

wealth and eventually power into the

82:22

hands of the elite we should be yelling

82:24

and screaming from the rooftop if you do

82:27

this you’re actually hurting majority of

82:28

the people rather than helping them I

82:30

just don’t think people see that yet

82:32

oh I think the vast majority of people

82:35

do that’s the silent majority that’s out

82:37

there the so-called Forgotten man of

82:39

Amity slays her book by the way by that

82:42

name The Forgotten man is a wonderful

82:45

historic historical work another one is

82:48

when money dies by Adam Ferguson these

82:50

are historians so you’re not going to

82:52

get the you know that the political lens

82:55

as much as you would by reading an

82:56

economists view a lot of folks are

82:58

looking for books to read I would

82:59

encourage you to read both of those that

83:02

said if you’re anxious don’t read those

83:03

right now because you know those are

83:05

stories about about very difficult times

83:08

if you want to be a prepared mind

83:10

they’re probably good stories to read

83:12

but if you’re anxious they’ll just make

83:14

even more anxious because they’re you

83:16

know it shows you the range of the

83:18

possible outcome we may be facing here

83:20

but that said you know I’ve actually had

83:24

this conversation of was it better to

83:25

have anticipated this going back to 2008

83:29

or in someone with my friends cases

83:31

going back even longer and lived with

83:34

that weight on your shoulders over that

83:36

whole period of time knowing that this

83:38

was potentially coming or was it better

83:40

to actually not to to believe that we

83:44

really were as wealthy as we thought we

83:45

were and and and to you know live in

83:50

blissful ignorance of how unstable the

83:53

situation was I can see both sides of it

83:56

but personally I’m glad I’m in that camp

83:58

of people who understood it because it

84:00

helped me prepare my family help me

84:02

prepare mentally for what’s happening

84:04

helps me think more clearly through

84:06

through the situation and and I was

84:09

pretty negative about the world going

84:12

into it coming off the financial crisis

84:15

for those few years as I was reading all

84:17

those books it did definitely bring me

84:18

down again that’s my warning to you

84:20

don’t read them if it’s going to bring

84:21

you down but then then then came along

84:25

Bitcoin in 2012 and I spotted the impact

84:28

of that that’s not a speculative asset

84:30

back when we were talking about earlier

84:31

in the interview about the price of

84:32

Bitcoin I really don’t care about the

84:34

price of Bitcoin I care about one thing

84:36

and one thing only is the network

84:38

working is it stable and you know what

84:40

that network stability this week was

84:42

stunning in the face of all this price

84:45

volatility and Hugh

84:46

increasing volume every 10 minutes the

84:49

Bitcoin blockchain added a new block and

84:53

it’s not price stable it never has been

84:57

but it has its systemically stable and

85:00

that’s not to say that it’s not going to

85:03

continue to be I am not giving anybody

85:05

advice here I’m just saying that this is

85:07

one of the alternatives one of the one

85:09

of the ways you can empower yourself is

85:11

to educate yourself we’re all gonna be

85:13

stuck in our homes for the next at least

85:15

couple weeks read read books read the

85:19

history if you’re curious about the

85:20

history and again you’re you can steel

85:23

yourself for the anxiety if you are

85:25

anxious and and and and would rather

85:28

talk a turn to instead of understanding

85:31

the past what might come in the future

85:33

teach yourself how to control your own

85:36

private keys if there’s one thing you

85:38

take away from this conversation its I

85:40

hope and understanding that some assets

85:42

are IOUs and others are not and I have a

85:47

feeling that that’s going to turn out to

85:49

be a pretty important distinction all

85:51

financial assets stocks bonds you know

85:55

your ETFs your bank deposits all

85:58

financial assets are IOUs of leveraged

86:01

financial institutions who have been

86:04

given corporate welfare in spades and

86:08

levered themselves up and made

86:09

themselves not very sustainable the big

86:11

banks especially but on the flip side

86:14

there are all kinds of assets that you

86:16

can own where you can control it

86:18

yourself and you own it outright land

86:20

your house your car your your you know

86:24

here orange groves if you invest in that

86:26

you know agricultural property jewelry

86:30

precious metals and cryptocurrencies and

86:34

and I would just encourage you to start

86:36

reading about all those because think

86:39

about your wealth differently a lot of

86:40

people there’s an ad on TV where there’s

86:42

an older couple that’s it talks about oh

86:44

we hand it off to our financial advisor

86:46

he knows

86:51

Kizer lives in that traditional

86:52

financial system and isn’t really

86:54

thinking about wealth preservation the

