Transcription
Lynn Alden, founder of Lyn Alden Investment Strategy, is back, and uh, it's been a while. Lynn, welcome back. Lots to go over today: uh, the entire macro picture, and uh, your theory on fiscal dominance playing out. And we'll get your updated views on what's going to happen to the economy and markets alike now that we have not just a new Fed share, but also supposed peace in the Middle East for now. Welcome back.
>> Thanks for having me.
What would you say are the most significant events in the last two weeks for you that may or may not move markets into the remainder of remainder of this year? We'll start here.
Well, I don't think there'll be shocking answers. I think the, uh, kind of the partial resolution, uh, to, uh, the the conflict with Iran, uh, I, I think is obviously a key one, as well as the, uh, new Fed share and kind of communication, uh, that they've done going forward. Um, so I think those are probably the largest things.
Uh, and the reason I say, of course, uh, you know, kind of the partial resolution, is is that, I mean, it's only a memorandum of understanding. So I think there's we're still going to have headlines in the coming weeks and months. Uh, but but it's at least, uh, headed a much, at the moment, more positive direction than it has been for for many months.
The economists I spoke to this week, um, pretty much unanimously, all projected higher interest rates in the long end of the curve, as well as the short end, uh, to vary in varying degrees, uh, because of the new Fed share, and because of inflation expectations, and because people are expecting the Federal Reserve now to raise interest rates this year rather than cut. So my question is: even if monetary policy didn't change from last year, would interest rates on the long end still go up because the deficit has increased and so the debt has widened as well?
Uh, I think there it's more complicated than that. I think there's a lot of moving parts on the long end of the curve. There's obviously expectations around, uh, what inflation is going to be. Uh, there's sheer amounts of supply hitting the market compared to, you know, uh, what, you know, is is, uh, that that existing balance sheets are willing to buy. Uh, there's even geopolitical, uh, decisions sometimes, like, are international buyers on strike, or are they accumulating?
Um, and I, I, you know, for from 2019 until, you know, a year or two ago, I was kind of on the record of being a pretty structural bond bear, uh, meaning that either combination of higher yields, meaning bond prices down, or even just sideways yield and not really keeping up with debasement. Um, but once we got to like a year or two ago, I, I view them more as kind of a a neutral, unimpressive trade, which is that I, I don't try to anticipate, you know, 50 basis move, 50 basis points moves in either direction for the long end.
I mean, in general, if the market, uh, expects that the Fed's going to be a little bit more hawkish, uh, than they did, uh, a week ago, it makes sense that we've seen some curve flattening, which is that, of course, they're they're a little bit more hawkish on the short end, uh, and they're a little bit more comfortable with the long end.
Uh, but these these things can change very quickly, and I think one of the key factors that I think the market still doesn't fully, um, appreciate, uh, because the market is so trained to think that the the solution to inflation is is always higher rates. Uh, that's kind of the main lesson from the '70s, or at least like that's the biggest takeaway from from the '70s, early '80s. Um, and but that's that was in an era where most of that money creation was from bank lending. Uh, and interest rates are a very powerful tool for for curtailing or, uh, and sometimes accelerating bank lending.
Uh, but when you're in fiscal dominance, you know, when when when when fiscal deficits in a given year are bigger than net new bank loan creation, uh, interest rates don't do quite as much for that, because every time they raise interest rates, while they could put some downward pressure on bank lending, they actually blow out the fiscal deficit even more. Um, and so they're in a very, it's a challenging position to be in if you're the Fed. Uh, because as as the chairman pointed out, their their current level is already restrictive on housing, uh, and yet we still have above target inflation. Uh, and it's it's it's because it's not really bank lending.
>> Just summarize for us one more time, please. What does fiscal dominance mean in this context? And in an era of fiscal dominance, what role does a central bank play?
>> Right. So, basically, fiscal dominance, it it can it can take a few different forms, but essentially, when you get over like 100% uh, federal debt to GDP, you've got a very big stock of existing debt. Uh, and if if you, you know, we in the US we went, had a, we had kind of a 40-year period of of rising debt to GDP, uh, but it was offset by structurally declining interest rates until we hit roughly zero. Uh, and now that we're trending, you know, sideways in interest rates, uh, and we still have the the high debt to GDP, we no longer have that interest rate offset.
