Transcription
Good day, folks. Welcome back to another edition of the Rough Consensus podcast. And today, I sat down with my very good friend Nick Baria. Now, I met Nick in Sydney a couple of years ago, and there's very few people who I turn to whenever the bond world is doing something. We're seeing yields start to rise, and the one that caught my eye this time was the Japanese bonds—yields are just absolutely skyrocketing. Nick is the guy that I'm going to send an email to and say, "Hey, what is going on? Share your thoughts."
And we went through all sorts of things in terms of bonds, liquidity, dollars, currencies, trying to understand what's going on with the broader liquidity picture. Now, Bitcoin, as we know, is kind of the last functioning fire alarm; it's one of the most sensitive liquidity assets. And Nick's done a lot of work both studying, understanding, and developing his own metrics to properly understand the liquidity profile. So this conversation was one that I really wanted to have, just to try and put things into perspective. I think you're really going to enjoy this. Let's get stuck into the episode.
Good day, folks, and welcome back to the Rough Consensus podcast. And this is actually a conversation; it's been a long time coming. Uh, Nick Baria, mate, welcome to the podcast.
Czech, it's great to see you, my friend. How are you?
I'm very well, mate. The, um, the kind of one of many reasons I wanted to get you on the pod, uh, I flicked you an email the other day because I saw the Japanese bond curve was just—yields are ripping higher—and I was like, I have to go to my resident bond guy to understand what is going on. Um, so I, I think let's just start really big picture. We're coming up on 3 months; Q1's coming to a close. A lot has changed in a very short span of time. Um, obviously, as with the new administration, doesn't matter who they are, the monetary system and the financial system is always in the backdrop. What's your kind of big picture assessment of what you've seen in Q1, um, and just with like a bit of a view on like what does it mean for bonds? How are you seeing this administration dealing with things? What are kind of the big topics and themes you've got in the top of your mind?
Yeah, we can start with Japan really quickly because it's a situation that stands out. There is a massive bear market going on in Japanese government bonds, and it is a function of inflation—realized inflation, expected inflation. Now, in Japan, they b—because they have so much debt—they only have two choices: they can either support the bond market by printing money, that weakens the currency on on net, or that's the first-order effect of printing a currency; you're increasing the supply of it and therefore decreasing the the spot price, all else being equal. Or if you don't support the bond market and there's inflation present, which is the case right now, then there's no buyer, and the and the Bank of Japan is behind—it's they're behind the curve in terms of where policy rate should be because inflation is way ahead of where they need it to be. That means they're behind the curve in terms of raising interest rates. So the bond market is is pricing in future hikes for sure. However, the main determinant of any bond price is what an investor demands to be compensated for realized and future inflation. It's not really realized; it's just the future inflation because who cares about looking backward. And so in Japan, there is an understanding that inflation is is getting underway. As inflation has taken its tour around the world over the last 5 years, it's hitting Japan, and bond investors are not going to just lay down. Even though Japanese government bonds are owned by Japanese, they don't have to; they can sell those bonds to buy equity. That's the right trade here for Japanese investors. But outside of that, you don't have to own Japanese government bonds; you can actually get short them, and you can make money. So that, you know, there's a momentum trade there as well. Yields are getting to a point where the Bank of Japan is going to have to say something, or it's or this is just going to continue. And when you see this move—and I'm looking at the chart on yields right now—when you see this move level off, I would expect the currency to get hit in that scenario. But if you know I—if I switch over to the chart of USD JPY and I just look at a weekly, you know, the USD, you know, JPY, the yen has basically since the end of 2022 traded flat. It's got to be like—it's almost like it's gone through a pivot, right? We've gone through the the massive selloff, and we're starting to get lower highs and lower lows—still a process—but this is in the USD JPY. So that means that the yen's getting stronger. That's what I've noticed. We've kind of had this the the capitulation event has happened, and it's in that reversal pattern, meaning a stronger yen, and and now you look for it in the bond market, and that and that's and that's what you're seeing. So the answer to your question: it could be this idea of currency strength, which means the Bank of Japan—the expectation there is for them to not come in and save this bond market—or just the the good old yield curve control; it's dying; it's dying in front of your eyes on the chart. And you know, when you think when you trace it back, I think 2009 is the level of interest rates that we're at in Japan, uh, the highest, you know, since 2009. So you know that's a bare—that's a bare—that's a material bear market. And where where this particular Japanese government bond market is going, or what the BOJ is going to do, it's it's just outside of my area of expertise to be very, you know, honest with you. But looking at the chart here, you do see you do see a disaster—a slow-moving disaster here in the Japanese bond market—a ton of capital loss that's going on here, and um, because from such low interest rates now at 1.5%, this is a big destruction in value. So we'll have to see where that impacts the rest of the world, but I feel like Japan is one of the sources of strength in the US Treasury market that we're seeing over the last few months. If you want to tie it back into the rest of the world, mate.
There's so many things I want to unpack there because one of the topics—like the really the thrust of what I've been kind of processing and trying to work out what's going on—is this idea of rotation. We've got this environment where capital—the world is a relative place—money has to go where it's treated best. When we're seeing this, and I and I think probably one of the the core things I've been thinking about is that obviously we're in a a bond bear market, which means we've got higher yields, um, and it makes sense just at a higher level. I wouldn't want to lend these governments money either, right? You look what they're doing with it; they're burning capital. So it would make sense that yields start to go higher. But in this relative world, it's not just bonds and equities and bonds and commodities; it's also geographic. And in a way, we're looking at money. I mean, we've seen the the MAG 7 start to roll over; we've seen the US bond market start to attract more capital. How are you seeing this kind of interplay? And I I think you you mentioned that this inflation has moved around the world, and I think Japan is one of the countries where it's really the high—I think it's the highest in the developed world right now. We've got these different movies of what happens that's like almost like looking into the future. How are you looking at—maybe Japan? I know Australia, we did yield curve control, and it ended spectacularly. We've got these kind of movies that are playing. Where do you see—I guess maybe the US is probably where a lot of people want to focus 'cause it's obviously where the the biggest money is. If we were to look at the US and what we kind of see coming forward, what are the movies that we've seen around that are kind of relevant that we would use as a as a benchmark or a reference point?
