➡ Joe Calusari is a guest on Mark’s show with whom Mark has had several conversations on Twitter. They plan to discuss their opinions which might be contradictory.
➡ Joe has been absent from Twitter due to his account being hacked, and he possesses a different perspective as a commercial litigator working in the Bitcoin/crypto space.
➡ Joe highlights his role as a co-chair of the fintech blockchain and cryptocurrency practice group at Amundsen Davis, a firm that deals with a significant amount of Bitcoin/crypto related cases.
➡ Joe provides legal advice to start-ups and companies bringing tokens to market, and representing them during legal disputes, he also handles general commercial litigation cases.
➡ While discussing financial and macro matters of 2023, they assess the situation from a year ago when they analyzed whether the Federal Reserve would manage a soft landing.
➡ Joe admits that corporate America has mostly avoided the negative impact of rate hikes, as many companies secured themselves by borrowing at low interest rates and extending the maturity dates.
➡ The guests agree that current understanding of economic dynamics has proven some traditional economic assumptions wrong, like the idea of interest rates inevitably affecting stock prices.
➡ The trend over the past 30 years has seen increased passive indexation, especially in the American stock market, where individuals buy stocks with each paycheck without analyzing much.
➡ This trend has widened the disparity between the haves and the have-nots as those with disposable income keep buying assets, which they trust more than the actual currency because it provides liquidity whenever required.
➡ Americans use their excess savings to buy some sort of asset like bonds, stocks or real estate, and turn to credit if they need short-term liquidity.
➡ Due to the rush to convert dollars into assets for a better store of value, the US stock market, particularly the S&P 500, has become the most popular choice.
➡ The Federal Reserve and central banks have changed their interaction in the market since 2008, intervening more quickly and preemptively rather than reacting.
➡ In 2008, a 26% plunge in home starts led to market intervention, but this has become much quicker over the years. For example, Bear Stearns took seven months for a bailout in 2008, but in 2023, it took only six days.
➡ The Fed uses various tactics such as announcing new programs to calm the market. Even if they don’t actually buy junk debt, the announcement alone can pacify a nervous market.
➡ The perception of a strong banking system, even if not entirely accurate, can reinflate markets and keep the bubble inflated.
➡ However, there’s potential risk when the reality doesn’t match the perception, as seen in the 2008 crisis, and bailouts have shortened from months to days.
➡ The author discusses about market liquidity issues and the impact of the Fed’s interventions as well as lending practices by banks.
➡ He mentions and discusses the predictions about market crashes by various experts including Harry Dent Jr., and the credibility of their projections.
➡ He discusses the continued need for government spending and the complexities of managing national debt, particularly in a situation where there is not enough international appetite for it.
➡ The author discusses the potential for the Federal Reserve to “pull magic tricks” in managing financial crises, by flexibly adjusting its interventions.
➡ He emphasizes on the systemic risk in the commercial real estate market and the capacity of the Federal Reserve to manage this through their interventions.
➡ The issue of where exactly the limit lies for an untenable amount of debt relative to GDP, and the impact of this on market dynamics, is also debated.
➡ The author discusses the complex dynamics of debt, interest rates, and demand for treasuries, suggesting that there is considerable demand for treasuries and rebutting claims of insufficient demand.
➡ He addresses the issue of the Federal Reserve allowing their bonds to mature under QT (Quantitative Tightening) and not replacing them, causing the Treasury to borrow from the marketplace.
➡ Finally, the author critiques the strategies of Treasury Secretary Janet Yellen, especially in terms of the maturity length of the debt the Treasury is issuing.
➡ The concern lies in whether issuing short-term papers during the fear induced by Covid would lead to a depression, as it could drive the yield up higher, countering efforts to reinvigorate the economy through QE and fiscal stimulus.
➡ The strong appetite for treasuries, particularly at ten-year levels, may be indicative of an expected recession or future lower rates.
➡ Speculation about future interest on the debt shows it could average at 1% of GDP for the next decade.
➡ Growth and inflation significantly impact the bonds market; traders consider inflation as the biggest variable in the cycle.
➡ Considering the ten-year yield calculation, owning a piece of paper that does not keep up with the rate of inflation is seen as impractical unless a collapse in growth and inflation is expected.
➡ Some traders anticipate disinflation and a back down to 2% inflation, making bonds at 3.8-4% a good deal.
➡ It is suggested that inflation comes in waves, with the prospect of returning higher inflation could lead to structurally higher inflation for the rest of the decade.
➡ The trade of the decade could be short bonds if inflation picks up again due to rejigging global supply chains and onshoring endeavors.
➡ The Federal Reserve’s shift from a hawkish to dovish stance seems to be due to expected disinflation and an economic slowdown. By acting preemptively, they aim to achieve a soft landing for the economy.
➡ The recent repricing in the market is considered to be the result of the Federal Reserve signaling its intention to ease policies in response to the slowing economy.
➡ Current forecast data shows the risk of an economic recession as they are falling short of their target inflation rates.
➡ Nasdaq experienced a sharp sell-off at the end of October corresponding to a greater than 10% market correction.

➡ The turnaround in the market coincided with Janet Yellen’s decision to issue more short-term papers, which is easier to absorb, and reduce the issuance of long-term papers. This was viewed as a pro-risk move, triggering a market rally.
➡ People speculate that the dovish stance of Paul at recent meetings is due to Janet Yellen’s potential push for more duration supply in the market, projected to be announced in the mid-January quarterly refinancing announcement.
➡ Some people contest the independence of the Fed and speculate that it may be under pressure or working with the Government to prevent a recession this year that would hurt the incumbent president’s chances of re-election during a recession.
➡ The Fed has shown that it is political, having handled stable prices and the labor market, even though these two factors can sometimes run counter to each other.
➡ It is expected that the Treasury will continue to dominate the market and the Fed will remain as a backstop, dealing with the mess created by heavy fiscal spending.
➡ Looking ahead to the November elections, the success of their efforts to keep the economy steady will be heavily influenced by the labor market. A rise in unemployment could potentially destabilize the economy.
➡ The labour market has a structural shortage and without a recession or rise in unemployment, these problems will remain unresolved.
➡ The discussion concerns the response of labor to a recession, noting periods where GDP growth has been muted and the potential consequences of an unexpected event that disrupts the labor market.
➡ It’s stressed that a slowdown in the Personal Consumption Expenditure (PCE) is worrying alongside unemployment, and the long recovery period if labor markets degrow is noted.
➡ A belief is expressed that there’s a proactive approach being taken today in regard to labor markets with mention of potential stimulus checks, as well as the political repercussions of pandemic relief efforts in an election year.
➡ The dialogue shifts to concerns regarding corruption in the GOP and the potential impediments to financial relief, as well as a discussion about the political battle against tech, bitcoin, and cryptocurrency.
➡ A potential approval of several Bitcoin ETFs is hinted at as imminent, explaining that with new regulations, companies would have to buy Bitcoin with cash to create shares and cannot exchange Bitcoin for shares.
➡ This rule shift is seen as retaliation against Grayscale, as it would disrupt their current model and potentially bring hefty tax consequences if they had to sell open-market Bitcoin to adhere to the new regulations.
➡ The deterrent to Grayscale is further explored, speculating that it may allow entities like Blackrock to gain a stronger foothold in the Bitcoin ETF market due to their adaptability with these changes.
➡ The SEC’s grievances towards Grayscale resulted in a structural barrier that seems to belittle their ability to convert Bitcoin into ETFs.
➡ The SEC’s actions would not prevent Grayscale from converting but makes it more challenging and onerous for them.
➡ Large financial entities like Blackrock, etc., have already set up buffer accounts to buy and sell Bitcoin.
➡ ETF approvals aren’t the major catalyst for the price of Bitcoin, as savvy market participants have already priced in the expectations.
➡ If the ETF inflows significantly surpass expectations, it will be a huge stimulus for Bitcoin.
➡ Grayscale has the ability to set up its own ETF that buys Bitcoin from the trust, but doing so could incite tax events that contribute to the trust shares trading at a discount.
➡ The approval of ETFs could increase the legitimacy of Bitcoin and attract more mainstream investors, thus catalyzing its uptake.
➡ Majority of people have their investments in 401k’s and mutual funds, and as allocation managers start putting Bitcoin in these funds, it will be over years.
➡ The potentially substantial disruption of store value markets, including gold, equities, bonds, real estate, and offshore bank accounts, by Bitcoin points to its potential future valuation.
➡ Bitcoin can serve as a better version of a Swiss bank account due to its privacy characteristics.
➡ Consequently, Bitcoin could cater to the influx of dollars into different systems that used to be managed by commercial banks and parent organizations abroad.
➡ The analogical comparison of creating dollar-based deposits and Bitcoin suggests that offshore entities may seek stable alternatives, like Bitcoin, as a hedge in case of increasing inflation, higher debts and costs of capital, and bond rates trending upwards.
➡ Bitcoin could serve as a reliable alternative for entities that want to avoid assets like equities or sovereign bonds that can be printed at will by companies or issuers; the avoidance is due to the possibility of inflation and dilution.
➡ The establishment of Bitcoin-based ETFs could be a potential signal to financial firms that Bitcoin is a reliable reserve, due to the creation of a price floor preventing the price from dropping to zero.
➡ Large sums flowing into Bitcoin from offshore entities and bigger institutions with balance sheet capacity, rather than retail investors, could raise Bitcoin from $40,000 to $200,000 or $300,000.
➡ Changes in banking systems, such as a global dollar shortage due to offshore fractional reserve banking, or risky practices like moving significant amounts of money between banks could cause problems for the Federal Reserve, reinforcing Bitcoin’s appeal as a reliable collateral.
➡ Bitcoin as a reserve asset could simultaneously be accepted as a good and reliable form of collateral by international commercial banks, which would be a major psychological shift and a massive step for recognition of cryptocurrency.