>> Uh, and so now interest expense has outpaced defense spending, uh, and there's there's really no clear resolution to this. It's going to an ongoing large part of the of the federal, uh, uh, uh, deficit going forward. And there are techniques to deal with it, including financial repression. You know, you can do yield curve control and submerge the whole, uh, all the debt below, um, inflation. Uh, but then you have generally accelerated currency debasement in higher levels of inflation.
Uh, and so the the the answer to the second question is: what is the role of the central bank? Uh, their role is diminished, right? So it's it, in say the '70s and '80s, we can call that a period of monetary dominance. So you had low debt to GDP, uh, deficits, while they were there, uh, especially in the in the '80s, um, you know, they they just weren't the driving force on money creation, uh, as as it is now.
Um, and so going forward, the Federal Reserve, uh, you know, they have they still have all their major roles in in bank regulation, basically oversight of the banking system. I mean, that that remains unchanged. Uh, but their two primary tools of industry, uh, decisions, as well as balance sheet decisions, uh, basically become less impactful, uh, and their and their option space like narrows, uh, because instead of saying, "Okay, high inflation because banks are lending too much, let's raise rates," uh, it's clean. But if you have, "Hey, inflation's up because we're running structural big deficits and, you know, we had a war, so like energy was elevated for a while," and you say, "Well, let's raise interest rates in response to that," what exactly are you doing? Because you're not, you're not, the government's not going to spend less. If if anything, they're going to spend more because you just increased their interest expense.
Um, and you're still having the similar effect of of on bank lending, which is, you know, the marginal, uh, borrower might be more conservative because interest rates are going up. Um, uh, but that's already not really the core issue anyway. And that's how you get this kind of two-speed economy where, um, you know, if someone's like a a young family looking to buy their first home with a mortgage, uh, without help from from say their their parents, uh, they're in a world of hurt right now. Uh, it's it's practically unaffordable. Uh, whereas, uh, the deficits are primarily going to social security, Medicare, defense. Um, obviously wealthy individuals are doing very good. And so you get this really polarized economy, and and the answer is that the the the Fed's not really designed for fiscal dominance. Uh, not like this, this is kind of the breakdown scenario, not in the acute sense, but in just in terms of of policy effectiveness. Fiscal dominance, like, the tools are are are geared toward areas of monetary dominance.
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Recent news now: at the G7 G7 summit earlier this week, uh, the signing of a peace deal with Iran was, uh, concluded for now, uh, temporary peace. We'll see what happens in a few months. But, uh, Trump argued that the reopening of the street of fumuse may have prevented a major global economic shock, called it a catastrophe that was avoided. How accurate is this statement?
Well, I think in the longer term that's relevant. Um, I mean, we've already seen some shocks. I think many people, including me, have been surprised at how resilient the world has been to a closure of that much, um, uh, oil hitting the market. Uh, the biggest factor ended up being that China was a lot more flexible than many people thought in terms of, uh, uh, greatly reducing their imports, uh, being willing to draw down their, uh, large and opaque, uh, uh, inventories. Uh, and that was a much bigger offset.
Um, and I think another thing that surprised people is that, you know, energy's been kind of choppy for a while. And so it's interesting that that, um, uh, President Trump kind of cited that now. Um, because I don't think that we were that we were like near-term, uh, compared to any sort of like, you know, economic disaster from oil.
Um, I, I think the the the more kind of pressing one is just optics of the situation. Uh, probably a a political kind of somewhat separation between the US and Israel's interests on this, and kind of increasing realization of that. Uh, it it's been a very unpopular war from the start, uh, in terms of polls compared to most other wars when they begin. Uh, it goes against campaign promises. We have midterms coming up. Uh, so I, you know, I, but there's some of those reasons he he can't realistically cite. So I, I think he has to point to other ones, and he's pointed to stock market. He's pointed to oil. Um, and and so I think that's, yeah, there's a there's a lot of reasons for him to have eased out of the war, and and, you know, he'll cite the subset that I is is less damaging.
>> Okay. The, uh, I'll play for you a short clip, and uh, and we'll we'll evaluate this together here. This is, uh, Trump speaking at the G7 summit.