Well, I think the U—I think the US is well positioned right now to attract capital from around the world, and that's more on a business opportunity level, but that that's the fundamental layer. And then capital will move or is attracted to the US because of that. Then, in the relative game, the way I think about treasuries is that treasuries are an expression of that compensation for inflation, and the yield curve has somewhat to do with what's going on in the deficit of the United States, but the deficit is a determinant in inflation; it's the inflation itself that causes people to demand a higher yield. So let's look at the chart of 10, and what you see is a stabilization in that 4 and a 3 area, and in the last few weeks a rejection of it, meaning that 4 and a 3 to 4 1/2 is an it's an attractive place to buy treasuries. And if you look back over the last couple years, as long as yields are flat and yield and and they're around four to four and a half percent now over a 2-year time horizon with yields flat, you're talking about a 10% total return on your investment. That's starting to look really attractive on a look-back basis for investors overseas, especially in periods of dollar strength. We haven't talked about the dollar itself; I'm sure we will, but the the rates themselves in the United States are determined by inflation. So it's a long rant to just get back to the basics of compensation and where is inflation going in the US. I would argue that the 3% area in in the US for inflation is a sweet spot for bond investors; it's a sweet spot for equity investors; it's also a sweet spot for the Fed and in many ways the government itself. So potentially four winners; the one loser, of course, is the saver, um, and and the regular person who, you know, is probably suffering a lack of uh ability to keep pace with the cost of living, with wages not keeping pace with that. Being said, Jerome Pal today cited the statistics, which we also see—wage gains are in the four handle still while inflation is really below three in the US. So in that 3% area, do I see it going to four and five with everything going on? No, I don't see that's not in my base case; it's not even—it's not really in my—much in my probability—very low in my probability distribution. So generally a more more disinflationary type environment, you know, going into the two handle or even one handle I would say is higher probability than getting to five, and that comes from because we're seeing true inflation get to like one and a half, and it fell off a cliff recently, which I'd be curious what your thoughts on that dynamic is. A lot of it is look back, meaning that if if if prices have risen and they've gotten to a point where—guess what?—now not everybody—we get we got word about foot traffic over the last couple weeks in the US—foot traffic is down; restaurants are down; uh, shopping is down; consumer is is down, right? And so that's data that is out there; it's cited. Now we know consumer is is slowing in the US; that's now—that's realized data. What what is the cause of the consumers not going to the restaurant anymore? They just don't want to spend. And is that driven by—is that driven by them being fired? Well, the data doesn't necessarily support that that it's a bunch of people getting fired—price sensitivity and your ability to borrow, right? I mean, debt levels—all these things—but it's the sensitivity because if it's on sale, you're in the restaurant, but if it's not, you're not going to go. And so what what does the look back mean? It just—it just means that they had the ability to raise—raise—and now they don't have the ability. So the longer that they keep prices flat, and you look back now, the inflation rate isn't there anymore because time has passed, and they haven't been able to hike prices. So I do believe that that's where we are in parts of the US econ uh economy, but the inflation readings, especially looking at ISM services, ISM manufacturing, prices paid—those are our favorite metrics, you know, our most informative—they don't really support any deflationary dynamics or any really middling dynamics; they still support, you know, higher prices. So again, that's where my 3% range baseline comes from. But let's get back to the bond market. That 3% is spectacular for bond investors that are seeing 4% in the market, and surprise surprise, yields in parts of the curve are coming back to the three handle. So so in a way, if I kind of summarize a lot of that, it it seems like the US economy is just kind of chugging along; the growth impulse is starting to slow down, but um, not quite to the level of—you know, we're not seeing recessionary signs; it's just kind of a an economy starting to plateau out, which again, plateauing just means that it's it's chugging along at a base level. Um, I've actually heard this—I think Dr. Jeff Ross was talking about ISMs and the like. Now, I come from the engineering world where these things mean nothing. Would you mind just giving like a bit of a snapshot 'cause you mentioned there's only a handful of indicators, and that's something I'm very familiar with—picking just a handful of things that really give you 90% of the picture. Um, you mentioned ISMs. Could you just explain, first of all, what what it stands for, what it means, what those indicators are, and any others that you put in that like—just what are the things that you use to say the economy—good, bad, indifferent?
