WBD410 Audio Transcription
Inflation & the Role of Bitcoin with Steven McClurg
Interview date: Friday 15th October
Note: the following is a transcription of my interview with Steven McClurg. 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 talk to Steven McClurg, Co-Founder of Valkyrie Investments. We discuss the problems of rising inflation, fragility in equities and bonds, and if Bitcoin can serve as a hedge.
“If the government is printing 5% more dollars and they’re using that money to do things, they have essentially taxed you with the money that you already have without you knowing it.”
— Steven McClurg
Interview Transcription
Peter McCormack: Steve, how are you?
Steven McClurg: Oh, fantastic. Good to see you in person, Peter.
Peter McCormack: Yes, thanks for coming. We had a last-minute cancellation, somebody had COVID, we had all our equipment here and I was like, "Who do I know in Nashville?" and then you pinged me when I was Nashville and said, "Let's have a beer", and I was like, "I've got to get Steve back on. We had a beer last night and I was like, "What do you want to talk about; what's bothering you right now?" and you mentioned inflation, which is something on my mind at the moment. Inflation rates vary, depending on who you speak to. I think CPI's at, did you tell me 5.4%?
Steven McClurg: 5.5%, 5.4%.
Peter McCormack: Yes, that's quite high. PPI, I've got it down here; PPI's 8.3%, energy's at 25%. The energy sector in the UK at the moment, wholesale rates, I think, for gas are up 250% and we've seen, I think, four companies go to the wall now, and the government have had to step in. Also, I've been looking to buy a house. The house I wanted to buy last year is up 30% and houses seem very expensive at the moment. So, I'm feeling like there's not a particular honest conversation of inflation happening outside of the Bitcoin people.
Steven McClurg: No, that's exactly right. Well, as a matter of fact, Bloomberg just released an article today on housing, and we've been looking at this for a while, because if you look at lumber costs, lumber costs have gone four times, 400%, in the last 18 months. Copper has been up anywhere between 200% and 300%, and those are the two most expensive components in building a house.
So, the Bloomberg report shows housing prices are up 20%, which is quite high, but that's on average in the United States. Some areas are up double, 30%, like what you're experiencing, 50%. I mean, here in Nashville, it's about 50% higher.
Peter McCormack: What do you think's driving that on the house prices? Is that because there's not enough newbuild, or is there something else going on?
Steven McClurg: You know, it's a combination of a few different things. So, first of all, there is real inflation happening, even though CPI's 5.5%; that's a number that is recorded by the US Government based on certain things and leaves out other things. Things like energy, housing and food aren't necessarily included the way that they should be included. And as we know, most people's paycheques in the United States, in some cases up to 65% of a paycheque is housing. So, that's what really affects the normal person, the average person.
So, there are a few factors, one of them is supply chain issues as well. Where we mentioned inflation, money printing leads to things costing more; but supply chain issues have caused issues with things like lumber and copper, I mentioned earlier, which are the main components in building new houses. And not just houses too; cars. We have a chip shortage, which is causing car prices to go up, if you can even find a car that you want.
Peter McCormack: Yeah, second-hand car prices are going up?
Steven McClurg: Yeah. I talked to somebody yesterday who bought a used Jeep Wrangler, and sold it back a week later to the dealership for $10,000 more than what he bought it for.
Peter McCormack: That's incredible!
Steven McClurg: Yeah, I don't even know what to say about this.
Peter McCormack: I got my dad a car recently, and it was a four-month delivery, and they were only getting a delivery of two cars that month, and they had supply chain issues plus COVID issues with factories shutting down, plus chip-shortage issues.
Steven McClurg: Right, plus inflation.
Peter McCormack: Plus inflation.
Steven McClurg: Things just cost more to make.
Peter McCormack: It's obviously concerning. Thinking back to the housing situation, is this also therefore affecting rents, do we know if there is rent inflation;, because I know in the US, a lot of places have rent controls, not everywhere, I know somewhere like LA does; do we know if this is impacting rents?
