Gold, Crypto, the Debt Crisis, and How to Survive When the US Needs a Bailout
The U.S. government is nearly $40 trillion in debt, a fact that pretty much guarantees exciting times ahead. Coleman Church on what comes next.
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Chapters:
0:00 Debt Trading and Emerging Markets Debt
8:58 The IMF's Role in American Foreign Policy
16:08 What Will the Banks Do With Ukraine?
17:17 What Is a Debt Crisis?
23:06 Will America's Financial Dominance End?
25:27 The Seizing of the Russian Reserves
26:19 Why Gold Is a Better Investment Than the Stock Market
28:57 How the Fed Is Secretly Destroying Free Market Capitalism
31:23 What Is Deflation?
34:37 How Do We Fix the Deficit Problem?
45:45 How Safe Is the Stock Market?
53:32 How Is AI Impacting the Market?
1:00:00 What Happened to All the Concern About Climate Change?
1:01:45 What Is ESG?
1:07:59 What Is the Alternative to Investing in the Stock Market?
1:12:07 Is Crypto the Next Global Reserve Currency?
1:23:38 Could Crypto Be Weaponized by the Government?
1:24:23 What Do We Know About Global Gold Reserves?
1:31:51 The Unintended Consequences of the 2008 Financial Crisis Bailouts
1:43:19 What Would Happen if the United States Needed a Bailout?
So emerging markets debt originally, the asset class grew out of the debt crisis in the 1980s when money center banks were hung with primarily Latin American debt after the 80s crisis.
Nicholas Brady, Treasury Secretary of the time, came up with a plan called the Brady Plan to restructure the debt, back it with collateral U.S. Treasury strips that would make it more palatable to a broader base of investors.
So get it off the balance sheets of the money center banks and to create more of an institutional uptake of the debt and retail uptake of the debt.
It's a way to clean the balance sheet up and to create, I think there are two impacts.
One, you clean up the bank's balance sheets, get it off their sheet and create a marketplace and a dynamic that allows liquidity for this debt and then creates a whole new marketplace and a value to issue and clean up the country's balance.
So you're doing good for the banks and you're doing good for the countries and theoretically doing good for a whole new investor base.
And that started in the early 90s.
And I kind of walked into Wall Street in the early 90s out of college and I just fell into this market that was starting and really boomed for a while.
So you have collateral, you have risk-free collateral that's attached to the bonds so that to get investors who would obviously wary of sub-investment grid emerging market.
At that time, it was called less developed countries, LDC.
Then it evolved into emerging markets debt, which actually is sort of a misnomer at this point because it characterizes almost everything outside of G7 from single A debt to defaulted debt.
It's grown over the last 30 years to incorporate sovereign debt debt of countries, primarily issued in hard currency, dollars and Euros, down to investment-grade corporates, government-owned debt, like oil companies, let's say nationalized oil companies that would be called quasi-sovereigns, down to corporate debt, all the way down to defaulted debt.
So it's all of credit.
All credit products in a number of countries.
It's ballooned.
But at the infancy, it was really an evolving asset class to kind of clean up the balance sheets and open access back to lending to these countries.
And instead of just being relying on major money center banks for loans that really sat on their balance sheet and weren't that liquid, didn't trade much.
Let's open it up to a global investor base, trade Euro bonds, put in your, not necessarily put in your 401k, but put in your pension funds.
And then hedge funds traded it.
And from there, it evolved from dollar debt into the local currency debt became much more fashionable.
So investors can buy Turkish learner denominated debt or Kenyan shilling denominated debt.
You issue locally, issue local bills to local banks primarily, local bank treasuries.
Foreign investors can access that through typically plain vanilla kind of derivatives, and they'll issue dollar-denominated Euro bonds that are open to the world to trade in dollars.
And what I learned through that whole thing was, because I went through a bunch of these crises, there was the 94 Mexican peso, 97, the Asia crisis, Taibot, if you remember Taiba crisis and Korea chai balls and all that.
And then 98 was Russia.
2000 was Argentina Peso crisis.
And then we had the GFC.
So there was a series of rolling crises all in like the first 10 years of my career.
That definitely kind of wounds your ability to stay perma-bullish when you're going through a bunch of rolling crises.
But what I learned through these series of crises is that what you have to kind of start with is the bazooka, to go with the Moab of bailout that you have to go with way more than the market thinks you need.
Because in the Mexico Peso crisis, if my memory serves properly, they kept coming with not half measures, but sort of just enough of what they thought would bring back some market stability or market confidence.
And just enough creates a bit of spike in confidence and then start to panic again and then come back again until finally they come back with the mega bazooka, swap lines, bailouts, all that sort of stuff.
So that was also early in sort of the Washington Consensus era foreign policy.
I've been, you mentioned Ukraine, and the trip I went to Ukraine was an investor trip.
And part of the purpose of an investor trip is to go and to meet with their finance ministry, their debt liability people, meet with banks, meet with locals, get an assessment.
And, you know, you go to, you'd always, you always go to the IMF, the IMF there, and ask what the likelihood is of the next tranche being delivered.
And, you know, perhaps it's a bit cynical, but 30 years of trade emerging markets will make it pretty cynical.
But I'd always go into those meetings and walk away from those meetings, like, what are we talking about here?
Of course, they're going to disperse the next tranche.
That's what they're in the business of doing.
They're in the business of lending money to these countries because that's what they do and that's where they make their money.
So it's very rare that they won't or they don't unless it's a real sort of turn your thumb up, turn your nose up or plumb your nose at the IMF.