Yeah, so the ISM—let's start there—uh, stands for the Institute of Supply Management, and I will get into what what that comes from and what that means and their index there. But to answer your question most specifically, the best the best best metric that we have as observers of this market of where growth and inflation are is the 10-year Treasury yield. And so that is the best—it's the way that we can view what investors are demanding to be compensated for future growth in inflation. And I say growth and inflation, but it's really just one word; it's really inflation, right? Because the growth is what can drive the inflation. Inflation comes from economic growth, which is spurred on by credit creation. So that's really all one equation. So the yield is the expression. And so when would I be worried about recession? Well, if the yield fell to 3 and 1/2—10-year yield fell to 3 1/2%—I'm thinking about a recession, or if it fell to 3%, then the market is telling you that there is a recession on the horizon, right? So the market is is the best price, and the bond market—it's not the stock market; it's not Bitcoin; it's not the dollar—because the Treasury market and the 5-year yield and the 10-year yield—these are time values of money, right? And that is—that's as pure as you can get on the reading. Now, ISM stands for Institute of Supply Management; that is a it's an institute that collects data from companies. Now, the ISM people would be more familiar with the term PMI, which stands for purchasing managers index. Now, the the spirit of PMI is—it's an index that a data provider—they go out and they survey the purchasing managers of companies. Now, the purchasing manager—what is his or her job? His or her job is to hire, fire, put in new orders, decide to build inventory, decide to shed inventory, decide to hike prices, decide to lower prices, to spend or not to spend—essentially, that's right—and and it and to mark down the prices that they are paying to their input. And so these PMI providers, they go out and they ask companies across the economy, and they split these readings into services companies and manufacturing companies so that because the these companies are going to behave differently from each other at times in the economy. So it's informative to split it up. So the ISM readings are a PMI from the United States; they're the they're the longest-serving data set; the ISM manufacturing dates back to 1947. So it's a really really fantastic data series and something we can overlay with recessions and and lineup. So now how the how the index works—both PMI and ISM—they're diffusion indices, which means that it's from 0 to 100, and 50 is the basically the neutral level, saying that the answer to every question was no change, and above 50 means that there are expansionary answers and below 50 contractionary answers. And that way you can get a spot reading on the economy. So I like to think of PMIs as live GDP, and a great part of PMIs is that they have subcomponents, so you can actually see what is what is strong and what is not within that headline reading. But the headline reading does give us a sense of—is this economy expanding or is it contracting, and by how much, and is it expanding more than last month or less than last month? So it to me it's live GDP; I don't even—I don't even really look at GDP, and and I say that, you know, tongue and cheek because I look at everything; I'm on the desk, you know, almost every day looking at these things and and uh watching markets tick around, but they don't—GDP doesn't contribute to my analysis at all. So I really love ISM because it's the US PMI, and um, I find it quite authoritative in in many ways—the labor market, inflation, and the broad economy.
Good day, folks. I just want to give you a very quick update of what we're doing over at the CheckonChain Project. If you head over to checkonchain.com, you'll find that we've got three core product lines. The first is our charting website, and you'll find just about every Bitcoin chart you could possibly want—from onchain to technical, ETFs, derivatives, MicroStrategy. Now, these are all charts that I've constructed for my own analysis; I use them in my newsletter all the time, and they're all available for free. So head over to our charting website if you pretty much want to find any Bitcoin data that you're looking for. Now, for our newsletter, we have two tiers. For our paid tier, we do two updates per week, and this includes everything from market analysis—what I believe is going on at the moment, different fundamental pieces about how I think about data and how I think about Bitcoin's market structure—and also more fundamentals like master classes—how to think about different onchain tools and how to use them and how I personally use them in my own Bitcoin experience. Now, our final tier is Check on Chain Orange, and that includes a monthly slide deck, which is where I do some of my deepest thinking and really look ahead to try and see what may be coming over the horizon. We do a monthly conference call where all orange members are invited; people can invite one guest, and we also talk through all the different dynamics in the slide deck, and it's a bit more of an open forum and an open discussion. Now, each orange member also gets a half-hour call with myself and Alec, my business partner, where we can talk about what your goals are and how we at Check on Chain can best help you, but also just to put a name to a face and get that more personal experience going. So I hope you head over to checkonchain.com, check out the work that we're doing. Without further ado, let's get back to the episode.
It's funny, isn't it? Because when when you get into markets, I'm sure you've gone through this journey—you end up with a a textbook and a screen just full of indicators, and you're like, "Oh, I need all these things." And then the longer you spend in markets, you're like, "No, these are my five." And they're like, "Is that all you look at?" It's like, "I only need five." I get this question a lot, actually, um, people talking about liquidity. I know you have a relationship with with Michael How—you guys talk on a regular basis. So I'd love to kind of touch on liquidity. For me, Bitcoin is how I measure liquidity; the Bitcoin price is basically how I just sum all of it up. And there's a lot of talk recently—I've seen, you know, M2 starting to inflect higher—and I know Michael How—I think if I if I summarize his view—we had a lot of liquidity in '23 and '24. Um, this came from reverse repo; there's all sorts of things—you know, issuing short-dated bonds; there's a whole lot of Treasury and Fed games—that's actually another thing I want to touch on, like what's the role of the Fed and the Treasury in this evolving world, 'cause that's interesting. But my—I think his view is that liquidity—the impulse is slowing—which means we're not getting that—we don't have $2.5 trillion of reverse repo to get dropped back into the market. So in a way, there's less levers to be pulled. What's your kind of general read on this liquidity view? How do you think about it from that perspective? And then kind of as a as a bolting on to that, how do you actually view Scott Percent and Jay Pal? How do you view the interplay between these two? Because that is—I think it's a very interesting dynamic. What is the role of the Fed? How does the Treasury intersect with these guys? Like, how do you think that's going to play out moving forward?
