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Hello, my name is Andy Edstrom and I'm so excited to welcome you to the third episode of Scarce Assets, a show that examined scarcity, the most fundamental driver of economics and markets, and the scarcest asset of all, which is Bitcoin. Today, I'm very happy to be here with my Co host Jesse Myers and our guest, the brilliant Lynn Alden. Now I have the pleasure of saying a few things about Lynn. Just like our first two guests on scarce assets, Lynn is a professional innovator both in Bitcoin and outside of Bitcoin. She's an entrepreneur and an investor and an exceptional macro analyst. Now this gives her a unique and valuable view into all asset classes as well as into the global monetary system. Her book, Broken Money is honestly the best finance book I've read in a long time, and that includes both traditional finance books and Bitcoin books. And I'm also confident to say that it's probably the single best book I've read on the monetary system. And I've read quite a few of those. So the title is Broken Money, and I personally got a lot out of it and I highly recommend it. And lastly, I'm just going to say that I've listened to thousands of podcasts myself, and Lynn is consistently both entertaining and professional. I'll just add an anecdote here quickly, which is in late 2020 I had the privilege of appearing with Lynn on the Swan Signal podcast, then hosted by the great Brady Swenson and now the great Sam Callahan. And about 10 minutes into the interview, my 4 year old bombed into the room and took the conversation off the rails for a moment. But Lynn was totally unflappable. She both took it in stride and also did not have small children running around through her frame. Who knows, maybe she will someday. But in the meantime, she's always been both a true professional and very kind to me, and I'm absolutely delighted to have her here with us today. So Lynn, how are you? I'm great. Thanks for having me and Congrats on your new podcast. Excited to see where it goes? Thank you very much. Really appreciate you joining us. Let's just dive right in to Broken Money, your book. One of my favorite parts of the book is chapters you devote to examples of money creation and what the implications are for the money and credit system and also for inflation. So I want to ask you if you'd be willing to touch on maybe a couple of archetypal examples of what some people might call money printing and talk about what they mean for inflation or for the monetary system overall. Sure. And like a a consistent theme that I touch on in broken money is idea. That money is like a Ledger that people either agree to use or some cases forced to use or using a Ledger either in the literal form or the abstract form. And so the big questions to ask are who can censor transactions and who can create more of those units or in some rare cases who can destroy those units in a centralized way. And so, you know, you can kind of think of that as two main things. There's commodity money itself, right? So we have a lot of known examples of those. We have grains, we have obviously gold and silver. In later years, we have shells. There's all matter of different types of money that people can use. One of the examples that I like is the tobacco example in early United States before they were actually a country, just the early colonies. And the reason is it was kind of like the gold standard but accelerated. So like all the flaws of money all kind of happened within a pretty short time period because it was, it was less sound. And so we kind of ran through the full gambit of all the problems and and frictions that people find with money. And so, you know, when they get to the colonies, there's not a lot of species, there's not a lot of coinage. And so they're kind of gravitating towards other types of money, especially for kind of everyday transactions. On one hand, they turned to the shell money of of the, you know, the indigenous people. And they kind of used that money without the ceremony that was normally attached to that type of money by the natives themselves. But they, they just kind of used it for its scarcity purpose. And then they also turned to using tobacco as money, which was a major cash crop. And what's notable about tobacco is obviously it's you know you get a lot of value per kind of mass and weight relative to other crops. It's a it's a cash crop in that sense and it was it has globally desirable crop and so they start kind of making that into money. They say, OK, well here's it's legal tender. We're going to use this along with things like wampum, you know, the the shell money and. But then all the natural things start happening, right. So if if tobacco is money, it means more people are holding it it for reasons in addition to its utility value. And so it's kind of overvalued. It's like more valuable than you'd expected to be based on its utility alone. And so there's a really strong desire to plant more of it because it's it's overvalued. And so people start planning more of it and you start to get tobacco price inflation. And then so then the authority is like no, no, wait, we have to put restrictions on who can plan it, right. And so then they have, you know, if you're it's kind of the the classic, if you're close to the source of power, you know you're one of the privileged groups that can plan it. Otherwise you can't. Then there's like bootleg tobacco planting because it's it's still profitable to try to plan it. Obviously there's more risks and then there's problems of fungibility. So not all tobacco is the same. It's different ages, different types, different quality. And so then they said, OK, well, instead of using tobacco directly, we're going to abstract it. Everybody's going to put their tobacco to warehouse and professionals will grade it and it will have tobacco receipts. And now you have both tobacco that's not really scarce, but you're still using this money. It's got lack of fungibility, but you're so now you're abstracting it. So you have like really counterparty risk on top of an unsound money and eventually the system became so untenable and that the economy's developed enough that they had more species to work with. So they they abandoned that system. And in parallel similar thing happened with the shell money. So you know, the shell money was very valuable to the natives. It was very hard to make. You know, it's it's got inherent scarcity to it and it has the good properties of money. It's portable, it's long lasting and has all those attributes. But as soon as you add metal tooling and other kind of sophisticated techniques of gathering shells and then polishing and drilling them and making them into their final form, they could basically devalue the money. They could inflate the supply more readily than was normally the case. And so a similar along with the lines of tobacco, they inflated it until it was not really useful money anymore and they had to gravitate towards stronger types of monies. So there's all, there's all sorts of examples like that, but I find those interesting because they're well documented compared to many other types of monies. And there was all kind of all the problems kind of unfolded over an accelerated pace because you had like a clash of cultures and you had a kind of a unique example of a fairly developed civilization but in a new environment. So they were kind of cut off from there, you know, more developed core and so you had kind of the clash of older money systems, new money systems all kind of coming together. Well, it sounds to me like the tobacco monetary standard just went up in smoke in a relatively short period of time there. He was sitting on that for a while. Been saving that one up. OK, well, let's talk a little about another one of the key insights I thought from your book which relates to monetary velocity. I have to say I did not understand this concept until I read your book or really I hadn't understand, understood how impactful or important it could be, especially as it relates to velocity of other standard monies monetary standards whether it be