Transcription
Hey everybody, welcome back to the Mustard Seed podcast. This week I have on Joe Consorti. Joe, welcome.
Joe, thank you for having me on.
Absolutely. Glad to have you on. I want to start off, you know, this this conversation really talking about macro, gold, and Bitcoin. But I want to uh start in particular with gold. It's just kind of been going on an absolute pretty incredible move. I've seen that it's like more oversold uh you know or overbought uh than it really ever has been in history according to like a technical indic indicator. What do you make of what's going on in the gold market right now?
Absolutely. So 2025 is definitely uh if it's been the year of any asset, it's been the year of gold. Um it's up 62% year-to-date. Actually, that was numbers that I struck as of yesterday. It's probably up even higher right now. And so it's well above $4,200 an ounce, which is insane because gold has been relatively speaking more or less flat for 15 years prior to that. Um, so that's quite amazing for this uh for this rock. Um, you know, it's now worth $28 trillion, closing in on $30 trillion, which is crazy. Um, I can remember just a few years ago when it was 20 trillion. Um, silver has also surged even more. Um, but Bitcoin is doing the opposite. Well, kind of uh, well, not doing the opposite. it's rising to a much smaller degree and I'll talk about those dynamics in a moment. Um but the first reason why gold is doing what it's doing um is because in some sense it's recognizing where we are uh from a fiscal standpoint as a country. Um you know gold buyers aren't just seeing the geopolitical strife that's going on between the United States and China and other nations who've had huge levies u huge huge tariffs levied on them. Um, but it's also happening in and amidst uh an environment where we have inflation that the Fed has admitted is probably going to stick right around 3% um year-over-year, which you and I both know in realistically means 7 8 9 or 10% price inflation year-over-year. Uh, the official numbers are not accurate. They don't weight the goods and services that you and I actually need and use every day more, right? They weigh those less in the basket because it makes inflation seem less acute. You know, gold is rising in and amidst that environment, but it's also rising in an environment where the problem we have here as far as price inflation goes, is far worse in every other country. There were there were two pictures yesterday, I'm sure you saw them. Uh, one was in Australia and the other, I believe, was in South Korea. People lined up outside of gold bullion stores in order to go purchase gold. Um, that's like a an image that you would expect to see back in the 1930s. Uh, not today. Certainly not today. Um obviously I think this is also something um uh it was Sam Callahan that quote tweeted that and said uh you know Bitcoin doesn't have lines. Um but uh realistically the reason you're seeing gold uh you know fly right now and it's up 62% year to date is partly the flight to safety trade. It's partly sovereigns bidding up gold at the margin. um you know as a percentage of foreign exchange reserves gold uh is rising close to if not it's already higher than US treasuries for the very first time in gosh uh pre-1970s right so um we're going through this kind of global monetary reordering in my mind um at some stage gold cools off but I don't think it'll cool off anytime soon so long as the government remains shut down the trade war with China continues raging on I think you start to see um go I think you continue to see gold appreciate even more than it is now because it it is the not just the apex safe haven asset in markets. It is the asset that people purchase uh when they need uh some kind of safe haven, right? There aren't any others, right? As far as an uncorrelated asset goes, there are a couple of others. Um but gold is the single best one in the market and you can tell why right now. on. So gold flying 62% essentially tells you something's wrong at the government level, at the individual level, uh, and especially at the monetary level. So high level, that's what's happening here.
Yeah, I think that makes a lot of sense. And I think one thing that I've recognized and I'm curious to to hear what you think about this is it's fascinating to see gold's performance and it still be, you know, nearly almost a $30 trillion asset. like this is this is you know one element on the periodic table like worth $30 trillion around the world. That's pretty significant to see it moving at the rate that it's been moving. However, you know like you put it in the context of sovereign debt, real estate, US equities, private equity, all these other asset classes, gold's still kind of just a drop in the bucket compared to everything else. And when you point out that everything else has this extreme counterparty risk or has some form of counterparty risk and has been monetized and has this monetary premium, well, it kind of does make sense that gold and obviously Bitcoin too are eventually going to see a lot of these major inflows uh coming back into not much capital or just scarcity of of real actual money. I'm curious if you agree with that.
I do. So, two things there. Um, speaking of how much gold is flying, the first thing you said, uh, Bill, your friend in mine, tweeted out that gold is now adding one Bitcoin market cap every week, which is true. So, uh, uh, uh, over the last couple of days, I think it was over the last five days, I don't think it was even six days, um, gold added $2.3 trillion to its its market value. That's insane. Uh, because that is larger than Bitcoin's market cap. It did that the prior week, and it did that the prior week as well, or not the prior week as well. So for two weeks in a row, as far as I know, and then beyond before that, it was a little bit more protracted. Um, gold added two full Bitcoin market caps. So number one, this flies in the face of everybody who's kind of saying that, uh, Bitcoin is so large right now, uh, this type of behavior where it can run 30% in 5 days is gone. Uh, I would say that volatility is kind of a downside dampener, but I I don't think it precludes Bitcoin from moving to the upside with force. Uh, you know, the reason I say that is because the buyers of Bitcoin are increasingly becoming people who never plan on selling it. But there are still those forces, those people who want to drive Bitcoin higher rapidly. The people who don't purchase Bitcoin in ETF format, the the people who purchase it in spot format. Um, you know, and so I think that the forces are still there to drive Bitcoin massively higher in short order. And I think you can see those forces very evident in gold. when the time comes, assets that are pure monetary premium do very well. Um, now what I mean by what do I mean by pure monetary premium? Well, gold obviously has some manufacturing utility. Uh, but its chief utility is its use as a store of value. Um, it's monetary properties that allow it to best accomplish that chief utility are its relative scarcity. That's what makes gold a $29 trillion asset. It's not the fact that it gets used in watches or construction or circuit boards. um it may be circuit boards at the margin, but you're using such a tiny amount of it, it really doesn't matter. Um, in the grand scheme of things, the reason that gold's market cap is rising is because people want to store their value because they're losing trust and other stores of value. They're recognizing that hard assets are more valuable at storing their monetary capital than equities that are carrying not only corporate risk, balance sheet risk, but also a monetary premium on top of that, right? Why would I store my monetary premium in an asset that also carries all of these different myriad of risks when I could store it into an asset that is pure uh you know sponge for speculative capital right that's what I'll call it and so you know in my mind and Peter Schiff also uh I saw Peter Schiff I think it was on uh some kind of clip out of I think the Graham Stefen podcast and he was talking about why gold has this value um you know has is so valuable and he was lying to their faces he was saying well it's because it's used in watches and cars and construction and this and jewelry. And he was lying, right? Because that's not what gives gold its value. And so, you know, for the gold bugs, right? Um, they've been waiting 15 years, so good on them. I think hard money in and of itself, uh, whether you're talking gold, silver, or Bitcoin, um, is fantastic, and I think it's poised to be the best asset class to be allocated to over the next few decades. Um, but the market still doesn't yet understand what BTC And so to your point about, you know, what happens when people realize that, you know, there's this uh basically there's this immense amount of monetary capital. Um I I think that Bitcoin stands to do better than gold over a long enough time horizon. But in my mind, I don't think the market knows what Bitcoin is yet. And because of that, I I kind of doubt there will be a rotation directive from gold into BTC. I do think for other reasons, Bitcoin will do well, but we'll get into that.