Yes, it's the the interplay between the Fed and the Treasury is a fascinating topic. Um, let's start with liquidity. So liquidity is a tricky word, and you know, I'm going to be a lot of my research focus is going to be built around this word over the last, you know, few years—sorry, over the next few years—uh, as I get past Bitcoin age and you know, get to the next phase of my of my research career. I believe that liquidity is is the most important concept, but it's terribly ly understood because it actually has quite a a few ways to describe it. There are a few definitions of liquidity; I actually count three, and they're—there's quite different from each other, and I'm only talking about one of them going forward, and many people are talking about a different one. So let me break it down. Liquidity—the traditional way that people think about that word—is how easily you can trade an instrument; how liquid is it? How easy are you able to get the spot price when you go to buy or sell that—something like—with that is easy is considered highly liquid, or it has a lot of liquidity. So treasuries are that highly liquid asset and that they can be sold quickly. Right now, liquidity—the way that you just referenced it—is a metric; a lot of people call it M2; this is a liability ma-based metric—basically a money stock uh measure—and money stock is a liability of financial institutions, right? Central banks and banks—they issue reserves, currency, and deposits—these things are part of the money supply, and they're liabilities of banks. Now, definition one—we let's throw that out, okay? Because that's obviously a different liquidity that we're talking about here; it's more about the trading environment—trading environment flow, right? It's about flow. Now, Michael Howell—I I consider him, you know, a teacher to me; I've read his book, Capital Wars, which people—if they like this idea of liquidity—just go just go buy Capital Wars and read his book; it's one of the most important books I think that's been written, and something that I'm going to be going for my third read uh soon this year, um, it's just—it's that because I didn't get it the first time; I'm just going to admit that I didn't get it at all. I actually didn't get it at all; I had to—I read it, and I only made it through half, and then I had to interview him like four times. Then I started to get it; then I read it again; then I really got it; then we started to build our own TBL liquidity metric. So I went to Michael Hal, and I'm like, can you explain liquidity? And he said, it's not a liability; that's just money stock, but that's not how money flows. We have all this shadow money, so—and we have credit creation. What actually matters for the flow of money, which is what drives asset markets, right? It's flow—is the asset side of the banking system, not not the liability side, because the asset side is how that you have the collateral multiplier. And so what—how do you measure liquidity? So we've built a liquidity metric; it's called TBL liquidity, and what we have done—it's inspired by How—but see, in my learning, I didn't go and say, hey, Mike, how did you—what's in your index? I read his book, and I asked him a ton of questions, but I never—I actually at the beginning said, what's in the index? But you know, I realized he's not going to just tell me what's in it, and because it's proprietary. But I then—I tried to understand. So what did we construct? We started with the asset side of the banking system: so Fed assets plus commercial banking US assets plus ECB assets plus Euro Bank um etc. We've included China; we've taken them in and out to try to play with the numbers and work, but the asset side—so not M2, not deposits, not currency, okay? But then you layer in bond prices and bond volatility because the assets are what—treasuries etc. So when their price increases—bond, you know, rates go down—the size of the banking system grows; equity physically grows as the price of the bonds grow because liabilities don't grow; therefore, the ability to churn out new credit and create credit and flow and make markets and sell options—it goes up. And what happens when bond volatility falls? The propensity to make markets goes up. So f—falling bond and falling rates—it actually boosts our liquidity metric. Then, after a few months, we said, hey, we got to layer in the dollar. So now, as the dollar goes down, our liquidity metric goes up. So we have an asset base with three multipliers: rates, V, and the dollar. And as V—as the dollar falls, rates fall, and bond V falls—the size of our metric increases because we have associated the asset base with these three multipliers—actually, they're—they're in the assets—so we're measuring a live change of that asset base—that collateral multiplier—and that's what we call liquidity, 'cause that's what Mike Howell taught us. He said that liquidity comes from credit creation, and credit creation comes from the assets; it doesn't come from the liabilities. Liabilities are byproducts of credit creation and are not well measured because of shadow money—because money market funds, Eurodollars, forex swaps—I don't even know how we can measure forex—the size of the forex swap market—I mean, I haven't even gotten there in the construction yet, right? I told you I haven't gone—I haven't done my third re—I haven't read the book since I've had my own metric, right? You've—now you've done the work. So when you reread that thing, you're gonna—you're gonna firing up all of those different—all those neurons because you've basically gone through the proof of work to understand the problem yourself; you've deconstructed it from a you know—and that's the thing—if someone gives you an answer—you know, people will do this all the time—they'll send me a metric and be like, what do you think of this metric? And my answer is, I have no idea; I don't know how they built it; I can't—I can't speak to it. But give me the idea; explain the problem you're trying to solve; I'll construct my own version of it that I understand, and I'll do the mental loops. Now I can give you an answer—won't be based on their metric; it'll be based on my interpretation of the problem and how I would solve it with data. It's—it's been an incredible process; I've learned so much; we have so much to learn and so much to work on. And now it's not just me; I have a team; they're helping me with this, and uh, they'll be reading Capital Wars—what—you know—they'll be—they know—they know they have to—it's coming. But we we want to understand it to the…
Best of our ability, we want to understand it so well we can teach it. And you know that's the goal, that's the mission. So we have to teach ourselves, and you know, forever a student. We've talked about that totally, absolutely no mantic. And it is a, um, it's, it is an interesting idea, this idea of liquidity. Because if, in terms of the components, it actually makes a lot of intuitive sense. If you're China, for example, if the dollar gets too strong and you owe dollars, it's you, you owe a currency that you can't print, and therefore it's harder, your liquidity structure will go down, and vice versa. Weaker dollar, you've got more money to spend.
Um, a lot of people will be familiar with, uh, in 2021, a lot of the market was, uh, collateralizing their futures position with Bitcoin. This was particularly in the first quarter of second quarter of 2021. If your collateral becomes super volatile, suddenly your, not only is your futures position moving around, but so is the collateral that backs it. You probably should take your leverage down. It's much the same way when bonds get too volatile, people have to pay back because they're like, "But what if my collateral reduces in value and I've lent out all this money? Suddenly my stop loss gets hit." It's much the same, uh, the same rationale. So it makes sense, right? It's a very first principles approach. So we, uh, we just had the, getting back to, um, Treasury and Fed, because I'd be very curious to hear your thoughts on that. We just had the FOMC meeting.