Steven McClurg: It is. So, there was another report that was just published this week as well that shows year over year, rent in the United States is up 11% on average, now that's across all markets. The markets that have become the more desirable markets, that people are moving into, like Nashville, Tennessee in general, Georgia, Florida, Texas, rents are up as high as 25% in those areas.
Peter McCormack: Jesus.
Steven McClurg: So, not only are houses more, rents are much higher. Another interesting thing about housing prices is, again in the United States, not only are the prices up and rents are up, first-time homebuyers are down. So, it used to be about 33% of all housing sales were to first-time homebuyers; it's dropped to 29%. That means that first-time homebuyers can't afford the houses, or they're getting bid out of it by Wall Street companies that are buying houses and turning round and renting them out.
Peter McCormack: Yeah, I've read, I can't remember if it was a report, or if it was in a book I read, but when I was looking into Mnuchin and what happened with, I can't remember the name of the bank he was involved in, but after the FDIC bailed out of the banks, I think it was BlackRock were buying up thousands of distressed properties at a reduced rate, and that was their revenue model, and they were pricing people out.
I know we should support capitalism, but this is skewed capitalism, because they were buying the properties with loans, and I believe the loans were coming from the Mnuchin bank, which was bailed out by the FDIC. I want to double-check that and I'll put it in the show notes what actually the article was I read, but I was amazed. I mean, the portfolio was tens of thousands of properties, maybe more.
Steven McClurg: That's incredible, and I know a few years ago, there were a lot of these private equity companies that were popping up, that the entire business model was to buy single-family homes, which was sort of a new thing in the last ten years. Usually, there's these private equity real estate funds that buy commercial properties or apartment buildings, but single-family homes is really a new thing.
I can't remember if BlackRock has its own fund that does this, or if they're investing in other, either affiliated or outside funds that do that. But they certainly were involved in purchasing these single-family homes and then turning round and renting them out for much higher prices.
Peter McCormack: For me, I think this is a really bad for -- because, everyone who has a desire to own a home should be able to afford it. I was fortunate enough my first house, my dad lent me £5,000 for the deposit and I bought a house. I know with my kids, by the time they get onto the housing ladder, or want to get onto the housing ladder, it's going to be significantly more expensive and they will probably have zero chance of affording something until they're in their 30s, realistically, without any help.
I think pricing people out of home ownership is a sign that we've got serious problems within the monetary system, because it's the fiat argument; we're rewarding the hedge funds and Wall Street by giving them the ability to take ownership of these homes, and pricing families out. I don't think it's an argument for or against capitalism, because I think this is where capitalism's gone haywire.
Steven McClurg: Right, I agree with you. I don't think this is for or against capitalism either. I'm for capitalism, but when you have a Federal Reserve and a Treasury department that is literally printing money and fuelling inflation -- so, what happens when you print money, it taxes everybody that holds dollars, very plain and simple.
Peter McCormack: You should explain why, because some people don't think of it like that. I tend to try and share some of these ideas on Facebook with friends and family, and I keep referring to inflation as a hidden tax, and the message doesn't always land. I think people have been gaslit into believing inflation is a sign of a growing economy and it's okay as long as it doesn't get out of hand; 2% inflation's great.
Steven McClurg: So, first of all, yeah, 2% inflation's fine. But CPI is 5.5%. By the way, that's not even a real number, but we'll use that for argument's sake; we'll use 5%, although I believe the real inflation rate is closer to 15% to 18%, maybe even higher. But let's say that it's 5% like the CPI says. That means that enough money has been printed to increase the supply by about 5%; it's simple maths.
So, if you have $100 and you decide you're not going to invest that $100, you're just going to keep that $100 bill, hide it under your mattress, keep it for a year, a year from now the purchasing power of that $100, still $100, but the purchasing power a year later is only $95. You see how that hurts you, but how is that tax? Well, if the government is printing 5% more dollars and they're using that money to do things, they've essentially taxed you with the money that you already have without you knowing it. It's a very simple context.
