WBD293 Audio Transcription
2020 Bitcoin & Macro Review with Lyn Alden
Interview date: Tuesday 29th December
Note: the following is a transcription of my interview with Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I am joined by Lyn Alden, a macroeconomist and founder of Lyn Alden Investment Strategy. We discuss the coronavirus pandemic's impact, the increase in the broad money supply, high inflation and institutional investment in Bitcoin.
“I don’t think there are that many more hurdles anymore. I think once you have enough legendary investors come out, once you have a corporation add it to the balance sheet, once you have an insurance company add it, most of the flood gates are open.”
— Lyn Alden
Interview Transcription
Peter McCormack: Lyn, hi, how are you?
Lyn Alden: Good, how are you?
Peter McCormack: I'm really, really good, thank you. I think we're all good. What a week, right?
Lyn Alden: Yeah, it's been a crazy week.
Peter McCormack: I mean, I only care about Bitcoin. I know you have a diverse portfolio, but that's my only investment. So, when I have a good week, I have a really good week; and, when I have a bad week, I have a really bad week. But, I know you're a bitcoiner now, so you must have been enjoying this run-up; did you expect it?
Lyn Alden: It's a little earlier than I would have guessed, I suppose, so one thing I've been covering since November is, I was cautioning people about a potential correction, because we came pretty far pretty fast; we're testing previous highs. And, I reiterated that I'm not trading around, I'm not selling any Bitcoins and just setting expectations.
So, we got that correction, we got that consolidation and then, my main focus there was, once it breaks over $20,000, that's quite a run-up potential. So, until it breaks $20,000, it was vulnerable to corrections. But then, it just kind of out of nowhere, just broke above $20,000 and kept going.
Peter McCormack: It kept going. What was it; just short of $23,800, which I thought was pretty impressive. I think it will be interesting to see if it stays above $20,000, if there's any pullback. I don't tend to look at what happens this time of the year. Are people still trading as much? What do you expect?
Lyn Alden: With Bitcoin, I don't know. I know that general markets, people trade less but historically, especially the US stock market, they call it the Santa Rally; so, stocks tend to do very well into the year end. We'll see if that ends up applying to Bitcoin or not.
Peter McCormack: Well, there are lots of interesting people coming in. Anyway, we're going to do a review of the year, so thank you for doing this; really appreciate you coming on. Our last show did exceptionally well; it's been viewed over 80,000 times now, which is amazing, and we're going to be working together a little bit more over the year, which is also exciting. But, we've got a lot to cover.
I think realistically, the best starting point we're going to have to start with is the economic shock. You called it the biggest in modern history, what happened this year. Just out of interest, when you call it the biggest in modern history, what kind of timeframe is that; is that our lifetime, even our parents'?
Lyn Alden: I mean, back to World War II, roughly, at least in a lot of countries.
Peter McCormack: Right, so definitely. It's the biggest I've known, and the strangest.
Lyn Alden: Yeah, if you measured as, for example, GDP decline, unemployment increase going up in the United States; and for most countries, I mean their GDP was just absolutely crushed during quarter 2. So we've already had a sharp rebound; we still haven't got back to previous levels in most countries. So, you know, basically it's a bigger economic shock than the crisis from over a decade ago. And, you pretty much have to go back to the major wars, or the Great Depression, to find similar economic shocks.
Peter McCormack: Have you noticed any difference between countries which may have handled the lockdowns in a better way, like outside of people's opinions of whether lockdowns should happen or not; I'm not interested in that right now? Let's say, for example, the UK. We have these tier-based systems. Where I live, we've just been put into Tier 3, which is the highest level. The whole thing's been an absolute massive failure.
And, you look at a country like Australia and again, I'm not judging the strictness of their lockdowns. I'm more just interested in, have you noticed any pattern related to different countries; the economic shock?
Lyn Alden: Not in some of the really broad economic indicators. So, for example, we can look at Japan, for example, and Japan, they never did full lockdown, so they had very low virus counts, but they still had a really big economic slump. The same thing generally applies for a lot of other countries. There's not a ton of correlation. It partially depends on how export-driven the economy is; how commodity-dependent the economy is; but, I think that certainly makes a difference when you get down to the individual small business level, right, because those are the ones that are most impacted by the shutdowns.
That data's much harder to measure. But, for example, in the United States, we saw a big drop-off in small business activity. We started to see a rebound in the summer, but then it rolled back over and it's just been kind of stagnant. So, that's actually my biggest concern probably of this whole crisis, is basically the crushing of small restaurants, small businesses, compared to a lot of the bigger companies being able to stay in business more comfortably, partially because they can access capital markets; partially just because they have more financial reserves to work through; and also, because they got bailouts.
Even though we did, in the United States for example, we did PPP loans that turned into grants, so that went into keeping some of these small businesses afloat; but, that only lasted a few months. So, if the shutdowns last a lot longer than the stimulus, a lot of them end up going out of business.
Peter McCormack: Yeah. I guess if you're someone like McDonald's, you can very quickly implement -- we had it here -- there's no access to the restaurant, but you could use the drive-thru. We know things like Domino's can very quickly set themselves up to be delivery only, and they have the ability to advertise this, reach out to people. I guess if you're smaller, like a pub or an independent sandwich shop, in that kind of situation, firstly putting in the infrastructure, but also letting people know that you can do that, is a lot more difficult?