>> 300% they have no money. We have tremendous leverage. We have the leverage of the economy as an example. We'll get that done. That's that's a small one, and we'll work with Israel and get it done. But, uh, I'd like to do it. I mean, you have people living there. Buildings are being dropped on top of them or right alongside of them. A billion dollars worth of bombs on Iran. The blockade was so incredible. The naval blockade, the admiral, the whole thing. Not one ship got through. That meant no money got through. They were dying. They had no money. They have inflation that's 250 or 300%. They have no money. We have tremendous leverage. We have the leverage of the economy as an example.
Here he's talking about leverage against Iran. What leverage did, uh, the US actually possess against the Iranians in this particular case?
Well, largely what he said. I mean, we we do have, we obviously, you know, the US killed their leadership structure. Um, so we had we have military leverage, uh, as well as, um, you know, economic leverage.
Uh, the, I think the the challenge is, I think they miscalculated, uh, the relative leverage, um, because, you know, they their leverage against us is not as direct. I mean, they can't just blow up our cities. Um, uh, but they they they can affect his midterms, for example. Uh, they can affect consumer sentiment in the US with higher energy prices. Uh, they can, you know, they can they can they've been putting out like memes. They have they have a a cultural leverage and and kind of, um, uh, things they can do online, um, uh, about kind of the just the reasons for the war and why we're there and who's, you know, all all of that.
Um, and so I think that that unlike Venezuela, which was obviously a very swift operation, I think built US confidence that they could just kind of do this to any country. Iran demonstrated that they have a really kind of deep, decentralized bench of leaders, uh, that can that can come back up after other top ones are taken out. Uh, they've shown that their, um, technology is pretty resilient, uh, you know, their their ability to do drones and missiles, uh, and to avoid having their capabilities disrupted to do that. Uh, it just kind of shows that the cost, uh, for the US on this is very significant. And and partly is, I mean, technology changes over time. For the better part of the past century, the the the carrier group has been the primary form of power projection. I mean, aside from nukes, when you actually need targeted power projection anywhere in the world, the carrier group, uh, is the main, uh, force of that. Uh, but they don't work that well against asymmetrical, cheap threats, like tons of drones, tons of tons of missiles.
Um, and of course, the US naval blockade was effective. I mean, I don't, not that many people doubted that the largest navy in the world could could block, um, uh, that area, uh, because they don't have to be close to it. They can stay farther back, and if they just identify ships that come out of it, they they can stop them later. Uh, so that the US Navy in many ways had to stay far away for safety. Yeah, they can still do a blockade. But by doing so, I mean, the the bigger issue is Iran was blocking other countries, uh, from exporting their oil. And ironically, the US blockade was also blocking other countries, including allies, from, uh, getting oil through.
Um, so a lot of this is just like a scramble almost to get back to where things were before the war began, or kind of more broadly back to the the previous Iran deal, uh, which is when, uh, Iran was was not enriching, uh, uranium, and it was allowing, um, you know, international inspectors to come in and verify that they weren't. Um, and so a lot of it is is is, you know, nearly a decade now, almost trying to get back to what was already working.
>> Okay, here's another, uh, clip. This one's, uh, key here regarding inflation.
>> Well, first of all, thank you for the word plummeting, because that's what's happening. Oil prices are plummeting, and, uh, that means oil prices are going to come down. You know, if you make donuts, you have a heating, you have a stove, and you have to buy the, uh, the heat, you need the gas or the electricity or whatever you're using. And when oil prices come down, oil is the biggest thing. Oil is, you get oil prices coming down, and they're going to come down, and we're hitting in the threes now for gasoline, and that'll come down a lot lower. So, I was in Iowa just before this started. And I was saying to myself, I can't believe we're doing so well, but I have to go and we have to put out this fire in Iran because I don't want them using a nuclear weapon. They would have used a nuclear weapon. 100% they would have used it.
Uh, we'll stop here. Uh, not withstand the nuclear weapons comment, let's talk about the inflation part. Uh, his thesis that oil is coming down and therefore the rest of inflation will come down, that's a subject of great academic debate. What's your opinion on that?
Well, a couple things. One is, so I, if we're assuming if, um, the memorandum of understanding and the ceasefire remain in effect, so if the industry does open, you know, for the most part, uh, that should be a a a kind of a bearish force on oil, which is good for the world, um, uh, and, uh, even just not having oil rise anymore, if it just stays where it is and just chops around, at least it's not rising, uh, in that environment, um, and that allows kind of month-over-month, year-over-year, uh, measures of what's going on to to cool down.