Um, I've been of the view that like it's very interesting as an engineer watching the finance world tune in, watch this press conference every, whatever it is, month, two months, and there's all this discussion of what JPow said, what his mood was, how he responded to this question, the whole Fed watch thing. I find fascinating. One day we're going to look back and say, is that really how we did monetary policy? Um, we've also seen Scott Percent more recently, uh, on camera saying all sorts of things like, you know, we're probably heading for some kind of slowdown, and there's going to be some pain along the way, which personally I think is, it's the first time I've seen in a very long time where a politician is essentially saying the truth.
Um, what are your thoughts on how Treasury and Fed and, you know, they're winding back QT? Eventually, I saw a tweet you put out before. There's a lot of people who say, oh, stopping QT and immediately go, that means QE, and I'm not quite there yet. What's your view on this whole structure? And I guess the human element, the governance element of the, uh, of the dollar system? Yeah, QT rolls into QE over time. That's why it's material; it doesn't mean it's happening today, but, um, I, let me touch on a couple of things. Okay, the, the just to finish on liquidity, when we finished the study, we correlated it with, with stocks and Bitcoin, and we proved a relationship. So we saw that the conditions are in effect, and when we layered in the dollar, the correlation went up. And if you think about credit creation being the source of flow, just think about contraction in the credit system being money sucked out, right? And so that's the absence of credit creation. And so when the dollar strengthens, a foreign borrower that's unable to either pay back or do the role that is what contracts the system, and so that's, you know, you can think if you want to do a one-to-one relationship of things. When you think about the dollar strengthening, it, it actually has the ability to contract credit because the person cannot pay it back.
To go to Scott Bent and what he said about the economy rolling over, I thought that that was very important because it was them admitting that we're not here to save the stock market. But I found his comments about the American dream to be the most informative and, and truth-telling. You know, the gotcha media and, you know, we don't have to get into all of that, but, you know, how they say it, so they were like, "Hey, you know, what do you have to say to Americans that are going to be like, my prices are going to go up because of your tariffs?" And he's like, we are focused on the American dream, which is being able to have a good life and buy a house and housing affordability. We are not focused on, I think he called it bobbles from China. I think I think that's the actual term. We're not focused on bobbles from China and the price at, you know, the price at which you're buying those bobbles. So that is a very clear signal that we do not, the administration, that we do not care about what tariffs are going to do to consumer prices in any, in any short or medium-term way. Either the supply response will be there from US companies, the exchange rate will adjust, but what matters more to us is our agenda. So we don't have to get into that, but it is that agenda. So there, you know, that's a, that's a whole separate episode where they're going with it. So that's on the Scott Besson side of things.
Now, in terms of the Fed and the Treasury and, you know, how they're working together, not working together, who's controlling things and all that, the Fed, it doesn't have that much power, and that's really the way I see it. The Fed actually lags the Treasury market. We've talked about this for years that rates lead the Fed. We see that, we saw that during the hiking cycle where twos skyrocketed way before the Fed, and then they crashed down below months before the Fed paused, but you know, and then started to head lower long before the Fed started to cut. So rates always lead the Fed. The time value of money is in the market, right? The Fed is just a, it's almost a lagging policy rate. Now, the Fed does impact liquidity when it grows the size of the banking system. That's why QE and QT matter so much. That's why Bitcoin went up 5% today on a little, little $20 billion reduction in the cap of QT. And I'm not sure when you're going to air this, check, but on Wednesday, March 19th, a couple of hours after the Fed, I did a 45-minute video on literally just the cap going from 25 to 5 and how it go and how it works through the flow and why it matter, why it pumped Bitcoin today. It's not that it's QT to QE, it's that it's all about flow; it's just a marginal shift. I saw a good tweet, I think it's actually, um, that the tweet was that a reduction in QT is QA at the margin. It's got the same concept, right? You're reducing contraction of liquidity, which is the same as, relatively speaking, an increase in liquidity. And I saw one that, uh, from one of my favorites, uh, Conch on Twitter, and he said, tap the sign, and it's like when they say that, you know, um, that there's a problem, bet more, right? And, and so because it, it basically means that at the margin they're coming into support, right? When they, when they see a problem, they're coming into support. So at the margin, the flow comes there. And, um, you know, I do think that the Fed, in the absence of any balance sheet change, is not super relevant and will play ball with where the Treasury wants interest rates to be because it's like, hey, we have to borrow, and if you can lower the rates, then it allows, I mean, it physically allows, uh, you know, overnight money to come into the treasury market because the, the steeper the curve is, the more attractive it is to lend to the government. The flatter the curve, the incentive isn't there. And it was our opinion at TBL that the Fed cuts of last year were almost entirely to uninvert the curve to get banks out of a negative net interest margin where they have to fund their dealer, you know, inventory at a negative carry on an overnight basis because repo rates were at five and a third and treasuries were all in the forehandle. So that's a, that is a tight financial condition by itself. The Fed will never say we, we cut rates just to get negative carry out of the repo market, but I know from experience that that's how the Fed thinks in a lot of ways. I've done the work there, and I've talked to, and this would probably speak to the, um, their, their shadow third mandate, which is financial stability. That's more, am I correct in that read that they're essentially saying, look, if we keep going in this inverted state, we're going to end up with problems that we don't want to deal with. Let's get ahead of this thing and uninvert the curve by lowering the short end. It's almost like the overnight repo market is their guiding light, and, um, and as long as that is, as long as that is in play, they, they can't even see anything else, right? So they have to, they have to attend that first. And Jerome Pal said it today in the first couple of minutes. He went to, okay, we did QT, then he did his little economy spiel, then he came right