I don't think that's the most euphemistic way of putting it or how they describe it.
But effectively, yes, I'd say backstop or to keep them afloat and to offer them guidance as to how to run austerity programs and get themselves back on the rails so that they can move towards prosperity, democracy, all those sort of things.
So, you know, that's not, that's not, that's not particular to emerging markets countries.
All sovereigns, all sovereigns do that, right?
Everyone in the West is doing that as well now, right?
Living beyond their means.
But some of us, like the United States, are able to run what's called counter-cyclical monetary policy because we have a reserve currency.
So we have a special privilege to be able to maybe be somewhat more profligate than others.
But the money runs out a lot faster in emerging markets countries when you can't finance your debt and you have a dual crisis of both your currency and your interest rates running out of control.
And at that point, you've got nowhere to go other than to your friends in D.C. or Brussels and ask for the backstop.
But in return for the backstop, you need to make some promises about how you're going to conduct your business going forward.
And as you can imagine, cutting expenses, raising interest rates, slowing the economy doesn't generally get people re-elected.
So the IMF theoretically makes money from the interest on the loans, but it's typically below market loans.
So it's not a real profit motive.
Banks make money from this from facilitating the debt, the trading of it, the issuing of it, the fees of issuing of it.
Investors make money from higher interest rates, obviously.
And then there's a subset of investors, like distressed debt investors that will buy a bunch of defaulted, defaulted paper, sit on it, and then do workouts.
Like the most probably stark examples recently would be Argentina.
And, you know, right now, Ukraine will be a pretty significant one as well.
Ukraine is a different one than, say, in Argentina because it has, at the moment, more of a geopolitical put, so to speak, than pick a random country like Bolivia or Argentina.
Although now under this administration, clearly there's more with sort of Monroe Doctrine part two, there's more of a geopolitical put to Argentina.
But Ukraine's a tricky one because there are you obviously up until recently, you had the entire West behind them, right?
And there's this week alone, you've got Larry Fink, Witkoff, and Kushner over there working on stage two, what's going to happen, the peace process, but also the rebuild.
So it's an odd one.
I think that's going to be a combination of public and private because there'll be so much rebuild to do and there'll be a lot of money to be made in the rebuild.
Well, a debt crisis typically is not a debt crisis alone.
It's accompanied by a currency crisis, the debt crisis, the external debt, and then a local market interest rate crisis, which is also debt in itself.
So the local TVOs, local interest rates will skyrocket at first to try to raise interest rates to try to attract money to the currency to stem the route on the currency.
And that can work up until a point until you lose control of both.
So what a debt crisis looks like is currency, runaway currency devaluation, runaway higher interest rates, which clamps down the interest rates, clamps down any lending locally, clamps down any local growth, creates defaults on domestic businesses, the currency running away depending on the country.
But all countries, it causes inflation, but countries that rely on imports certainly even more, right?
Everything you're bringing in is going to cost far more in your local currency.
So it's really a spiral.
And then current, typically what happens is bonds will drop to a level that's called recovery value.
And recovery value is effectively what is a term really more from, I say, the corporate credit markets where if you were to strip everything down and sell it for parts, what could you get?
But they have recently, you know, Saudi, for example, because they're going on a massive expansion to diversify themselves away from their core business, which is oil, which is actually a very wise thing to do.
Because if you look at if you look at countries historically, Venezuela is probably the most extreme example that had an opera.
There was a single A-rated country in the 80s.
I went there in the 90s, I mean, gleaming infrastructure, like incredible highways, beautiful hotels, amazing, amazing place.
And they never took the oil wealth and diversified away from it in a meaningful way.
And then when you have an oil shock and you've taken out too much debt against the, let's make up a number, $100 oil price and oil drops to 30, you're all upside down.
And so that's what, you know, it's what MBS is looking at for a multi-decade plan to build, you know, build these cities, technology, innovation centers and so forth, which is clearly learning from the past.
They're borrowing to do that, yeah, but they're borrowing at fairly cheap rates.
There's also a concept that you want to borrow as the sovereign level to set a benchmark against which your companies can borrow in international markets.
The broader the investor base, theoretically the cheaper the interest rate.
So they'll set a benchmark level and then a corporation can borrow at that rate plus 20 basis points or 50 basis points.
And if we continue to, I mean, what concerns me, what concerns me longer term of the potential to lose the reserve status is if we lose our military dominance, that's not happening, obviously, tomorrow, the next day.
There's a few things that could, obviously.
I mean, you're more versed than I am in this whole notion of modern-day drone warfare, but that certainly levels the playing field very, very quickly.
You see what the Houdies were able to do with not so sophisticated and not very expensive drone technology.
But that's, you know, that's, that's the, that's a purview for some military expert, not me.
So the United States can continue being indebted to the degree that it is because it has the world's reserve currency and it possesses that because of its military dominance.
Yeah, so quite simply, the Western power seized the Russian reserves that were sitting in the New York Fed.
I believe it's 300 billion is the number that they seized.
And the Europeans still want to use that for rebuild and so forth in Ukraine.
Now, not to get into who's right and who's wrong in the Ukraine-Russia conflict.
That's not the point of this.
The point is it sets a precedent that's a scary precedent.
That is your money that sits in U.S. treasuries or gold in our Federal Reserve is not safe if you run afoul of the powers that be.
So there's a very obvious and natural reaction function to that, which is powers like India, China, and Russia stop buying treasuries and start buying gold.