Lyn Alden: Yeah, absolutely.
Peter McCormack: All right, so let's break down what happened in terms of your kind of observations on how, and we'll use the US as that's the majority of the listeners to this, but in terms of what we've seen in stimulus from the government. What's actually been in place; what has the effect been; what's the impact?
Lyn Alden: So, the stimulus in the United States took a couple of different forms. One was $1,200 stimulus cheques; they got a lot of the attention. But, some of the bigger components of it were basically that the Federal Government provided extra unemployment benefits for people that lost their jobs.
Normally the way it works in the United States is that states provide unemployment benefits, and they're pretty small benefits; but this year, the Federal Government said, "We'll add another $600 a week to those unemployment benefits". That lasted three or four months. So, for people who got the full amount of that, that was several thousands of dollars. In many cases, that exceeded the wages that they would have made if they were still employed during that time. So, we actually saw briefly, national income went up in April and May.
Also, they did PPP loans. These are basically several hundred billion dollars of loans that went out to small businesses that are largely forgiven, so they mostly turn into grants, as long as you met certain really basic requirements. But, of course, you found out over time, a lot of that was used for fraud. It disproportionately went to kind of medium-sized businesses, not even really super small businesses; it was kind of scaled up. And, a lot of that went to some of the bigger small businesses, if that makes sense.
Since then, stimulus mostly tapered off and now, they've been negotiating another package that might be $900 billion; it might be another number; and so far, they've been unable to come to a consensus. It looks like they're getting closer. Maybe when this airs, there will be news out that it will be different. But basically, there's such an economic hole and all this stimulus going back to try to fill it up. So, we're seeing a really rapid increase in the broad money supply and the national debt.
Peter McCormack: And, what has the impact of that been, because the things I look out for are very basic, and some things you highlighted to me; for example that despite companies closing down for business for temporary periods and the massive impact on GDP, we have seen this massive rise in the stock market, despite a huge increase in jobs? It doesn't make sense why this is happening, but what's your analysis?
Lyn Alden: So, part of it, I think, makes sense and part of it doesn't. So, if you separate growth stocks from value stocks; so most stocks, like banks and other stocks like that, they had a much worse time throughout the year, and only in recent months did they really start to recover pretty strongly. Many are still below their early 2020 or late 2019 highs; whereas tech stocks, growth stocks, most of them just soared all the way to new all-time highs. In some countries like the United States, those tech growth stocks make up a big chunk of the index, so they can pull the whole index up really sharply.
We've seen a kind of bifurcation between companies that are not harmed by it and that were harmed by it. But then, because interest rates came down so far that cash, in many places, is negative nominal yields and in the United States, even if you're getting a zero or a slightly positive yield, it's still not keeping up with inflation, so you get a negative real yield. So basically, investors are seen to be using stocks as a store of value. Even though some of them are highly valued, even though they're risky, one of the alternatives is cash that then takes your purchasing power away.
For example, as Michael Saylor pointed out, he was sitting on hundreds of millions of dollars in cash, while the broad money supply is going up 25% year over year, and likely to go up, not to that extent, but double digit percentages probably for several more years. So, when people see that happening, they'd rather be in equities.
Peter McCormack: Right. One thing I wanted to understand is that traditionally, people who invest in stocks, usually you should be investing in stocks based on projections of how that company will do and forward belief. But, we've also seen a massive increase in retail investors with apps such as Robinhood.
I'm guessing that, if there are a number of new buyers coming in, I'm going to hazard a guess that these people aren't as experienced in knowing what to trade, how to trade, reading cash flow forecasts, reading projections, looking at the competition within the market, and maybe are just buying a little bit more based on, I don't know, gut feel; and therefore, does that traditional supply and demand mean that there's too much demand for those stocks and that's inflating the prices?
Lyn Alden: Yeah, pretty much, and we haven't really seen this type of retail enthusiasm since the late 1990s, during the dotcom bubble, because we never got this in the aftermath of the 2009 crisis, for example. When the stock market started to recover, we never saw that enthusiasm come back. Whereas, we have to go back pretty much to the late 1990s to find a lot of indicators look similar. So, back then, the amount of IPOs was very high and the majority of them were unprofitable; something like 80% of them were unprofitable. And, of course, there was a frenzy of retail buying. That was, of course, not long after the creation of the consumer internet; so, the availability of online brokerages really took off.
So, we had that big lull where there wasn't a lot of retail activity; we saw more passive investing. But then, this year, I guess people couldn't really go out in many cases, they got stimulus cheques, and so people just poured into all sorts of trading programmes, so they basically flooded in the stocks. But then, even institutional buyers, they're just looking at their available options, they're looking at interest rates, and they're still saying they'd rather be in equities.
I think it depends on the sector you look at. So, I think some of the tech stocks got really overvalued. But, there are other stocks, like healthcare stocks or other sort of equities, that are still average valuation compared to their history; and so, they still look more attractive, for example, than cash, because you can buy healthcare stock that might have a price-to-earnings ratio of 15, which is normal. It might be paying a 2% or 3% dividend yield in its growing earnings, compared to holding cash in a bank that is paying you, like, 0.2% and inflation's 1.5% and you're just getting your purchasing power chipped away while broad money goes up at 10%, 20% a year.