back to QT, and he said, while we don't see a bunch of problems, we do see that there is, you know, some events going on in the money market, so we want to be, we want to be mindful of all that. So he said it right away. We know they're talking about it; we know they're watching it. It's the repo market; it's overnight funding. They can't have repo rates on top of treasury yields; it doesn't allow investment in treasuries; it, the steepness of the curve needs to be there for some health. And you know, I'll look at the curve, the curve, you know, flattened over the last few days, and, um, you know, a little bit of steepness today on the move, but a 25 basis point curve, it's not enough to, you know, get the Treasury funded in the way that they want. There's not a tra, there's not enough attractiveness there. With that being said, check, look how strong the Treasury market trades with no curve; it tells you something. It just tells you there's a big bid. One of the things I want people to remember is that even though the Treasury market is over 30 trillion in size, the USD market is hundreds of trillions in size. So the Treasury is the safest asset amongst hundreds of trillions of securities, so it ends up being the outlet. You look at Japan; where do you think that that money is going on a one-to-one basis? It's treasuries. Makes sense, right? Pull out of, um, one and a half yielding JGBs and put it into four and a half yielding US treasuries. It, it, it makes sense. The world's a relative place. That's right. Fascinating. So, um, there's a couple of things I want to do. Um, I kind of want to just get your, if we wrap all of these things up, um, and you know, I'm a big advocate for, I don't like to predict the future, but we always have like a foreseeable timeline. Um, what does your base case look like in terms of, you know, again, people have been talking about an uptick in M2 and liquidity, and I know Marco How's a bit more sensitive about there, there's like refinancing waves coming in like the, you know, foreseeable future. What's your general base case for, let's just maybe stick with 10-year Treasury, dollar liquidity, just like that general ballpark. What's your kind of expectations? Um, and I saw on Twitter, then I want to close because you actually said that, uh, you kind of wish this interview was going the other way. So I actually wanted to pass it back to you and see if you've got any, uh, any questions to come the other direction.
I, I always have. So I wanted to have you on, man, but I've been so busy. We stopped guests for a while as I was, you know, trying to finish the book and, um, you know, just been busy with, with, with the book release and all that. So we'll talk. I'll, I'll ask you a question. I do want to ask you, I have something about, uh, long-term holders, um, on my outlook. I think that the government saying that they're okay with the role it is, it comes down to the basic econ 101, the deconstruction of GDP, which is consumption plus government spending plus your trade situation, your net exports. And so if the US government is going to reduce their government component to GDP, GDP is going to take a hit, and if GDP takes a hit, what that does is it just lowers the aggregate income across the economy. What that might do is it might cause some losses, which could cause some credit contraction, which could cause a decrease in liquidity. Now, I be, I believe that the conditions for liquidity are good in the absence of inflation because in the absence of inflation, you don't have a bond bare market, you don't have bond volatility, and you don't have money racing into the dollar to chase higher yields. So those are the conditions for me for good liquidity, and right now I see the politics as capping the dollar, and I see the motivation to get rates low, even by design, with a little bit less government spending as a supportive liquidity condition, even though it can have a negative short and medium-term impact on liquidity. So if you want to summarize all of it, you just go right to the midterm, as cynical as you can, midterm elections in November of 2026. Those are only 20 months away. So split it down the middle: the next 10 months bad, the 10 months after that good, heading right into the election and ride that wave. That would be my base case as to how the government wants to play it. And what I'll say to Pal's credit is that he has threaded the needle thus far on avoiding a recession coming from 2022, um, with an unprecedented inflation, you know, a 40-year high in inflation. So let's keep that working thesis, and that's what is, that is what is guiding me. I don't see, I don't see some dollar strengthening tailspin unfolding with, within the current dynamics. So, but you know, my job is to, to keep saying that I don't know, and we'll keep watching. Totally. No, that's really good, because, and that's what I love about these kind of conversations, Nick, because you've come at this from a macro bond world. I obviously think a lot more in the, the Bitcoin, its internal, the way it trades, the onchain, the derivatives, all that stuff. And in recent pieces, there's been, if I kind of summarize it, my view was being 2020, the 2025 is going to open choppy and chaotic. The world's going to adjust to a lot of change; therefore, I'm probably expecting that we'll have some downside, but at the same time, I don't think we're going to get, we're not going to 20K, we're probably not going to 40K, right? I would be surprised if we got back down into the 60,000s. That would be, but if we get there, I've kind of got, there's like a bit of a floor under us. I don't think it gets that bad, but I'm also measured to the upside. I don't think we're going to be at 250K by the year's end, but it, it's one of those things where we've kind of come to a very similar conclusion, which is generally constructive with a bit of front loading of just chill out and be patient because the market's going to have to find its new equilibrium. Very interesting. We've come to a similar conclusion, but from two completely separate angles, um, and often that gives you a bit of confidence, right? We can look at things from two different ways and go, well, the story seems to be investors are willing to buy Bitcoin maybe at a cheaper price, but over the long term, relatively unfazed, the story is going to unfold as we all expect. Yeah, credit creation and that machine is going to get going. And if you actually listen to the administration, part of their play, part of their game plan is a massive deregulation wave targeting growth and lending and bank lending, which is M2. I mean, that's raw M2, new money, and that goes into, that goes into production, and that has the ability to increase aggregate demand and actually bring back inflation and growth prospects, and then you'll have your own cycle at that point that you'll have to worry about tightening liquidity because of this unwillingness to lock in collateral at, at, at today's yields. So, but I, that's, I mean, it's got to be tomorrow's story with the, within the current dynamic, or at least that's the way that I see it. Nice one. Well, mate, let me hand it over to you. What's your, uh, what's your question on from the other side?