86:57

way that I’ve been thinking about it

86:58

you know since 2008 it’s definitely not

87:02

too late and there’s no substitute for

87:04

educating yourself that’s the most

87:06

empowering thing that that I can advise

87:09

folks to do take these next couple weeks

87:12

when you’re with your families hug them

87:13

close and and take care of them take

87:16

care of your neighbors and then spend

87:18

the time educating yourselves about the

87:20

here opportunity it comes to those who

87:24

are prepared it’s a great thought I

87:27

couldn’t agree with you more and it’s

87:29

actually I don’t think I’ve ever said

87:31

this publicly but one of the ways that I

87:33

think about Bitcoin in allocating it

87:35

personally and again not financial

87:37

advice just how I personally think about

87:39

it is what percentage of my portfolio

87:41

and wealth do I want protected from the

87:45

quantitative easing and the monetary

87:47

stimulus etc and I think that over time

87:50

as people educate themselves like you

87:52

said I think that becomes much more

87:55

obvious to them but but again your your

87:58

point this week so you said a couple

88:00

different points of the Bitcoin network

88:02

is still operational still strong it’s

88:06

still kind of doing exactly what it’s

88:08

supposed to do if you compare that to

88:10

the legacy world right I think well I

88:12

saw you say somewhere that the legacy

88:14

world foundation is unstable and

88:17

everyone is focused on getting price

88:20

stability so the underlying fundamentals

88:21

almost don’t matter as long as they have

88:23

price stability

88:24

if you flip that in Bitcoin everyone is

88:26

focused on the foundation being stable

88:29

and they don’t care as much about the

88:30

price I ability voting things one of

88:33

them so well is optimizing for the the

88:37

Bitcoin right is obviously optimizing

88:39

for the long term and I think that’s a

88:40

kind of perspective when you compare

88:43

those two things so you know we’ll kind

88:45

of see how that plays out but listen I

88:47

appreciate you taking so much time to

88:48

this especially thinking through it with

88:52

with the two of power outages

89:04

in the next few weeks yeah I’m mostly

89:09

using my Twitter account these days so

89:12

at Kaitlyn long underscore CAI tli NL

89:15

Ong underscore I also do have a blog

89:19

Kaitlyn – long calm and post on LinkedIn

89:22

and stay tuned we haven’t talked about

89:24

the bank that that I’m starting it is a

89:27

the Wyoming has a has an interesting

89:30

place in history because we where the

89:33

place that fought a mini civil war over

89:36

clarity of property rights it’s the

89:38

Johnson County cattle war in the late

89:41

1890s over whether people over whether

89:44

landowners were allowed to fence out

89:46

trespassers in the form of of

89:52

we’re driving their cattle up from from

89:55

the South could they go over private

89:57

property and we came down as a state

90:00

definitively after that experience on

90:03

the side of private property and it has

90:04

there’s no accident that the banking

90:07

laws in Wyoming allow for a

90:10

special-purpose depository institution

90:12

that is 100 percent reserved in other

90:13

words not leveraged on the cash side but

90:16

also in Wyoming rehypothecation of app

90:19

of assets is and and literally people

90:23

have gone to jail this has been

90:24

litigated up to the Supreme Court in

90:26

Wyoming and upheld that if you own an

90:29

asset and you pledged it as collateral

90:31

for a loan and then you take that same

90:33

asset and then you reap legit as

90:34

collateral for a different loan that’s a

90:36

felony is fraud and boy that exact

90:40

experience happens every single day in

90:42

the financial industry and in the state

90:43

of Wyoming it’s it’s a felony so where

90:46

I’m going is there are places in this

90:48

country that have it right and Wyoming

90:51

is one

90:53

and so I’m working on that and stay

90:57

tuned we will have a big announcement

90:58

coming out about about Avanti Bank this

91:01

week we won’t have it open until early

91:04

2021 we’re not technically a bank until

91:06

we get a charter and we’re aiming for

91:08

early 2021 but I can’t see it

91:11

an even bigger need than I see today for

91:15

a bank like that to come in and help the

91:17

digital asset industry so we’re working

91:20

hard up you have one of your biggest

91:23

fans here I think what you’re doing is

91:25

is incredible and you know for those

91:27

that don’t know how hard you’ve been

91:28

working to kind of all this possible

91:31

from everyone else just thank you

91:32

because I think you’re right that no

91:34

people are going to or important that

91:36

work is is coming up here so we’ll have

91:39

to do this again as things kind of

91:41

transpire but I thank so much for taking

91:42

the two hours of your day to come to us

91:44

Caleb thanks everyone stay safe out

91:47

there thanks Bob

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