Peter McCormack: Yeah. I don't know who's getting the 0.2%, but I'm not getting that at my bank; that's for sure. Do you worry about something like Tesla, because the company is now valued more than all other car companies put together? Do you worry that we could be heading to a similar kind of dotcom crash that happened in the 1990s; could something trigger that?
Lyn Alden: I think some of those sectors have got into bubble territory, and so like, if you look at some of the mega caps like, say, Google and Amazon, they're expensive but they're not comically expensive relative to their cash flows, their earnings. There are some stocks, like Apple, that I think are quite ahead of themselves. But really, to find the most kind of bubblicious ones, it's a lot of the unprofitable tech companies. The price-to-sales ratios look a lot like the late 1990s.
In particular, we've seen a really big boom in renewable energy this year and it's funny, because the fundamentals aren't that different than 12 months ago, but the stock prices are in many cases up, like double, triple, quadruple, or in Tesla's case, more than that. And, now that Tesla's been added to the S&P 500 index, roughly right now, basically investors are already putting that in now. And so, that creates a lot of forced buying, because all these major index funds have to buy Tesla now and it's the biggest component ever added to the S&P 500.
The reason that happened is because, in order to be added to the S&P 500, you have to be a profitable company, and Tesla spent most of its lifetime not profitable, but it got so big anyway, in terms of valuation. So, I think Tesla and some of the other renewable energy stocks, some of the unprofitable tech stocks, some of them are vulnerable in the years ahead to a pretty sizeable crash.
Peter McCormack: All right. I'm just looking. The Tesla market cap is right now $620 billion and analysts expect revenue of $8.3 billion, $8.4 billion, and a reported net income of $331 million; pretty wild!
Lyn Alden: Yeah, it's outrageous. It's an extraordinary high price-to-sales ratio, and it's tricky because a lot of people point out that they're not purely a car company. That's true, but still a big chunk of what they do is hardware, whether it's cars, whether it's solar things, whether it's batteries, things like that; and hardware traditionally does not have super high profit margins. One of the exceptions is Apple; they have the blend of hardware and software. They've been able to have really high profit margins. But in general, it's just a very competitive business and we see a lot of other top auto makers, like Porsche and other big names, come in to the electrical vehicle space; so, I consider Tesla to be a pretty high value risk stock.
It's one of those things, and this has been a funny year, because anyone who had any sort of prudence, anyone who's saying, "This looks expensive", generally throughout the year, whatever you were looking at just got more expensive. So, it's been tricky definitely for people that are trying to risk manage anything, but it's one of those things that can go further than you think; but, whenever it does reverse, it can get pretty scary.
Peter McCormack: Would you dare short it?
Lyn Alden: So, I wouldn't do one of those long-term shorts on it, because you're always at the risk of it going up. I've done a couple of attempted shorts on Tesla for fun this summer, which is basically if it starts to have a correction from very over-bought levels, I'll put a small short position on, but then with a very tight stop so that, if it goes up and breaks a certain level, like breaks new all-time highs, I cover my short and get out. So, I basically lost no money on it, but one of those times it could pay off pretty substantially.
So, I use it as a minor hedge sometimes if I want to, because I have Bitcoin, I have equities, I have all these other investments, so occasionally, when we have overbought conditions, I look for a small hedge; but, you have to be very careful when you do that. Those investors that have just been holding a short Tesla position have just got crushed.
Peter McCormack: All right. Well listen, let's get back to what's been happening with the economy this year. So, you said to me in your notes, because we spoke beforehand, you said to me that this isn't like a normal recession. What is the key difference and how do you think we will come out of this?
Lyn Alden: So, with most recessions, basically you get a big decline in economic activity, you get a big deleveraging event, and you get a big stock market decline, so people lose a lot of net worth on paper. This one, because we're towards the end of a long-term debt cycle, which is a subject we talked a lot about in our previous podcast, basically things work different in this sort of environment in the sense that, usually it's of rapid increase in the broad money supply, because basically the amount of debt is so big in the system that if it were deleveraged, the system would kind of unravel and become insolvent.
So what you see instead is, you see partial deleveragings here and there, but then you also see a rapid increase in the broad money supply and some degree of currency devaluation. So, the fact that we had the biggest economic shock in history, while average incomes went up, is an example of that. And, the stock market hit fresh new all-time highs, while we had the biggest economic shock since World War II.
If you also look at things like the amount of sovereign debt issued, both United States and around the world, is absolutely immense. It looks basically like a war. You have to go back to World War II again to find times where fiscal deficit as a percentage of GDP were this high. So, it's a very different environment than the normal five- to ten-year recession.
Peter McCormack: Yeah, that was actually something I wanted to ask you that I didn't really understand. I understand how the UK and the US can essentially switch the money printer on. How do they do that in the EU when they have a single currency; how do individual states --
Lyn Alden: Yeah, that's part of the reason they've done, in some cases, smaller stimulus, because they have to do something as a consensus. So, kind of like in the United States where we have so much polarisation between red states and blue states and a you have lot of political gridlock that makes things hard to get done; Europe, in many ways, is more extreme in that sense, because you have to get buy-in from multiple countries.