➡ The evolution of Bitcoin technology can lead to its becoming both a reserve asset and a medium of exchange, through developments in layer two, layer three, layer four, and the concept of block space scarcity.
➡ The stringent regulations proposed in Elizabeth Warren’s bill could lead to discouraging self-custody of Bitcoin, channeling investors to ETF-based Bitcoin ownership.
➡ This shift could lead to a high concentration of Bitcoin ownership in the hands of companies like BlackRock, potentially making Bitcoin transactions practically illegal due to the difficulty of compliance with such regulations.
➡ The text touches on the host’s recent podcast appearance with Preston Fish’s and American Hodl, where they discussed potential overreaching legislature concerning crypto space, specifically Bitcoin.
➡ They believe that every person involved in this space should anticipate and be prepared for such legislation, not just from the federal government but also from states and other localities.
➡ Despite these concerns, the speakers do not believe that these measures can effectively cripple the Bitcoin market due to its inherent design.
➡ The passage of such legislation is expected to lead to litigation and potential counter rulings, mirroring what happened during COVID with the mask mandates being struck down as overreaching and over broad by some courts.
➡ The speakers make continuous reference to Warren’s bill, though specifics of this bill aren’t detailed.
➡ The aim of these laws seems to be to make it more difficult to buy, purchase, or custody Bitcoin and other cryptocurrencies. They see this as part of a wider push by legislative bodies, like the SEC, to exert influence over the emerging cryptomarket.
➡ The SEC’s contradictory practices, allowing Coinbase to IPO but then arguing that it doesn’t have the right to conduct its primary business function, were highlighted as an example of this ongoing power struggle.
➡ They concluded the conversation by calling out Elizabeth Warren’s team’s premeditated efforts to shift the public narrative about cryptocurrencies. The podcast ended with a promotion for Joe Carlosar’s law firm in Chicago, specializing in crypto-related litigation and regulatory issues.
➡ The individual is available on Twitter under the name Joe Carlos.

➡ They encourage others to follow and interact with them on this platform.
➡ They’ve had a conversation with others, specifically Joe and Mark, who they have thanked.

All right, Joe. Joe Calusari, welcome to the show. I’m excited to sit down with you. We’ve gone back and forth on Twitter a bunch. We’ve been in several Twitter spaces. I’ve always enjoyed our conversations back and forth. I’m excited to sit down and do a long form with you. So thanks for joining me. Yeah, likewise, Mark. Thank you. This is going to be great. Yeah, I know. We can explore maybe some of our differences in opinion.

We’ll see what those are like. As we were kind of talking about a minute ago, I’ve been off of Twitter for about five months. My account got hacked. I think I’m a week away from getting it back. We’ll see. So I’m not sure if we agree or disagree. We’ll talk about that. But real quick, just to kind of set this up, you kind of come about it from a little bit of a different angle.

We all do different angles, which is what makes it good. Right. We’re all individuals, but you sort of have like this. You’re an attorney, you’re a litigator. In my experience, I’ve worked with lots of attorneys. I was hired lots of attorneys, and they can think of every single problem that could ever go wrong for me. But that’s why I hire them. Right? I’m the eternal optimist. I need my attorney to protect me from all the downside.

So I’m guessing just attorneys. Well, from my experience, attorneys just think things a little bit differently. Again, I’m the optimist, and you’re probably more of the pessimist, but you’re a commercial litigator and you work in the bitcoin crypto space. Give us a little bit of a background on that just to set this up. Yeah. And you framed it very well. I do think a lot of attorneys are kind of natural, sort of.

Let’s see, the worst case scenario. I like to think myself as, like, let’s see, every scenario, right. I like to play out every type of possible thing, from the insanely bullish optimistic to the most unlikely sort of tail event pessimist. So I hear it all, and I try to think through it all just to give you my background. I am the co chair of the fintech blockchain and cryptocurrency practice group at Amundsen Davis, a Chicago based firm.

Well over half of my practice currently is something related to bitcoin cryptocurrency miners. I represent a ton of different folks, both on the commercial litigation front in the bitcoin space. But also in the regulatory front, advising startups and entities as they bring tokens to market, advising bitcoin companies in how they navigate the space, which is always changing, as you know, from a regulatory standpoint. And then I do have a good amount of my practice, which is just general commercial litigation, breach of contract, breach of fiduciary duty litigation that really is more sort of neutral from the bitcoin crypto space.

So I think I bring an interesting perspective on this, and I have been just an armchair retail investor since I was in grade school, basically trading on a custodial account with my father. So I’ve always been a student of the markets and love bringing the macro into the discussion. I think in many ways it makes me a better lawyer because I think I understand some of the business aspects and some of what’s going on in capital markets better than a lot of my other contemporaries.

Great, that’s a great way to frame it up. I want to get into some of the legal stuff. Let’s start on some of the financial macro stuff in the beginning, and let’s go back and just look at 2023 for a minute, and then we’ll talk about where we think 2024 is. As I said, you and I, I know we did a couple of Twitter space and things like that.

I know you’re good friends with our mutual friend, or you’re working with Nick Batia. I’ve done a bunch of stuff with Nick Bhatia over the bitcoin layer as well, and I remember doing some shows with him sort of back like November a year ago of 2022, and talking about is the Fed going to be able to pull off this soft landing? And so that was sort of my narrative.

I just did this live presentation and I showed twelve videos over the last twelve months where I kept saying, hey, the soft landing. Hey, they’d be able to pull it off. January of 2023, they changed the CPI calculation. I thought that would give them the COVID they need. Then the BTFP was basically silent, easing. And so those are kind of some of the things I was looking at from some of our earlier conversations before I was kicked off Twitter.

It seemed like you were kind of more of looking at the year bearishly, and there’s no shortage of bad indicators to look at. So, first of all, were you a little bit surprised in how 2023 ended up? Yeah, absolutely. I’ll just tell you, I think it’s really important to be honest and sort of reflect what you get right and what you get wrong. And I think what many folks, not just myself, but many others, were sort of focused on.

And it was a flaw. Right. It’s like the old adage, you never want to be the general that fights the last war. I think what most people were focused on was the fact that in prior hiking cycles for the Federal Reserve, what you tended to see is you saw this very pronounced reaction function where they would hike rates and then corporate net interest costs would instantly, almost react to that.

And that would cut into the bottom line of companies, which would trigger basically a recessionary dynamic where unemployment rises. And what we’ve actually seen is corporate America in large expects, at least for now, has dodged really, the damage that would be inflicted by higher rates. Why is that? Two reasons in my review. First off, I think a lot of companies were really hogs at the trough, feeding on low interest rates, and they borrowed at those very low interest rates, moved out those maturity dates for, in some cases, four, five, six years, and they did this in 2000 and 22,021.

So when the fed began to hike, I think, yes, you saw some sort of chaos in the bond market for the on the run treasuries. But what you didn’t see is you didn’t see companies sort of start to panic because they are saying, look, from a balance sheet perspective, I’m locked in at very low rates. I’m protected, in some cases, until 2027, 2028. Why would I panic? Why would I trigger that? That coupled with the fact that you still had significant fiscal support, still to this day, I mean, we’re running basically wartime deficits at this point.

And you had consumers who built up a really big honeypot of additional savings, accumulated savings, which they’ve drawn down on to try to combat higher prices. So all those dynamics together, I think, have lengthened out this cycle far beyond what most people had anticipated. Yeah. The one thing that I think it was, Mark Twainy said, it’s not the things that you know for certain that get you or you don’t know that get you in trouble.

It’s the things you know for certain. And I remember as soon as the fed raises rates, the risk free rate goes up, then stocks have to reprice lower. They have to. They have to. They have to. Well, they don’t have to because they didn’t. And then it was like, well, when mortgages go from 3% to 8%, home prices have to come down. They have to. They have to.

They have to. No, they don’t, because they didn’t. Now, a lot of that, to your point, is because a lot of that we have this lag, right? So when they raise rates, we have this lag. Maybe because they’ve, one, to your point, they locked it in low, but two, because they also raised it really fast. Maybe that changes the lag a little bit as well. But something that I’m thinking of is two things.

So I’m just curious to get your take on these things. So one, you mentioned sort of like the companies didn’t react. And part of that to your point is because they had this long locked in debt. Right. Something that I’ve been thinking about as well. I just keep going back to Ludwig von Mises’crack up boom. And then suddenly the people realize that inflation is both permanent and intentional.

And once that happens, people want to get rid of the currency and they just want to buy assets. Right? That’s basically paraphrasing what he says. And so it almost seems like globally we’re seeing sort of this switch to assets. Nation States. China bought half the lithium mines in the world. Right? OPEC would rather keep oil in the ground, so to speak. Central banks bought 1000 tons of gold again.