Yeah, I think you brought up the whole utility argument of gold where it's, you know, used in electronics or whatever else. And I always find that kind of interesting because if you think it of just other elements on the periodic table, many are very useful. Oxygen is incredibly useful, right? We need it to simply survive. But there's so many other, you know, metallic uh elements on the periodic table that are useful in so many different uh different industries and and so on and so forth. Yet most of these other elements are not worth trillions of dollars. In fact, like I think silver is like the only other one that's like maybe worth $2 trillion. So still pretty microscopic compared to gold. And so to me it's like it's pretty obvious that there has to be something else other than like the utility value of gold that's leading towards why it's a $30 trillion asset. And I think it's exactly like you pointed out, like it happens to be it happens to have the the appropriate monetary properties to be a good form of money and to be a good form of long-term savings technologies.
I think that's a common uh a lot of people, especially newer to Bitcoin and newer to gold, tend to get tripped up on something like that.
Just like the utility. Yeah.
Yeah, they do. I mean, you know, with Bitcoin ultimately chief utility is a store of value. You can tell that because what's the main way that people used it? Um what's the main way that people use it every single day? Um it is a store of value particularly here in the west, right? In the east where uh property rights aren't as secure and people don't have the ability to transact generally in their own right, Bitcoin can serve as a monetary network much more than it does as a store of value. But for those of us in the west where we have freedom to transact 99.9% of the time, I'm talking about the United States specifically, obviously we've seen kind of these uh abuses of that in Canada and in Mexico and other nations, but but here in the uh here in the west when I'm talking about the United States, um you know, property rights are pretty secure. You have the ability to transact. And so what is the killer app of the 21st century when it comes to an investable financial asset? It's store of value. Storing your value better than anything else can. value in equities as I mentioned earlier comes with corporate risk. It comes with um you know, governance risk. It comes with balance sheet risk. Um any any number of other risks associated with owning a an equity um and the risk associated with its underlying business. Um the risks associated with owning gold um there are fewer right uh it is a bearer asset so you could technically custody it but there is a theoretical upper limit to how much of it you could custody. It is scarce, but it's only relatively scarce in that when gold's price goes up, more miners can go and mine gold, drudge it up out of the ground, increase the pace of uh the supply schedule, and then drive its price back down to earth. Um, with Bitcoin, that can happen, right? So, Bitcoin kind of wins out against gold in those two different ways. Um, not only is it uh a bearer asset that does doesn't have a theoretical upper limit, I mean, the theoretical upper limit is Bitcoin supply. No one person will own Bitcoin supply. But the point is, um, you know, after 20 Bitcoin, you don't decide, well, you know, that's too heavy for me. They're the exact same weight. Um, whereas after, you know, uh, 20 10 gold bars, you may be saying, all right, that's enough gold for me. I can't put any more under my floorboard. So, it's superior in that sense. And I think the sovereigns that are now accumulating gold will begin to realize that over the next 5, 10 years. I'd wager by 2035, Bitcoin winds up on one of the balance sheets of one of the G20 countries in the form of official sovereign foreign exchange reserves. Um, but I digress. And then on the front of scarcity, Bitcoin performs Bitcoin's monetary attributes are superior to those of gold because it has absolute scarcity. When gold's price goes up, gold miners are incentive to go drudge more gold out of the ground, and that naturally depresses the price. When Bitcoin's price goes up, Bitcoin miners are incentivized to go onto the network in order to make money. it doesn't bring any more Bitcoin onto the network. Maybe you increase your uh um you decrease your block times for a little while because of how many miners are on the network, but guess what? That's going to be fixed very soon, right? Um, you know, every every two weeks, right, we have this uh this difficulty adjustment or every roughly two weeks we have this difficulty adjustment and so it really doesn't matter. Um, you know, difficulty will adjust back downward to the amount of miners in the network and the supply schedule will remain unchanged. So, there's this huge misconception, right, um, in the market about what Bitcoin is and its monetary attributes. It still trades like the NASDAQ, but there's some really good developments that I've been seeing that lead me to lead me to believe that we're on the path of this finally changing. Number one, uh, the banks, right, the banks are finally talking about Bitcoin, uh, being part of the same trade as gold, um, and also following a similar path to gold did in the 1980s. Um JP Morgan has said that Bitcoin and gold are part of the exact same trade. Bitcoin is a higher beta play on the trade and this trade that they're talking about is the debasement trade. The fear of monetary debasement, secular weakening in the dollar, persistently high inflation and so gold gets purchased. They say Bitcoin is a part of the same trade and adjusting for risk capital, Bitcoin should be valued at $165,000. Deutsche Bank um with probably the most incredible research report that I've seen out of a major global bank about Bitcoin in years. Uh they put out a report saying that Bitcoin was following a similar trajectory to gold did back in the 80s with declining volatility and increased institutional adoption. And they say that Bitcoin could wind up on central bank balance sheets in the form of foreign exchange reserves as soon as 2030. I think that's a little bit of a bullish target. I think that's far too forward in the future. But this is Deutsche Bank. This is Germany's largest bank making this call out officially releasing this research. And so to me, it's it's telling me that at the margin, the world's largest financial institutions are beginning to understand that Bitcoin is uh the base layer um for you know the global monetary network, right? Um it is a base layer monetary asset that belongs on the balance sheets of major sovereigns, major banks. you know, the way that markets trade is kind of downstream from what these big banks think because uh these big banks writing these research reports that's going to land on the desk of hedge funds. It's going to land on the desks of institutional allocators. It's going to land on the desks of media companies and sooner or later it's going to proliferate into the price action, right? I always thought that naturally the price action would move in that direction, but big banks saying those things leads me to believe that we'll arrive at that future where Bitcoin and gold are part of the exact same trade. They're tightly correlated and Bitcoin reaches gold parity sooner than later.