Let's take it a step further. We talked about this last night over food and drinks; El Salvador. Why would El Salvador go away from the dollar standard to the Bitcoin standard? Well, if you have a $100 bill here in the United States and the US Government's printing more money and they're taking that money and now that $100 is worth 5% less, anyone that holds US dollars is also being taxed, regardless of what country you live in.
So, if you're a resident of El Salvador, or your Treasury in El Salvador is in dollars, and there's 5% inflation on the dollar, then you've just been taxed by another country, and you're a sovereign country. So, why wouldn't you move to a standard that has a limited supply?
Peter McCormack: And add to that, your imports have become more expensive.
Steven McClurg: That's exactly right.
Peter McCormack: And you've not received any stimulus cheques, so that money that's been printed, at least there's some residual effect within the US. Maybe you've received a stimulus cheque, maybe there's been some build out of the infrastructure; there's some residual benefits within the US. There's almost zero for El Salvador.
Steven McClurg: That's right. You're not getting anything for that money. But this also brings up another point. So, the people that usually suffer are people that are middle class and lower, working class and middle class, or retirees. So, we talked about how the dollar works if you're just holding dollars. If you're a retiree, you might be holding a lot of dollars, but you're also holding a lot of bonds, fixed income.
So, if you think about where US Treasuries are right now, the ten-year Treasury yields 1.5%. The way that bonds work, and I know you already know this, Pete, but this is for everybody else; the way that bonds work is, if I give the government $100, they give me $100 in bonds, and they pay me $1.50 every year for ten years, and then I get my $100 back after ten years. That sounds kind of okay. I don't want $1.50, I want much more, but if you're a retiree, you don't want to risk losing that $100, so $1.50 sounds really good.
Well, if the inflation rate is 5% a year, then that means that a year later, that $100 that you put into buying a bond, if you were to take it back, it now only has the purchasing power of $95. In year two, and granted the maths is not going to be exact here, because you're taking a percentage of a smaller number, but year two, it's going to be about $90, year three $85, year four $80.
Peter McCormack: If it stays at 5%?
Steven McClurg: If it stays at 5%. Right now, it's more than 5%. So, if it stays there, slightly above 5%, you're basically getting $50 back ten years later, as far as purchasing power goes. Put in $100, you get $50 back ten years later, and all you've received for that is $1.50 a year for ten years; $15. So, you've essentially lost $35 in that trade, as far as purchasing power goes. So, that doesn't make any sense.
If you're a retiree and you have a fixed income, you're 65 years old, 70 years old, hoping that you can make your money last, it's not going to last. You're not going to be able to afford things, you're not going to be able to afford food, you're not going to be able to afford housing and you're not making any more money either. You're making $1.50 for every $100. So, this is where the real problem is.
Peter McCormack: Well, what has the impact been on the bond market, because people are still trading bonds? The US bonds haven't been marked as junk bonds yet, people are still trading bonds, so what's happening in that market, or have they sold the belief this is transitory, and therefore we will have high inflation this year, but as the economy reopens up and supply chains fix, that inflation rate will come down?
I mean, my own view, a simplistic view is, from everything that I've studied and read, I've read When Money Dies, about the Weimar Republic, I've obviously been out to Venezuela, I follow with interest what's happening in Lebanon and Turkey; I'm not saying that the US is certainly going down the same path, but it does feel like actually, we could be heading towards much higher inflation rates?
Steven McClurg: I think we certainly will and we certainly can, but we certainly will. And before I became a degenerate Bitcoin hodler, I traded bonds; I was a bond manager. One of the things that you should know, and by the way this was in a period where rates were low, part of the time that they did this; the way that bonds work is, if let's say rates were 3% and rates go down to 1.5%, well bond prices go up during that period of time. So, yields go down, bond prices go up; when bond prices go down, yields go up.