gold or Fiat. Would you mind enlightening us a little bit more on this Velocity issue and and the technology related to it? Well, so velocity has multiple different definitions. You know, the kind of the classic definition is is, you know, you compare GDP to the money supply and see what that multiple is. So velocity is kind of that filler variable, but in the broader sense, it's basically how how easily money moves. And that has a technological component to it. And one thing I described in the book is that for in the development of money, there's basically 2 technological paths that are happening simultaneously. One is what we're actually using as money itself, which we just touched on. For example, if our technology is too good for shells, we can't use shells anymore. We have to use something that even our new technology can't make more of quickly, like gold, for example. So you kind of move up the hardness scale in terms of different types of of commodity money. That's that's one technical path. But the other technical path could basically be described as analog encryption or various technologies that overlay on top of those monies and allow the ownership of it to move around more quickly. Because when you're moving and transporting commodity money, especially, you know, gold bars and things like that, both the transport of it securely and then the auditing of it down to its core, these are time consuming, inefficient, expensive processes. And so going back, you know, literally hundreds and in many cases thousands of years, there's various types of proto bankers kind of before the modern banking establishments and early bankers, they were trying to find ways to make this more efficient. And so going back to, you know, ancient Egypt, for example, there'd be papyrus bills of exchange. And there's also early examples along the Silk Road in like Central Asia and a lot of things that we don't really consider technology today were all ways to make the transfer of of money is quicker and more efficient. So coinage for example is one of the classic monetary technologies. You put them in the standard units with various anti forgery techniques or anti shaving techniques on the metal itself to make that exchange more rapid. There's also the the invention of paper and then the invention of book binding and then the invention of you know different types of inks and then you have analog encryption. So for example if if I give gold to a merchant and that merchant signs a piece of paper that I can then transfer to another city and exchange for at a different merchant for gold, again, obviously those merchants in their network have to have some sort of anti forgery technology on top of it to to make sure that it people can't just copy those paper receipts and just redeem gold that they never put in. And so you have the development of this various kind of anti forgery encryption techniques in the analog sense. Then things like the printing press which you know again is today is not new technology. But back then that was a big deal. I mean the complex paper instruments that are standardized and and complex became cheaper to do and so that that expanded the number of things you can do with paper like widespread usage of banknotes and things like that. So there was that that technological path over top of the of the commodity money angle. And these were kind of developing along the simultaneous lines. And then when you get into the modern era, you get even further developments. And I I contend, for example, that the Telegraph was an enormous stepwise change in the speed of money globally. So prior to that, there's virtually no way to send information faster than matter, right. So even with complex banking and Ledger systems, those Ledger's still only moved at the speed of people, right? So foot horses, ships, you know, with rare low bandwidth exceptions of like fire signals in the night. You can't, you can't send information long distances quickly, faster than ship. But what made the Telegraph so interesting is that now you could send higher bandwidth information around the world very quickly. And for the first time in thousands and thousands of years in human history, we had this big gap between how quickly we could transfer information versus how quickly we were still confined to transferring matter. And the, you know, that had, I think most historians when they focus on that, they focus on the geopolitical implications. But there's a pretty straightforward monetary implication which I don't see discussed that often and why I chose to emphasize it so much, which is that information transferring information allows you to make transactions, but especially in a low bandwidth setting like that and it does not allow you to make settlements. And so the, the gulf between settlement, the transactions and settlements became larger than ever. So prior to then there were still somewhat of a gap. So there's various paper instruments I I mentioned you know, they basically increased the gap between transaction speed and settlement speed, but it was still like a manageable size. But this just completely blew open the, the, the scale and the speed of those two things. And what I would argue is that basically we had a century and a half of just extreme levels of financial centralization and most of that was to bridge that gap between those transaction speeds and those settlement speeds basically because you had to rely on some sort of trusted entity in in the middle until we we basically just dropped the idea of settlement altogether. We just dropped the idea of using any sort of underlying gold and the Ledger itself became the settlement. And you know, going to the the modern era, what makes Bitcoin so interesting is that finally technology and bandwidth globally came together enough that we could do digital settlement, not just digital transactions. And that really could not have occurred much earlier than it happened, right? I mean you had obviously the development of the Internet. You had to have not just low bandwidth Internet, but fairly high bandwidth Internet, pretty globally accessible. Then you had to have pretty advanced encryption techniques. Some of them were only invented, you know, less than a decade before Bitcoin came out. And so as these things come came together, we got the emergence of Bitcoin which is digital settlement. And so that's like what I describe as closing that 150 year gap between transactions and settlements. And the kind of the take away point is how much technology influences who controls money, right. So, you know, if you go back centuries, the idea of surveilling every transaction is like science fiction, whereas now it's, it's almost like people say why, Why wouldn't government surveil every transaction, right. It seems normal. And if you, if you kind of question it, it's almost like you're the weird one. You're like, well, what are you up to then if you don't want every transaction being surveilled? And so basically the, the technology, the speed, all these things are heavily influenced by technology. Even though a lot of monetary history books focus on human decisions, which I you know they're they're relevant for certain times and certain areas. But that link between technology and money and how fast it allows money to move and who controls it, I I think is something that was generally under explored and why I emphasize you so much. That's that's incredible. I I have to confess, I had not yet read Broken Money and I will now be reading it after getting this little teaser. Incredible. But I have to, I have to ask this question of So Linda, does that mean that you view central banking and Fiat money as a necessary stop gap, a transition era that was bound to happen as a result of this technology gap? Yeah, I would use the word inevitable more so than necessary. One of the themes that kind of indirectly comes up in the book is the idea of kind of technological determinism, which is that when certain orders of events happen, one kind of leads to the other. And so if we use another example, if we were to rerun this human history 100 