Right? And maybe some of it is just like the world is starting to wake up to. And maybe this is optimistic, optimistic to like, hey, these are the games the Fed plays and we don’t want to go back into this fiat game. We’ll just stick with assets. Do you think maybe the world is starting to see that a little bit? I think that it’s been in a trend that has basically persisted for the last 30 years.

I think that the only real disruption of that comes in moments where you have a huge sort of spike in unemployment because of passive indexation, primarily, right. Particularly with the american stock market. The american stock market is driven overwhelmingly by the passive indexer, the person who reflexively bids stocks with every single paycheck into vehicles. They don’t even think about it. They’re just buying. I mean, they’re not analyzing it in terms of PE multiples or so forth.

They’re just taking whatever their savings and putting it into accounts. And I think what you’ve also seen is that has been sort of contributing to this sort of disparity between the haves and the have nots, where those who have disposable income are buying assets. They’re using it to buy assets. And they trust assets probably more than the actual currency, mostly because they can always get liquidity in the form of credit creation whenever it’s needed.

Right? And you kind of know this. There’s this statistic that people talk about how most Americans would have to go into debt if they had to make up for an unexpected $500 expenditure. The reason I think that is, is because a lot of Americans just put their excess savings into some sort of vehicle, some sort of asset, even the conservatives things, bonds or stocks or real estate, whatever it is, if they need short term liquidity, because credit is so ample, they’ll just tap it that way.

So, to your point, yes, there is a mad rush to ditch your dollars and put them in some type of asset that can have a better store of value. And the store of value of our time at this point, overwhelmingly is the US stock market, mostly the S and P 500. That is the premier choice. So I don’t think this is a new development. I think, to your point, it is a trend, and it is trending towards more and more of the let’s save and store in some vehicle other than the currency.

Now, something else that was sort of driving my narrative throughout the year, and actually still is. And I’ve done some videos about this. I went on Swan signal, broke it down, and I’ve done videos, but basically how the Fed and all the central banks really have changed how they interact in the market, really since 2008. So I’d love to get your idea on this or your opinion on this, but in 2008 was sort of the first time we saw QE, at least from the Fed.

Right. Maybe it’s been applied in different forms other places, but really the Fed sort of jumped in and intervened in the market, right. In 2006, we saw a 26% plunge in home starts, but yet it wasn’t until 2008 that they started to even think about doing in the real estate market. We had bear Stearns go down bankrupt, which sort of triggered that collapse. It took seven months to get a bailout.

Seven months. In 2023, we saw six days. They got a bailout. A couple of other parallels I’ll just throw out real quick would be obviously the TARP package. 700 billion, about 1 trillion overall. 2020, we had 10 trillion. We saw the stock market in 2008 drop 60%. This time, 30%, six year recovery, three month recovery, kind of thing like that. And now even more. What we’ve seen is in 2020, we saw, I think, 13 special funding facilities get set up.

Three, four letter agencies. They were buying equities in the market. I mean, they were just throwing everything at the kitchen sink. And now again, back to the PTFB, this funding facility for banking. Six days they got that set up. They have swap lines set up, not just with friendly nations, but even non friendly nations, non allies, we have these swap lines set up, which is sort of like giving them these credit cards.

And so it just looks like the way the Fed interacts in the markets is a lot more, it’s not reactionary like it was in 2008. They’re like preemptively. Here’s your credit line. If you get into trouble, go ahead and use it. You don’t need to call me and get an act of Congress to go through. And I think a lot of that is changing it today. Over the last several months, a lot of people are saying, oh, but mark, don’t, you know, the commercial real estate mortgage, 2.

9 trillion, it’s going to crash, going to take down the mid sized banks with it? Sure. The Fed could just take it all in their books, you know what I mean? I guess one, do you think that’s correct? Do you think the Fed and central banks are interacting different than they were today, preemptively as opposed to reactionary? And do you think that changes sort of the direction moving forward from here? Yeah, I think they definitely are increasingly becoming more rapid, which I think is your point now to.

Okay, I think the Fed primary tool, and this isn’t just my opinion, this is, if you go interview some of the former Fed chairs, Bernanke and others, they’ll tell you that the primary tool of the Fed is to talk. Right. They want to smooth expectations. They want people to be comfortable. That’s what we saw in November. Right. They eased the markets without doing anything. Just the jawbone. Exactly.

And you can go back and look at some of these policies, whether it be the BTFP that you alluded to in March or even look at, which I think is a better scenario, when the Fed announced, almost to the day when the Fed announced that they were going to buy corporate bonds, like high yield bond etfs, the HyG and others, that’s the day the market bottomed in March of 2020.

And what I read from that inconsistently is that the Fed’s communication function, their ability to set expectations, is basically a form of psychological manipulation for market participants. If you can convince the market participants, we’ve got your back, the Fed’s at our back, and they’re going to make sure that you don’t have a cascade of bank failures or that we don’t have a cascade of high yield debt that defaults, then the market will move on that expectation and will provide liquidity in itself.

You got to remember, when everybody’s scared and nervous, the one thing they want is they want someone to pat them on the shoulder and say it’s going to be all right. And that’s the primary, I view that as the primary role of the Fed. The Fed. Right or wrong, okay. You can dispute whether it’s a good system or not. I don’t really care. My point is that when they come forward with these programs, they always have to announce some other new program or new venture.

And it’s all designed, I think, primarily just to calm things down. You had significant movements in capital markets before the Fed actually was buying junk debt. That tells me really that it’s all about pacifying a very nervous market. And if they can pacify it, mission accomplished. Yeah, I agree 100%. I say this all the time. I love that you said that as well. But I think a lot of the, we’ll call them intellectuals in the macro space, they’re factually correct, but intellectually dishonest.

And what I mean by that is they’ll say, but the Fed didn’t do anything. And I say, but they said they were going to do something. And just by saying it. So technically you’re correct, they didn’t do anything, but they said they were going to do something, and that did something. Right. And so I agree with you. The thing is this, and this is a quote I always like to remind myself of in many ways, when you have those discussions with those sort of macro folks you’re talking about, it’s not about reality.

It’s about the perception of reality. And the perception influences people’s actions. So if people perceive that they’ve got their backs, that can reinflate markets, it can reinflate the bubble, and that’s really what’s required. Now, what I will say is there are times where despite the message they’re broadcasting, they can go out there and they can say, as they did in 2008, that the banking system is strong. It doesn’t make it so.

Right. But got to remember, Mark, as you know, when Bear Stearns went down in the spring of 2008, the market originally rallied off that, okay? It bottomed, and then it rallied because people said, okay, they’re saying it’s fine. They said, subprime is contained. Remember these things? They would go out there and try to manipulate the marketplace. It wasn’t. It clearly wasn’t. And you finally had the shoe drop, which sent people into a panic.

But my point is that just because they’re saying it doesn’t mean it’s true. However, the market can react based on what they’re saying. So it’s a very complex dynamic there, right? Yeah, 100%. I agree with all that. But going back to the bear Stearns, as I already laid out, it took them seven months to get a bailout today. Now it’s six days. And so to your point, they tried to job own the market, but then the market realized, hey, we still don’t have liquidity.

The whole system is still seizing up, we still have bigger problems. Whereas this time it was like, here’s the liquidity. Everyone’s whole, no one’s losing money, everyone’s good, right? And so I think that it was the job owning, but they also did something. And I’m just curious, your take on this, because Harry Dent Jr. I’ve read five of his books. His research is amazing. I’ve had him on my show, he spoke at my conferences, and not to call him out, but I pulled up a bunch of YouTube videos, and for twelve years, the market’s going to crash 90%.

Seven years, going to crash 90%. Six years in June of this year is going to crash by 90% this year. And it’s just like, he’ll be right eventually, right? But I think a lot of it is failing. My opinion, again, I’ve read his books because I think his research is correct. I think the assumptions are wrong. And failing to think about how many more magic tricks the Fed can just pull out of their sleeve, like, oh, the bank’s going to collapse.

Well, let’s just throw BTFP out there and eventually we know this collapses. Right. But I think about these constraints that we have. Right. And you’re well aware that we could dig into, but you mentioned the fiscal, like, the government has to keep spending that’s there, right. They have to continue to have buyers for the debt. There’s not enough appetite internationally for the debt they’re producing. The Fed’s going to have to buy, the rates are going to have to come down, the interest is going to overtake the expenses or the income, et cetera.

So these sort of constraints that we have, and it just seems like the Fed’s going to have to just keep pulling magic tricks out of their hat. And again, like I said, just hypothetically, this commercial real estate mortgage market, 2. 9 trillion could crash the whole market, or the Fed could just put it on their books. What would stop them from doing that? Or do you think that’s the likely scenario? I think, again, these are all ones of.

Right? Like, so can you have some defaults and problems in commercial real estate? Yes. And I think what the Fed would look at is they look at is the default rate, is it something that is undermining or causing a systemic risk? Okay. And that’s always a fine line. You don’t know where they’re going to draw that line. I mean, that’s the quote unquote Fed put, which I think still exists.