The gold call was certainly we have inflationary, you know, inflationary pressures we can talk about.
But even more to the point, it seemed obvious at that point that that's the trade.
Debased trade is that the currency that we, the currency that we all use and think about every day has been debased against gold, right?
The value of the dollar.
I think oftentimes people look at the dollar, is the dollar strong or the dollar weak.
And what people are looking at is effectively the DXY, the dollar index, and that's a basket of major currencies, or it's heavily weighted to the major currencies, Euro, Yen, Canadian dollar, Aussie dollar.
And it's really at this point kind of a ridiculous comparison because all of those countries are sort of in a basket case with their debt issue and their growth.
But if you look at the dollar versus Bitcoin, or if you look at it versus gold over the last 10 years, it's pretty clear that the currency has been debased in those terms.
So if you look at it in that terms, the stock market returns don't really actually look quite as great, as wonderful if you're looking at what a dollar would, how many dollars it took to buy an ounce of gold 10 or 15 years ago versus today.
And all of that, or some of it, is downstream from the decision by the Biden administration to freeze Russian assets because that scared the crap out of the rest of the world.
But there's also, I mean, I think the big move in, I mean, if you look at what we did after the GFC in terms of interest rates and global financial crisis.
Where what we did, bailout, extraordinary measures, fiscal and monetary, keeping interest rates at zero.
Emergency measures, keeping rates at zero that remained in place for a good 10 years.
Like, I don't know how you state emergency measures at zero interest rates when the stock market quadruples over, turples, quadruples over 10 years.
One is if you believe in a free market capitalist system, you believe in the pricing mechanism.
The free market pricing is everything.
The price of meat at the farmer's market is set by the free market.
Who's willing buyers, willing sellers at a fair price?
Once you start to put in price controls, the Soviet Union, it's definitionally, we don't have free market capitalism.
At the core of free market capital, the price of money.
So we artificially put price controls on the price of money.
It's the way I look at it.
We artificially kept interest rates way too low at zero when the market didn't necessarily demand the conditions.
Maybe at the time, certainly five years hence, 2015, I don't really see why we needed to keep interest rates at zero for that long.
So yes, I think the reason was, in my opinion, the reason were the people at the Fed, the dozens and dozens of PhDs at the Fed making these decisions, probably to a man, to a woman, wrote their PhD on the Great Depression and what the Fed did wrong and dealt with the horrors of deflation.
So really, the Depression was really a result of deflation, right?
So that's the greatest boogeyman of all.
So anything you can do to fight deflation, deflation is the real killer, especially when you have an excessive debt load.
What you kind of want is a gentle inflation to help inflate away the debt to show a gradual, the benchmark, the target Fed target for a long, long time has been 2% inflation.
They soft up that to three recently and, as you know, just cut rates this week, even with core PCE at 2.8.
It depends on who I is, who the I asking that question is.
So if you're you and your wages are constant and you've paid off your house, certainly deflation would be great.
Go to the store every day and things are cheaper.
I mean, there's deflation in certain sectors, right?
For years, there's been deflation in all technological goods, right?
You can get a flat screen TV for 400 bucks.
So for you, Tucker Carlson, it would be wonderful.
For the economy as a whole, that's really run on hyperfinancialization and debt.
If you have a deflationary spiral, you are going to be left with a bunch of defaulted debt.
So where we are right now, you know, to pivot, I guess, to where we are here with the U.S. is I think when this administration came in, they messaged pretty clearly that the move was going to be away from the Biden administration and more towards some austerity.
There would be some tax cuts, but it would be offset with spending cuts.
Doge, Elon, et cetera, people got very excited about potential cuts.
And then I don't know what happened shortly into the administration, but there was clearly a pivot that I didn't see coming.
And it was around the time of the tariff, the tariff tantrum and the big sell-off in the stock market.
But out of that seemed to come that there was a shift towards what people are now calling run it hot, which is forget about tamping down spending, little tax cut.
Maybe we'll take some slower growth, but we'll reduce the deficit.
That'll be good for the long term.
And instead, let's just run it both ways, fiscal and monetary.
So let's cut rates and let's cut taxes and let's spend more.
And I don't know what happened or if that was always the plan, but or someone saw under the hood and said, look, the only way, typically there's two ways to get out of a debt problem.
You grow your way out or you inflate your way out.
And it seems to me we're going all gas, no breaks on both.
Like we'll just we're going to grow and we're going to we're going to let some inflation go and that's the way we're going to get out of this debt issue.
And I think Trump this week was saying I could see 20, 25% GDP growth.
I mean, that's a nice number, but that would certainly help our deficit issues.
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He tried to keep cutting rates into an inflationary environment and put pressure on the central bank to cap rates, but the free market always, you know, I think I always say you can suspend the laws of science, of physics, of gravity, of market economy for a time.
But ultimately, the gravity always works.
So the free market always works.
So, no, it didn't work.
They have runaway inflation and extraordinarily high interest rates.
And he's been under a lot of pressure domestically for reelection, obviously.
But I think you go back, you started with ideology.
The answer is always going to depend to an extent on what your ideology is and what you're willing to sustain in terms of paying short-term to long-term.
And for me, I was more a proponent of what I thought the plan was going to be, which is some deficit cutting through spending cuts.
And from what was coming out of Doge early, it seemed like there was plenty of fat to cut that would have been politically rather popular, I think, especially with the right PR guys behind it.
You know, guys were getting out there every week and on Twitter and going on podcasts and talking about sort of the absurdities they were finding.