Now, whether that will lower other prices, uh, that that's more contestable. I mean, obviously, you know, commodities are very volatile. Other prices tend to be more kind of they ratchet up, but they rarely ratchet back down, unless it's like a super deflationary area like technology, like, you know, electronics and stuff. Uh, but most prices they slowly ratchet up. Uh, not not usually as quickly as as oil and gas, but they they ratchet up, including in response to higher energy prices. And if the if the prices come back down, usually those prices are are stickier. Uh, and generally when people talk, you know, when especially when politicians talk about, um, prices coming down, they really mean the the rate of change of prices going up is is reducing.
Uh, and so I, I do think that, I mean, the the the obviously the the sharp increase in inflation we've had, there's been a couple reasons for it, but energy has been by far the biggest factor. Uh, and I do think again, as long as the ceasefire continues, that that should ease in the back half of this year, that we no longer have that kind of rising inflation, uh, that we that we saw, uh, in the past few months. And there's really no signs that we're we kind of have a breakaway inflation like we saw in in 2021, 2022, because we don't have the money supply growth, uh, of that era. We still have money supply growth. We don't have like the, you know, 40% year-over-year, uh, increase in in M2 that then trickled over the next several years out into the economy, out into prices. Uh, we have kind of a a fairly normal rate of money supply growth at the moment. Uh, and so I think in inflation's still probably going to be stickier above 2%. Uh, but I think it could be correct that it it goes kind of sideways to down, uh, in the coming months.
>> Does the market share that view, Lynn? Uh, looking ahead, keeping Fed watch tool is projecting a near 85%—oh, it's 90 now—90% chance today of at least 125 basis point rate hike by December. So, 10% chance rates stay where they are, 90% chance they raise rates. Uh, if inflation expectations are to curb a little bit, somewhat like you said, later in the year, why are expectations for rate hike, um, higher and higher throughout the rest of the year?
Well, you'd have to ask all those that are making that that case. I think, um, I would say that while a chance of a rate hike is pretty meaningful this year. Uh, I, I think 90/10 is a pretty aggressive, uh, position on that. I, I'd be I'd be a little bit more split on neutral to to, you know, one one hike.
Uh, and of course, the two conflicting issues there. One is that because inflation is above target, um, and it's been rising recently, uh, and, you know, the Fed made it clear that they are, you know, they want to, they're emphasizing the price stability side of their mandate, not the not the unemployment side at the moment, uh, that they do, uh, have, you know, kind of an interest in in potentially raising rates to try to bring down inflation. Now, again, from our earlier kind of talking points, I mean, in in when when you have a war or you have fiscal dominance, interest rates are not necessarily the tool that that fixes that, but it's a tool that they have. So if you have a hammer, you you use the hammer, even if it's not the best tool.
Um, uh, but they've also, like, in in the Fed chair's, uh, you know, recent, um, uh, Q&A, you talked about how they they care about trending numbers. Uh, so, uh, in a month or two, if we start see this current inflation wave crest, because if oil prices stop going up, if if this trade in and just for the most part peace in that region allows energy to flow, um, uh, they can, the Fed could conceivably say, "Well, okay, inflation's above target, uh, we're still restrictive on housing at current rate levels, uh, and it's it's inflation's rolling over, so we're not going to be super aggressive."
Um, now, again, one one, uh, hike in either, you know, either one one hike or one cut is not that big of a of a driving force, and I just think that it's it's for me it's almost irrelevant. I mean, obviously, it obviously impacts if you're a leveraged short-term bond trader, uh, and things like that. You know, you're trading interest rate futures and things like that, it's obviously very relevant. Uh, but if you're an equity investor, a gold investor, a, you know, real estate investor, um, you know, even just an unlevered bond investor, like, you know, if you're doing things like that, um, you know, 25 basis points is not a a massive thing to focus on in my opinion.
>> Mhm. Do you think the US would have gone into a depression had the three for remain closed? Take a listen to this clip.
>> But so are we. So rather than possibly going into a depression, rather than having your favorite president be Herbert Hoover, that was always the one I didn't want to be. I wouldn't have preferred Nixon. I wouldn't have preferred. There are plenty I wouldn't prefer, but the one I always thought of, Herbert Hoover, and he caused it. He raised taxes too fast and he raised interest rates too fast all at the same time, and it caused the Great Depression.