times, either 99 or 100 times, the bicycle would be invented before the automobile and before the airplane, right? Because one kind of leads ones like a necessary but insufficient part of the next one, right? So something really weird would have to happen to invent the airplane before you have something like a bicycle or something like a car. And the same thing is kind of true with money, which is that we kind of saw the emergence of pretty common paths, right? So first there was proto banking that's kind of it's like channel like banking in the modern context. It's almost like lightning came before Bitcoin in the sense that you know you'd have these bankers that are basically they they have direct connections with other merchants in other cities and they can allow for the transporting of money pretty quickly. It's more about actually transferring money than credit even though it relies on credit to make that transfer. And then you had the development of of you know more free banking type of arrangements. But the problem is that when all the gold kind of gets put into a couple different hubs, like a couple different major banks, the governments know where all the gold is now, right? Instead of being diffused throughout the population, it's it's in certain hubs and there's ledgers built on top of those hubs that allow people to transfer the ownership of it more readily. That was basically, for example, the whole point of, you know, banking in those Italian city states is that they'd have the gold in one spot and you'd have a Venetian merchant and an Arab merchant. And they could just go to their go to the banker and say, well, OK, we transferred these spices and now we're going to just transfer these Ledger entry for for who owns this amount of gold. And the gold would still just kind of be sitting in the same vault. And the problem is that that all coalesces and governments know where it is. And so they can say, well, OK, now every every bank has to put all or some of their gold into this big central vault. And then also you have the constant tendency towards duration mismatching. So there's all these debates around fractional reserve or full reserve banking. I prefer to kind of describe it as either full either duration matched or duration mismatched banking, which is basically your your, your liabilities are you're making promises that you only probabilistically can keep. So you have this kind of ultimately unsound arrangement that leads to kind of cascading crises. And then one of the solutions for those is central banking. But then it comes it's almost like a deal with the devil in the sense that it it fixed over your immediately problem but then it further over decades further centralizes the system. So one of the things I argue is the fact that. You know, gold failed almost everywhere. At the same time, you know, other than Switzerland and a few others, it, it pretty much all failed at the same time. And the fact that we look around today, there's no countries on a gold standard like not one. There's no country that does for their banking, even though it's just inherently more stable of a system. It's just the incentives did not work that way. I generally argue that the the, the, the, the path, the technology that was available so strongly tilt incentives towards some directions that you know 99 or 100 times out of 100 it leads towards those directions at least until another technology comes along that swings those incentives back in another direction. Right. So for you know a century you'd have sound money advocates or Austrian economist proponents saying how things should be and just kind of getting ignored, right. They they're they're kind of making arguments about and it's just kind of nation states were like that's cool and they just ignored them. Whereas I kind of view Bitcoin as the first tool that actually gives them the the burden of power, right? That they that things now a little bit kind of tilt the scales back in their favor to some extent. So yeah, I, I I kind of view a lot of it as even though there were human decisions that can be described as some cases ethical, some cases unethical, and they can affect the timing of certain things. When you generally see the whole world move in a direction for a period of time, it's it's usually the case that technology has kind of strongly tilted the scales in that favor, at least at least for that era. Yeah, I want to, I want to under score that that's another major point that you make in the book, which is governments or other organizations can react or attempt to react or they can attempt to impose restrictions or rules. But it's really hard to argue with the fundamentals of technology and when a new technology that's better along multiple parameters comes along very difficult to to contain it. So I would you mentioned you mentioned duration mismatch. So I'm going to take us to one of my other questions which is this is the scarce assets show. So let's talk about an asset that most listeners probably don't consider to be very scarce and that's U.S., government bonds, 10 year and longer maturities. My hypothesis, let's just say, is that this asset may be very scarce this year and that's because it's an election year. Then I think the Fed and the Treasury want to keep the long end of the curve down to keep asset prices up and that could mean either more QE or it could be a mix shift, an additional mix shift let's say by the Treasury in favor of shorter maturities rather than longer. Do you have any thoughts on this and and what's going to happen with the with the bond mix likely in the next year or two? Well, so one thing that's interesting is that the entire reverse repo facility basically represents excess demand for T-bills beyond the amount that is available. And so and that that's a market that I've been following pretty closely throughout my just kind of macro career. So for example back in 2019 we had the opposite, we had a repo spike and we had the Fed engage in repo activities and that was partially just because there were too many T-bills, relatively available liquidity to absorb those T-bills. But after all the QE that happened during the during the pandemic stimulus and lockdowns and all that, you had this build up of excess cash that wanted to be in T-bills. And so they set up all the reverse repo facilities and things like that to ensure that T bill yields don't get driven below their the lower bound of their interest rate targets. And so as long as that pool of capital exists, policy makers specifically at the Treasury have the option to tilt duration towards the shorter end to try to meet that excessive demand for T-bills and relieve the potentially insufficient demand for longer dated securities. And so we we've seen kind of a gamification of that in the past year or more. And one of the kind of the dilemmas you face as the Treasury is you know you're you're trying to issue debt. I mean you're not the the Treasury's not the one that determines what the deficits are, right, that that's mostly Congress and the president and all that kind of comes together. But you're as the Treasury, it's your job to figure out what types of bonds to issue to, to meet those demands. And if you go back long enough, that wasn't always the case. It used to be that Congress would basically authorize every type of of bond to pay for every type of debt. And eventually they said, OK, that's the micromanagement is getting too silly there because the the whole apparatus is getting too big. And so they said, OK, well, we'll just set a limit. Here's a debt ceiling. And the Treasury can go out and figure the details of what bonds to issue and what durations and any sort of parameters they want to do. And so the Treasury has this job of meeting this very large deficit and they have different parameters that they're trying to meet. So one is obviously they want to have the lowest cost available to the government. That's that's a big variable, right. So if there's a different part to the Treasury curve, you can potentially save some money by issuing debt on the on the cheaper part of the curve, but it has