So, what you do as a bond trader is you're essentially buying bonds hoping that yields will continue to go down. And by the way, I do think yields will continue to go down. This spike that we've just seen to 1.5% is temporary. People are getting excited, they're seeing a trend, they think it's going to go up; I don't think it goes above 2%, I think it goes right back down.
Peter McCormack: Negative?
Steven McClurg: I think it definitely could go negative in the US. It's already negative in Germany. There's other countries in Europe that have experienced negative yields. US is tough call; it could happen. But the trade is buying bonds and then selling them as the price appreciates, and you're just eking out a little bit of a trade each time.
The other thing that a lot of people don't realise about bond funds and bond managers is there are certain investors that that's all they can hold. They have to have a certain percentage of their portfolio in bonds. Examples of that are life insurance companies; they have certain restrictions that they have to hold bonds. Pension funds, certain endowments, certain trusts, they have to hold bonds. So, it's a market that is going to exist whether it's a good buy or not.
Then, of course, conventional wisdom has always been that in a person's portfolio, they hold 70% equities, 30% bonds, and that's how a lot of financial advisers tout how allocation should be, and they just buy it because it's conventional wisdom. So, there's a market there, but as a bond manager you're constantly trying to play that price away and get whatever you can out of it and earn whatever yield you can.
Evergrande, right, so that's a big one! So, if you're earning 1.5% on Treasuries and you find this random Chinese real estate company that's paying you a lot more, you're going to put that in your portfolio if you're a PIMCO or a BlackRock -- BlackRock held Evergrande bonds; we saw that -- because they're not hitting the yield that their clients are expecting. So, they're having to really reach out to really risky assets like Evergrande, just to boost their yield enough to get close to, if it's pensions or insurance, the actuarial assumptions that you have to hit as far as yield goes, in order to just satisfy your clients. So, these are big risk.
I remember when I was involved in emerging market bonds and 2009, I was looking at Greek bonds; you got a little bit of yield after that, but it's so risky. And everybody was piling into Greek bonds, but a year later we had some problems, right. So, if you were piling in just to get that yield, it ended up wrecking you. But the way that bond managers also think is, "Well, it's also wrecking everybody, so who cares? My performance isn't going to be hurt that much, because everybody's going to get rekt", and it's a really interesting system.
But yeah, to go back to your question, people are really pushing to get some risk, buying Evergrande bonds, buying anything that's going to give them any kind of yield whatsoever, just to hit those expectations of clients.
Peter McCormack: I really struggle with the idea of a pension these days. My father had one; it was a direct contribution from his wage every month. I think it was a final salary pension. He worked for an airline, he paid into it. Twice, it's had a haircut: once just before he retired and once during his retirement. And I've, myself, looked into a pension. I had one before I got divorced and it got cut in half, and I came to this conclusion that I think I would rather work forever than have the haircut from my wage each month to have a viable pension.
I've met this pensions adviser, and perhaps pensions have changed and they're not as viable anymore. But I met a pensions adviser and he said, "How much do you want to have to live on in your retirement?" He said, "As long as your mortgage is cleared". I was like, "Okay, well if my mortgage is cleared, and I imagine I want to travel a bit, see my kids and grandkids, I think £40,000 to £50,000 a year, that would be fine. I mean, obviously I want a lot more, but that would be fine.
He ran the calculations and he said, "You need a pension pot of…", whatever the number was, something like £1.5 million or something. And he was like, "So, you'd need to be saving…", we ran the calculation based on my salary, and it worked out I needed to be putting something like nearly half my salary into a pension. He said, "Well, you should have started when you were 18". I said, "I didn't, I was 33 at the time". I was just like, a pension's just not a viable option for me.
Steven McClurg: Right, well today, it's certainly not a viable option for anyone.