So, none of those individual countries can just unilaterally do a massive fiscal stimulus, because they gave up control of their own currency whereas, for example, Japan, United States, Britain, they all have just more unilateral decision to basically devalue their currency and prop up whatever they're trying to prop up.
Peter McCormack: So, does that mean the euro is a good currency to hold right now; is it holding up better against the dollar and the pound and the yen?
Lyn Alden: Ironically, yes. I mean, I haven't checked it versus the pound, but the euro's been very strong versus the dollar this year. That was actually one of my -- I've been outlining that probability ever since late 2019, that I've been in basically the camp that I think that the dollar was going to decrease versus a basket of major currencies, and that basked is dominated by the euro in terms of market cap. So, that has happened so far this year pretty sharply, and it's partly because Europe just has just not done the same level of fiscal stimulus as the United States, so their currency held up stronger, but some of their economic indicators have been weaker.
Peter McCormack: Yeah, that's interesting. I'm just looking now. Back in March, essentially when it started, I'm trying to follow this; yeah, it has dropped. I'm not sure if I'm reading this chart correctly; it shows I'm well out of my depth! But, it does look like it's dropped. That's interesting; quite a big drop as well.
Lyn Alden: Yeah, like late last year, €1 was worth $1.11 and then, we had that big volatility event around March. But now, €1 is worth $1.23.
Peter McCormack: Yeah, that's amazing.
Lyn Alden: So, it's had something like a 10% appreciation.
Peter McCormack: That could continue as well, right?
Lyn Alden: Potentially. It's getting up near some resistance levels, so if you look back, we had similar weakness in the dollar back in 2017 into the very beginning of 2018 and we're kind of retesting those highs. So, it will be interesting to see if they can break that level, or if it kind of gets range bound here. My base case is probably, over the next couple of years, you'll see the dollar weaken versus a basket of major currencies, but we have to watch some of those key levels.
Peter McCormack: Well, they're all going to weaken against Bitcoin; that's for sure! Okay, so listen, you were talking about the increase in the broad money supply by about 20%. Just so people understand, just explain what the broad money supply is?
Lyn Alden: Yeah, so there are a couple of different ways to define money. It's funny because we think money should be simple to define, but it's actually there are multiple ways to define it. So, banks, for example, have base money. So, base money consists of things like the reserves that banks have on deposit with the central bank. And, base money also includes things like currency in circulation; physical currency.
But then, there's a much large amount of money that consists of checking accounts, savings accounts, certificate of deposits, things like that. If you were to look at all your fiat bank accounts, that's part of the broad money equation. And, in the United States, that figure is something around $19 trillion; so, there's about $19 trillion if you add up checking accounts, savings accounts, currency in circulation, all those different metrics.
So, that figure has gone up about 25% year over year. And, if you look back over the past decade, it was rising at maybe 5% or 6% on average, so this has been the biggest jump since the 1940s. And, that's a lot different than, for example, what happened in 2008/2009. So, when people often look at what central banks are doing, like they're increasing their balance sheet; a lot of that QE that they do when they increase bank reserves, a lot of that does not get out into the broad money supply. That only gets out to the broad money supply if either banks lend it, or if the government runs massive fiscal deficits and basically ejects it out to people; they give people cheques, they bail things out.
We saw that on a much smaller scale back in 2008/2009, but in this year, both in the US and to a lesser extent, in other countries, that combination of massive quantitative easing combined with massive fiscal deficits basically injected that money straight into the broad money supply.
Peter McCormack: Right. So, when you talk about potential new stimulus bill, well let's just say for the sake of ease, say it's another $1 trillion, does that increase the broad money supply by $1 trillion?
Lyn Alden: Generally, yes. But, it depends on a couple of specifics. So, if we were to go back, say, before we got to all this craziness with central bank balance sheets going vertical, generally if the government were to do a fiscal stimulus, it pays the money out but then legally, it has to issue bonds to basically recoup those expenses; it can't just print money and send it out to people. So, they would basically extract money from somewhere else; so they issue bonds and then investors buy those bonds; so that extracts capital from them and then it injects that capital to other people. So, in that sense, you would not see a broad money supply, you're just rearranging where the money is.
However, if they do a massive fiscal stimulus, and then when they issue the bonds, the central bank just prints money and buys those bonds, then that money is not really extracted from anywhere else in the economy. And of course, there are all sorts of legal things, like the central bank generally doesn't buy directly from the Treasury. Banks will buy it and then, they'll sell it to the Fed at another time. But, one way or another, they end up on the Fed's balance sheet with newly printed money.
So, when you have that combination of massive fiscal stimulus with massive quantitative easing, that directly increases the broad money supply.
Peter McCormack: So, 25%, you're talking about $4 trillion to $5 trillion increase this year?
Lyn Alden: Yeah, something like that, yeah.
Peter McCormack: Holy shit! Okay, so the implications of that are -- how does that tend to trickle out into the economy; what tends to be the implications, because I've read a lot about a lot of the money just ending up making rich people richer? There are a lot of people complaining that's essentially what's happened here; it's gone to essentially the billionaires and the people running the companies. But, where does this tend to kind of trickle out to?
Lyn Alden: So, if you look back historically, again looking at the United States, over the past century, we've had two very inflationary decades. Those were the 1940s and the 1970s and both of those were also the two decades that saw a very big increase in the broad money supply. So basically, we're on track where broad money supply increases over the past several years, especially because of this year, are starting to look like those decades.