other consequences. Another big one is obviously liquidity. If you don't want to cause a liquidity problem, you can issue bonds on the more expensive part of the curve, but that is more conducive to liquidity and asset prices and things like that. So basically the treasury of the past year or more has erred on the side of issuing among the more expensive parts of debt, which is short duration debt in an environment of an inverted yield curve, right. So it's the most expensive part of the yield curve, but it's the least negative for liquidity and in many cases can be positive for liquidity because they're sucking money out of the reverse repos rather than elsewhere and spending that back into the economy. So I do think that they're going to probably keep tilting towards the short end of the curve until the reverse repo facility is used up. Some of this is non linear. So. So I think 1 error that market participants make sometimes is they extrapolate, here's what happened the last quarter or two. So here's what's likely to happen the next quarter or two, whereas when you look at the four quarters of the, the fiscal year, for example, tax quarter is very different than other quarters, right, because you have this influx of revenue and you have different different spending patterns, right. So what what happens in any, any given quarter is not necessarily the same that happens next quarter. So I think that the next couple quarters are maybe less extreme than we've seen over the past couple quarters where if you if you just analyze like annualize the last two quarters, you get to a pretty silly number, whereas that's not really how it works in in the calendar year. And so I do think that some of this will become less extreme over the next, call it five months or so, but that structurally those same problems are there. So I think we've already seen kind of the maybe the most shocking part of the transition where they thought a lot of these coupons were going to happen. It was, it was kind of a shock announcement of how tilted towards bills it was. We'll see what happens, you know kind of quarter by quarter including shortly here to see what the specific kind of you know, long for short is going to be. But I do think that the, the Treasury is managing liquidity above most other variables. And if you look at, for example, you know, bank reserves in the system, they kind of hit their bottom right around that banking crisis of nearly a year ago and they've been flat up ever since. That was kind of the line in the sand for where they wanted to go. And so ever since then they they've pretty much been managing around liquidity. And so I think that's probably going to continue at least until the reverse facility's drained, perhaps later this year. Yeah, that's that. Is that still in a few months or that it was on a tremendous drawdown rate that last I looked was targeting like end of March for it to be depleted, but it's probably slowed since then? So, so far it's not slowed that much but I do think it could slow around tax season as we get closer to to tax season, we're now kind of entering tax season and that's what I mean by those non linear effects. So the shortage is, I'm not sure because you know tax season could surprise the upside or downside. Sometimes it comes in a little bit, you know hot or cold I think in large part because asset prices have been pretty good lately. Tax season will probably be pretty solid all us being equal, which is why I think it might slow a little bit. And and there are well known well known analysts and investors that are more explicitly calling for a slowdown of the drain rate of the reverse repo facility. I have maybe less conviction than them, but I I do err towards that likely being the outcome which is that the the very sharp rate we've seen over the past six months or so, I do expect that to slow. So I wouldn't necessarily take what we've seen over the past quarter or two and just apply it straight toward you know kind of the end of this quarter, early next quarter. I do think we'll see a little bit of bumpiness, you know, as as we kind of get closer to tax season. Yeah, go ahead now. I think that's a great framing. And you know, Lynn, you're always careful to have a view but to acknowledge that there's uncertainty, you know, around or there's risk around maybe the base case expectation. I'll just throw in one little anecdote. So my father who's also my business partner learned a hard lesson. This was decades ago. I mean I think this was early in his investment career and he took a position on long treasuries and the Treasury stopped issuing for a period of time. I think it was the 30 year or maybe it was the they had been issuing a 20 year but 20. Year, yeah. The 20 year was not issued for quite a while. That's what it was. See you of course you knew, you knew the correct answer. So yeah, so they stopped issuing 20 year bonds. Well, you you can guess. You can guess that price moved because all of a sudden it became a very scarce asset and he was unfortunately on the wrong side of that trade. So it was a, it was a painful lesson for him, but just a reminder that it's hard to be certain about what's coming. Nevertheless, we do our best and you do a great job of it. I think I just jump. In the way I approach it, like it is how I work on a lot of things, whether it's writing my book or drawing a picture. It's kind of like I I have an outline, a base outline of where I expect things should go, and that's a fairly high conviction outline. If I'm setting out to do something like write a book, do a picture, or make a macro call, if I'm bothering to do it, it's usually cuz I have a conviction about that. So the outline is generally pretty high conviction, but then as you over time you actually move towards completion of that work, you fill in details and you keep adding more and more details. So maybe start with the book outline and you start adding kind of more chapter outlines and things like that. And then you start actually writing the chapters until you actually form the whole book. And with the macro view, I'm kind of doing the same thing where I'm, I'm taking pretty broad strokes and I have this kind of high conviction view on kind of the the overall structure of the direction of where we head on certain things. But that has to be updated quarter by quarter by quarter as new information comes in as as kind of probabilities become certain or air towards One Direction to the other. That then allows you to see a little bit further into the fog of war to to you know fill in the next view a little bit. So that's kind of how I think about predictions, which is that you know, predictions are obviously very hard and just the the main thing is try to avoid being completely offsides, have a view but then be be pretty quick to update that view as as new information comes in. Sorry to interject there. No, that's good. That's helpful. So Speaking of peering into the fog of the near future, I think I saw a certain senator from Massachusetts call publicly for the Fed to cut rates. Of course, the Fed is not a political body, of course. Any thoughts, Any thoughts on rates this year? You know, are they kind of crucial to your outlook or are they not as important? So I'm, I'm, Matt. I'm like monitoring the reverse repo facility and the rate of QT to be a little bit more important than the rates themselves, partially because the rates themselves weirdly have a dual aspect. So they are tightening to some parts of the economy, but as a point I've been making is they're actually stimulating other parts of the economy. And that's really only the case when you have public debt to GDP this high, right, Right. So back in the Volcker era when you had 30% debt to GDP, the higher the rates go, it's mostly just depressing the economy. It's mostly an anti inflationary, anti credit creation effect, which is why Volcker did it. But the problem is when you try to repeat that when you now have 130% debt to GDP just for round numbers, on one hand you, you are having the same effect of you know pushing down on interest rate sensitive sectors of the