Peter McCormack: Well, that's the thing; is it a dead concept for anyone outside the rich, or a dying concept?
Steven McClurg: Yes. And maybe we have to break out -- let's bifurcate the terminology. I think in the UK, pension means something a little bit different than in the US. In the UK, when you say pension, it generally means your retirement account, your IRA. Here, we also have, if you're a public employee, you have a pension where they have a set salary that they pay you after you retire.
Peter McCormack: Handy.
Steven McClurg: But if you're not a public employee, you live off of your savings, your IRA. The way that those generally work, so let's say it was $1 million that you had to have when you retired in order to retire, and that was ten years ago. So, ten years ago, you needed $1 million to retire, and back then rates were closer to 5% to 6%. So, if you had $1 million, you could earn $50,000 a year, which again, ten years ago, that was enough for somebody to get by here in the United States.
If that same person thought that, "Okay, I'm going to retire in 2020 or 2021, and I've got $1 million in the bank, and that worked ten years ago when my financial adviser told me that's what I needed", and you're earning 1.5%, you're not earning $50,000 a year anymore, you're earning $15,000. But let's say, for some reason, you were still able to earn 5%, you still were able to get $50,000. Is $50,000 enough to live in the United States anymore? Not when housing is up by anywhere between 10% and 25%, depending on if you're buying or if you're renting. If you're renting and you're a pensioner or a retiree, even at old rates, it doesn't cover it.
So, how much do you need to retire today? It's probably closer to $8 million or $9 million!
Peter McCormack: Just saying that number, it's ridiculous! Well, the conclusion I've come to is, I have a pension, it's Bitcoin, we'll get into that; but also, in spite of what some people think, I'm going to buy a second property, and maybe a third. The idea is, if I can get two properties, I can only yield off them. The mortgages will be paid by the renter and after I've retired, perhaps they'll be the homes my children have to get them on a ladder, when I'm dead basically.
So, that's kind of an idea in my head, and I talked earlier about BlackRock buying thousands of homes. I obviously don't care if someone owns two or three properties, I think it's a fair investment. But for me, there was no logical sense getting a pension. The logical sense was to get a mortgage, which its price will go up, it's value will go up with inflation, actually usually outperform inflation, and then obviously to hold Bitcoin. But I just find the whole concept now of a pension like we have, dead.
It's really funny how you talked about the pension that public sector workers get. It's the same in the UK; they have the best pensions.
Steven McClurg: Oh, it's fantastic, yeah. Government jobs are the best.
Peter McCormack: I don't know if the jobs are the best. You can't lose the job and you tend to get a great pension, but it's really putting a lot of people in a really tricky situation. I feel like there's a whole number of things coming at us in all different directions. So, we have inflation; here out in the US, you've got the end of the rent protection; what's that they do?
Steven McClurg: Oh, that's right. There was a moratorium on rent prices or rent rates and evictions.
Peter McCormack: Yeah. So, New York's a really interesting case for that. We were in New York a couple of weeks ago doing some work. Me and Jeremy here and a couple of people went for dinner, went to a steak restaurant. This was midtown, not far from Times Square, I think 38th Street, so a popular area. We were there 5.00pm, 5.30pm.
Steven McClurg: Where were you, at Keens?
Peter McCormack: No, I did go there though with Danny, which was -- that's the place with all the pipes?
Steven McClurg: With all the pipes, yeah. It's one of my favourite places.
Peter McCormack: It's a good steak. But no, we were at just more of a touristy one. It was good, still very good steak. And I think there was six of us at one table, and I think two other tables had people at it, and every other table was empty. I was like, this is a Thursday at 5.30pm, this should be full. There was a bunch of times when I went out to dinner. When I went to Keens, I went in the evening, it was half empty.
So, I feel like there's all these different pressures coming from different directions. We've got high inflation, but the other thing I don't understand, we've got high inflation, we've got a struggling economy, yet plenty of jobs available, people can't recruit. I was up north of Boston recently and I went into a restaurant and there was a queue outside, but only half the tables were full, because they couldn't get enough staff.