Okay, two points there, actually, I want to make. The fact, the idea that had the Iran deal not been made, the economy would have gone into a depression. Then he referenced Herbert Hoover, who a lot of people ref, uh, associate, uh, with Smoot Holly, and that some, according to some economists, arguably caused the Great Depression. And now he's arguing he raised interest rates and taxes too quickly. Uh, what what actually caused the 1930s Great Depression, and can the same parallels be applicable today?
Uh, well, I mean, we could have a whole show on that. What caused the Great Depression? I mean, there's like two, there's tomes written on that. Um, the the short answer, the short answer is, um, that was the, there was a private debt bubble, right? I mean, Italy, it goes it goes back to World War I and before, because you had, you know, all this money creation, all these kind of, uh, broken gold pegs, attempt to get back on gold pegs, even though money supply was grown. And, you know, obviously with international commerce between Europe and the US, um, we had that boom in the '20s in the US, um, and it, you know, throughout that decade, we got very high private, uh, debt levels relative to GDP. Uh, banks are very levered, um, there's a ton of speculation, uh, in the stock market, uh, and it all popped.
Uh, and then there's other factors like, um, uh, um, you know, the Dust Bowl, like literally bad agricultural practices. It's way easier to go through a great depression leverage-wise if you don't also have agricultural failures, uh, and things like that, uh, and and, you know, just kind of that that extra misery.
Um, but basically, the the primarily the issue was that that that private debt bubble. And then, yeah, when you add on to it a a president that was kind of focusing on tariffs and kind of just generally, uh, anti-trade types of policies, uh, I would say certainly didn't help the situation. I wouldn't say that, you know, that handful of things just kind of like, like things were fine and then he did those things and it caused the Great Depression, is not how I would characterize it. I think that the leverage and the speculation in the years leading up to it was the biggest factor. But then it was all these attempts on, you know, what do you do once once that starts to pop.
Um, now, bringing that to the present, uh, when it comes to depression, I mean, by by some metrics, I would say that 2008 was our like 1929, uh, scenario. That was our that was our our generational peak in the private debt bubble. So private debt relative to GDP, uh, private debt relative to money supply, uh, the ratio of how levered banks are, all that peaked in that 2008, 2009 period. We we've kind of rotated more from a private debt bubble toward a public debt bubble. That that's kind of where we we've kind of started shifting toward fiscal dominance.
Um, now, of course, it's it's we went through it in a in an environment that was not as deflationary because they were much quicker on the money printing trigger. Uh, and obviously we're in a different technological environment, no crop failures. Uh, it's easier to go through a great depression when you have, you know, computers and and things like that. So, it's it was a different environment, but it was it was similar in that we hit zero interest rates, we hit a private debt bubble, uh, and then we had just years of debasement and rotation toward toward the public debt. So, the long-term debt cycle that I've talked about before.
Um, and then so, would would this have caused the Great Depression? Well, by some metrics, I mean, for example, consumer sentiment during the war, US consumer sentiment was literally at record lows. I mean, it's been measured since the '50s and hit record lows. And people can talk about whether it's still an accurate measurement or not, but the way that they measure it, it hit record lows. Um, you know, we have obviously very high, uh, public concerns around cost of living, around just kind of the expectations that the next 5 or 10 years are going to be better than they are now, or the expectations that things will be better for their children than they are for them. Uh, a lot of that is, or just trust in trust in media, trust in government, trust in, you know, all the kind of institutions, that's all very low. So, a lot of that is kind of in in that kind of depressionary type of thing that incl, you know, economically depression.
Um, I, I wouldn't go so far as to say that the straight remaining closed for another few months would cause a what what many people would look at as a US depression. Um, uh, I, I do think that it would have been ongoing issues once we can no longer draw down US strategic reserves, once China had gotten pretty low in their drawdowns, once commercial inventories are pretty drawn down. Uh, that's that's when you start to risk like, you know, $150 plus oil scenarios.
Um, the countries I think that would have potential depressions in that scenario are, uh, the kind of the frontier markets, the the lower income developing countries, uh, that are more likely to face energy shortages, uh, if that happens. I mean, for example, Egypt in April had to do an energy curfew, um, probably if you look at some economic figures there, they had almost like a mini depression because you were shutting down parts of the economy for every day. Uh, and but, you know, because it was short-lived, it was, you could bounce back from it.