Yeah, I agree that like on a long enough time horizon, you can view Bitcoin as this high beta gold play. over kind of like you know we've been seeing you know gold's been on an absolute tear and Bitcoin yeah it's it's you know it's near all-time highs but if you if it was that high performing as that high beta Bitcoin play or high beta gold play then it would just be abs it would be one of the largest Bitcoin bull markets of all time right now like I I'm curious why do you think we've seen maybe this lag between Bitcoin and gold or why do why is gold outperforming Bitcoin this year.
Absolutely. So for me it's pretty simple. There were a couple of events and I was speaking to Joe Carlosari last night. We had a pretty big spaces and we got you know like 800 900 people in there and we were talking about this and and both of us arrived to this idea that in 20 2020 Trump's election pulled a lot of Bitcoin gains from 2025 into the present. And so for reference, within five days of November 6, when President Trump was elected, Bitcoin rose 31%. And then it went on to rise another 20% um from there or 25% um to get over 110K the first time. So that's bringing a lot of gains forward, right? Um gold uh did not have a similar reaction. it rose marginally, but really its performance came slow and steady during the start of the year when we started to see weakness in the dollar. Um, and so that's one thing. The second thing is the creation of these ETFs. Uh, in the leadup to the ETFs, you'll remember Joe, Bitcoin rallied, I think probably 15 or 20% and then once the ETFs were launched, it only took 45 days for Bitcoin to jump another 20 20% from there. Uh and so for me it's a function of uh a couple of things. Number one, these major uh Bitcoin native developments, these hugely bullish developments pulling a lot of the price action from this year forward. Um and number two being that there were so many narratives that created such excessive long positioning. Uh, and obviously market makers, people that have way more money than you and I, um, quant funds, people like that, seeing that amount of positioning, they want to kind of shake everybody out and wax everybody for their money before we move higher. Um, generally speaking, the most frustrating thing is what happens. I remember, I think you'll remember too, in 2021 after we hit 64K for the first time before we went down and then went back up, everyone was saying, uh, 100K by conference day. I vividly remember that being said constantly and it didn't happen. In fact, on conference day, we were $45,000 and we went lower throughout the conference. Right? So, generally the most painful thing um tends to be what happened. Uh in my mind, it's a couple of different things, right? This this narrative of uh the four-year cycle um and that Bitcoin was kind of nearing its its last gasp here during October. The second being Q4 of 2025 of which I provided a lot of data for, right? Obviously, historically, November is Bitcoin's strongest month. December is its second strongest month. October is its uh its third or um swap around December and October. But either way, Q4 is the best quarter for Bitcoin historically, particularly over the last couple years. Um when that becomes the prevailing narrative and all that anybody is talking about, people with more money and more access to information and deeper pockets and, you know, access to these order books um will want to fade that in order to make a lot of money. And so, you know, that is another factor as to why I don't think Bitcoin has done very well. And the and the third thing is quite simple, and that's the geopolitical and macro uncertainty, right? Um, obviously, Trump uh talking about these trade wars with China, saying he's going to institute a 100% tariff on all all goods, not just some goods, in addition to the 30% tariff that's already on most goods, not backing down from that. Saying, "Oh, yeah, I'm going to back down from that." And then saying, "I'm not going to." We're in and it amidst this trade war that's happening very publicly. And so the only release valve for whether or not people are fearful for the future or optimistic for the future um is Bitcoin, right? Obviously other markets are open now, but last Friday you got a taste. Um Bitcoin is still very highly sensitive to the rest of the market. And so if there's any fear whatsoever, they're going to sell the asset that has the most sensitivity to the market. And so that's why Bitcoin got sold when it did. And so then the question becomes, okay, why hasn't Bitcoin recovered even though the Russell, right, is now at all-time highs, right? The Russell 2000 index is now at all-time highs. This small cap index um is doing extremely well. The NASDAQ is now doing well. It's up on the day. The S&P is doing well. It's up on the day. Bitcoin's still down um you know, since markets open at 9:30. Well, Bitcoin's open 24/7, but since New York market is open at 9:30 um to uh you know, by by8%. So, what's going on here? Um you know, in my mind, it's what I spoke about just a moment ago, and it's also the macro uncertainty. um you have a Fed that has said a couple of different really interesting things now and I'm excited to get into talking about the Fed is that um the Fed has begun cutting rates and they said that they were cutting rates into a you know moderately weakening labor market. There were a couple couple of really interesting things. For example, um the FOMC dot plot so where Fed members thought Fed funds rate should be were all over the place. Some thought it should stay right where it is. Some thought it should be higher. Some thought it should be down near.5%. So all over the place. So that doesn't give the market a lot of confidence about the direction moving forward. That tells you that some Fed members think the economy is extremely strong or inflation is so hot there is no reason to cut rates and they're willing to sacrifice the labor market to do it. Or other Fed members are saying we are about to hit an iceberg and rates need to be much lower than they are now. So that doesn't imbue the market with a lot of confidence. And if you'll notice, um, risk assets have kind of, they've still rising, but they've kind of tapered off over the last couple of weeks since the Fed did its first rate cut, um, exactly one month ago today, or almost one month ago today. Uh, and the second thing is that, uh, the government is shut down, which is great news for you and I, right? The IRS, people are being furled. That's wonderful. Um however the data that traders and desks and funds use to make trades um has not been available largely. You've had key economic releases that have not been released and that only adds fuel to this uncertainty fire. Right? So you have a