Now, maybe it's a drop in the bucket overall, but I think it was a worthwhile exercise to go with.
I mean, so the idea always was that federal bureaucrats, public servants, as we call them, were serving, were serving, and they were making less than their private sector counterparts, and there was suffering involved, but patriotism impelled them to do it.
So they did.
And now you look at the numbers and it's like, no, Your federal employee on average makes way more than your private sector.
But then, you know, of course, the population of federal workers or federal contractors, which are, I mean, there are probably as many federal contractors.
No one ever says that, but there are.
Deloitte is a federal contractor, right?
So there are so many of them now that we maybe have reached that tipping point where no administration can pivot against its own employees because they're voters.
So, and it's also extraordinarily difficult to get a real handle on where the numbers are because we're not releasing any numbers right now because of the government shutdown.
So, you know, the Fed's flying blind to an extent.
You can rely on certain private sector indicators that are kind of shockingly bad, frankly.
When you look at consumer loan defaults, credit card balances, credit card, the late credit card payments, auto loan defaults.
I think October was 185,000 announced private sector layoffs.
I think it's worse since 08.
So you have a situation where you've got to, you know, the U.S. can the U.S. economy is at 70%, 69%, 70% consumer-led.
So if we're going to rely on the top 10% to continue to spend on Gucci bags and trips to St. Bart's, I just don't know how sustainable that is when the lower end is, you know, swapping out New York Strip for pork loin.
And Walmart numbers are great because middle and upper middle class is shifting from the publics to Walmart shopping.
Like everyone's getting squeezed.
So I don't know that the growth is there.
The growth can come.
Maybe the growth can come with these tax cuts, with interest rate cuts, with certainly with deregulation will help and all this promised foreign investment.
It does seem from an ignorant outsider standpoint, which is mine, that there's an awful lot of emphasis on the public equities markets and like the stock market's the measure of how we're doing.
Whether or not that's a good measure, you know, I don't know.
Maybe not a perfect measure, it feels like to me.
But how safe is the stock market in the United States as a place to put your money?
Well, it is the largest, most liquid stock market in the world.
It does attract not just domestic savings, but huge foreign investment.
For, you know, there's an expression that says money goes, capital goes where it's treated best, and we still do treat capital the best in this country.
Extraordinarily dynamic markets from, you know, venture cap to private equity to public markets.
And that's something we should all be very proud of.
And it helps, you know, grease the skids of global commerce.
And that's great.
There are some concerns, clearly concerns about the current valuation of the equity market and the structure, the economic structure of the flows.
So one, there's a massive concentration risk.
It was the FANGS.
Now it's the MAG 7.
The top 10 Companies in SP 500, I think, have accounted for something like 42% of the gains year to date.
The big get bigger.
You had NVIDIA at one point tipped over $5 trillion market cap, which is, again, a hard number to really get your head around.
At that point, I think it was larger in market cap than every market in the world, except for U.S. and Japan, entire market cap of any other trade, any index in the world.
Except for, I believe, U.S. for sure, and I think Japan, again, I could be wrong, but something in that state, in that you get the idea of what I'm saying.
And that, you know, we don't need to go into all sort of the price to book and price to sales and expectations of future revenue, all that sort of thing.
You get into a market psychology event where stocks that go up continue to go up because people chase momentum.
I read something yesterday that the explosion in options trading, the volume options trade is now $3.5 trillion a day, which is larger than the entire market cap of the Russell 2000.
So 2000, like the 2,000 mid small mid-sized companies, 300 million to 2 billion market cap companies in the United States.
And that doubled, I think, from 2000, from 2022, and then doubled again.
So an option, my understanding of an option is an option is a bet on in what direction in the direction with and you get an immense amount of leverage immense amount of leverage.
How do I so let's say that you want to buy a call betting that NVIDIA is going to go up between now and the close and at the money NVIDIA call, meaning let's say it's trading at 177 right now and you think it's going to go up and the price of the at the money, the 177 call is till now to the end of the day is 75 cents, let's just say.
So you're betting that it's going to go up more than 75 cents.
If it goes up $1.50, you've doubled your money.
You're not just making 75 cents on 177, which would be whatever third of 1%.
You're making 100% of your money.
So you're getting all you can lose is the premium, the 75 cents you pay for that option.
But everything over 75 cents starts to run exponentially in terms of profitability.
So people are making an insane amount of money on in this run-up on options, zero-day options, and they're doing it from their phone.
But again, with the gamification of, you know, crypto trading and Options trading and Robinhood, and with gambling, you know, DraftKings and all that stuff.
It's sort of part of the culture.
And it all started in COVID or people at home with extra STEMI money and not much to do.
And the market was ripping and people got hooked on it.
And people keep doing it.
And generally, people are doing quite well.
Retail has done better than institutional, largely speaking this year.
But the other part of the structure of the market that's somewhat concerning is just this passive flow.
So then there's a guy named Mike Green, who you should probably speak to, who's done the best work on this.
And passive flow, basic 401k.
If you put your money in every two weeks, your money's automatically going to your 401k.
And it's you click to that, it's auto invest.
If you go and you look at most companies' 401k options, their options on what to invest, and then you break down each one of them, basically every single equity option fund you have has the same high concentration, the same five stocks.
So, you know, Apple, Microsoft, NVIDIA, whatever.
So you don't know that necessarily.
You don't really know what you're buying or what percentage of the fund is in those.
It's very highly weighted because the higher the market cap goes, the higher weighting, the higher the weighting goes, and on and on and on.