But if we got a more persistent shortage, uh, that would be an issue for many countries, uh, less so for the US, but again, long enough, you, yeah, you could have $8 gas prices and, uh, a very big economic problems.
>> Okay. So, Lynn, ultimately, the assets that will perform well and not perform well in this kind of fiscal dominance environment, in particular after a ceasefire has been reached and after the FOMC has shown signs and signaled that they're willing to tighten monetary policy even further. Uh, your your your take on asset allocation for 2026?
>> Uh, I roughly the same as it has been. I, I have a strategic allocation, which is just high-quality equities, uh, basically equities that are not in a bubble. Um, you know, growth at reasonable price, sometimes value, um, uh, you know, I think gold, you know, gold obviously took a hit whenever you have a the market perceived that the Fed's going to be a little bit more hawkish, you generally get a little bit, uh, of a sell-off in gold. The issue there is that gold had a really, really powerful two-year run. Uh, so I do think that it has to like build a new base. Like, you know, some bears would say gold's going to round trip, you know, all of its gains from 2024, 2025. I wouldn't be in that camp. Um, but it it did rise really quickly. A lot of the asymmetry was taken out of the trade, and I think it has to kind of find a bottom and and build a new base. Um, so I'm not jumping into gold as a trade, even though you still have like a just a permanent strategic position in it. Uh, so you, for me, a lot of the interest right now is in equities. Um, I, I think Bitcoin is still in a very kind of low sentiment area. Uh, it's not getting any favors at the moment from a hawkish Fed, similar to, um, gold. Um, but once that starts kind of forming a bottom and a longer base, I think that's a an interesting kind of two-year trade or or longer. Um, but for a lot of investors, I think the the core of a portfolio makes sense to be, uh, equities. Let's just go over each asset asset by ass. Let's just go over analysis each asset by asset. Gold has come down significantly from its highs. Is that an indicator for future market movement with the rest of the assets, or is gold moving independently, do you think?
I would characterize this relatively independently. I mean, kind of like how its 2-year, um, uh, burst upward was independent from from many other types of assets, at least in terms of magnitude. Um, you know, I think there's there's been there's been geopolitical reasons for it. Uh, it's, you know, in fiscal dominance, generally precious metals do pretty well. Um, but again, it just it got over its skis. Um, you know, a good asset can get over its skis when you have like, you know, relative strength index, uh, sentiment levels and things like that getting really high. Um, it's generally going to go in the other direction. Uh, and again, I, you know, some people would say, "Okay, it's radically overvalued here." I, I wouldn't go that far, uh, when it got, you know, when it got up to like 5,000 an ounce. Uh, for me, it was just it was no longer cheap, um, you know, and, uh, it was, you know, kind of back up to something that looks like fair value, uh, but it had gotten there so quickly that that there's risk there. So I, I think that most likely, uh, you know, gold's going to trade how gold's going to trade, which is, you know, I think it's going to wander around, and from a tactical standpoint, I want to see it kind of put in a base before I'd be pounding the table on on buying it again.
>> Bitcoin, you're still doing work with Bitcoin. Uh, Bitcoin also has fallen out of favor, not just in terms of price, but also in terms of market sentiment and investor sentiment. Um, surely you've noticed that as well. Um, yeah, again, Bitcoin moving independently or indicative of broader risk-off sentiment ahead?
Uh, I'm not sure I would put it in in indicative. I think basically, uh, a lot of the, I think there's two big factors. One is that the broader crypto space, which I'm I'm pretty structurally bearish on outside of Bitcoin and stable coins. I, I think it's finally just seen throughout the market that that narrative doesn't have as much legs as people thought it did. Um, uh, a lot of it was kind of fake decentralization. A lot of it was regulatory arbitrage. Uh, and that there's really not a lot of there there outside of, you know, hard money, uh, you know, stable coins, uh, tokenized gold, tokenized equities. I mean, that, you know, real world assets, that that's still fine. Uh, but generally these other crypto things, you know, DeFi, NFTs, uh, ICOs, that kind of thing, uh, is just in general, it's it's not as big of a market as people thought. So I think that that that industry is kind of gradually stagnating. Uh, it really has been stagnating since 2021. Uh, like DeFi total locked value never really took out its 2021 peak, for example. Uh, so I think I think that Bitcoin has that whole kind of broader thing weighing down on it.