discombobulated Fed. You have economic data that's not being released due to the government shutdown. And you have Trump doing this uh uh this kind of tariff war with Jeep. Uh and so for me it's really no surprise that Bitcoin hasn't done extremely well. uh I said every single time I was talking about you know October and Q4 I would always say if conditions hold or etc parabas right all else equal if nothing changes if conditions hold bitcoin should do x y or z um but conditions didn't hold right the government shut down we entered into a tariff war with China uh and at the same time the Fed is now coming out and even being more uncertain and they're saying that they they're they're seeing instability in overnight funding markets Um, you know, this is the same type of instability that caused the 2019 repo blow up that drove them to inject, I think, 400 billion dollars into a brand new facility in order to keep markets going, in order to keep financial plumbing going. So, that doesn't imbue markets with confidence either. The totality of those factors in my mind are why Bitcoin hasn't done well despite everything else doing well. uh those Bitcoin native bullish events pulling price action earlier um uh in the uh in the year which is why you've seen this extended period of consolidation the general uncertainty that we're seeing from um the macro landscape and uh this tariff force certainly doesn't help out either and so in my mind those are the big things but I do not think it's cause for concern. Um yeah that's that's kind of where I'll leave that.
Yeah, I think those were some very reasonable points and that makes a lot of sense to me. you you had this other post recently that I thought was was really interesting where you mentioned you kind of highlighted this ongoing trend that's been happening with with the Fed and just with the monetary policy response that we see in in response to bad events that happened and you mentioned that like in 2008 it took 9 months after Beer Sterns to start QE then in 2020 it took two weeks and then in 2023 it took two days to launch the BTFP after Silicon Valley bank collapsed. What do you make of this trend? Like I think this is something that everyone's kind of noticed or felt. Is this like an actual trend? Is it just a coincidence that the responses have been faster and faster? I'm curious to hear how you're thinking about this.
Of course. Well, in 2008, um, the Fed took a long time to really put a foot under markets um, and prevent them from crashing even further and support the banks. The idea was that the market would be able to sort itself out and an emergency response at, you know, the point in time that it would have made the most sense was unwarranted because it wanted the market to sort itself out. Bear Sterns, obviously, a deal was brokered for JP Morgan to purchase Bear Sterns. If bear sterns had collapsed, that would have really meant the unwind and a huge deleveraging of the financial system. The great recession likely would have become the supreme depression. I don't know what you would call the great depress something worse than the great depression, the deluxe depression. I don't know. But that's what would have happened um had JP Morgan not purchased Bear Sterns. And then uh you know 9 months later the Fed beginning QE which is this asset purchase program where it purchases treasuries directly from banks imbuing them with cash. Purchases assets from banks imbuing them with cash. Um in order to keep the system turnurning, keep them lending, keep the economy going. It took them nine months. Um they started it in or they talked about it in November and they began it in December. Uh Bear Sterns almost collapsed and then was purchased at the last second by JP Morgan in March. Okay. So that's a 9-month response time. And so the Fed basically learned, okay, had we not waited so long, perhaps we could have avoided the unemployment rate going as high as it did. Had we not waited so long, perhaps we could have saved more banks than we did. Had we not waited so long, perhaps the fallout of this economic crisis could have been could have been smaller. And so they took that as a learning lesson. Um, I left out one example. Uh, I said in 2020 it took just two weeks for them to begin a QE. That is true. Um the early warning signs of COVID having an impact on markets was when we saw news of it spreading through China at the end of February and then it really hit markets uh early March and then again in the middle of March, March 3rd and then March 12th. Uh those two days, massive sell-offs in the S&P 500. Bitcoin touches $3,000 uh for a split second. And on that day, the day after March 12th, March 13th, uh the Fed did an even larger wave of QE, a larger direct asset purchase program. I believe it was to the tune of, and this was just round one of QE, $700 billion. I could be wrong. So that's the response time, end of February, middle of March, two weeks, because they learned in 2008. There's another example as well. I talked briefly about the Fed repo repo crisis in uh uh September of 2019. Their response there was overnight. So there was a cash shortage in the repo market. They declared an emergency meeting. I don't know if Zoom existed at that point. I'm pretty sure it did exist at that point, but they all came and they created a brand new facility in order to prop up financial markets. Um, and then in 2023, it took two days after Silicon Valley Bank collapsed for them to create BTFP, which was this loan facility where banks could pledge distressed collateral in exchange for par value. Right? So, basically essentially having the same effect as QE, making banks whole. You know, what I put in this tweet is that the Fed's crisis response time has gone from 9 months to two days, right, over just the last 17 years. So, over the last two, three business cycles. Um, and so the reason I said this is because even if you believe that the Fed is easing into an economy that's not doing well, right? There are two ways the Feds can ease, right? Um, the Fed can either ease into an economy that's still doing quite well, like last year, for example, September 2024, the Fed begins easing, not not too soon after, everything begins skyrocketing. Bitcoin skyrockets, um, and you know, the S&P 500 skyrockets, the economy is doing well, etc. And then the Fed can ease into an economy that's not doing very well, right? you have maintenance rate cuts that you saw last year and you have rate cuts that are in response to a severely weakening economy. Um, so that's increasingly what it seems the Fed is doing. Now, the reason I put that tweet out is because even if you believe that, why would you worry should there be a crisis, the Fed has shown time and again that it's more than willing