It’s just a question of where the strike is. And what I would look at it like is like, okay, to the first point of your question, how much debt? It becomes an untenable amount of debt, and nobody knows the answer to that question. Is that 200% of GDP? Is it 250? Is it 300% of GDP? Well, I think it’s diminishing returns, right? Sure. It’s not like at this point it just falls off a cliff.

It just gets worse, worse, worse, worse, worse. Right. But now look at what has triggered. But by just going out there, and you mentioned it earlier when we were talking about the Fed pivot, right. Just going out there and the Fed making some statements about how they think they’re ending or near the end of their rate hiking cycle. You saw the ten year yield drop like a stone.

Right. Showing a massive bid for treasuries, particularly at the long end. Right now the government can borrow at rates compared to where they were just a few months ago, much lower. Right. So why is that bid there? Why is there a global bid for treasuries right now? And you can talk about maybe it’s a recession, front running recession. People are trying to put on the safety trade of buying bonds.

Maybe it’s just that they think that rates are going to be much lower in the future. The Fed is going to have to bring interest rates down, so there’s going to be buyers coming in. But I really question this notion that there’s not sufficient structural demand for treasuries given the fact that you have rates where they’re at, inflation where it’s at, and if you take those two numbers, ten year yields should relatively track nominal GDP.

They’re actually, by some measures under that right now. So I really struggle with this notion that there’s not sufficient demand for treasuries. I think that if anything, the last few months shows you there’s a considerable demand for treasuries. And the big whales that would provide even more liquidity, the insurance companies, the pension funds, they’re not even buying right now. And you’ve got ten year yields that have fallen, what, 70 bips in recent weeks? Okay, so let’s talk about that.

That’s a good point. So I kind of made the case, I threw out there that there wasn’t enough demand. And you’re saying that there is enough demand, and I think there’s nuance to that, and I think we’re both correct. Right. If we look at that, was that failed auction in August, the 30 year. Right. And it wasn’t failed, obviously, but it had a long tail on it. Sure.

And if you look at the difference in the auction from January to the auction in August, this was a 30 year, and it’s different. It’s a longer length of time, and the rate is different. And the market was different back then as well. Correct. But what we saw is actually the international. Well, there’s three categories of bond buyers. The demand actually was the same. The appetite. They bought as many bonds.

The problem was the treasury issued way more, and so there wasn’t enough at that point. Now, to your point. So is there enough demand for the supply the treasury is giving? Well, what about if the Fed still tries to roll it off their books? What if the treasury tries to some point? At some point, there would be a mismatch. The treasury doesn’t really. This is a big misnomer.

So QT is not the opposite of QE. Qe, they’re going and they’re taking a treasury on the bank’s balance sheets, and they’re swapping it for bank reserves, a less liquid or liquid, but a less versatile form of collateral. Okay. Qt is not that. Qt is effectively, we have a bond. Whatever maturity it is, we will let it naturally expire and not replace it. That’s a different dynamic. Right, Mark, because what you just said, are we selling this into the marketplace? Are we reintroducing that long duration instrument and actually putting it there so someone in the private market can bid it? And that’s not what QT does.

Qt says, okay, you had a seven year piece of paper. We’re going to let it naturally mature, and then we’re not going to reintroduce it in the marketplace. What does the Fed have to do at that point? The treasury. What does the treasury have to do? The treasury has to go then, and they have to borrow from the marketplace. And what we’ve learned in recent months, and what I think most people naturally know is that how they borrow, the duration they issue is really important because institutions can better and more easily absorb short term paper than long term instruments.

Okay. It is very difficult from a liquidity perspective to buy a 20 year or 30 year piece of paper versus a two year or a six month. And what I think that, to your point, I think, in fairness, what secretary Yellen has been doing at treasury is she’s been favoring more short term paper, which is far easier for the market to absorb, particularly when you can drain reverse repo and have that big pot of money serve as a stimulative effect.

Does that make sense? Yeah, it makes sense, but let’s just go back to that. So under QT, the Fed has a bond mature. Correct. Which rolls off their books. Right. Which then the treasury has to go to the market to get the money for. Correct. But it’s a difference in the maturity. Right. So if they had a five year bond or a seven year or ten year, that is maturing, and they have all these maturing routinely.

Right. You know, they can take a five year or 30 year and go at one year, send it back out at one year or a three month bill or three month or whatever. Which to your point earlier, which is the corporations did a pretty good job of locking in long term debt. Homeowners did a pretty good job of locking in long term debt. Yellen looks like the worst trader in history.

When rates were at the lowest point in history, they could have locked it out for 30 years. And here she put it all on the front end. Yeah, but that’s a little bit unfair because you think about why she’s not just stupid in doing that. Why didn’t she want to introduce long dated supply into the marketplace? And if you go back at those periods where rates were really low, she’s trying to provide liquidity to the marketplace.

It would run counter to her efforts. Right? So take, for example, when the ten year is at 0. 3% and there’s fear in the marketplace after Covid, do you really think it would be wise for her to issue a ton of short term paper at that point when there are many people that thought we’re going to end up in a depression? Because if you’re introducing that supply at that point where the markets are already weak, what are you going to do? You’re going to put that yield up higher, you’re going to move it to close to 1%, and it’s going to run counter to your efforts at the same time to do QE, to do fiscal stimulus, to try and reinvigorate the economy.

So I think that’s just from my perspective, respectfully, I think that’s kind of a little bit unfair because they’re trying at that point to stimulate when they would do the issuance there. It would actually run counter to their efforts to stimulate. Yeah, I see that. So sort of back to the constraints that we have and sort of where we’re going. You also mentioned the appetite for these treasuries and how at the ten year right now it seems very strong.

And so what does that mean? Are people expecting a recession or lower rates in the future? Kind of a thing like that? I covered, Reuters had picked up. Yellen said that she projected the interest on the debt would average 1% of GDP for the rest of the decade. Yeah. And so to do the math on that, how do we get to interest being 1% of GDP? Obviously there’s a bunch of levers in there to play with.

I got this from an article from Ria, I believe it was. But when you look at the math, so it’s basically the interest rate has to get down to 0. 8 in order to have like this 1% of GDP average. Right. So that’s what she’s saying. And so then the market probably goes, well, shoot, if we could lock it in at 3234 5%, I mean, it’s better than the 0%.

It’s going to average. So maybe that really kicks up the appetite for that. It all depends on what is going to happen with growth and inflation. Okay. If you’re a serious bond trader, and I have some friends, that that’s all they do, right? They’ll tell you that the big oddball in this whole cycle is what happens with inflation. There are some of the inflationistas who have said we’re going to have structurally higher inflation for the rest of the decade.

We’re going to have it quote, okay, well, if that’s the case, then yields are completely mispriced. I just want to make sure I had the right number. You’re sitting at a ten year of 3. 89. Okay? And when you’re calculating that 3. 89, you have to factor in growth and you have to factor in inflation kicker, right? Why would you own a piece of paper that does not keep up with the rate of inflation? It doesn’t make sense unless you expect growth to collapse and inflation to collapse.

So I think what many traders are doing right now, they’re expecting disinflation. They’ve put in this Goldilocks sort of period where you get inflation back down to 2%. And to your point, if that were to occur, then, yeah, bonds at 3. 8%, bonds at 4%, tenure at 4%. That’s a no brainer, right? If you have inflation, the official government statistics CPI at 2% and you’ve got a ten year, then you have basically the quote unquote risk free rate at 4%.

You’re getting a 2% kicker there. That’s a no brainer. Now, if you’re your side of the trade, you’re saying these tenures should be closer to five or 6% because inflation is going to pick back up again and there’ll be another wave. Yeah. And to your point, wave. Perfect, right? It’s like inflation comes in waves. And so this is not, nothing never does a smooth line. I just think for the rest of the decade, right, we’re looking at now seven year period or whatever, six year period with sort of the globalism, globalization, sort of breaking apart, trying to re onshore supply chains, et cetera, et cetera.

I think it just leads to inflation. But going back through then short bonds is the trade of the decade. Just to clarify for the audience, if you’re correct, which you may be, I’m not saying you’re not, but short bonds is the trade of the decade. Short treasuries. But then let’s talk about the fed pivot here. It’s not technically, well, whatever you consider a pivot for me, I consider a pivot would be we were raising, now we’re lowering.

So right now we’re like in a pause. But whatever you want to call it, certainly a hawkish to dovish pivot. We could call it that. Right? Maybe, I’m curious, your take on that. And is this a political move or is this a data move or is it both? I think it’s both. To your point, just about the terminology, you got to remember the most famous Powell pivot, the one coming out of December 2018, early January 2019, where Powell originally said the balance sheet run off, it’s on autopilot.

And then by the middle of next year, after the yield curve inverted, they were cutting. He actually quote unquote pivoted before the cut came. The Powell pivot came in Q one of 2019 after the stock market sold off pretty violently. At the end of 2018, it was down 20%. So I think for their perspective, they love to prime the pump from a communication standpoint, like we talked about, it’s all jawboning, setting market expectations.

And I think that was calculated in what they were doing. They came out. And to add on to that, Joe, in November of 21, the pivot came, we’re going to start tightening, but they didn’t actually start doing it until 2022. Exactly. That’s exactly right. And when did bitcoin top November of 2021. I think Nasdaq topped somewhere a few weeks later. Same thing with the S and P at the end of 2021.