Uh, and then obviously there's been concerns around some of these levered, uh, Bitcoin treasury companies, uh, which, uh, sometimes I think are overdone, but some of those are are valid concerns. I mean, anytime you have leverage, I think it is is worth paying attention to and, you know, how they're managing risk.
Um, and then the other factor is that a lot of investors that kind of viewed Bitcoin or broadly crypto as the fastest, uh, horse in the race have shifted toward AI. Um, so just the the sharp rise in chip stocks, in hyperscalers, obviously the SpaceX IPO, that's pulled a lot of capital that is otherwise, you know, maybe seeking, you know, kind of viewing Bitcoin and crypto as tech, has been pulled in that direction. So until that kind of cools off a little bit, I think Bitcoin could be some pressured. Uh, but I think Bitcoin's fundamentals are still good, and it's kind of in the bottom, you know, 10, 15% of its kind of historical. There's different ways to measure value for it. For example, market cap compared to on-chain cost basis and things like that, other sentiment indicators. Uh, it's it's kind of near the lower end of a lot of its, uh, historical indicators.
>> Do you think the same investor base that flowed into crypto has now rotated into the AI space?
I think partially, yeah. I think, I mean, but I think obviously AI has sucked in a lot of pools of capital. I think that there it's not like just just the crypto space went into AI. It's like a lot of pools of capital went into AI, and I would say, yeah, a lot of a lot of investors that were excited by digital assets, uh, throughout the 2010s and early 2020s, um, have, you know, there's a new set of tools to either build on or invest in. Uh, so I do, yeah, a lot of it has kind of rotated in that direction, which I think is healthy, because again, I think the again, the broader crypto space, I, I just think there there's limits there to what it can do.
>> Okay. So, when someone asks, "Well, is AI in a bubble right now, and should we stay away from that?" that's a very loaded question that has a lot of moving parts. How would you go about tackling that question? Like, what's the thought process in evaluating if if an entire sector—uh, by the way, Elon Musk himself, uh, is now worth about the same as Canada, I believe, no, half of Canada, uh, SpaceX at some point was worth Canada's GDP—so an entire sector that is several times times the GDP of many G7 nations around the world. Uh, is that in a bubble? How does how does one go about answering that question?
I think ironically, the answer could be similar to gold, which is, uh, so gold had that crazy 2-year run, and the question was, "Is it a bubble?" And I would say, "Well, I wouldn't call it overvalued. I just think it got here kind of too quickly for for comfort."
Um, and so it's likely to correct, form a higher base. Uh, and then, you know, it it can it can recover from there. I think AI is similar, which is that, I, I mean, I think a lot of the tech is real. I think it is a a pretty big productivity gain, uh, in a lot of cases. Um, uh, I, any sort of technological shift often has waves of getting overbuilt or overvalued.
Um, you know, the famously the companies that, you know, laid laid the fiber optic cables like go bankrupt, right? I mean, it's not that we didn't need those. It's great they did that, but, um, it was very expensive, uh, and they kind of overestimated how much front running would happen, how much, uh, growth would would occur. So I mean, I do think that's, you know, when SpaceX trades at 100 times revenue, uh, it's excessive. Um, I think that that there is real risk with the hyperscalers, uh, because they're a lot of them are free cash flow negative now.
Um, the primary AI models, um, you know, OpenAI and Anthropic and all this, they are VC funded, uh, they're they're highly unprofitable. So they're they're subsidizing usage of them, meaning that, you know, the the the demand we see in AI now is partially because they're making it cheaper than it really is. Uh, because they're, you know, they're trying to get growth. Uh, which which makes sense when you're in that growth arc, but it also it's kind of like how Uber was growing very quickly because it was underpriced, but once they started pricing it at a more balanced level, uh, demand kind of, uh, eventually slowed down.
So I, I do think that arts of AI are way ahead of themselves. I'm I'm been a little bit more bullish on the chip stocks than others, than like other parts of the AI trade. Um, uh, because I do think, for example, we are going to just persistently use way more GPUs than we did 5 years ago. We are going to persistently use way more RAM than we did 5 years ago. Uh, but again, things can move a little bit too quickly. So I think I think the AI trade is heated. I think parts of it are bubbly, like like SpaceX. Um, but, you know, whenever it does kind of cool off or consolidate for a period of time, I, I always kind of go fishing in that market, uh, and say, "Okay, what is kind of sold off, but but is still doing great numbers?"