to step in and make these banks whole, right? And turn the ship around. Um, it's kind of their third mandate, right? Um the Fed's dual mandate obviously is that they need to maintain uh full employment and stable prices. Stable prices is a bit of a misnomer because they're targeting prices to go up forever. They're targeting 2% now 3% inflation. But either way, those are their two mandates. Their third mandate that doesn't get talked about very often is that they cannot allow financial markets to collapse. Um and more importantly as well or as a result of that they can't allow a protracted bare market in the US equity market. They just can't allow it to happen. Um you've seen that every single time the S&P has fallen by a considerable amount, the Fed has instituted some easing measure, right? It's just the reality of the situation we're in. They can't allow the wealth effect to turn negative and drive people to spend less money, which would drive economic growth to contract, right? The economy to contract. Um, so it's unhealthy. It's extremely unhealthy. But what I know for certain is that if liquidity seized up tomorrow, which I mean it's uh yesterday on Wednesday, we saw the spread between uh I think it was sofur and the reverse repo rate blow out to like 26 basis points. Those two rates are supposed to be directly in line with one another basically within within a basis point or two blew out to 26 basis points. So huge funding stress happening in the overnight lending markets. That's liquidity that helps banks go around. If something happened this week, the Fed would just roll out another facility to backs stop those things. Then the bull market would rage on. Um, it's very unhealthy, but it's all the more reason to hold hard assets, to hold gold, to hold Bitcoin. Perhaps that's one of the reasons that gold is exploding higher right now. Um, but that's the reality of the economic environment that we live in, right? The Fed will always choose to print.
Yeah, it's the unhealthiness is both scary and and kind of fascinating. Like I I've kind of wondered does the internet and of itself and like how connected we are and how global the entire economic system is at this point has that like played a role into why the Fed is reacting so fast? Like I'm thinking back to you know 1930 or something when there was a run on the banks and the Great Depression was starting. It's like news I'm sure moved so slow compared to the internet. Obviously, it's like if there was a run in a bank, like it would be in a newspaper somewhere and then spread over time. Like it wouldn't happen overnight. Whereas, like thinking back to the Silicon Valley Bank crisis, like people on Twitter were freaking out and like saying like if you're a startup that has millions of dollars of VC funded, you know, capital that you raised in Silicon Valley Bank. Like I'm pretty sure I remember people saying like pull your money out of the bank and like it happened really fast. Whether they were insult, you know, whatever happened and and you know, is another story. But I guess it's just interesting like how fast things happen, which perhaps maybe makes gives reason for the Fed they they need to move faster because of how fast things can unwind at this point. I I'm curious if you think that there's uh you know evidence that that might be the case too or it's just you know we're kind of just uh putting a band-aid over every little thing that that pops up.
Yeah, I you know it's a little bit of both, right? like Silicon Valley Bank uh the collapse happened so quickly and the bank failed and they went ins solvent so quickly as a result as a direct result of social media um and kind of the reflexivity available in social media. Somebody tweets about it, somebody sees the tweet, they call their family, all of them are on the way to the bank. All of a sudden in less than 24 hours the bank is insolvent. Whereas previously right obviously big national banks were kind of not they weren't the uh primary way in which people banked during the 20s. Uh it was small community banks. Great example of this if you've ever seen it's a wonderful life um when George Bailey and um uh Mary Hatch are going off on their honeymoon George owns the building alone. Um, the building and loan obviously is an institution that doesn't exist just like credit unions are starting to not exist. It's mostly large regional if not national banks, but it used to be small community banks. Um, the way that George learned about it was he saw people running toward the bank while he was driving down Main Street on the way to his honeymoon. And so, you know, that's the way that these things used to happen. It used to be an actual run on the bank. You usually you used to actually go to the bank. It used to be neighbors telling each other, but now it happens much faster as a result of uh social media and things like that. And so it forces the Fed's hand to be a much more proactive financial institution in backstopping these things. So yeah, that's what I'll say there. I think there there definitely is some truth to that. But there also is truth to the second thing, which is that every little tiny thing the Fed does allow um some things to happen. For example, it did allow Silicon Valley Bank to fail. But every single bank that was impacted by that and allowed First Republic to fail, I believe, too. Um, every bank that was impacted by that, it basically said, "Look, uh, pledge your distressed US treasuries to us and we'll give you the value at par, right? Essentially creating cash where there wasn't any before." And so, hundreds of millions, hundreds of billions of dollars were pumped into the economy as a result of the Fed's program. Um, and so basically in any time of crisis, no matter how small, you would think a bank that is relegated to Silicon Valley that has a couple of branches throughout the rest of the United States, First Republic as well, um, it had several branches. It had a few hundred branches, but not nearly as systemic as something like uh, JP Morgan or nearly as systemic as something like Bank of America. The Fed still chose to create a facility for it. And so they allow minor things to happen, but when those minor things happen, it doesn't preclude them from creating this massive facility where they pump a bunch of money into the economy. And that's the way of the world. Unfortunately, with the financial institutions, we're essentially living through it's essentially a socialistic uh system. It's a socialistic regime where they get bailed out endlessly regardless of the poor lending that caused them to get there in the first place. Um, and the bill is foot by you and I, right, in the form of price inflation. So, yeah. No, you're right on both fronts. It's it's awful.