economy, right. So commercial real estates, small business, bank lending, you know, residential real estate turnover, things like that, that all that all effects is similar. On the other hand, you're completely blowing out the fiscal deficit which is stimulating parts of the economy that are not as interest rate sensitive or not interest rate sensitive at all. And so if you're if you're on the receiving side of those deficits one way or another, if anything, your propensity spend is now higher and so that effect is more muted. Whereas liquidity is still pretty much liquidity. So QT is generally still not good for asset prices unless it's being countered by something else like for example the draining of the reverse repo facility. So I've been, I've been paying a little bit more attention to the balance sheet more so than the rates. Another factor worth pointing out is that as as inflation has cooled down to varying degrees, a, a flat interest rate profile results in widening real rates, right. So if if they just hold interest rates flat and interest rates are declining, that means they're increasing real rates. And so they actually have a capacity to mildly reduce rates while still remaining, at, say the positive real rate level that they had, you know, some some months ago. So that might be a that might be a path that they approach. They might, they might trim rates, for example. But say that they're just kind of maintaining the level of hawkishness that they're already at. They're actually not really viewing it as less hawkish. All right. I think that's one way of looking at it. Of course, you could get the inverse effect. If you get some sort of energy shortage or some sort of inflationary reacceleration, then simply holding rates flat might become more dovish over time because now interest rates are increased. I mean, now inflation's increasing and real rates are reducing. And so I I do think that they're going to air, you know, less hawkish this year. I, I, you know, I think they've been signalling that pretty clearly. I do think, you know, while the Fed tries not to be immediately political, right. So when we think about separation of central banking and the executive branch, it's mostly in the acute sense. So, so that, for example that a, a president can't just call the head of the Central Bank six weeks before an election and say I'm going to fire you unless you raise rates right. There's there's certain separations of powers that make that sort of acute or obvious. You know, interaction not not really possible. But when things get bad enough or when things get structural enough, there is integration between them. So the obvious examples during World War 2, that was the most direct example of basically the central bank being entirely captured by the Treasury because they viewed it as they viewed it as a national emergency, not to. And in the in the more recent sense, you know Fed officials generally are almost by definition pro establishment. They generally favor establishment candidates. It might not be as acutely but it they, you know to the extent that they can put their thumb on one side or the other, that's kind of the the direction they're going to point in. So I I do think that they have a fairly significant incentive not to have an acute recession this year. It doesn't mean you can't have a slowdown, doesn't mean you can't have sector specific weakness, but I think that they're going to probably do their best not to have some sort of full blown, you know, whole labor cycle acute recession if they can help it. Thanks for tuning in. If you're interested in exploring any of these topics further, or want to learn more about how we can help you secure a new or existing Bitcoin allocation, get in touch with our team at on rampbitcoin.com. We look forward to supporting you on your Bitcoin journey. Yeah I definitely agree with the with that take the powers that be will try to keep the train on the tracks at least at least for a bit. Well, let's let's get more specific maybe on on portfolio construction and I'm not gonna ask you to give away your secret sauce. You have an excellent subscription service which is also quite reasonably priced where I know you make specific, you know picks on securities. But maybe could you talk more generally about your framework at the moment and also working into that, I think six or seven months ago when we did that panel that you were kind enough to appear on and give us your view on this, you had a framework which included sort of a macro asset class which is basically scarce assets. I don't remember if you called it that specifically, but I'm wondering if you're still thinking in terms of having significant exposure to, generally speaking, scarce assets which are different from, I don't know, equities or real estate? I do, yes. And so, you know, over the past 40 years, especially in the United States, there's been this kind of structural tilt towards disinflation. SO4 decades of declining structural inflation, 40 years of declining interest rates. And therefore both stocks and bonds were very good performers. They had you know partially thanks to those reductions in in interest rates. You had higher equity multiples that made sense relative to interest rates over time and that's kind of a virtuous cycle for as long as it lasts until you hit zero and and stay at 0 for a while at least. And so we had this kind of 40 year period where owning stocks and bonds together made a lot of sense. When you look at longer data sets or more multi country data sets, we are not just picking the best equity market in the world of the reserve currency country right. If you're if you have a a a more global view or a view that does not just include that kind of 40 year dissipationary regime. Generally more diversified portfolios hold up better than the stock bond portfolio. So it could be as simple as adding say a gold slice historically, right? So instead of saying 6% stock, 40% bond, if you said 60% stocks, 30% bonds, 10% gold. There are decades where neither stocks nor bonds do particularly well. But gold does. Amazing, right? So the 1970s and the 2000s would be examples of that. Those tend to be the more inflationary decades, all else being equal, they tend to be weaker dollar decades. So where the dollar index rolls over, you get international equity outperformance, you get commodity outperformance, you get gold outperformance relative to U.S. stocks and bonds. And so I think especially in this kind of era of fiscal dominance where we're no longer in that kind of 40 year structural disinflation, monetary dominance cycle, I generally think that having that. That inflationary segment in a portfolio is useful. So that can include, you know, I like to describe it either as real estate in some context, but more more specifically it's kind of commodities, commodity producers and hard monies and and so for example that can include energy, right. If you if you map energy prices to inflation, energy prices are kind of like a high beta version of inflation. If you're trying to hedge inflation, one of the best ways to do it historically is is having long exposure to various energy assets. And then hard monies have a more complicated relationship to inflation because they're more specifically about currency debasement. But overall they they kind of protect you from similar types of decades, decades where neither stocks nor bonds do particularly well. We could call them stagflationary decades, we could call them weaker dollar, higher inflation, higher international decades. There's different flavors of these types of decades. But in general, those things that have been under invested in during the disinflationary cycle and they potentially are the causes of the next inflationary cycle that like they're the things that have become scarce, they tend to go up when other things don't. And we've seen in recent years that you know during you know, kind of years where both stocks and bonds do poorly, it's those energy and commodities and more inflationary assets that do well. And so I actually think that one of the best ways that someone can hedge