Steven McClurg: That's right.
Peter McCormack: I just feel like in every direction, things are kind of getting skewed and a bit fucked, and I don't know how bad this gets.
Steven McClurg: Well, right now, we only have slightly higher than a 5% unemployment rate in the US. And in my opinion, 5% is full employment, because 5% of people don't want to work anyway. But I think there's something like, as far as open jobs go, accounts for something like 8% to 10% of the workforce. So, people just don't want to work unless they have to anymore. And you're right; that's exactly the reason why these restaurants aren't full. It's not because, yeah, demand might be down a little bit, but you can't seat people at tables, because there's nobody to take care of them. Hospitals, same thing. Nurses, there's no nurses available. It's not beds, it's nurses.
Peter McCormack: Do you think this is -- how much of this would you apportion the blame to mismanagement of the COVID situation? Well, not even mismanagement; let's say the decisions that were made, because we can debate over what was right, what wasn't, the break essentially shutting down economies, which I think we've realised is a disaster. And how much of this do you think is the money printer? I know that they're intrinsically linked, but do you think even without COVID, this was coming anyway?
Steven McClurg: I do. I think I was actually on your show talking about how I thought there was going to be a --
Peter McCormack: Yeah, you were, yeah.
Steven McClurg: -- beginning of 2020, I believe, I thought that there was going to be a downturn.
Peter McCormack: Well, you actually came on my other show, Defiance, to talk about supply chain issues.
Steven McClurg: That's right. We talked about these exact supply chain issues, said there would be issues. We talked about oil was going to go negative, and it went negative.
Peter McCormack: I should have shorted!
Steven McClurg: Exactly! But no, I think that this has been coming. I think we were already at the end of the economic cycle, and usually what happens is when you get to the end of an economic cycle, when the markets should crash and things should go wrong, sometimes they'll just keep going, they'll keep burning hot for a little bit, and it takes an event to trigger it. And, the event was COVID. Nobody could have predicted COVID as the event, but that was the event that ended up triggering it, and the government did what the government thought it should do.
It's hard for me to say, "Hey, this person's to blame, this policy's to blame", after the fact, because what would I have done if I was in somebody's shoes; you don't know, right? You've got act fast, you've got to think about the country. But you can point to cause and effect, and in a situation where states were locking down, localities were locking down in the US, entire countries were locked out around the world, I mean me and my family sheltered at home before anybody even said to. I mean, we didn't know what was going on. We locked ourselves in the house for two months and we were like, "Let's see what happens here. We don't quite know what's going on".
Peter McCormack: Bodies are dropping dead in China.
Steven McClurg: Yeah, exactly.
Peter McCormack: Somebody's got to answer for that at some point.
Steven McClurg: Yeah, that's exactly right. But when that's happening and governments are telling people they can't go to work, you have to do something. You can't just tell people, "You can't go to work anymore, you can't leave your house anymore", and then not figure out some way to make sure that these people are eating and paying their rent. So, there were policy decisions to give stimulus cheques to certain people, and whether they did it was right or wrong doesn't really matter, people had to be taken care of. If you say, "You can't go to work", you need to supply that person with food somehow.
But the end result was these stimulus cheques kept coming and coming and people weren't working and got used to -- in many cases in the United States, people were staying home from minimum-wage jobs and earning twice as much for staying home as they were working. So, why would you go back to work, right? And this is just logical. When you're conditioned to do something and you're conditioned to expect a certain thing, you continue to expect that thing and you continue to engage in that activity. And that activity was, "I'm not going to work and I'll figure it out. Somebody will give me money. It's fine".