Yeah. I I also want to bring up what the Fed was thinking back at the the Bitcoin peak of 2021 and compare it to kind of like where we're at today. I was I was looking at this earlier this morning and it's like obviously 2020 rates got cut to zero. massive quantitative easing, massive government stimulus. inflation was transitory as they said for for a little bit and then mid 2021 when inflation was pretty extremely high they started to talk about okay we might raise interest rates and then by the end of 2021 from what I looked at they were talking about okay we are projecting that we're going to raise rates three times in 2022 and that was around where Bitcoin peaked you know in November of of 2021 now it seems like today we're in a different scenario where the Fed, you know, I was looking at watching Paul Jones on on Bloomberg this morning and he said next, you know, a year from now we might see Fed funds at two and a half% which would be obviously lower than where it is today. So now it's like we're kind of having potentially a different obviously a different scenario where Bitcoin's still at all-time highs, but it's it's a little down. But instead of, you know, the Fed talking about how they're going to tighten the the the system, they're looking at continuing to to uh add more liquidity into the system and ease credit conditions. How how are you thinking about that, you know, kind of divergence between where we were at the peak of 2021 and where we are today? And does that mean that, you know, Bitcoin is not peaking now and and markets are not peaking or does it still mean that, you know, Bitcoin could be, you know, peaking at this point?
Of course. So, would it be okay to share my screen? I have a couple of charts to go along. Okay, fantastic. Um, I've got I've got a couple of different If I could find Surprise. Okay, here we go. Uh, actually, I can't find that one. So, I'll just do these two. Okay, great. Let me share this screen. All right, window. Here we go. So, this is Fed funds and CPI. I'm going to frame this up this way. Um, so this is Fed funds up here. This is the upper bound on the federal funds rate, the Fed's main policy rate. Uh, you can see here that price inflation started ticking up in early 2020. Obviously, it was just getting back to baseline of around 2%. Uh, but it only took two months for price inflation to go from8% on a yearly basis to 3% on a yearly basis. that's already uh you know one full percentage point 100 basis points above the target. Didn't matter. The Fed remained on hold and they remained on hold for basically uh an entire another year, right? A full year after price inflation was already above their target for them to actually begin raising rates. In fact, uh they allowed price inflation to get or excuse me, this is PPI actually. Um, so this is an incorrect number. Um, but they allowed price inflation to basically get to its peak of about 9.1 uh before they started raising rates. Now in an amidst this environment, what was Bitcoin doing? So this is Bitcoin. Um obviously this is in log scale. You could see that postcoid after we crashed, Bitcoin went up $695,000 within 20 months, right? From when it uh um bottom during uh the bear of COVID and when uh you know late November 2021 came around. Um and we went to 67,000. Uh then as the Fed began hiking right as you can see here as they went from a uh uh a upperbound on the Fed funds rate of 0.25% all the way to uh 5 a.5% uh Bitcoin crashed right so Bitcoin went from $47,000 uh to lower than 15 I believe at one point and then it started uh recovering a little bit to by the time the Fed had arrived at its terminal rate of 29,000 bucks. So, I also put out another tweet um and I'll show this right here that during the time that the Fed was uh tightening um monetary conditions, right? Both in the form of raising rates and reducing its balance sheet in the form of QT. Its balance sheet is here in white. Fed funds is here in blue. Bitcoin's price is here in orange. You'll note that Bitcoin has managed to rise despite this immense monetary tightening that we've seen. both, you know, the Fed funds rate at 5 a.5%. Now it's finally cutting, but a really high Fed funds rate relative to where we were and balance sheet runoff, right, which is a net drain on liquidity. Uh, it's managed to rise 750%. In that environment, so you'll see over here again, Bitcoin rose 695% when the Fed uh uh did basically zero interest rate policy, helicopter money, and QE, right? Those three things in tandem. But it actually rose by a higher percentage while the Fed was tightening monetary conditions. And so two things, number one, it flies in the face of this idea that Bitcoin is a zerointer interest rate policy phenomenon, right? That it will only rise as a result of expanding central bank assets and uh falling central bank policy rates. Uh it proved that over the last year and a half, two years. The second thing is now that we're entering into um uh a global economy where the Fed is not only lowering interest rates, but Paul Tudtor Jones, as you mentioned, is talking about lowering interest rates even more aggressively than they're already being lowered. And the Fed ending its balance sheet runoff, which is moving from tightening to neutral at the margin. The Fed is in full-blown monetary easing mode. And the next logical step that happens after QT is QE. The reason I say that is the reason they're stopping QT is because uh central bank reserves are getting dangerously low. Um that is why we are moving from ample reserves into a framework where reserves are getting dangerously low. Um and when that happens, the Fed needs to step in with support. And so that's why QT is ending so quickly. If we do get immense financial strain in markets, this is going to flip right back into QE. But the point is, Bitcoin managed to rise 750% despite tightening and already very tight monetary conditions. What do you think is going to happen now that monetary conditions are easing both on the rates front and on the balance sheet front? So, those are the two charts I wanted to show. One caveat, and I couldn't find this chart, unfortunately. I have 850 charts, uh, all of which aren't named very well, so I'm I'm kind of kicking myself about that. But the third chart I wanted to show is the correlation between thergoup economic surprise index and the S&P 500. If it's positive, that means good news is good news. What do I mean by that? The cityroup economic surprise index is an index that shows whether or not um
On net are more economic data releases surprising. Are they coming in higher than expected or are they coming in lower than expected? Right?