their portfolio that otherwise consists of, say, stocks and bonds would be to own some of those, like energy producers for example, right. Because they're more likely to have a decent year when those other assets have a a poor year. Maybe not every time they have a poor year, but especially if that is caused by some sort of energy spike or inflation spike, that thing can specifically increase those prices while putting downward pressure on either either bond prices, meaning higher bond yields or you know, lower equity valuations due to higher discount rates and things like that. So I do think that's really important. And then having that scarce asset slice, that hard money slice, you know in in older eras that would be gold. Now it could be Bitcoin or it could be a hybrid of gold in Bitcoin, depending on that investor's view, their age, their volatility tolerance, how much they've researched those, you know, two types of assets for example. But I do think that it if we do enter a more sustained period of a more stagflationary type of environment, which doesn't have to be extreme, it doesn't have to be like the 70s. It could be like the 2000s, for example. It could be like the 1940s, which is a decade that I use a lot as an analogue that not many other analysts do. I think it's now it's becoming more common. But that's if you go back to, if you want a third example, the 2000s, the 1970s and the 40s, that'd be another one. I do think that most research shows, you know there's the Dragon portfolio for example by I think Chris Cole, he put that for some years ago. He kind of modelled out 100 years and said what kind of portfolio would do well over that longer cycle, not just this 40 year cycle. There's also portfolios called it the permanent portfolio or other things like that. They kind of model these longer time frames and they generally show that you're having something other than just stocks and bonds. It tends to be very helpful, could be gold, could be real estate, could be energy producers, could be Bitcoin. Obviously all three of us here are are pretty bullish on Bitcoin and so that that would probably be our our slice of choice in that segment. But yeah, there are a handful of other ones that can that can serve a somewhat similar role. Yeah. That's really helpful. And one of the things I struggle with personally as an asset allocator is within that scarcity bucket. It seems to me that some of those assets, maybe including energy, are more macro or growth driven and then others maybe like gold or less so. And so I wonder, you know, does it make sense to get more clever and slice it between the scarce assets that do well when yes, there's inflation but also there's decent economic growth versus yes, there's inflation but not so great economic growth in terms of a stagflationary type of environment. I confess I'm I I'm trying to get better at that at further segmenting the growth versus not growth in that bucket and and I'm wondering how you think about it. I think that partially depends on your conviction as an investor. You know, they're investors that are really tuned into the energy markets. They're investors that are really, you know, they spent 1000 hours looking into Bitcoin, for example, and they're going to have different comfort levels. You know, someone that might want to have a 10% Bitcoin slice of portfolio would be considered very aggressive to someone else who's not not as bullish on Bitcoin or high as high conviction bullish on Bitcoin. And they might think 1 to 3% makes more sense for them, for example. And so partially depends on how many things an investor wants to monitor, how many, how how much they care about smoothing out volatility year by year or their particular propensity to trade. So do they think one year they want to position for this year and then position for next year and then position for the next year after that? Or are they saying this is what I want to hold for this decade and maybe rebound to it from time to time or somewhere in between those outcomes. And so for example what I put forth as a as a portfolio idea to clients airs towards that more diversified view because the last thing I want to do is you know have a A7 year old investor put 20% of their net worth and Bitcoin because they read my work and My Portfolio says that for example. And then they're they're caught off guard and they sell at A at a weak point because it's more volatile than they expected, right. So what I do in my personal account might be a little bit more aggressive say on the Bitcoin side of things whereas I, you know I own decent of Bitcoin, I invest in Bitcoin venture. So I pretty high exposure to Bitcoin that I would not necessarily recommend to people as like a starting point and instead I kind of default towards that more diversified view. I guess if I had to pick two, it would be Bitcoin and energy stocks. Whereas gold is the one that's arguably losing market share to Bitcoin. Whereas energy is important, you know, in in any era as long as the valuations and balance sheets and other things like that are are appropriate. So I I really think it comes down to what an individual investor's comfortable with. So I don't, I don't know if there's a right answer other than to say that naturally I expect over the next decade, unless something goes terribly wrong, Bitcoin to outperform gold, but but probably with more volatility along the way. I like that Take. Yeah, that's a very interesting wrinkle You include there too that that energy stocks might be your #2 because I think that sort of suggests there's enough conviction on your side about Bitcoin that it might shift into the historical role that gold, gold has played and and and eclipse it in terms of role there. But overall it's it's it's wonderful to to hear that you're thinking about this in the very similar way to how Andy is thinking about it. And I think you know the the spirit of the show came from Andy wanting to have a a podcast for wealth managers that talks about how you know for 40 years the 6040 portfolio has been a winning strategy and as a result of that wealth managers are not really thinking about scarce assets. So it's been 6040 zero and looking ahead Andy thinks I think and it sounds like you think that should be different. Yeah, I I think so. And and really the, the one decade in, the exception there was the 2000s, right? So that's when you had gold, have a big run up, energy have a big run up U.S. stocks, they pretty much just got back to their.com highs, especially in inflation adjusted terms, right. So is it not a bad decade, but it wasn't a booming decade for stocks. Real estate was the the, the area that was more booming until it wasn't, but that was one of those kind of scarce asset decades as well. But it was small enough in the grand scheme of things that you could almost just ignore that decade and just keep riding the 6040, which is what a lot of people did. And I think that the question is, could we go into a longer period where that's not really the case, like a, a longer version of the 2000s. And I I do think that's certainly possible and that's an environment where you'd want to own those other types of assets. We've seen for example, you know, we take for granted that the Usus stocks always go up. First of all, it's not always the case. There are long stretches where especially in inflation adjusted terms, stocks don't go up for 15 years or more. And then two, when you look globally, that happens a lot more frequently. I mean Japan goes 30 years without new highs or Europe goes 20 years without new highs. These things happen on a regular basis, especially when you start with very high equity valuations. A lot of foreign capital pushed into your area. So in the late 80s it was Japan. Everybody was like, OK, Japan has taken the world, we all want to own Japan. Their market cap to GDP became very kind of imbalanced in the late 90s, early 2000s, the creation of the euro. It was very optimistic time for Europe. There was quite a bit of capital pushed into Europe, you know, not to the extremes of Japan, but you know, fairly high starting evaluations