So it’s always about sort of front running. What they’re now pivoting to tell you is coming down the line. They don’t want to surprise the market, even just as one final little nugget of this. Do you remember even when it was a blackout period, which is basically when the Fed’s not supposed to leak any information, they’re not supposed to give you any information in advance of the FOMC meeting, they gave that famous sort of leak to Nick Timros, which really made him a star, where they basically said, we’re going to do a 75 basis point hike in the summer of 2022.

Excuse me. That was unexpected. Right? They realized we’re behind the curve with respect to inflation. We’re going to move it up expectations from 25 or 50 basis points to 75, which was really not something you normally see. That’s all about setting expectations. And I think that he did that with the last meeting. He took the market by a surprise with how dovish he was coming out. So why is this? I think it’s because they’re seeing some of the forward indicators show significant disinflation.

I think they’re seeing some of the early signs of an economic slowdown. And what they’re trying to do is they’re trying to stick the soft landing by getting ahead of the curve. Right. Typically they’re behind the curve, they’re being reactionary. And again, this goes back to your point, the new dogma being preemptive. Right. Rather than sitting here in the spring when you’ve got some clear recessionary like data, they want to say we’re easing now because they know there’s a lag effect before that easing comes into the marketplace.

And I think the market got its message from the Fed. And that’s why I think you’ve seen repricing along the. Yeah, yeah, that’s some of the data points I’ve been looking at. I mean, the PCE potentially is. Maybe they’re more important indicator than the core pc is the main core pc. And what we can see now, the forecast is like they are undershooting their target, right. They were projecting by the end of next year to get it down to two and a half ish 2.

4. And we’re going to be there right now. We might achieve 2025 goals, it looks like, based off of sort of where they’re projecting it, which is not good, by the way. No, it’s not good at all. No, that’s bad. That’s recessionary type readings, right? Yes. I mean, we agree on that. And this goes back to what I kind of set up the conversation with, was really being preemptive instead of reactionary, because people would say, oh, when the Fed pivot happened, stocks crash.

Well, that’s correlation, not causation. Right. It’s like they were already crashing and the Fed acted too late. And so to see them doing this now seems like it’s a data driven move. But then also, then, of course, why would they do that when inflation is still there? And it seems like they would choose inflation over deflation, particularly going into this political cycle, into a 24 election cycle. There’s one other aspect that I should add, okay, which I think is huge.

If you remember the stock market, the S and P and Nasdaq were selling off pretty hard near the end of October. Do you recall that? And almost to the day of when the stock market bottomed after more than 10% correction, it peaked in July, in August, sold off down into the end of October. And within a day, as folks have pointed out on Fintwit, it was right after you got this update, the quarterly refinancing announcement from treasury.

And what the big sort of news item that many attribute to be a catalyst for this run in risk assets was that, like we talked about earlier, Janet Yellen was going to issue more short term paper that’s easier to absorb, and she wasn’t going to issue as much long term paper. I think George Gammon, your friend, he talked about this as well. The decision not to put that much supply of longer duration into the market was read by many as being a pro risk on rally.

Why is that relevant to what’s happening now? You got to remember that in mid January, I think it’s the 21st of memory serves, there’s going to be another quarterly refinancing announcement. And what we may see at that point is Janet Yellen finally saying, we need to now introduce some more of the duration supply. She doesn’t want to run the entire government on short term paper that you constantly have to roll.

She needs to lock in some of it in longer duration. So what many have sort of theorized is that one of the reasons why Paul had to come out and potentially be more dovish at this meeting is because she knows that Janet Yellen is going to come with additional duration supply into the market, and they don’t want to sell that paper at near 5% or 4. 8% tenure.

They’d much rather sell that ten year paper at 3. 89%. Yeah. So history tells us that an incumbent president in a reelection cycle going into recession has very little chance of reelection at this point. So maybe two part question here for you. One, the Fed, being this independent agency, do you believe that? It looks like, I mean, I can give you a bunch of data points. I don’t necessarily agree with that.

It looks like there’s taps on the shoulder. The Fed wants to control the dollar, but if the government goes bankrupt, what good is the dollar sort of thing? So anyway, one, do you think they’re being sort of coerced or working with the government? Let’s just say. And then, two, if that’s true, then do you think if the Biden administration wants to win, they would do pretty much anything? They could, whatever.

They’re possible to make sure we don’t go into a recession this year. So I’ll start from the spirit of the first part of the question, which I think the Fed is inherently political at this point. I don’t think there’s any doubt about that. I think their actions have shown that particularly ever since, really, the dual mandate. I think it’s very difficult to have the dual mandate where you have stable prices and the labor market, when in many cases they can run against each other.

And what I think you’ve seen a little bit of this with the hiking cycle where Powell has said the labor market’s out of balance. That’s the phrase he used. What he’s really saying in code is that there needs to be more unemployed people because there’s too much demand for labor, and that causes sort of increased inflationary dynamics. So I do think you have an inconsistency and also this sort of natural thing that we have to be married at the hip with treasury because there’s so much of the fiscal dominance in play that we have to sort of, at least implicitly, backstop the demand for treasuries where necessary.

Okay. If there is illiquidity or certain issues. The bigger issue, though, I think, is that what does it mean in an election year? And I think what a lot of folks are missing, and I think I’ll credit people like Lyn Alden, who talks about this quite a bit, is she uses, and I think, has referred to this term of fiscal dominance and the ability of treasury, really, to dwarf what the Fed is doing.

And I think there’s a lot of truth to that when you’re running wartime deficits effectively. Do you really believe, mark, that hiking 25 bips or 50 bips or cutting 50 bips is going to impact the economy with the amount of spending that’s coming into the marketplace and that’s what puts real money into people’s hands. The Fed, they were well documented for years after the GFC saying, we don’t understand why the QE we’re doing is not triggering inflation.

We don’t understand it. We don’t see the CPI ticking up. And I think the same is true with the interest rate policies. When they’re at zero. You still had relatively muted CPI and PCE. I think what they found out after Covid, or during COVID rather, was that if you really want to get the economy running, if you really want to induce consumers to spend, just give them cash.

And the only entity that can give them direct cash is the treasury. Right. So what I expect is that my view is that treasury continues to dominate and overshadow what the Fed is doing, and I think that will continue. And the Fed is sort of the backstop behind it. They’re kind of the janitor that has to come in and clean up the mess that the fiscal spending is doing.

To their credit, I think they were trying. But ultimately, Janet Yellen spending, Treasury spending is just dwarfing anything they’re doing. And one final thing is you got to remember that Janet Yellen, by Q one, she will have successfully rebuilt like 80% of the TGA. And to your point, about an election year, that’s a huge pot of money. It’s hundreds of billions of dollars. She will have to provide liquidity to the marketplace.

And she doesn’t care what Powell does. Powell can raise. He can keep them steady. He can lower them. She’s got hundreds of billions of dollars she can use to provide liquidity in conjunction with the executive branch where necessary, without any effect on monetary policy. Yeah, very well. Broken down. And I agree with all of know to your point, Len Alden, I had her on just recently we talked about that.

And I agree with that. And you look at a lot of factors, obviously just government spending, but even how that’s being broken down and look at the amount of labor force participation just by government jobs. Right. Like they’re driving over half of the economy plus all the spending they’re doing and all these other things, and even the job owning. And so the Fed is trying to crush demand by making everybody broke.

But the people they’re making broke is a small percentage of the market. The Fed is just pumping the other half. So I agree with that. So then based off of that, let’s put our prediction hat on. Let’s just go to November when the election is. Do you think that they’re know, again, I think we both agree that they’ll probably do whatever they can. Whether they can or not is a different story.

And so I guess the question is, do you think they’ll be able to keep this thing going through November and are we up or down by then? Yeah, I think the success in their efforts to keep the plates all spinning is going to be mostly driven by what happens in the labor market, because I think you can make a case here based on some of the indicators that unemployment may begin to rise in q one, q two of next year.

If it rises gradually and slowly, I think their chances of success and sort of keeping the plate spinning till the election is higher. But you got to remember, economic systems are dynamic, right? So they don’t respond. Everybody thinks it’s just a linear, sort of slow, gradual rise, when in reality what we’ve seen in prior recessions is you generally have the straw that breaks the camel’s back. You have sort of the tipping event, which can cause a significant spike in unemployment.

And if you see a significant spike in unemployment, that’s going to be very difficult for them to deal with. And in addition to that, while you will have liquidity from the treasury because of the rebuilt TGA, you’re not going to have any stimulus packages come through in Congress. There’s no reason for the opposition party to bless a stimulus package when they’re trying to take back the White House.

So that’s going to be an interesting dynamic. But I think it all comes back to the labor market. Even by the Fed’s own estimates, they expected the unemployment rate to be higher by the end of 2023. They didn’t come close to the target. That is telling me that there is a structural shortage in the labor market. And without a recession, without a rise in unemployment is sort of meaningless.

Right. What does that really mean? Like the old adage that a recession is when your neighbor loses your job, a depression is when you lose your job. There’s a lot of truth to that, right. What we really care about in a recession is how does labor respond? We’ve had plenty of periods post GFC where the growth rate, the actual statistical growth rate, real GDP, has been very muted, right.