Um, and when the correlation between that and the S&P 500 is positive, it means that good news for the economy is good news for the S&P 500. Why is that? Because that means that if the economy is doing well, the Fed will look at that and they'll say, "Okay, we don't need to cut rates or uh we're going to cut rates into this." And uh the S&P 500 as a result does well.
However, um if the cityroup economic surprise index and the S&P 500 or any other risk asset for that matter has a negative correlation, that means that good news is bad news or vice versa, bad news is good news. Right now, we are in a um bad news is good news regime, right? Which essentially means that bad economic news that that's coming in. If economic data comes in lower than expectations, that's good news for the S&P 500. Why is that? Because it gives the Fed more reason to cut, right? And so essentially, that's the regime we're moving into. The market is aware that the reason the Fed is cutting is because of a weakening economy. The more economic data we get to support the Fed's reason for cutting, the better that risk assets do. And so that's the third chart I wanted to show to kind of illustrate why the Fed is bringing rates down and why it's going to ha it has had and will continue to have a positive impact on risk markets.
The one hair, the one caveat here is that the economy can't cool too quickly. Every time the economy cools too quickly, um the Fed pumps its brakes, right? Um or the Fed the economy uh reacelerates too quickly rather, the Fed pumps its brakes. Uh we saw this last year, September of uh of 2024, the Fed cut three times and then they stopped, right? And we were on hold for about another six, seven, eight months. um should the economy reacelerate too quickly, then the Fed will be on hold again. That might be bad for risk markets, but I I personally don't think they will because at this point in time, they're prioritizing um the interbank lending market and funding stress. Uh so those those are the two charts that I kind of wanted to show you um about Bitcoin in relation to monetary easing. It managed to do extremely well during this period of immense monetary tightening and now it in fact it did better than uh during the period in 2020 and 2021 when we were easing and now we're moving into a period of easing. Right? Keeping it simple like the road ahead is fantastic for BTC so long as we're able to get through these next several months without the economy either reacelerating to a tremendous degree which would cause the Fed to you know stop uh easing at the margin and without the economy cratering because then that would make every correlation shoot to one that would cause a crash in Bitcoin a crash in gold a crash in the S&P a crash in everything as people ran for cash you would get another March 2020 esque event Um, so as long as we can kind of ride the middle of that between those two extremes and the Fed can bring rates down to where it wants to bring them down to and the Fed can stop QT, the path forward for Bitcoin is fantastic.
Yeah, it makes a lot of sense. It's like we need to remain in this Goldilocks zone and then credit will continue kind of slowly being or you know moderately being created throughout the economy and capital just begin keep flowing into the highest quality assets and you know obviously Bitcoin and AI and basically Bitcoin and AI are kind of like the highest quality assets maybe at this point maybe gold too obviously. Um I want to kind of end this with or wrap up with what your thoughts are on digital credit. Right? This is kind of a a new term that Michael Sailor has created um referring to okay we have this digital capital i.e. Bitcoin which is in a way collateral to issue this digital credit you know fixed income securities and one of uh his his most recent or his most recent preferred equity that is this digital credit is stretch STRC which he's kind of been um talking about as this like money market fund type type entity or T- billill like product that pays a 10 uh 25% uh yield at at par value right now. I'm curious, you know, what are your overall thoughts on that? And then if we are going into this monetary uh easing regime or it's going to continue, does that make digital credit more attractive? And is that good for Bitcoin?
>> Very well said. So, as rates come down, capital moves out on the risk curve and you know, obviously that means into equities, but it also means into things like higher yielding corporate bonds. uh you can liken stretch just from a yield perspective to a high yield corporate bond, not an investment grade one. Even though the collateral that's backing it is 100% investment grade, the yield that can be achieved through stretch because of that collateral is more like a high yield instrument, right? So it's kind of a first of its kind thing for the market for the fixed income market. They really don't know how to think of it or how to value it. um stretch in particular because it kind of has the because of the collateral again and the issuer and their leverage ratio. It has a quality that is investment grade like but it offers a yield that is like a junk bond right which is innovative uh to say the very least and it all comes down to collateral quality and so for me I think stretch and the other micro strategy preferred instruments stand to benefit in a really outsized way because you go down the entire curve you go through their entire capital st uh stack and all of their options are several hundred basis points higher than the US treasuries um across you know different teners right obviously Micro Strategies capital stack spans uh a bunch of different instruments across different risk appetites uh different durations um as do uh US treasuries right not from a risk perspective but from a duration perspective right you have um you know short duration stuff uh in bills and notes and you have longer duration stuff in uh in t um in t- bonds and so you know I think that as rates come in you're obviously going to see bitcoin do well chances are you're going to see levered bitcoin companies do well and that's all dependent on the path forward for Bitcoin, right? Um, this chop has not been kind um to levered Bitcoin vehicles, unfortunately, because when you have a leveraged instrument, uh, if your underlying asset isn't doing anything, then that causes the levered instrument to go down. Uh, I would say that if Bitcoin does what I think it's going to do, um, on whatever time horizon that is, whether we continue frustrating the bulls and get more capitulation and then we move higher in early 2026 and frustrate everybody even more or whether we get that sooner than later before the end of the month, I think that bit, you know, these levered Bitcoin vehicles, should we, you know, get this sustained period about outperformance, right? 2021 ask not just this huge runup and then nothing else then I think the lever bitcoin vehicles depending on their leverage ratio they stand to do well and the the preferred equities from strategy stand to do very well as well I mean look you stretch is offering I think what 11.5% now um paid monthly that's incredible right especially relative to the the other options there out in the market it pays at a similar cadence to a money market fund and so I think it's going to be hugely attractive to folks as rates come back down uh and they notice that their money market funds that they're putting their excess cash in in their savings account at their bank is now suddenly instead of yielding 4% it's yielding 3.75 and then 3 and a half and then 325 and then three uh they're going to get more and more jaded and they're going to look at their their assets and they say okay um what else can I put this capital in right because uh this is not appreciating at the rate that I want it to stretch is going to be a great option for that in my mind and so really what strategy is doing is quite innovative. I think that uh it's too early to be a detractor. It's plenty reasonable to be a skeptic. Uh but I think it's way too early to be a detractor. I think understanding the quality of collateral strategies, leverage ratios, um and the the uh the team of operators that's putting these things together is really important to to understanding the way that uh a thing like stretch fist fits into your portfolio. But I do believe that as rates come in, as we go and uh uh embark on this monetary easing regime and the yield on Stretch doesn't move, right, I think that's going to be a huge sign um uh uh hugely beneficial for investors to be moving into assets like Stretch and all of the other Micro Strategy capital stack. And uh I think it'll pave the way for many more instruments like that over the coming years.