and high expectations which then were not met. And so you had 40 years, 20 years of not not very good on average European equity performance. And right now, I would argue that the the, you know, U.S. equity valuations are quite expensive. They, it's not new. I mean they've been expensive in the past five years and they've only gotten more expensive. Pretty much the percentage of global capital that could be in the US, a lot of it is in the US, right. So there's not necessarily a ton of capital just sitting there that could decide to come into the US A lot of it's already in the US And so should some of these virtuous cycles start going the other way as they they have done in the past in certain decades, so the 70s or the 2000s or maybe more structurally at some point in the future you could have a shift where the US equity market, you know, maybe doesn't crash, but maybe it just under whelms for 1015 years or more and being in other assets are where it's at. And it could be that those assets go up in price, for example, maybe Bitcoin captures market share and adds A0 to its price for example. Or it could be that you one reason I like energy stocks for example is that they pay good dividends, they have good balance sheets. And so you know some small price gains combined with just ongoing income can make up for like a a flat decade in in equities for example that that don't pay much dividends. And so it's either in terms of outperformance in that sense or the absolute kind of total return that you can get from erring towards scarcer assets or or or another another way of putting it is under owned assets that are also scarce that they're, you know even scarce assets can be a problem if they're over owned like gold was in the, you know the late 2000s decade, you know going into 2011 for example, gold was very over owned. And so even though they didn't make a ton more gold since then they made a decent amount but not a ton, gold went nowhere for a decade because pretty much all the marginal capital that wanted gold was into it. So basically the combination of something that's scarce and historically under owned or under owned relative to potential is, is what I try to look for. So Speaking of opportunities in perhaps under owned assets, you're a general partner at Ego Death Capital, which means you are allocating funds into areas of the Bitcoin ecosystem, which I think we would probably all agree is still under owned, although the recent ETF launch is helping in that regard, what are you most interested in? Are there areas of level twos built on Bitcoin? Are there certain categories of business models that are most interesting to you right now? What what's What's got you fired up and interested in spending time in terms of sectors within Bitcoin? So we're fairly agnostic just because the, you know the Bitcoin start up scene is still relatively small overall and so kind of having a a pretty broadview to go anywhere within that makes sense. Personally, and as a fun but especially speaking for myself, I I tend to like utility over speculation. So even though there could be a big market for speculation, I I prefer to, you know, I have higher conviction on things that I expect to be around longer utility things, things that solve a problem rather than just kind of increase another Ave. for speculation. So I think a big theme over the past several decades, there's been more and more financialization and the there's like a global arbitrage, right. So when you have 160 different currencies and some of them float against each other and pegs break and there's all these different equity markets, all these different real estate markets. If you're a financier, you have you have like this whole playground of options to like short one thing and go into another thing. And when you look at the the crypto scene, it's kind of like the end stage of that, like it's kind of the the pinnacle of financialize everything and speculate on everything. Bitcoin is in some ways the reversal of that. It's basically saying that it with the reintroduction of a sound boring good money, it actually can de financialize certain things, you know, not to, not not to an extreme sense, but it can it can reverse that trend towards ever more financialization and arbitrage. And so I I tend to err towards things that are solving for utility, right. So for example I generally like things that that help scale Bitcoin or that help make it more private. For example, that's one reason I've been interested in the the broad field of Charmaine E Cash. There's not just one company building on it, there's multiple. And what they did was they took 40 year old technology that never really found a home on dollars like they originally tried to do it. But instead they kind of realized that Bitcoin is arguably a much better money to put that technology onto. And that's both a scaling method. It makes fees cheaper, it improves privacy. So even if you can afford base layer Bitcoin, you might still want to use E cash for for example, your daily spending wallet and and things like that. So it kind of accompanies lightning, it accompanies these other systems and allows Bitcoin to scale and be more customizable. So I find that a very interesting area. I think that Lightning infrastructure is, is still a growing era area. A lot of people have been critical of lightning lately. But it's interesting. If you look at for example the River report from later, late last year, we see that even though public capacity has been stagnant, the number of Bitcoin payments and the overall volume of Bitcoin payments has continued to increase in large part because the network keeps getting more and more efficient. And so anything that makes lightning easier to use and it solves some of the well known problems of Lightning I think is a market opportunity. I think DLCS are interesting. You know they kind of blend utility and speculation because you know they can enable things for example like on chain derivatives and things like that. But of course those those also have utility use cases. And so I I think there's multiple areas that are interesting, but basically anything that kind of emerges from concept and starts to get momentum and scaling I think is useful. I think a final thing I would put on it is that when I analyze Bitcoin, I try to take into account timing, right. So I think that one thing you have to be careful of as Bitcoin bowls that are then operating a fund is, you know, we, we might think, OK, the whole world should be doing this. Why is it not doing this yet? Whereas I think we have to have a more realistic sense of timing and therefore say, OK, this might look like this in 10 years, but it might not be a good investment for five years. So maybe it's early for this one area even though I think that's where the puck's going. And you either have to avoid that area for now or if you go in that area, the founders of those companies should take into account that this is a, you know, this is still a while away and so you want to have, you want to build conservatively, you want to have long runways, you don't want to build a business expecting everyone's going to use it next year. You have, you have kind of that long term term plan. Yeah, the history of entrepreneurship in Bitcoin and probably all sectors is is many. Many died on the vine. Many were too early, too early. I I do think we're Bitcoin is like the there's so many cases. Every new startup that's at the bleeding edge of something in Bitcoin falls into the like the Gartner Tech Hype Cycle Classic framework of like everyone sees the potential and thinks it's going to change the world, and then you go through the long through of disillusionment before it actually changes the world. That's true of every feature of Bitcoin. It's kind of like how everything from the.com bubble end up becoming a reality, but like a decade later. Yeah. So all the, all the, if anything, a lot of those valuations that were extreme at the time, some of those companies went on to make new all time highs at reasonable valuations 1015 years later. And it's just that, yeah, the whole sentiment