Peter McCormack: What is the answer to get out of this? It seems like the logical step would be to raise interest rates. We haven't had interest rates, I think, in the UK above 1% -- I actually cannot remember; it feels like we have always been at 0.25% or 0.5% for ages. I'll have to check. I could be wrong, we could be back there. I know at my bank, I get a rounding error in terms of interest above zero. It feels like we should raise interest rates, but that also comes with a knock-on effect in terms of the economy as well. But it feels like we just need to have this correction.
Do you know what it makes me think of? It makes me think of my vaping. I keep thinking, "I've got to stop fucking vaping", and I put it off until tomorrow and then the next day, and one more day. And I know I'm basically, when I get off the plane, I'm going to have to stop, because my kids are going to go mad. But it's like I'm always putting it off, and it just feels like nobody wants to take that, which is a political bullet really, of saying, "We need a correction in the economy". And I also feel like that is also potentially in the international game of chicken, because the US doesn't want to weaken before China; China doesn't want to weaken before the US.
Steven McClurg: Right. Yeah, because what happens is, if you raise rates, it essentially strengthens your currency. And if your currency is strengthened, then that means that your exports go down, because now, if the US goes first and China's exports are cheaper, then more people will buy the exports from China, for comparable goods. So, it would hurt American businesses, depending upon where you are.
The other thing with increasing rates right now is, we spent a lot of time talking about housing earlier. Well, with housing prices going up, and that's an effect of inflation, money printing, low rates for too long; and if you also introduce high rates, well, mortgage rates are correlated to ten-year Treasuries. If all of a sudden mortgage rates go up, housing is no longer affordable. Right now, it's barely affordable and it's only affordable because you can get a low mortgage. But if your mortgage price goes up, the housing at those prices aren't affordable anymore, and you get a potential market crash, depending on how much rates do go up by.
Housing crashes aren't good, as we saw in 2007, 2008, because people put their life savings into a down payment on a home, just so that they can have a place to live. And now they're upside down with their mortgage, they do things like get out of the mortgage and go rent somewhere, and you leave all this inventory and ruin your credit for seven years. So, it's a very delicate situation.
I actually don't think that the answer is increasing rates at the moment. I think the answer is the Fed balance sheet. We've been talking about "tapering" for a few months now, and the Fed came out, about a month ago, saying that they would potentially be tapering soon, without giving any kind of timeline on when that would happen; tapering meaning they're buying these securities and assets like bonds onto the balance sheet, but at the same time, they're replacing the ones that are rolling off.
The smartest move is actually to continue the purchasing while you're letting bonds roll off, and then slowly slowing down the purchasing. As you do that, it eases you into a situation where then, you can begin to raise rates, because that will start to damper inflation; it won't stop it entirely, but it won't create quite a shock where just average people will get hurt.
Peter McCormack: And that's the real risk, is a repeat of 2008? But it feels like that could happen anyway, Steve?
Steven McClurg: I do, I feel like it could happen. I think the difference between today and 2008 was, rates were low then, but we've taken rates much lower now, and inflation has finally kicked in. For the last 15 years, everybody's been predicting inflation, inflation, inflation; and inflation takes a long time to come into the economy. Now it has, so we've got to take action, but here's the other result of inflation, by the way.
The rich get richer, because if you can afford to have assets, equities -- by the way, stock market equities are highly correlated to inflation. Hard assets: art, wine, houses, land, classic cars, you name it. The more of that you have, the more rich you get in an inflationary environment. The less of that you have, the worse off you are.
Peter McCormack: So, inflation is good for the rich, but it increases the wealth divide, which is the primary issue we're concerning ourselves with here really, because it's not a healthy situation.
Steven McClurg: Yeah, that's right.
Peter McCormack: Obviously, it's important for you to understand this with regards to your work. Have you modelled out worst-case scenarios?
Steven McClurg: Yeah. So, we're at a really interesting inflexion point right now, where inflation's at the point to where, if the Fed starts to take action and raise rates, we could probably see a stock market correction anywhere between 30% and 60%. And when that happens, people lose jobs, companies get shut down, people are upside down in their mortgages. It's a whole knock-on effect, and it certainly hurts people that are not rich, more than it hurts the rich. But yeah, I think we can see a really massive downturn.