>> Yeah, I agree. And I stretch to me is is so interesting like in a way it is like obviously not like legally and there are add certainly additional risk involved with it but they've they've tried to create it like this cash or cash equivalent type product with and there obviously is a higher yield of that and again like there are risks to it but if you you know go to strategies credit tab on their website and you enter your your inputs of Bitcoin's KGER Bitcoin's volatility even if you drop the keer down to zero. It's like the risks are pretty low even if you assume Bitcoin is incredibly volatile going forward and and has a default kar of zero or slightly above zero. And so it's to me what's kind of interesting about this is like strategy literally creates stretch out of thin air a dollar and a and again it's it's in a way like a cash or cash equivalent and then they use that capital to buy Bitcoin. And so it's like, okay, if you're creating additional dollar credit and then you're using that newly raised capital to buy Bitcoin, it's this whole idea of a speculative attack, which is like a very positive feedback loop where a stronger currency, Bitcoin, gets stronger in a weaker currency, the dollar continues to get weaker. Like I can see, you know, this going, you know, both ways. Obviously, leverage amplifies future returns and the posit the feedback loop can obviously work both ways, but I kind of see this as like if Bitcoin really gets moving, it could get moving in an very extreme degree and catch a lot of people off guard. I'm curious if you agree with that or or how you're thinking about it.
>> I do because here's the deal, like Bitcoin has been consolidating since May. Effectively, it's been rangebound since May. You could see over my left shoulder that Bitcoin's price, I'm 99% certain, I can't see it right now, but I believe it says 110,000. Um, which is basically where Bitcoin has been since May when it first crossed 110. It has made several different attempts at breaking beyond that. It went as high as 124 and then 126, right? Um, but the reality is that Bitcoin has been effectively rangebound in that $16,000 zone for five months straight, over five months straight now. And so once we what what that does, Joe, is that bring and you know this, it brings the average cost basis of everybody who purchases Bitcoin higher and higher and higher the longer we spend at this level. So it's actually a sign of strength that we haven't yet broken underneath this despite all of the uncertainty and the chaos that has occurred not just in macro but from a Bitcoin native perspective. So I think that once Bitcoin breaks and actually breaks with volume um as some of these uh headwinds that Bitcoin is currently facing become tailwinds. I think it's going to break extremely violently. Right? The longer the consolidation, the more violent the breakup. Um, you know, Bitcoin consolidated for less time than this last year and when it broke to the upside following Trump's election, it went 30%. Right. Uh, I do think that a lot of the gains this year were pulled into the present because of things like Trump's election and the even the ETF launches. Um, but I do think that should the bull market continue, not just in Bitcoin, but in other risk assets as a result of what the Fed is doing, um, then I do believe that if Bitcoin breaks to the upside amidst that environment, it's going to break violently. Um, and you're going to see targets like 135, 150, 165 be hit in quick succession. It's all contingent on whether or not the headwinds that markets are currently facing, not just Bitcoin, but uh uh turn into tailwinds. That's how I think about it in my mind. Uh but yes, if we do break to the upside, I do believe it's violent. The main thing to watch now is funding stress. Um the Fed has highlighted that there's immense funding stress. Um the spread between these two key overnight funding rates uh has uh ballooned from five basis points to uh I think 35 basis points today over the course of the last couple of months. That's not good. Those are similar levels to when the Fed stepped in previously uh six September uh uh from now. So six years ago. So be on the lookout for that. Um, and so long as we can navigate that storm, if the Fed can effectively prop that up and avert a sell-off in risk markets, then Bitcoin, uh, if Bitcoin stands to break, which I think there's a high high likelihood that if we can avert a crisis, then Bitcoin stands to break. It's going to be very violent.
>> I like it. Well, Joe, this has been an awesome conversation. I've really enjoyed it. Um, any final closing thoughts before we close it out?
>> Yeah, absolutely. Um, you know, try to the best of your ability to zoom out and look at P things from 30,000 ft and not get too uh not get too uh deep into things that don't necessarily matter uh into uh data points that don't necessarily matter, right? Try to think of ter uh you know the market in very simple terms, right? We were in a period of monetary tightening at the margin. The economy could handle that. Now the economy is moving into a position where it can't necessarily handle that. We're moving into a period of monetary easing. um that is supportive for risk assets, Bitcoin included. If we reach a crisis, that means a sell-off in risk assets, Bitcoin included. But the important thing to remember is that in times of crisis, the Fed responds instantly. They will not allow a prolonged recession to occur and risk assets will do well in that environment, right? So over a long enough time horizon, these assets are going up forever. Don't fret, don't worry. Um don't get, you know, caught up in the nitty-gritty of the data. Zoom out to 30,000 ft, recognize where we are in the cycle, and position yourself.
I like that. Zooming out is definitely great advice. Uh Joe, thanks so much. This has been incredible.
Absolutely. Thanks, Joe.