It’s been in the 1%, 1. 2% before the 2000s. They used to say that was pre recessionary growth. Now it’s sort of become the norm for us to expect 1% growth, 2% growth. Personally, if you had a gun to my head, I think it’s far more likely than not they can keep it sort of stable. But if you got some unexpected event that tips and breaks the camel’s back for the labor market, that’s a whole different ballgame.

Yeah. And I would definitely agree with you on the labor market. So going back to political or data, it’s both. The data being seeing the PCE slow down ahead of schedule, which is dangerous. But also, I agree, it’s the unemployment they’re seeing. And we talk about risk assets. They take the stairs up and the elevator down. Right. And so does labor markets as well. And the problem with labor markets is once this degrowth starts happening, it could take years to recover.

And so it’s like they really want to get in front of this. And that goes back to kind of the point I made from the beginning, which is they’re much more preemptively working today. So I would agree that that labor market is the thing they’re probably most concerned about. Well, I don’t know about most concerned about, but one of the most concerning things for them, I would agree with you on that.

The thing that I would just go back to is, great. So all these people lose their jobs, businesses shut down. Cool. Let’s just send out Stemi checks. You know what I mean? There’s a problem with that because it’s an election year. Right. So you have a political reason why folks would block that effort. If you’re a member of the GOP and you were attempting to try and retake the White House, as I said, why would you vote for anything in the form of a stimulus check? Why wouldn’t you want the pain to get worse? Unless you don’t see all the rhinos on the republican side and don’t see a uniparty system.

That’s more of a political conversation. Let’s jump gears. I mean, unless you want to add something to. No, no, that’s great. Let’s jump gears. I want to get into more political things, but from a different standpoint. And this is more about the bitcoin ETF. Yes. And sort of Elizabeth Warren’s sort of war path against bitcoin and cryptocurrency and just tech in general, really. I see this sort of like Elizabeth Warren, Gary Gensler sort of camp, Biden camp, really against tech.

It just seems like specifically crypto and bitcoin. So we have, on one hand, we have, like, Wall street jumping in with this ETF. On the other hand, the government’s, like, really coming heavy handed. Let’s start with the ETF side. So at this point, I mean, shoot, man, it looks like any day we could see a handful of etfs get approved, maybe by the time this recording even shows up.

We don’t know. January eigth. We know. It’s certainly not going to be before the fifth. We know. Okay, there we go. The reason. Why are you saying that’s the soonest, or you think that’s what you’re calling is the date? I think it’s most likely to happen on the eigth, but we know it’s not going to happen before the fifth. And there’s a real reason for that, because what they did is they retooled some of the comment periods for the etfs.

The SEC said that some of the comment periods will extend through January 5, which is a Friday. I think it’s the Franklin one, a couple of others. And the reason why it would be very unlikely. I mean, it’s possible, I assume, that you could have approval, but it’s very unlikely for them to issue in the Federal register that people can comment on these etfs and issue feedback and then suddenly approve it right before then.

That wouldn’t make a whole lot of sense. They typically allow the comment period to expire, and the latest comment period is January 5. So my bet is the following week after the fifth. Okay, interesting. We’ll see. I don’t disagree. It looks like just the last couple of days, the amount of chatter happening, and not just the chatter. The next thing I want to bring up is it’s not just the chatter.

It’s like the increase of meetings happening between these ETF applicants and the SEC, but more specifically, the changes that they’ve had to start making to these applications, which is genius for. I mean, have you broken down these on other. No. Okay, go ahead. Let’s do it. Give me your attorney hat. Yeah, no, it’s really, actually, I view it basically, and again, I’m speaking for only myself and no client or my firm, but I’ll just tell you I view it as basically an act of retaliation against Grayscale, and I’ll explain why.

Because they are insisting on this issue of the cash creates for the shares, basically for the creation purposes of shares. They want the entities, the etFs, they’ve really had their foot down on this, and that’s what a lot of the meetings have been about. They want the ETFs to go buy bitcoin with cash, as opposed to creating shares through people tendering over bitcoin to the entity. The in kind creation is what it’s called.

And the reason why that’s really significant is that all the other ETF vehicles out there, other than grayscale, they are in many respects, although they may want to have a better source of bitcoin, they’re just letting in kind. It’s not as consequential for them because they can just go source the bitcoin, buy it with cash, and they use that to fill up their ETF structures. Now, grayscale is a different story.

Right, as you know, Mark, but before we jump to the grayscale, let me just ask you to clarify this for me. So they went to being cash settled, as opposed to physically settled, not settled, creation of the shares. So this means that instead of I’m going to give them cash and they’re going to take that cash and they’re going to go buy bitcoin. Correct? Exactly. They’re actually going to go physically buy it and hold it, and then if I want to cash out, they’ll sell the bitcoin in the market and give me my cash back.

Correct. So the way to think about it is this. You have an original structure of the trust, right? And the trust just has shares. Just think of it like any company, okay? You have shares of the company. How do you create those shares? How do you determine if we’re going to issue shares? How are you going to actually create them? And the reality is that what Grayscale used to do is they used to let people send over their bitcoin and they would give them locked up shares.

Do you remember that? That’s how the premium was extracted for a long time. So that was an inkind contribution. They basically said, here’s my bitcoin. You take that, you give me shares. And they were extracting premium. Now, what they’re trying to get people to do is they say you can issue as many shares as you want, you can create as many shares as you want, but you have to create those shares with cash.

It’s called a cash create. Whereas, say, I have a bunch of bitcoin, I’ve got 50 bitcoin, and I want to go buy an equivalent amount of shares. I can’t tender to Blackrock my bitcoin and get the shares. Does that make sense? Yeah. Okay. But why does that matter? Why is that significant? Why does that matter? Because with Grayscale, Grayscale already has a ton of bitcoin. And if they’re going to insist on the conversion has to be a cash creation of shares.

If they’re going to uplift their ETF, basically transform the GBTC to an ETF. What they’re effectively going to have to do is they’re going to have to then get cash from people. And they can’t convert this big honeypot of bitcoin that they have to the ETF structure. There’s no way to do that without basically selling the bitcoin in the open market, which they have to realize a tax loss on, which is big deal.

Right? Like if you’re selling bitcoin, you acquired at 15,000, which grayscale did, there are tax consequences or potential tax consequences that makes it structurally a lot harder for grayscale to convert than a new entity like all these new ones that have filed, where all they need is cash. They can just go out into the marketplace, buy the bitcoin, issue the shares, boom, it’s done. So a lot of this move you’re thinking is sort of to push grayscale out of the running because they’re probably going to bring in several at one time, sort of maybe whatever in the air of fairness or whatever, but this gives them a way to sort of put that out.

And maybe the blackrocks, et cetera, don’t like this, maybe unfair advantage that grayscale has by already having all these customers and shares or not shares, but bitcoin, I don’t think it’s driven. This is my supposition here. I don’t think it’s driven by what Blackrock or the other participants want. I think it’s more just the SEC is very frustrated with grayscale. They lost in court against Grayscale. Right. And if they can kind of put in place a structural barrier that doesn’t prevent them from converting, but it makes it very painful for them to convert.

Why not? I mean, I think that’s their rationale. I think that’s why it seems kind of silly to focus so much on this. We don’t want in kind share creation. I don’t think it really makes a whole lot of sense, to be honest. But if they can twist the knife a little bit and cause a little pain, I think that’s their rationale. And from the perspective of grayscale, right, it’s a big deal, like having all this bitcoin now they got to figure out how to convert it.

It’s not going to be as simple as just a new market participant just spinning up an ETF and just saying, okay, I’ve got the cash, I’ll create the shares. Yeah. About a month ago, I was in Dallas or Fort Worth for the Texas blockchain association, and I sat at dinner with about ten people that were all very connected. I don’t want to drop their names here, but let’s just say some ETF people, some regulatory people, some lawmakers, it was a pretty good table of who’s who’s there.

We got into these conversations, and again, we have some ETF people there at the table, and they were explaining to me that, like the Blackrocks et, a lot of people are expecting this massive bump, but they’re trying to front run it. As soon as these ETFs get approved, the price going to go up because they’re all going to go buy this, a massive amount of bitcoin. They’re like, that’s not how it works.

They’ve already been building these seed accounts or these buffer accounts, these grayscale or not grayscales, but the blackrocks, et cetera. They can’t be buying and selling in the market every day. They can’t move the market. So they have these buffer accounts they’ve already established, and they’ll buy and sell from their buffer accounts, these seed accounts, and then these seed accounts will be managing sort of the market. So they’ve already been buying all year.

The ETF will have to go buy at market price from that vehicle. So I don’t know if you know anything about that, if that’s true or not. And if so, then it would seem like then Grayscale could just do something similar. They set up a grayscale ETF that then just buys the bitcoin from the trust. They could do that as long as they’re willing to pay the taxes, and that impacts the value of the shares.

So it’s conceivable that if they were to do what you’re talking about, they’re going to realize tax events, and that could continue to contribute to the shares of the trust trading at a discount to the bitcoin they hold. Which makes sense. That’s the real problem. Again, this would not prevent in any way grayscale from converting. It just makes it a little bit more painful and a little bit more onerous.