We've not seen the official consumer price inflation tick up to that level yet, and there's a variety of reasons for that: one is because a lot of people couldn't spend during this year, right? They could spend on things like home goods; they had to kind of retarget their spending. They couldn't travel as much; they couldn't eat at restaurants as much; so, that money didn't circulate very well, so we got a decrease in money velocity.
So, it partially depends on how that stimulus is done. So, hypothetically, if they just had all the money go out in the form of stimulus cheques, or things like that, that would get out to the regular person pretty significantly; and in part, that's what happened. But, because also part of the money was used for corporate bail-outs, part of the money went to the high end of small businesses in the form of PPP loans, I know there are literally financial asset managers or research firms that got PPP loans that turned into grants.
So, they were doing fine, then they got money; it turns into grants; and, part of the reason, PPP loans are supposed to support the employees. Like, if you otherwise would have to fire employees, this says, okay, you get this money but then you have to use mostly to pay employees. But, if you were not really planning on firing employees anyway and then you still got the cheque, that all just goes up to the senior management; that just goes up to whoever owns the company, unless they decide to give it out as bonuses or something.
So, because part of the stimulus went to those kind of upper echelon groups and part of the stimulus went down to the everyday people, it's kind of a mixed bag.
Peter McCormack: So, is there potential then, as we come out of lockdowns and people have their vaccinations and life gets kind of back to normal, that there may be an inflationary shock as people are sat on money? I know myself, look, I can't spend any money at the moment. I can't travel, can't have holidays; I've saved money during this period. But I do know, once it ends, we're going to have a holiday, you know, might buy a car, all those kinds of things; may move house. Can you have an inflationary shock as there's a sudden rapid increase in the circulation of money; is that a possibility?
Lyn Alden: Yeah, I think so. And, part of the reason we didn't see any sort of official inflation this year, in a broad sense, was because you had that big increase in the money supply that was offsetting that big deflationary shock. So, if you alleviate that deflationary shock, that money's still out there forever. So, if that money starts to move a little quicker, it's pretty easy to get an inflationary shock and there are a couple of things: for example, because we had a big decrease in energy prices this year. So, energy prices are one of the big components for inflation. And so, because we had that, that kind of took away a lot of the inflationary potential.
But then, of course, because commodity prices and energy prices became so low, we saw a lot of oil and gas companies start to cut their capital expenditures, so their production over the next several years is now lower than it would have been. So, if you get that rebound in travel; if you get that rebound in energy demand up against tighter supply, they'd even get higher energy prices and that would likely trickle out into broader inflation.
So, I think that's one of the key things to watch for is what happens with energy markets; so, I think there's a decent chance that by late 2021, maybe 2022, you definitely could see some of that demand as it relates to travel. So far this year, we know there has been targeted inflation. So, for example, grocery prices in many countries became very elevated because we had to kind of rearrange our supply chains; we had some shortages. And, if you look back in general, even though this has been an "uninflationary decade", you know, official inflation measures have not been very high, it really depends on what segments you look at.
So, in the United States, for example, things like tuition or childcare or healthcare services, they've been quite inflationary. They've been going up at a much faster rate than the official broad CPI. But that's been somewhat offset by things such as electronics keep getting cheaper, offshoring keeps manufactured goods very cheap, and so there's been this big kind of bifurcation between manufactured goods price increases versus service price increases. So, if you were to get that commodity shortage, you could have a broader inflationary surge.
Peter McCormack: What happened with inflation during the 1940s and the 1970s; how bad did it get? And, add to that, how bad do you think it could get; what kind of rates do you think we could see?
Lyn Alden: So, it depends on the country you look at. In the United States, which is where I have my most detailed numbers, the 1940s and then 1970s, they had similar levels of overall inflation, but it took different forms. So, the 1940s, they had three really big spikes of inflation. So, the highest spike, I mean, two of the spikes got into double digits; and, one of the other spikes got into the high single digits. So, they were just these rapid spikes. By the end of the decade, if you were holding treasuries, you lost something like a third of your purchasing power.
If you look at the 1970s, it was different because the actual high point, again it got into the low double digits, but the high point was not quite as high as some of the spikes reached in the 1940s; but, it was more persistent because it was kind of uncontrolled. Back then, again by the end of the decade, you lost about a third of your purchasing power if you were holding cash or treasuries. And actually, more than that is one difference it was at the 1970s, they were able to raise rates to try to combat inflation; whereas the 1940s, they did not raise rates, because sovereign debt was too high.
So, it's partially going to depend what happens with energy markets and commodity markets, but I do think that there's a chance to get much higher inflation than the Federal Reserve's 2% inflation target.
Peter McCormack: So, this is why all of the billionaires are moving their money into Bitcoin, because essentially it seems like they're front-running the potential for an inflation towards the end of next year?
Lyn Alden: Yeah, I think so. I think smart money is cautious. For example, if you look at Stanley Druckenmiller's comments, he's one of the best traders in history. His returns were just absolutely silly. So, when he got into Bitcoin, he cited inflation as one of the reasons. He expects gold to do well. He says, if gold does well, he thinks Bitcoin will do even better. He thinks some commodity companies could do pretty well. So, he's looking several years out. So, he cited, for example, a five-year outlook for his inflation concerns.