So it's an auto, it's just an automatic machine-like underlying bid to the market that continues to the big, the big get bigger and bigger and bigger.
And you can say, okay, what's wrong with that?
These are great companies.
They're multinational.
They have great business models that were low capital intensive and high margin.
And they're basically a lot of them are monopolies in their space.
Okay.
Well, two things can happen.
If unemployment rises, if you lose your job, you're not putting your money in 400k.
If you lose your job and inflation keeps ripping, you might have to withdraw from your 401k, which creates a vicious cycle the other way.
Too much concentration, and the structure of it perpetuates it.
And then you add on the leverage of the option trading with the momentum that keeps this trade going and going and going to where you get to $5 trillion market caps.
Now, there'll be a whole coterie of Wall Street analysts that will justify why $5 trillion makes sense because of this, that, and the other thing.
What if they're of the five, eight, 10 companies that have the bulk of the value, the plurality, the value of the entire SP, if one or a couple of those companies dramatically reset in its value and its share price, what would happen?
Well, you're seeing it kind of right now as we speak is the AI trade is starting to lose a little bit of favor.
There's starting to be some questioning on the AI trade.
And the market can't continue to trade up when it's trade-up if one or two of the major components are falling out of bed.
I mean, this week it's been Oracle and last night, Broadcom took the market down.
NVIDIA is starting to weigh a little bit.
So we're very tech sector heavy.
And the other thing that concerns me to an extent about not just for public markets, but for private credit markets is that with this AI build out and this data center build out, obviously an extraordinarily capital intensive.
And what I was speaking about before, about how a lot of these Mag7 countries had companies had it, a great model of being capital-like, they're now becoming quite capital intensive.
You're building physical things and you're spending, you're borrowing a ton of money.
And this is what the problem with Oracle is right now: is they tend to borrow a lot of money.
And they're borrowing a lot of money to build things and build things that depreciate in value over time, right?
Like a chip that you buy.
A lot of this, a lot of the financing that's been going on too has been people have been using collateral, these chips as collateral to borrow against.
So there's borrowing and borrowing and borrowing, but you're borrowing against a chip that naturally is going to be replaced by the next evolution.
So that's a bit of a concern about the value of the collateral.
And when that daisy chain unwinds, it could be ugly.
But the other thing is that there's so much, there's so much borrowing in the private credit markets for these hyperscalers and these data centers that it crowds out, there's a finite amount of borrowing available, right?
So it's crowding out borrowing and investing in other areas of the economy.
And that concentration risk concerns me to an extent as well.
And the difference, a lot of people have made the analogy to the 99, 2000 tech bubble.
And, you know, the good news coming out of that down the line is that, okay, we all got hyped up on the internet and we got carried away with pets.com and things like that.
But the truth was, in retrospect, we weren't hyped up enough about the internet and what it would do and how it would change the world.
But there's still a cycle that comes along where there's the euphoric cycle and then the crash cycle.
And then on the back end of that, you have the winners that survive, like the Amazons, right?
That you could have bought for practically nothing in 2002.
And then there were, you know, companies like similar to me to this, the hyperscale data center were the fiber comp the fiber companies like Global Crossing, Worldcom, right?
And those were bubbles that crashed.
But what were they doing?
They were laying fiber cable for the internet, which, okay, we had a malinvestment boom.
The companies crashed, but the cable still exists and the cables are in use today.
And the cables were very valuable and the cables didn't depreciate because the cables have a useful purpose.
So people are making the same argument now.
It's like, okay, we may go through that cycle as well.
It's maybe get a little euphoric.
There'll be winners and losers out of this and it'll be fine down the road and AI is not going away.
I'm not here to disagree with that.
But there's a slightly different component where you're building these things that aren't that could, you know, you're buying all these chips that could depreciate.
And I think there's the worm's turning a little bit on the efficiency of a lot of these and what they can and can't do.
And people say, you know, I saved a half an hour or I saved an hour coding something, but then it took me three hours to check to debug the work that the actual claw or whatever did.
But the real thing that we're going to run into is we don't have enough power.
We don't have an electric and we don't have enough water to heat and cool all these things.
That's just point blank.
And even, you know, Jensen and Altman and those guys, they'll tell you that.
And that's why they're going hat in hand to DC and trying to make, you know, trying to make, trying to make the case that this is a critically important industry that may need some government backing.
But even if you get that, the fact of the matter is the only way you can really power these things without spiking electricity bills another 300% and then creating a whole another political problem domestically is you need nuclear power.
And, you know, we can't, we have plenty of natural gas that can work as a stopgap, but you need nuclear power.
And it's a 10-year build out minimum to get the nuclear power that you need.
So when do we hit the somewhere between there, here in that 10 years, we hit the wall in terms of our ability to get the electricity for these at this growth rate.
Now, is this growth rate accurate projection?
Maybe it's not.
And if it's not, then we need to see a lot of these companies come off in value.
I saw something about, I saw something that Nature had, Nature magazine had to revoke a paper they did a few years ago that said that climate catastrophe was going to create an economic catastrophe.
So how did that, like as a guy who has dealt in markets, like emerging debt, pretty pure, it's like a debt trading is like a pretty pure market, right?
So as someone who's spent his life in that world and who clearly, you're clearly like committed to the idea of markets, like you believe people should be able to decide what they're going to pay for something and what they're going to sell something for.
I don't know that, funnily enough, I don't know that even the experts can actually define it.
And I'm not joking when I say that.