for what was going to happen got way ahead of itself. And I think that that happens time to time in Bitcoin. And you know, one of the skills of a founder in this space or any space, any sort of tech startup founder, one of the skills they have to know is kind of like a race car driver, like when to accelerate and when to slow down. So like when you're going around a turn, you know you want to break at the right time, you want to conserve everything you have, but then you want to know when to when to gun it, when to just go for it and pass someone. And so there's mistakes that founders can make where they're overly aggressive, overly optimistic, they burn through cash too much and then they, you know, they they burn out too quickly. They they, they, the market did not meet their their vision as fast as they did. On the other hand you don't want to be so conservative that you don't push when you really should and therefore you miss an opportunity and get get past. And so part of the things I try to do especially with my view of economics is is to some extent help founders as as no one's perfect. But as you try to navigate questions of of when to when to be conservative and when to OK this is the time pushing hard raise capital and and and deploy it right. So that's it's just one of the overall tricky things of of building something that's that's new and innovative. Well, that makes complete sense. Lynn, maybe I'll close on what I suspect will be a bullish note for Bitcoin. Any comments you want to make on either this year or the next couple years? I know you generally don't like to make, you know, one week, one month type of predictions, but what do you what are you seeing, Let's say 2024-2025 for Bitcoin? I've I've been giving like a two year view, more than a one year view. It's like higher conviction in that period because almost anything happened in one year, whereas 2 years I I think the, the directions matter more, The structural directions are kind of harder to not go a certain way. And so I do expect that within the next two years, we'll probably have another pro, pro liquidity cycle. So we've we've been in this kind of period of stagnant liquidity, so stronger dollar quantitative tightening, partially offset by all these treasury actions we've been talking about you know draining the reverse repo facility, things like that. But I do think that within the next two years we'll probably have another significant up leg in liquidity and one of one of the strongest correlations with Bitcoin is liquidity, especially global broad liquidity measures. So I do think that that will be a tailwind for Bitcoin. I think the halving will be a a tailwind for Bitcoin. You know, one thing I argue is that the the halving, the timing is not always perfect for for Bitcoin bull runs. If anything liquidity correlates with that stronger than the halving. But the halving is certainly still a a factor, especially for magnitude, especially for helping reach higher highs and higher lows as it goes through these cycles. So the fact that the halving is coming up I think is bullish. I think the washout of a lot of the excesses of the past cycle is mostly done, which kind of just sets the floor for Bitcoin. And I also look at the huddle wave, for lack of a better word, there's and there's there's more sophisticated ways to measure too, like looking at addresses that mostly accumulate Bitcoin and and rarely sell Bitcoin and kind of looking at their percentage relative to the whole. But different ways of looking at it is roughly the question of has there been a distribution cycle yet? So generally, stronger hands in Bitcoin tend to sell somewhat into strength. So if Bitcoin goes up 5X or 10X, some of those addresses tend to be trimming their holdings. You know, maybe it's because they're rebalancing. Maybe it's because they now can consume something that they couldn't consume before. You know, they want to buy the house that they couldn't buy before, and so they're selling some Bitcoin to do it. Generally when you see a significant amount of that distribution and a lot of new investors coming in, that's when you're maybe getting closer to a top in the cycle and that's not really started yet in this cycle. So even though we're off the the lows by about double or more, there's not really been that distribution cycle yet. And so far that's very clean compared to prior this stage in the bull market like an early bull market environment where price is off the lows, sentiments improving, it's not really dead anymore, but there's also been virtually no conviction, no like reason for those like strongly held coins to go back onto the market. And so I think that most of the catalysts still point toward pretty good two year returns in my expectation and really that you know the longer I go out, you know the the higher conviction I can be. So I might be very uncertain for the next six months, pretty high conviction for the next 24 months and obviously higher conviction would say A5 year view. Well, Jesse has not started selling any coins yet, so we know that the the Huddle Wave is is still intact. Of course, Jesse never sells any coins, so made too. Bullish Lynn Always too bullish? Yeah, last last last cycle I sold one Bitcoin, but I use it to buy Bitcoin miners, so I don't really count that one. And so I I'm I'm kind of the same way. Still Bitcoin exposure, you added some leverage on top of, on top of your Bitcoin position. Well, Lynn, this has been phenomenal conversation. Thank you so much. Is are there any parting thoughts or anywhere you want to send people online to learn more about what you're up to? So people can check out broken money wherever books are sold. They can also check out Lynn alden.com. Overall, I think that you know this is it's just a very dynamic environment. I described some decades as being macro heavy and other decades as not being particularly macro heavy. And I think this is a very macro heavy decade where things like liquidity, things like geopolitics, these can impact asset prices more than in a decade. That's not macro heavy and they tend to feed on each other, right. So one thing I point out for example, is that sovereign debt crisis are likely to lead to war and war is likely to lead to sovereign debt crises. So you kind of get that vicious cycle and and the same is true like you know, peace can lead to disinflation and disinflation can lead to peace because things are kind of when when orders present it tends to lead to more order until of course something changes it. And so because we're in this, this macro heavy decade with high public debts and like usual liquidity situations and now kind of a breakout of geopolitical conflict, the things tend to add together. So surprises are usually towards more macro not less macro. And so that's that's just my overall kind of framework for this decade is to kind of expect the unexpected, stay humble and and like I said kind of have a have a a sketch of where things I think things are going but then be very quick to adjust that as time goes by. So, for example, I've been using the 1940s as well as other, you know, analogues to to help me construct a a a mental framework or what this can look like. But of course, no one can see the future. I mean, I don't know what what countries will be in war a year from now. They're not in a war now, what wars might end or, you know, what might have happened with country XYZ or surprise assassinations or this happened or, you know who all that stuff has to be kind of adjusted to over time. And so I think that just stay humble, have an outlook and then it just just keep adjusting to new information. Well, I agree completely. I'm very bullish on macro this decade as well, which means I think you're going to be adding a lot of value to a lot of clients portfolios. You'll have plenty to do. So thank you again. Really appreciate it. Hope to do this again with you sometime in the future And on behalf of our audience at Scarce Assets, Thank you and have a good one. Sounds good, and good luck on your podcast. Thank you. Thank you.
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