It's one of those things that might happen 2021; it might happen 2022; but, I think the deeper you get into the 2020s decade here, with such rapid money supply increases, if you get any sort of commodity scarcity, that triggers a good potential for inflation.
Peter McCormack: Yeah. I've got the Paul Tudor Jones letter that went out to his investors; I probably shouldn't have this, but I've got it anyway. He refers to the Great Monetary Inflation; is this the term people are using?
Lyn Alden: Well, I have not heard that specific term, but it's an appropriate term, just because it hasn't been seen for decades.
Peter McCormack: I mean it says in here, "Enlisting all the instruments that might respond to the Great Monetary Inflation, the May investor letter postulated that one day Bitcoin might become the fastest horse in the race". He's actually very interesting. He's got all the different measures like Nasdaq, a bunch of things I've never heard of that you will know about, GSCI, the Australian --
Lyn Alden: Commodities.
Peter McCormack: Oh, is that commodities; with a yield curve. But, he sees Bitcoin as the best asset and the fastest horse in the race with this. So, it feels like what we're seeing with Bitcoin right now is that it's a race to get in, because we saw what happened with the price; it's doubled since Saylor did his. So, if anyone wants to do what Michael Saylor did, it's going to cost them double what it cost him. It's a real first come, first served with this. What did you make of MassMutual?
Lyn Alden: Oh, that's interesting just because, you know, a tech company doing it is different than a real established insurance company. So, the fact that now insurers are getting involved … Now of course, for them, it's a much smaller percentage of their assets; it's a fraction of 1%. But basically, that opens the flood gates where insurance companies could have a non-zero Bitcoin position. So, that represents trillions of dollars of capital. And, if 1% of that gets into Bitcoin, that could move the price around the world.
It's one of those things where that individual purchase was not very significant, but if that represents the beginning of a consensus, that's pretty interesting. And it's funny, because a lot of insurance companies don't even invest in stocks. So, if you look at a lot of insurance company balance sheets, it's mostly bonds and really super kind of low-volatility investments. Some of them also venture into equity positions, so Berkshire Hathaway, Warren Buffet's company, that's primarily an insurance company and they invest in equities obviously.
Then, there are other firms like Markel, or one of the Ohio based insurers; some of them go into equities. But, a lot of them are bonds only. So, to see this one just go into Bitcoin is pretty interesting.
Peter McCormack: Are you more bullish now on Bitcoin?
Lyn Alden: About as bullish as I was this summer. So, I started my position in April and I was pretty bullish; but, by the time I got to the summer, I was extremely bullish. So, I kind of have that same level of quite bullishness.
Peter McCormack: You're not wishing you just put all your money in Bitcoin this year? You're not thinking, "Damn, that was the one trade!"
Lyn Alden: This is not how I -- I have a pretty sizeable position though.
Peter McCormack: I read your reports! How long do they take you, by the way; each one's like a book?
Lyn Alden: They take several hours to do, but research goes into it ahead of time. Some of my public articles, like my recent one on the Global Dollar Reserve System, that one was one of my longest pieces ever, so that took days to put together.
Peter McCormack: Hold on, was that the one you sent me?
Lyn Alden: No, the other one.
Peter McCormack: Oh, money printing.
Lyn Alden: The one I sent you, the money printing one, that was actually also one of my longest though, that took a long time and, in part, because it was partially aimed at educating retail investors, but it was also a response to some other professional investors, because there have been a lot of debates lately about what exactly constitutes money printing. So, that was kind of a response to some of them to kind of lay it out and say, here's the mechanics and basically a counterpoint to some of the arguments I've been hearing.
Peter McCormack: Well, what does constitute money printing and what are the myths; where are people getting it wrong?
Lyn Alden: There are basically people saying that because quantitative easing does not get out into the broad money supply, that it doesn't constitute money printing. I agree with that part, but I think what a lot of people were missing is, if you do quantitative easing, combined with massive fiscal deficits, that injects it almost one-for-one, directly into the broad money supply. And I think there are a lot of people kind of missing that extra variable.
Peter McCormack: Okay.
Lyn Alden: Because, if you go back to 2008, a lot of people saw those balance sheets go vertical and they were calling for hyperinflation, and of course we never got that; it was not a very inflationary decade. And that's in large part because they missed the fact that there was no mechanism to get those bank reserves out into the broad public. So, it was not leant by banks; and deficits, while they were sizeable, they were not huge. So, we didn't see a rapid increase in the broad money supply after the global financial crisis, despite all the central balance sheets going vertical.
A lot of people are saying basically that it's going to happen the same this thing time; quantitative easing is not inflationary. And I'm saying, okay, that's fair, but look at what broad money supply's doing, because this time is a different matter than 2008/2009, because that's getting directly out into the broad money supply.
Peter McCormack: So, if somebody was listening to this, Lyn, somebody a bit like myself and they're thinking, "All right, crap, I don't understand all this, but I'm nervous", what are the things that people should be looking out for because, whilst we've had all these warnings, everyone's been warning us about the money printer, everyone's been warning us about inflation but, like you say, things are quite steady at the moment. Here in the UK, we aren't seeing massive inflation; we just aren't. And yet, our government has borrowed more money than they've ever borrowed.