>> Okay. Is this part of the plot of your new sci-fi book, by the way, that I believe is out, "The Stogart Incident"? Um, people should, uh, should note that Lynn is a talented fiction writer as well. We, we'll close off here.
>> Anyway, this book examines the future. Uh, yes.
Yeah, people should check it out. And I will say that one of the reasons I, I wrote it, uh, because I had that story in my head for a long time, uh, and, uh, I mean, AI exists in the book, and basically technology was kind of catching up to to some of the technological stuff in the book. So I was like, if I don't get this out now, it it risks becoming historical fiction. Uh, so, uh, yeah, it was a fun project to work on, and and people seem to like it.
Um, how do you envision—and this is, I guess, where the the writing of science fiction, um, gives us a lot of flexibility to use your imagination—how do you envision the world to look like in 50 years, uh, with the advent of AI and the advancements in robotics?
Um, yeah, it's a it's a good question. And I think when I write the book, it's like the the first part is just to entertain, uh, and make people think, and and the second one is, you know, as as a former engineer, I do try to get predictions at least directionally, uh, you know, kind of making some sense.
Uh, the book kind of assumes that that VR, virtual reality, eventually gets a little bit more popular. Uh, that that's been a slow technology to take off. It's, they kind of even remark in the book that it took a long time to take off, but they they finally kind of figured it out. Um, I, I think that just a AI and to some extent robotics is just a little, it's just kind of a background prevalence in in the book. So in the book, people do still have jobs. Uh, they still work. Uh, but generally most, a lot of people's work involves working with AIs as well.
>> Uh, when you say virtual reality, do you mean—sorry, interrupt—do you mean, um, like physically in a VR space with a headset, we're in a hologram, or do you just mean interacting digitally like you and I are now?
Uh, the the former, like Ready Player One. I mean, not not that extreme, but like basically, yeah, that that there's more visual technologies either in terms of augmented reality or or virtual reality that are just around the margins more popular than they are now.
Um, okay.
Uh, but yeah, that kind of ubiquitous of AI, uh, just just kind of as as part of our our lives. Um, the book does take a, I guess some might call it bearish take. I mean, it's it's less bullish than like the the utopias, which is that, um, it, they, it kind of assumes that AI does run into certain limits at certain points, even some characters articulate why. So AI becomes incredibly productive. Uh, but kind of like how aerospace, you know, the aerospace industry, we went from Wright brothers to the Apollo program in the in the course of one human lifetime. And then we kind of stalled, like we don't really have faster commercial flight than we had 50 years ago. Uh, you know, still until the cool stuff with SpaceX. We're not we're not, you know, doing as much in space as we were decades ago. We kind of we kind of flatlined. We ran into certain ceilings, and our our improvements were more incremental. You know, we added wing tips to commercial planes, uh, which gave them more fuel efficiency. We, we, we most of the changes were in their electronics, not their actual aerospace aspects. And I think AI probably goes through a similar dynamic, which is you have this kind of takeoff scenario, just radically more productive, more useful, um, changes the way we do things, much like aviation did. Uh, but then it kind of hits a not a hard ceiling, but like a softer ceiling where a lot of low-hanging fruit is picked. Now, uh, combination of Moore's law, combination of, you know, what a large language model can do, uh, you know, compared to a conscious brain, uh, and that it it becomes a valuable but not, uh, invincible tool.
>> Okay, excellent. Well, I look forward to reading that. Uh, I, I like sci-fi and I like your work, so curious to see what the, uh, the characters are up to and if the terrorist is caught—won't spoil that surprise. It's about, um, it's about, I think, it's a detective in the future looking for a terrorist, I believe, is the summary I read in your web page. So that sounds, that sounds pretty interesting. Um, and, uh, okay, thank you very much. Where else can we learn from you, Lynn, and study your work?
>> lynen.com. Thanks for having me.
>> Okay, lynalden.com. We'll put the link down below, and her ex as well. Put that as well. Thank you very much, Lynn. We'll speak again soon. Take care for now.
>> Bye.
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