They should have done it last year when it was at 15,000. Now doing it now, they’re kind of stuck. Okay, so I like that you broke that down for me. I appreciate that, because I was thinking it was more cash settled, and so it wasn’t really they’re buying the bitcoin. It wasn’t really going to affect the supply demand metrics of bitcoin. But you’re not saying that it’s just more about the redemption, the addition and the subtraction of the cash.

It’ll absolutely be spot bitcoin they’re buying. Nothing’s going to be cash settled. It’s all about how do you create the shares. Yeah. Now you were saying that you maybe don’t think this is that big of a catalyst. I think you made a point. Is that accurate when I say the ETFs being approved is not going to be that big of a catalyst for the price of bitcoin? I think it’s already been a catalyst.

I think the notion that people, savy market participants, don’t read the tea leaves and they’re going to wait until day one to buy the spot bitcoin ETF, I’m sure it will lead to flows and I think it will contribute in a positive way. I think that it’s already sort of triggered a bull market here, and I think you’ve seen a lot of it. The estimates are all over the place.

There are some folks at Bloomberg that I was talking with that they estimate in the first year it could be 10 billion. I know that there are other people on Twitter that are wildly bullish. They think it’s going to lead to hundreds of billions of dollars in inflow. We don’t know. Right. But as you know from markets, expectations are everything. So if the expectations are like 10 billion and you end up getting 10 billion, to me, I think that’s in large part not totally, but in large part that’s been priced in.

Now, if the expectations are 10 billion and you get 100 billion in inflows in the first year, that’s massive. Right. That’ll be a huge catalyst. But markets are interesting in this way that market participants don’t wait until the actual event to position themselves. And I would expect that the reason we’re sitting at 44,000 or whatever it is as of today, 43,000 is because people have already read the tea leaves and realized that this is sort of priced in.

That’s not a reason, by the way, to be bearish and think that we’re going to have some crash or cascade down. But I would not be surprised if post ETF we’re sitting in the then we continue upward trend maybe for the next six months to a year. But I guess when I’m making that comment, I don’t mark believe that they talk about this God candle right where the day the ETF launches, we’re going to go up $20,000 or $30,000.

I don’t believe that. I could be wrong. I don’t have a crystal ball, but that’s just my gut. I don’t believe that either. That’s not my gut either. And partly because, like I said, I don’t think ETFs are going to go out and buy all the bitcoin. They already have the bitcoin. So just right off the bat now, what it would do is potentially what I think the ETF does over a longer period of time is in new technology, you have this diffusion of innovation, it’s called.

And so you have the innovators, the true believers, then you have the chasm, and then the early majority. And the ETF, making it legitimate, helps cross the chasm. So then you get the early majority to start coming in, and they’ll buy on the exchanges in the open market. And so there’s a catalyst there. I think this could be a buy the rumor, sell the news event. I put out a video maybe two weeks ago saying, hey, warning, just be careful.

If it does dip, don’t sell, don’t get shaken out. We might see this short term sell off, but I think it is going to be a long term catalyst. 72% of financial advisors said if an ETF got approved, they would recommend buying bitcoin and crypto for your assets, for your portfolio. So it doesn’t happen automatically. The other thing is, I think, again, maybe not the first year, but two years, three years down the road.

You mentioned earlier these passive index funds, the majority of people have their money in 401 ks and mutual funds, and they don’t even manage that at all. And so you’re going to have these allocation managers, portfolio managers, allocating to bitcoin that people don’t even know. But this happens over years, right? Years. I saw you say something else that I thought was pretty interesting. It’s the only second time I’ve ever heard it.

I’ve said it. I talk about, like, if I wanted to price bitcoin’s future valuation, sort of like a venture capitalist, I’d look at the markets that it’s disrupting, how big those markets are and what percentage we could calculate or we could capture from those. And so I look at just store of value assets alone. And so obviously gold, store of value equities, sure. Bonds, of course, real estate.

But one I always threw out was offshore bank accounts, $30 to $40 trillion sitting in offshore bank accounts, we don’t know exactly. We see that those offshore bank accounts are not like they used to be. We saw these russian oligarchs getting their bank accounts seized, et cetera. A lot of that privacy has gone away. So bitcoin is certainly a better version of gold for store value. It’s certainly a better swiss bank account in your pocket.

And I saw you throw out something about you think that could be a really big catalyst for bitcoin. Am I right? So you go back to how the euro dollar system was developed and euro dollar system post World War II, and even to some extent before that, you had a huge influx of dollars into commercial banks and some non banks abroad, and they began to create dollar based deposits from that.

And the reason, the analogy I’m bringing this out, sort of comparing to bitcoin, is that, as you alluded to earlier, if the inflation eases are correct and you have higher structural inflation, you’ve got higher debts, you’ve got higher cost of capital and bonds trending higher, there will be increasingly offshore entities who are looking for something they can store that is not an equity. Right. Because equities can be printed at will by the company.

If they want to issue new shares, they’re going to be looking something that is not a sovereign bond because those can also be printed at will by new issuers or new entities. They’re going to looking at something that to the example that’s similar to gold, that they can have as a hedge in their balance sheets and they can use as reserves and without counterparty risk, because we saw what happened with Russia.

Correct? So I think this is early days, right, where nobody’s talking about it, which to me is that’s where you got to be. You got to be what nobody’s talking about. Everybody knows about nation state adoption, etfs, these sorts of things. But what I think the market discounts is that savvy financial firms, now that you have a us based ETF, that you have people putting money in to establish a floor, okay? That’s the big thing.

When you’re building reserves, you want a floor upon which the price is not going to drop and go to zero. Right? And I think the establishment of the ETF provides that floor in many respects. And that will be a signal, I think, to international participants that, yes, there’s enough for putting exposure on commercial bank balance sheets. And to your point, to offshore accounts in different areas, that will be a huge pot of money.

That will, even tiny amounts of that money flowing into bitcoin is going to make the price absolutely rip. So that’s a big deal in my mind. I think it’s more impactful than even the legal tender stuff. And that’s all fun, right, because it’s retail. But at the end of the day, what’s the old quote like, why do you rob banks? Because that’s where the money’s at. Banks are where the money’s at.

Right. That’s where you want to go. If you’re trying to really penetrate and reach critical adoption and to get bitcoin from $40,000 to 200 or $300,000, I don’t believe that will be primarily driven by retail. I think it’s going to be driven by bigger institutions with balance sheet capacity that are looking for an alternative to the bond market. Yeah. There was a paper I read a few months ago by, I think he goes by on Twitter, deep Throat IPO, I think is his name.

And he basically broke down a lot of these offshore bank accounts. To your point, the three biggest bank accounts being chinese owned bank accounts. And he was basically talking how they could collapse the whole us banking system if they wanted, just by transferring money from one account to the next. Like, they have trillions of dollars in these accounts. And JPMorgan, it’s been months since I read the report.

Well, it’s been at least five because I haven’t been on Twitter that long. But he talked about how JPMorgan, being the biggest bank in the US, had about $800 billion of liquidity and they could just, I’ll just withdraw 800 billion from JPMorgan and move it to bank two over here, like push of a button. But boom, they go insolvent. And they talked about that as a threat. But going back to kind of the point you’re making, and we’re talking about offshore banking.

I like that concept of sort of this ETF putting a floor there. What we saw, like in the Panama Papers and the Pandora papers is all these rich oligarchs and whatever around the world have all this money also. So not just the banks, but the rich people have all this money in these offshore bank accounts. To the point I was making earlier, we saw the russian oligarchs getting their money seized.

When you set up these intricate offshore webs of holding assets this way, you typically use fiduciaries to sort of set this up and so forth. And so all you have to do is get a few of them to go, shoot, we can put your money in this Fisbank counter. We found out the US is actually one of the biggest states, nations for this as well. But hey, it could get seized.

Why don’t you take 5% or 10% and put it in bitcoin over here? And so, I mean, that could pick up two, three, $4 trillion very quickly. The way to think about this stuff, I think, is, I’ll just full disclosure, I think it’s very difficult to even wrap your head around it. But everybody focuses on the size of m two, right? You see on fintwit, all these charts about m two, which is flawed metric in its own right, but there are estimates, right, of the euro dollar system, that it dwarfs the size of m two.

I read an estimate one time, they think it’s five or six times m two in the United States. And people are like, how is that possible? How could there be more dollar based liabilities? And it’s really because of fractional reserve banking, right? If you have some dollars in your account in offshore banking, you can create deposits for people and you can create lines of credit, you can effectively print money.

And then all that really matters is what is the reserves behind it. And if you have sort of a cascade to your point, you can create a global dollar shortage. You can create huge problems for the Federal Reserve where they have to open those swap lines and other things to provide liquidity that you were talking about earlier. Why is that relevant for bitcoin? Well, if these entities in large amount can basically print money offshore, and for them, it’s very low cost to put small amounts of their balance sheet into bitcoin.

Number one, I think that’s going to be a huge rip in the price, more so than even, I think, central banks or governments holding bitcoin. And number two, I think what it would do is it would effectively be a signaling mechanism where the banks, the actual liquidity providers for the market, are saying, we think this is good, reliable collateral. So, again, back to the perception of reality we talked about earlier.