When I, at my last job, we would do a conference every summer in Europe for investors, and we'd have a series of roundtable topics.
And the one topic that was standing room only sold out every summer in Europe was the ESG, without question.
It seems the U.S. has definitely faded quickly from that, but Europe still seems very hooked in, very hooked in.
It's not faded there at all.
It's definitely a part of the investment process.
But what's fascinating is if you go to 20 clients in London and you talk about ESG, you will get a different answer from each ESG specialist as to, especially in emerging markets, it's a very difficult thing to work your way around the ESG constraints when most of what emerging markets are based on are hard commodities.
There's also obviously the governance component, the G component.
It's not always maybe up to Western standards with the G.
But just like conceptually, the idea that factors that are not really relevant to your fiduciary responsibility, which is to maximize returns for shareholders or something related to that, like, I don't know.
That's just an interesting concept.
Like, how did that happen?
It's that my personal guilt as like an educated Westerner supersedes your right to have me handle your money responsibly.
Well, it's straight government intervention is what it is.
It's government.
It's government.
It's ideology.
If you are of that mindset where you believe in control economy, it is the dream of all dreams to incorporate your ideological bent into the last thing that should be left alone, which is the free market.
You now inculcate all of this ideology into every decision-making process all the way down to setting the price of money, which to me, I know I'll run afoul of plenty of people on this, but to me, that's a bridge too far.
That's not the place for it.
But once in, it's impossible to get out.
Once you go into that's involved in all the investment processes, it's really hard to take it back out again.
The question is, how quickly does the market rotate?
How do the rotation trade?
So we're starting to see that actually the last week or two, you're starting to see small caps really rally, DAO components really rally, old economy stuff really rally as tech is being soft.
So there's a theoretical way you can thread the needle there.
But with the concentration risk and with the size of just actual size of these companies, it's going to be a drag on the overall market as a whole, best case scenario.
One of the reasons the stock market, as my theory, is so big is because it's the easiest, and as you said, most liquid way to park your money with some hope of return.
And I don't really think Americans are encouraged to think of other ways.
And as As an emerging markets guy who's been able to look into other countries, frontier markets, et cetera, and how they look at it, there's always from, if you're an Argentine or a Brazilian or Turk, you're always looking outside of your domestic economy, domestic market for opportunities.
Well, the problem is the great obvious trades run a lot already, right?
Gold and silver is already run a ton.
So long-term investing, let's try to look at stuff.
The ideal cross of what sort of fairly valued or cheap or distressed or out of favor that people haven't really caught on to because you see a trend that's about to emerge.
Right now, we're in full-throated recognition of the debasement trade and silver is breaking out for not for that reason, but also there's a notion that there may not be as much physical silver out there as derivatives have been written against.
So it's just been a bit of a bit of a squeeze going on.
Two weeks ago, the Chicago Mercantile Exchange shut down for a cooling issue overnight just as silver was spiking, which was kind of convenient.
So yes, there are definitely more derivatives written against all commodities than exist, but no one ever asks, not no one, but typically if you're an investor, you don't ask for physical delivery of the commodities.
And I'm going to find out where that stuff's buried too.
So you don't typically ask for the physical delivery of it when you're trading in tens and hundreds of millions of dollars of derivatives against you cash settle your derivative against mine, cash settle.
The loser pays the winner and you move on.
So where do you go?
At this point, given where valuations are, I think you go abroad, you look at multiples on U.S. stock market where we are trading historically.
Extremely high PE ratios for the index on historical basis and very high against foreign markets.
I think what this administration's doing in Latin America particularly, as I mentioned earlier, sort of Monroe Doctrine 2, there's clearly a movement afoot to To stabilize the region and to partner with those that are critical to us, I would imagine that'll open up a ton of investment and growth there.
There are plenty of Latin American countries that offer pretty cheap historical PE ratios.
So I think it's probably time to diversify a little bit out of the U.S. and diversify out of tech heavy stuff.
That's where I would go simply.
I think you still have to own some gold and silver.
Just have to own some, but just not as much as you wanted three years ago, given how far it's run.
That's why I asked, like, it depends on who you are.
I think productive agricultural real estate anywhere is always a good investment, sort of a disaster hedge.
But yes, land is a whole yes.
I don't think I'd want to be rushing into blue cities and paying high interest rates and taking out a bunch of debt on overpriced co-ops in New York City necessarily.
So you made the point that for a bunch of different reasons, Ukraine war, but other structural reasons, we are on the path to losing our privilege as the holders of the global reserve currency at some point, right?
I think people bundle together the notion of blockchain and cryptocurrencies.
And what I'd say, I can't necessarily make a pure prognostication on any one particular crypto.
I mean, it's been a phenomenal exercise and wonderful to see.
It's sort of like adhering to Austrian economics to see the experiment work.
I don't think we want to get into the dynamics of individual cryptos.
I think at some point, probably Bitcoin as a crypto will be usurped just by sort of a better technology.
But put that aside, what, to me, unequivocally, and the next venture I'm going into is related to blockchain is blockchain is here and is not going away whatsoever.
And blockchain is going to transform the financial services industry, pretty much everything we do financially transaction-wise.
And fortunately, we have the wind at our backs with this administration and David's and Genius Act, et cetera.
And nobody who maybe was somewhat skeptical three, four years ago is at all.
I mean, Larry Fink is an example, I think he continues to say all assets are going to be tokenized.
I think just this week, DTCC said all assets are going to be tokenized and put on the chain.