Okay, so long-term holders and short-term holders, right? They have this relationship. Give us the bottom line. What are you seeing in the shifts? What did you see in the move from 110 to 80, and, uh, what's, just from, who's holding, who is moving coins, who is selling? From that pure perspective, what are you seeing? Great question. So, uh, the way I would describe this cycle, uh, the 2024 chop, solidation range. We spent eight months, um, just to contextualize this. Every time we got below a trillion dollars, and arguably every time we got below 1.2, two trillion market cap, it was swiftly bit up. Now that is the opposite to 2021 where we tried to get above a trillion dollars twice, and we were rejected the first one in mid-21, and then we had the 2020 bare market. So something about that chop, solidation, just from a fundamental perspective, tells me investors are saying Bitcoin is a trillion dollar asset. So now, where do we go? How much higher than a trillion dollars do we go, uh, on the first move? Right now, yes, there was the election of Trump, which is obviously a more favorable administration. Without that chop solidation and the accumulation that happened there, you don't get the rally to 100K. So in a way, you know, yes, Trump was the catalyst, but it was predicated on that accumulation zone. So, um, in that first rally, so the ETFs go live in January, um, we start at 45, we get to 73, and we chop around 50K. That period, we saw an enormous wave of sellside from long-term holders, mostly on the way up, um, you know, the German government was able to sell 40,000 Bitcoin, and the market actually rallied through it. Lots of accumulation happened there. Now, once we got to 100K, we started getting the second wave of long-term hold of selling. Now, if you look at the peak to trough, we've kind of had, it's like a double, like a W, the first peak to trough and the second one. If you add them together, it's about 3.2 million Bitcoin. Now, on that second rally from 73 to 100, the vast majority, about 70% of the coins that was sold came from the chop consolidation range; 30% came from previous cycles, but most people were happy to swing trade up a 30, 40, 50% move. Now, we saw a lot of this coming into year's end. So if you kind of think about this as like, where are the coins deposited in price? About 25% of the supply was deposited from, let's just say 50 to 60 to 70 up to 90 plus. Now, those coins are now going to be short-term holders. So that, that 3.2 million that long-term holders sold is now bigger than the, the massive distribution we had in 2017. It's now the biggest bull market distribution event we've had, and yet Bitcoin's trading with a 20, 30% pullback, right? 30% down, and people are losing their hair. It's crazy. It's crazy to see. So by most accounts, this looks like a very typical correction. Now, it's a correction that I think we should also, I've been calling it, put one bare market goggle on. That doesn't mean we're in a bare market, but it means you should probably be expecting a process, expect lower highs, not on a monthly scale, on a daily scale, on a weekly scale, on the short term. And the reason why is that those 25% of coins that were deposited above 90,000, that represents 52% of all the dollars that have ever been invested because one bitcoin at 100K is 10 times more than one bitcoin at 10K. So all of those people who bought up there, they're a little bit sensitive right now, prices below their cost basis, they're probably feeling a bit, you know, sore, but at the same time, we're not down 50%, we're down from their cost basis, not necessarily from, some people bought at 110, most people bought at 95, 95 to 85. It's kind of another day in Bitcoin for most people. So I'm of the view that we haven't shattered bull market sentiment. Yeah, there's a few people who are sensitive, but we haven't broken their sentiment yet. Um, we're in this phase where there's also a stack of supply that's been sold. So many long-term holders have, in fact, exited their position. We've got through the vast majority of their sell side. The question that remains is basically, have we got to, did those coins go from one long-term holder to another, right? Someone who bought it, maybe they're Michael Sailor, maybe they're an institution who's like, it's .1% of my portfolio, I don't care, it's so small, I don't care if they traded it to a hedge fund who's now getting squeezed on the back end. Yes, we're going to get ETF outflows; yes, we're going to get sellside. So the question that remains, how much of that supply that was bought at 90K was Paul Tudtor Jones who's buying it because they see debasement coming in for the next 10 years? How much of it is a Michael Sailor? How much of it is Mr, Mr. hedge fund manager who has a P&L statement they need to book in every, every quarter, every, every year? So my view is that we haven't actually gone high enough with enough euphoria to create what I think is like a structural long-term C and 2028 bare market, but I do think it's just going to take a bit of a process to get out of this, um, which very much aligns with maybe not 10 months, I think 10 months is a bit too long, but choppy H2, right? I've gone from choppy Q1 for sure; I'm now saying probably Q2 is going to be much the same, but we'll start coming out the back end of it later on. Um, so I'm generally constructive on the year, but I just think we're going to get through this near-term malaise. Yeah, I, I think that's really important to point out that the, when Bitcoin gets to these extreme valuations, it creates so much unrealized gain that it brings such a wave of selling that you can't overcome it for a couple of years, and that's a true bare market, and we never, we've, we've never flirted with that, and I don't think that you've seen that from an onchain perspective that we just got to the, it's quite remarkable cuz we've seen bare market inducing sellside, and this is the thing that keeps, I keep coming back to, we have seen that amount of sellside, and yet Bitcoin still chopping around at 85K, you know what I mean? Like, I just look at this thing, I'm like, it is astounding. Yes, we've had a lot of selling, uh, but you know, at the peak it was taking 85 billion a month in sell just from long-term holders, and the short-term holders are usually 2x that, right? So we've got what is that, uh, about 160 odd thou billion dollars per month in sellside, and the market chopped sideways through 100K. It's incredible the amount of demand, cuz