What are the things that people should be looking out for, and when would you think people will start to notice an impact on their personal income, or savings, I should say?
Lyn Alden: I would focus on probably energy prices; watch what all those are doing. And, if you're going to watch another indicator, watch what broad money supply's doing. And, if you look at, I mean several countries; if you look at most countries in the world, their broad money supply has not gone up as rapidly as the United States.
So, if you look at a lot of places in Europe, if you look at China, if you look at Japan, their money supply might have gone up, say, 10% year over year, which is pretty significant; in some cases, a little bit more. But, the United States has been one of the exceptions where we've gone up 25% year over year.
Peter McCormack: You talked also about the size of recovery and you talked about quick V-rebound, that rolls over into flat ground. What do you think it's going to be here? Is it because there are certain companies that can rebound quickly and there'll be access to capital; but, there are other industries that perhaps have been almost decimated?
Lyn Alden: Yeah, pretty much. So, if we look at previous, you know, if we look at the 2008 recession, if we look at the 2001 recession in the United States, it took several years to get back to full employment; so, not just in terms of the unemployment rate, but in terms of the number of people employed. So, a lot of people earlier this year were calling for a v-shaped recovery. They were like, as soon as the lockdowns end, I mean this was back in March and April; they were like, as soon as the lockdowns end, jobs can go right back up, we'll get back to normal. I was pointing out, that's not how it works. You can't just have millions of people leave the labour force and then quickly go back.
What you have is you have a full credit cycle play out, so you start to have insolvencies; you have thousands of restaurants just go out of business and close their doors; you have some of the more cyclical businesses, you know, companies that make products for restaurants, companies that are associated with travel; a lot of them just go bust and so those people never get back to their job.
So, what I called for instead was, I called it a backward square root sign recovery, which is you get that snap back in jobs, right, so you get that mini-V, because lockdowns end; restaurants go from being all closed to partially open. You get that kind of quick snapback, but it's only part of the way. And then, it rolls over and goes mostly sideways and then takes years to get the rest of the jobs back. So far, that's exactly what's been playing out where now, jobs are growing very, very slowly in the United States and many other countries.
Peter McCormack: So, could we be in a situation where we've got slow job growth, high inflation and the government being out of bullets essentially with both fiscal and monetary stimulus? It sounds like a disaster scenario.
Lyn Alden: So potentially. Part of the reason why some people aren't worried about inflation is because, if there is high joblessness, and if wages don't really rise because there are a lot of workers looking for jobs so they're not really in a position to negotiate for higher wages, that can potentially keep a lid on inflation, because you don't have more and more money chaser fewer and fewer goods. Now, that can be short-circuited if you get massive fiscal stimulus that just kind of pays people anyway, and then if you get some sort of commodity shortage. So, I think those are things to watch: what happens with stimulus and what happens with energy pricing.
In terms of running out of bullets, I mean, monetary policy is mostly out of bullets now. They're all near zero, in some cases below zero, so they're pretty much limited to asset purchases, kind of monetising whatever fiscal spending is happening. So, fiscal stimulus, they can pretty much do that until they get inflation, but then the genie's out of the bottle, right. So, I think that's what we're seeing now, is that because we're not seeing inflation they're just like, well let's do more.
So, you can keep doing more and it seems like there's no cost for doing that. And, at first there isn't, because it's offsetting a deflationary shock; but then, if you were to alleviate some of those deflationary conditions, either because people are travelling again, or energy demand is back, or commodity scarcity happens, and you're still getting those pretty sizeable fiscal budget deficits, I do think that creates a more inflationary environment, while the economy's potentially still pretty weak.
Peter McCormack: Yeah, it's interesting, because you refer to classic Fourth Turning stuff, and it's only a book I've recently come to know and I'm working my way through it. It's kind of prophetic really that that's what we're going through here, and it feels kind of scary really because of the implications of what the fourth turning means. We discussed it, I think, at our last interview.
I think I mentioned I'd been out to Santiago in Chile and there was massive inequality there, and it seems like these are issues that seem to be affecting other markets, and can affect here in the UK and the US, you know, an increase in people unemployed and an increase in crime; it's kind of scary?
Lyn Alden: Yeah, it is definitely. I mean, I can't imagine how, especially for people that couldn't work from home this year, imagine the anger a lot of people felt when their restaurant was closed; either they owned the restaurant or they worked at the restaurant, or they worked in travel. So, a lot of people are just experiencing a lot of economic pain this year.
Basically, it's at the situation where there's so much bifurcation between, you know, some places did very well throughout the pandemic; other places did very poorly; and so, there's just a lot of frustration built up. And, it also goes country by country. So, for example, in the United States, if you look at the median net worth of a person, it's actually lower than the median net worth of most European countries or Japan; basically, most other developed countries. So, there's a lot more economic vulnerability here for people if they lose their pay cheque; especially also because they can potentially lose their healthcare.
It's just been, around the world, especially the United States, but many countries around the world, it's been an extremely difficult time for people to go through. So, if you go back to the fourth turnings, it's just always a very challenging event where existing institutions get challenged, so more and more people stop listening to the establishment authorities and start wanting to do their own thing.