And that's going to remove a lot of little frictions in the system, extra costs that don't need and extra time lags that don't need to exist.
So the cryptocurrencies, cryptocurrencies exist with the layer of the blockchain.
You can't have crypto without the blockchain, but the two are somewhat distinct.
Everything we do is reliant on, except for you coming over in your golf cart with a bag of gold coins for me is reliant on energy to that extent.
Is it safe?
Is it hackable?
The theory, you know, one of the theories being proposed of Bitcoin, I'm not really sure if this is, you know, Bitcoin's had a pretty decent drop from high 120s to around 90.
You know, part of the part of the thing being floated is that with quantum computing making the leaps that's making that Bitcoin might be able to be hacked at some point, perhaps.
But again, I'll put that separate to the blockchain.
The blockchain, deeply encrypted, safe, these are the rails on which everything's going to run.
Sorry, one of my best friends runs a title company in Maryland.
But, you know, he's my age, so he's probably almost done anyway.
But that's just an example.
Like, why do we need to pay five grand for title insurance?
I just sold a house in Westchester, and I found out that there was from two owners ago, there was a, according to paperwork, there was a $650,000 mortgage still on the property and that never got expunged.
But the brokers just kind of waved it back and forth and everyone just kind of stamped it.
Like that stuff, that's just an example that everyone can kind of relate to.
But also why we'll be able to send money immediately, you know, with no, you know, if I send money to you, you'll immediately get the money, get the care, get the interest on it.
Why should I be paying $30 to send a wire from JP Morgan?
Like that's pure $30 of margin, like all that kind of little stuff.
And so the company that I'm starting, it's going to be starting with Jan 1.
It's called Liquidity.io.
And we have one of only six fully registered licensed alternative trading systems, which is a trading system that's going to be able to trade all these tokenized and financial assets.
And what we want to do is help democratize the financial markets and tokenize all kinds of assets.
But we're working with our backer just made some acquisitions with a couple of consumer loan businesses, auto loans and manufactured homes, mobile homes, for example.
There's a great story.
These two young guys in Dallas, they're working at JP Morgan.
And with their fourth bonus, they said, we're not going to blow it this time.
Let's buy some rental property.
And they couldn't find any rental property.
They were in Dallas.
So they just cold called like 250 mobile home parks and they found one, put in 50 grand, turned around, it was a $6 million trade.
They were going to do a bigger one.
And what they realized they were better off doing was revolutionizing the lending business for mobile homes.
Because guess who the biggest player in that is?
It was Warren Buffett.
So great business, obviously, high-margin business.
But what I didn't learn until recently is that there is no refi on a mobile home and there is no lending available on a secondary purchase.
So if I take out a loan for my mobile home and then want to sell it to you, you can't get a loan.
You have to buy it for cash.
And if rates go down from eight to four, I can't refinance it.
So they're going to, with their business and tokenization, they're going to eradicate all kinds of costs, which and create these two separate markets, which is a solution to, is a partial solution to the home affordability crisis.
In simple terms, say a crypto, like a like a Bitcoin is sort of a free-floating currency.
The market dictates.
A stable coin is more like a pegged currency.
So pegged to fiat.
this case uh like tether circle they're pegged to the u.s dollar and try to keep it stable at parity one-to-one uh so what they are is and there are national currencies like this There are countries like the Bahamas or whatever.
So the stable coins, they try to keep parity with the dollar and they are theoretically backed by treasury bills.
So money comes in, the money gets invested in treasury bills one for one.
You're backed by AAA rated, short dated, no risk.
But these become a conduit for all these transactions on the chain automatic through these.
So it could go through the stablecoin and into other things from there as a sort of a conduit.
Now, that's all good and well, as long as we're sure that those stable coins are taking dollar for dollar and investing in what they say they are without a lag or without moving too far away from that.
Tether at the moment, it seems to be diversifying away from strict T-bills and they've been moving into gold, which is working for now, but yet to be determined how that works out.
So that creates a natural bid for our treasury bills, which is a great thing for Beset and friends because that creates a whole new demand vehicle for our treasury debt on the stable coins.
And what these stable coins do allow for, again, a lot of emerging markets participants is allows them to quickly access dollars and avoid depreciation risk in their own country.
So you're getting a lot of foreign money into stable coins that will be bid for T-bills, which should hopefully help with our funding.
Is there any way for the U.S. government to use stable coins as a weapon in the way the Biden administration used Russian assets at the New York Fed as a weapon?
That means if you automatically revalue our gold reserves to market, we automatically have a higher effective capital base that should make us more credit worthy, for lack of a better term.
Well, I would say there's two components in the emerging markets trading business.
There's the trading thereof in sort of the big money centers like Hong Kong, London, and New York.
And then there's the domestic stuff that happens.
Now, I could say in terms of chicanery, there's a clear AD BC line at the global financial crisis on how we conducted business across the street in all products pre-GFC, post-GFC.
You have a front seat and you're participating in global events every day.
Mark's moving up, moving down.
You're working with a truly diverse bunch of people from all walks of life that are as close probably to meritocracy on trading floor as you could get.
And it was very clear what the motivator was.
It was making as much money as he could every single day.
And there was nowhere to hide from that.
So as a young person, it couldn't be a better learning experience because every day at the end of the day, there's a number next to your name.
And whether it was through your good luck, bad luck, hard work, whatever, the number doesn't lie.
And that's the number.
And it's just a great way to learn and to have to face yourself and improve upon yourself.
And, you know, trading forward was guys, you know, like PhDs from Princeton to guys that dropped out of college.