that's the thing that I think a lot of people miss, sellside has a buyer, right? Because that's what makes it, makes a market. So we're actually, when we look at sellside, some people like, why are you being such a bear? I'm, guys, that's the most bullish thing I've ever seen in my life. Bitcoin is a $2 trillion asset, and again, if you overlay like cycle low performance, it's trading just like it did back in 2016. Guys, this is the most bullish I've ever seen in my life. Yeah, it's going to take some time, but like, it's still got young legs. It's amazing to see. I love that. Good stuff, mate. This is fantastic. Um, before we close, uh, you are now, is this your second book that you've got out after Layered Money? It is. So let's talk about Bitcoin Age. Um, first of all, what was the impetus for it? What, what was the, what was the problem that you set out to solve or that you thought hadn't been properly addressed? Um, tell us a bit about the book, about the story of it, and, uh, you know, ultimately why Bitcoin Age is, uh, is hitting shelves at the moment. Sure. So I've written one Bitcoin book, and I've read many, many Bitcoin books, and as I've, as I was reading more and more Bitcoin books, I knew that I had a unique story to tell about why I think Bitcoin is here, why it has arrived. And so this is my Bitcoin story, where I think it came from, and Bitcoin came from three places really. It came from the history of credit, which was an inspiration for Satoshi and a lot of his predecessors; it came from the history of the internet, and because Bitcoin is an internet protocol; and it came from the history of cryptography, because Bitcoin is a tool that utilizes cryptographic solutions. And so there were a lot of stories about the history of cryptography and the history of banking and the history of internet that I hadn't, I felt had never been combined before. I just did a ton of research, check. I read, I read every paper and book that I could and put together what I felt would be the best way to teach Bitcoin, why it, why it's here and why it has a place and why it will coexist with the credit system for years to come. So I don't, I'm not a big subscriber to Bitcoin replaces all currencies or replaces the dollar as the global reserve currency. It's much more nuanced than that. Bitcoin is becoming the greatest store of value the world has ever seen. That doesn't mean it's becoming the world reserve currency or the basis for a financial system, which is a credit system. Bitcoin isn't a credit instrument. So you have to explain why these things exist side by side as well. So this is, this is my story, and, and you know, the first book that I wrote was a monetary framework. It's a framework to understand money and to understand Bitcoin as money. This is a story about Bitcoin. It has the people that helped build it long before Bitcoin was even an idea, and, uh, you know, how the dollar has become a dominant credit system that really escapes US sovereignty. It's become a banking phenomenon. So this is a story of the global banking dollar, and we get to the, the global banking dollar's dominance, uh, by 1975, and I outline that in six steps as well in the book. Very cool. And it very much aligns with the base case I have, which is we're going to have hard money collateral, and we're going to have soft money borrowings, and in a way, we're splitting the store of value and the medium of exchange because we've run a lot of experiments. We've done the gold standard; we've done the fiat standard. The world, I think we're going to, it's like, well, you know, as much as fiat has its problems, it's less of a problem if you can store your wealth in an asset that doesn't get debased. So in a way, we can actually leverage the benefits of both, and I think this is not because fiat is a good thing. I actually think fiat's complete [ __ ], but the problem is, how many, and I say this to a lot of people, how many of your circle of friends have you managed to convince to buy Bitcoin? There's, there in lies one problem. It, there's a, there's a learning journey that a lot of people just aren't going to get there. It's going to take such a long time. And then you've also got on the other side of the equation the governments who are just not going to let the fiat system just completely be usurped by Bitcoin. So you've kind of got both of these forces that makes, you know, if we've got a hard money collateral and we've got the ability to borrow and have that credit system which doesn't actually kind of break all the system, it's like, it's backwards compatible, so to speak. It actually could turn out being one of the better solutions because you're getting a hybrid system where you can save, but you can also, you know, still live within the, the parameters that we have today. So I think it makes a lot of sense. Yeah, you know, borrowing comes from two places: it comes from the lender and the borrower. So how many of those Bitcoiners have never taken out a business loan or a mortgage loan?
You know, I, in a in a credit system, the borrower has income and wants to spend today instead of tomorrow, and the lender wants to profit and sees a customer that is likely to repay in the future and can generate a profit by issuing and creating fresh money out of thin air. And so the system works as it works. It disadvantages many; it disenfranchises many; it enriches the few. So there are questions that society has to answer about that system.
In the meantime, we have Bitcoin, and we can we can get to that exploration as a society. And I think that we have begun.
Yeah, no, I agree. It's one of those few places where you can just park money, and I'm not, you know, price moves around, but I'm not concerned. I'm never going to get my money back, right? I know that I've got it in a store of value that's going to be just fine.
Nick mate, thanks so much for coming on the show. This was fantastic, a long time coming. Uh, where can people find you, and uh, do a bit of a send-off?
Yes, please. Go read Bitcoin Age, so you can find it on Amazon or anywhere that you buy books. The ebook or the hardcover are both available. The audiobook will be out in April. I'm excited for that; I know a lot of people are audiobook people. And if you want to find me, go to the bitcoinlayer.com. You can find links to become a TBL pro and uh, follow us on YouTube as well. So the bitcoinlayer.com for all that information.
Legendary. Thank you, mate. It's been a real pleasure, mate.
Cheers. Appreciate you. [Music]