So some people, for example, you had Brandon on your podcast who linked The Fourth Turning to Bitcoin. So, Bitcoin is a classic fourth turning response, since it's saying that people are going to do their own thing if they don't like how governments or central banks are handling things. And so, we've seen this big interplay between some of these more decentralised forces versus some of the centralised forces.
Peter McCormack: Yeah, we're in this position now where there's like this crossover I'm doing where I'm kind of working my way through The Fourth Turning and The Sovereign Individual, whereby we do have this escape valve where people do have Bitcoin, but also have the ability to move. And this kind of regulatory arbitrage where, it's a thing that Balaji talks about that's really interesting, is that you can vote with your ballot, with your feet and with your money; and right now, the vote with your feet is the most powerful vote that you potentially have. The mass exodus of people out of San Francisco into places like Austin and Miami is super interesting. And, I'm intrigued on what the impact that is going to have. I don't know if you're tracking any of that?
Lyn Alden: Yeah, because that's a key risk to watch out for, because as those states that have people move out of them, they lose tax revenue. And, unlike the Federal Government, they can't just print money to fund themselves. So, they basically have to end up, say, cutting police; whatever their state workers might be, they have to cut costs. And, that can create potentially less safe conditions, potentially less infrastructure spending, things like that, and so you kind of get that vicious cycle where then more and more people want to leave.
If you look back at New York's high crime days in the 1970s and 1980s, we saw some of that happen there, where just a local government can spiral pretty quickly. So, we talked before about how European countries can't unilaterally print a lot of money because they don't control their own currency; and, it's a similar phenomenon with US states. So, they are these big economies; they have pension debts to their public workers; they have all sorts of things; and, one of their only release valves is they have to cut workers, they have to raise property taxes and that creates a less desirable place to leave.
So, you can potentially see some crisis situations play out. There have been some US cities that have been absolutely devastated due to offshoring. So if you look at, for example, Detroit, or a lot of the small cities around the Midwest, a lot of them have just been devastated over time by jobs leaving, and then it just kind of becomes a vicious cycle. And so, there are a lot more cities that are vulnerable to that.
Peter McCormack: All right, well listen, we can't finish without touching a little bit on Bitcoin; there are a couple of things we need to cover. Obviously a very, very interesting time; we've touched it a little bit at the moment, but it appears that Bitcoin is becoming obviously a more interesting option for a range of people, from the billionaires to the hedge funds to even the insurance companies.
In terms of consideration for next year, do you think this is just going to continue to grow; do you think there are any particular hurdles for over investors yet to now come into Bitcoin; or, do you think the likes of Paul Tudor Jones, the likes of MassMutual and Square and MicroStrategy, do you think they've essentially created the protective moat around Bitcoin for people to invest?
Lyn Alden: Yeah, I don't think there are that many more hurdles anymore. I think once you have enough legendary investors come out; once you have a corporation added to the balance sheet; once you have an insurance company added, most of the floodgates are opened, right. At that point, I think the biggest thing is there will be some investors saying, "I wish I'd bought at $10,000, but I don't want to buy at $20,000", but then it goes up a little higher and they're like, "Well, I'll just buy it".
So, there's that kind of, you know, some people will be hesitant to buy it, but then it can cause FOMO in the other direction. So, when they finally give up and just buy it, then you get a price spike. And, one thing that's different now is that, because there's more institutional buy-in, some of these holding periods could be a lot longer. And so, when you have a lot of Bitcoin be accumulated by the Greyscale Bitcoin Trust, or accumulated on more institutional balance sheets, there's a good chance that's not going to be sold within a year, for example.
Peter McCormack: Yeah, a lot of long-term holders?
Lyn Alden: Yeah, and actually, if you look at the 2017 bull run, this is actually one thing I've been a little bit surprised by is, if you look at that run, it would become overbought sometimes; if you look at the relative strength index and other metrics like that, it would become overbought and then it would kind of correct 20%, kind of relieve some of that pressure, and then keep going up from there.
But, this recent few months, it's just been building to a higher and higher weekly relative strength index; higher than levels it reached in 2017. And, I'm basically watching to see, are we going to finally have that brutal correction and then keep going up from there, or because it's more institutional, is it just going to go up a lot further than people think.
So, one of the risks of, you know, a lot of people always want to wait for a correction to buy in, right, but then it can always surprise at the upside too. So, that's why, for example, I've been managing expectations of my readers, but also saying I'm not trading around it. Even if I expect Bitcoin to correct 10% or something, that doesn't mean I'm selling it to try to game that; I'm saying, I already have my position; I think dollar cost averaging makes sense; and, people just have to kind of be aware that when it gets overbought, don't be shocked if you were to get a correction, but it's not guaranteed.
Peter McCormack: Well, as ever, Lyn, it's always fascinating talking to you. You're like an encyclopaedia of macro knowledge. I always feel a little bit smarter, and also a bit dumber, after talking to you! But, super helpful, I love talking to you. It looks like it's going to be a great year for Bitcoin next year, very excited, appreciate you coming on, looking forward to making lots of shows with you next year, and I wish you a Merry Christmas!
Lyn Alden: Yeah, thanks for having me. Merry Christmas to you too and we'll see how the rest of this year plays out. I'm hoping that by 2021, things start to return a little bit more to normal.