I found that the best traders, there's investors and there's traders, right?
Different, it's a different mindset.
The best traders I find were guys like to think who thought more in two dimensions.
So if you thought in three dimensions, you could outthink your, you could outsmart yourself way too much.
The what-ifs and oh, but.
And if you're in one dimension, you're just not at the IQ level to function.
So the two dimension that kind of took the factors of play, saw what the trend was, took it at face value, didn't overthink it, went with it, and wasn't too much, had enough risk appetite, but wasn't too much of a cowboy, I guess would be the perfect trader that I saw.
And I think there's also, you know, a lot of going back to the global financial crisis is such a sembla moment in this country in a lot of ways because it actually, we made this deal with the devil.
And I, you know, I, I, I'm a beneficiary of the bailout.
I worked at a big bank that got bailed out.
And I will make no, I won't, I'll never deny that.
But in doing so, we let the Trojan horse in and we married the government effectively.
And we came in and they basically wrote our policies.
They wrote our policies for us and from HR policies to recruiting policies to all the regulation and the stuff that I saw from a distance in terms of sort of arbitrary fining for violations was kind of gangster-like.
And I saw a lot of good people sort of thrown on the funeral pyre sacrificed, just tossed out.
Like, let's, you know, this guy was in violation.
These guys weren't, but they were on the same Bloomberg chat.
So let's give like 10 bodies.
Everyone's fired.
Everyone's career's over.
It was, it was a, that was a bad, that was a bad time.
It was a bad time.
And so everyone started trading scared.
People started trading scared and it lost the joy and it lost the.
You know, if I were going to give, if I were going to give a more sort of generous take on it, you know, the CEOs really didn't have much of a choice in some regard.
It was like, look, here's the deal.
You could keep your job and keep making $25 million a year.
Or if you agree to this fine for mortgage-backed securities or whatever, LIBOR rigging or whatever it is, this arbitrary number, you could keep your job and you can keep your salary or you can get fired and the next guy will agree to it.
And they kept it afloat.
And they had to be in good stead with the government or the fines and the regulation would just come and come and come, come.
But once you get bailed out, once you ask for the bailout, they own you.
A lot of nice new regulatory buildings were built.
I think also one of the great stories that hasn't really been, maybe this was for you, one of the great stories that should be investigated is where did the proceeds from all those post-GOC fines go?
Because I saw some stuff in around the time that was kind of staggering as to where it went.
And obviously it went back into building more of the regulatory bodies, like more SEC regulators, whatever.
But I think some of the money flowed to some very specific political organizations.
What actually reminds me of something for the part of the previous conversation, which is, you know, people say you never know when you're in a bubble until it's over.
No, if you fought it in 05, you were out of a job pretty quickly.
Like, it went on for a long time.
I could tell you the reason I want to bring it up is, again, the parallels today is, you know, so in 07, I had been on trade and bonds for whatever, 13, 14 years.
So not the smartest guy, not the most quantitative guy, but been around enough to trade enough stuff to understand kind of how stuff works.
And all this stuff they're coming through with like CDO squared, it's CLO and like synthetic this and that.
And like, I didn't really understand it.
I didn't have to trade it, but like, I didn't really understand it.
I didn't really want to get into it because I didn't need to.
But it's just thinking if I'm already in the whatever percent of financial experts, just by nature of where I sit every day and it doesn't smell right to me, something's not right.
Also, I'm just, I'm, I'm substantially averse to any acronym.
And then when you take the acronym and square it, you know, you're in trouble.
But, but then this, this latest go-round the last couple months with all this circular financing and hype with all the AI companies.
And every day, you know, somebody's buying chips from somebody who's going to lend the money to buy the chips to invest in the scaler, who's going to do this.
Like for every day, four companies are, you're like, you know, I suppose I could figure that out if I sat down and really tried to, but it gives me a headache just even thinking about it.
And clearly it smacks of some kind of, it smacks of desperation or something.
That's just my, my gut is just having, you know, the sniff, having been around a long time.
It's like, dude, if it doesn't smell right, it's just, it doesn't smell.
And that's, I was with my wife in March of 2000 at a dinner, at a lunch with a guy who was chairman of a major major broker dealer, famous, famous broker dealer.
And we're, she's 30 at the time, never invested in anything.
And we're sitting next to him.
He's like, so what do you, she's like, oh, I've been day trading stocks.
He's like, explain that.
What do you mean you've been day trading?
She's like, oh, yeah, I just buy whatever IPOs.
Just, if it comes out, I buy it.
Do you remember that in 2000 on the IP front?
Everything just went up.
Like, she's like, Yeah, I just, I just buy it and I sell it.
It's awesome.
And I saw, I saw his eyes just go like this.
And that was like, that was like the, that was like the Joe Kennedy shoeshine moment.
I mean, it was literally like February or something.
Whenever people are going hard on like Cape Coral, Florida real estate, who don't know anything about real estate, not against Cape Coral, but you know what I mean?
And those were the artists hit zip codes.
Yeah.
So you think it's pretty obvious, is what you're saying?
I have to say, though, just like with the baseline fact that you spent your life trading emerging markets debt, I think if you're uncomfortable with something, it's fair for the rest of us to be uncomfortable with it.
Yeah.
Last question.
You've been through all these bubbles and bursts and debt crises and bailouts.
And at the end of every story is the United States or U.S.-aligned institutions like the IMF coming in and kind of saving the day.
Is that if that's that's the thread that runs through all these?