That is huge. If the biggest commercial banks abroad are saying this is a good enough collateral that can compete and be on par with treasuries, the collateral, the reserve asset of the world, the psychological stairstep there is going to be massive, right? It’s a huge jump for people to get to that point and realize this is what this asset was intended for, I believe, for at least the foreseeable future.

Bitcoin is not meant for regular, everyday transactions. I think it is a reserve asset that can be used in coordination of the larger system. Yeah, I know we’re running long on time. I have one more topic I want to jump into that sort of dovetails into this. I do want to say that I think bitcoin can be a reserve asset and an MoE medium exchange at the same time.

It’s a new technology that allows us to have instant, have unlimited volatility or not volatility, unlimited velocity without having to add debt on top of it. Right. So it could be both. Obviously, working on layer two, layer three, layer four. There’s a whole lot of talks about block space being scarce, et cetera. So transaction. It’s also an evolution, right? Exactly. It’s an evolution. So moving into the last topic I want to talk about, so now we have this seemingly Wall street finance jumping into bitcoin with the etfs.

We just talked about potentially even commercial banks globally getting into bitcoin, as we talked about. On the other side of that, we have sort of this warpath of regulations potentially coming down the pipe against bitcoin and cryptocurrencies in general. Elizabeth Warren, luckily she has a horrible track record of getting any bills through. I think she’s like 300 to zero or something like that. 300 to one. So hopefully that sticks.

But she’s trying to pass a bill that’s so restrictive, it doesn’t make any sense. And you would go, well, she’s, whatever, over 70 years old. She doesn’t understand it. That’s why she’s trying to put a bill through here. Or maybe it’s that because it’s so restrictive, it sort of makes it impossible to comply with. It’s the latter for sure. Exactly. Right. So, I mean, basically it could make potentially, if this bill goes through, it could make doing any bitcoin trends or crypto transactions illegal, I guess, potentially.

And it seems like maybe there’s an attack vector specifically coming down against self custody. And so it seems like almost coincidental that let’s open up the ETF so everyone can still own bitcoin, but then we’ll put a law in place that no one can custody bitcoin. So now you have to buy it all through Blackrock, et cetera. Curious your take on that. I think you pretty much hit the nail on the head.

I was on Preston’s podcast, Preston Fish’s podcast with American Hodl, and I have said for a while now that I think every person involved in the space should have in their mental model, Mark, that you’re going to get over broad draconian legislation passed not only by the feds, by the federal government, but you will get passed at some point whether it’s Warren’s bill or something else by states and other localities.

And you just have to be prepared for that. It does not mean that bitcoin is dead or it’s going to cripple the market. We all know that bitcoin is designed purposely to try to not be affected by some of these things. But that doesn’t mean that there won’t be these sorts of over broad, vague pieces of legislation that are passed. And what I fully expect, and I’ve told clients this, is that they will at some point, again, whether it’s Warren’s bill or others, they will pass these bills and there will be litigation over them.

And from my perspective, I work as a litigation. Your perspective you see job, I mean, honestly, I can’t tell you how many times that a regulation or a law or something has come down that doesn’t make sense. And the fortunate thing about our system, Mark, is that you can go forward to a judge, hopefully that will look at it with open eyes and say, you know what, this captures a lot of innocent activity.

It’s really not appropriate and they will strike it down. I’ll give you a perfect example. And it’s at the risk of bringing up a controversial subject, but you got to remember that during COVID people were talking about a national emergency and how it was life and death if they didn’t put in place mask mandates. And over time, those decrees, a lot of those mask mandates went before the courts and many of the courts struck them down saying they were overreaching and over broad.

That’s how the system is designed to work. I don’t care if you’re the SEC. I don’t care if you’re Congress passing a law. We live in a system of checks and balances. And when you go before and exercise your rights between hopefully a neutral judge that will look at the issue on its face, he or she will decide, is this appropriate or does this exceed the authority that is granted to Congress? And to me, when you’re basically trying to prevent people from storing words in a usb stick or in their head, or their head self custody ban, if you try to pull that kind of nonsense, I expect them to lose and lose miserably in the court system, but that doesn’t mean they can’t pass it.

Now, this particular bill, I don’t think it passes the house. I wouldn’t be overly concerned about it in the short run. But I don’t think it’s just a mistake that she just doesn’t understand the technology. She knows exactly what she’s doing. She has aides that are looking at these things and they’re trying to say, how do we twist the knife as much as possible? And it is the next step in a sequence that they have taken in this aptly coined Operation Choke,.

2. 0 where they are trying to make it more difficult to buy purchase custody exchanges. You got to remember custody bitcoin. You got to remember that right now it is the official policy of the SEC, as set forth in multiple complaints against binance, Coinbase and Kraken, that Coinbase is not a registered exchange. They’re not a registered broker dealer. They can’t even function as a clearinghouse. That is set forth in papers pending in the court.

So explain to me how, if that’s their position, know they’re not trying to basically shut down the entire crypto industry in the United States. You have the major exchanges. The SEC is saying you can’t operate. But then if that’s the case, then why did they make all these ETFs use Coinbase as their custody? It’s a great mean. I think what it stems to is that they got spanked in the court.

In the grayscale case, they basically waived the white flag because the court said, you’re discriminating between the futures product and the spot product, and you don’t have a real good basis for denying it. So what can they do? They can do something like say, we want cash create, so we’re not going to allow grayscale to get the first mover advantage. They can say, we want it all custodied.

We can say, you want disclosures that the underlying holders, like Coinbase and others, there may be questions as to their regulatory status. And that’s all they can do. The SEC has limited jurisdiction. People don’t really appreciate this. They can only deny etfs under specific bases. Their basis for denying it for years has been that we don’t know if there’s sufficient surveillance sharing agreements to monitor the activity in the spot market.

We don’t know if it’s wash trading or it’s manipulated or spoofing, et cetera. So that argument failed. They lost on that argument. And they can do two things. They could double down or just let it go through. And I think they waved the white flag and said, we’re going to fight on other fronts. This is not the battle we want to put everything on. We’ll let it through, we’ll fight on the exchange front.

In litigation. They couldn’t say that you don’t have a registered exchange or registered custody solution. So you can’t pass this when you don’t have a registered solution. They absolutely could, but I think the argument they would end up then is they’d be back in court. Because it seems like if they say, fine, we’ll approve you. Yes, you can use Coinbase. Doesn’t that sort of like, give Coinbase the legitimacy they need to now? Hey, well, you approved us to be their custody.

As bizarre as it is, it does not in the eyes of the SEC, to give you an example, the SEC. But what about the eyes of the court? Like precedents or something like that? Yeah. Well, I mean, keep in mind, mark, the SEC allowed Coinbase to IPO as an entity. They allowed them to come to market as a publicly traded company. And now they’re in litigation saying you don’t have the right to conduct your primary business function.

How does that make any sense at all, that you can come to the market? And what they will tell you is they’ll tell you they’re different divisions, they’re different statutory mandates. We can’t question someone’s underlying business. We can’t tell you it’s good the enforcement division can come in and stop certain activities, like the unregistered sale of securities. But that’s how weird the government is in some respects. Like there’s limited power in different spheres.

Man, there’s so much I’d like to dig into there, but we’re running long on time. Yeah, sorry. No, it’s just, man, there’s so many questions I have there around that part. But I know we’re running long on time, so we won’t keep digging down those rabbit holes. But to your point, I guess, sort of to frame this up or kind of put a pin in this, Elizabeth Warren’s team knows what they’re doing.

It’s sort of shifting the public narrative, if you will, and watch out for maybe not this one, but bits and pieces of it coming back over and over and over again in the future. The one. One thing I’ll add, you brought up a point, which is true, that she has a pretty terrible track record. Right, for passing legislation. The one word of caution, I will tell you, is that this bill has a ton of really important.

So, you know, most of the bills she’s proposing, they’re filed with the Senate and they never see the light of day. They’re never debated. They get very little or no co sponsors. This has very prominent individuals, heads of certain committees that are significant signing on with it. So that tells me that this is, and I tweeted this out. I think of all the bills that have been passed presented that have been proposed, I think this probably has the best chance of passing the Senate.

So she’s like 300, and maybe this will be her first win before she hopefully leaves office. Maybe, but not the House. I mean, the House. I don’t think this bill goes anywhere in the House. Yeah. All right, Joe man, we’re going to wrap it up with that. What a great conversation. I really appreciate you taking the time. For anybody who wants a very market savvy and bitcoin crypto attorney, check out Joe Joe, shout out your law firm and your contact information for everyone.

Yeah, absolutely. If you google my name, Joe Carlosar, you’ll see all my contact info at Amundson Davis, again, based out of Chicago. If you have any litigated dispute or regulatory issue in the crypto space, I’m happy to help or talk with you about it. Just reach out. Individuals or just businesses? Both. I represent individuals. Unfortunately, the smaller stuff I can’t really handle. But if there are significant losses, significant disputes, fraud actions, breach of fiduciary duty actions, that’s my bread and butter.

And if you want some macro musings and some legal musings, I’m at Joe Carlos on Twitter. Feel free to follow me and reach out to me there. All right, thanks, Joe. Thanks, Mark. .