Peter McCormack: I'm guessing those working within the government, with the Fed, fully understand where we're at with this, they fully understand the decisions they take, what the impact will be, and it's like stuck between a rock and a hard place, like "Do we raise rates and see a market correction; do we continue to print money and drive inflation?" It feels like whatever happens, a correction's coming, but there isn't the political capital to accept this.
Steven McClurg: Yeah, that's right.
Peter McCormack: But I know it, you know it, everyone we know in our communities in Bitcoin know it, we're all buying Bitcoin to protect ourselves; but it feels like at some point, this correction just has to happen in whichever direction. It's given up the addiction and allowing it to come in.
Steven McClurg: Correct.
Peter McCormack: Yeah, I don't know, man. I find it really scary. It makes me think of the end of the Big Short. Do you know what I thought was brilliant about the end of the Big Short? It was a hilariously funny way of explaining the housing market crisis. But there's that last minute where you see the family pack up their stuff, get in their car and they've lost their home, and I just feel like we're constantly fucking the little guy?
Steven McClurg: Yeah, that's exactly what's happening, in both scenarios. And here's the other interesting thing about the Big Short too, and this is really important. A lot of those guys realised that this was going to happen. As a matter of fact, I used to work for the reigning Bond King, Scott Minerd, and in 2005, he was saying, "We're going to have housing prices of biblical proportions", and everybody laughed at him. And in 2006, everybody was saying, "Where's the biblical proportions? Where's this bubble you're talking about?" 2007, "Are we still seeing bubbles?" 2008, "I'm right"!
The same thing happened in the Big Short. These guys had predicted it, they had prepared for it, and they didn't make as much money as they could have, because the markets were so irrational. You can't really short irrational markets; you'll just lose money. Markets can remain irrational longer than you can remain sovereign.
Peter McCormack: Who is that guy, is it Michael Burry?
Steven McClurg: Yeah.
Peter McCormack: Yeah. So, what's the role of Bitcoin in all of this, because this is a Bitcoin podcast, and I ask it as a wider question. Any of us can buy Bitcoin to try and protect ourselves, if the thesis is correct. I still think, in a market correction, if you see a 30% to 60% fall in the stock market, I think you'll probably see a big crash in Bitcoin now. I don't think we are protected against systemic risk at the moment. I think eventually we may be. It's how high we go up before that happens. We seem pretty correlated to the S&P.
I think earlier in the year, when we had the big jump up to $55,000, we outperformed the S&P, but we seem fairly correlated. We can keep talking about, at an individual level, you can long-term protect yourself against inflation by buying Bitcoin, but what's the role of Bitcoin now for the state, because we are seeing various politicians show an interest in Bitcoin, have taken an interest in Bitcoin. So historically, Senator Lummis has been a big proponent of Bitcoin, Warren Davidson in Ohio, but we've never seen Ted Cruz become a proponent of Bitcoin. I don't know if he cares or he doesn't, or if this is really just about votes, but we are seeing that.
So, if you worked for the Fed, if you worked for the government, how would you advise them with regards to Bitcoin?
Steven McClurg: Well, that's a tough one, because you said it, Bitcoin has become more highly correlated to the stock market and to other highly risky assets than an inflation hedge. Well, let me retract that statement; I didn't mean an inflation hedge, I meant a downturn hedge. So, if the stock market goes down 60%, Bitcoin goes down 70%. It's highly liquid, it's still treated like a speculative asset, and it becomes a risk trade. Depending on what it is or isn't doesn't matter, it depends on how people see it and how people trade it. So, in a risk-off environment, Bitcoin definitely goes down, there's no doubt about it.
In the long run, when you zoom out, I think it does quite well, and we've seen that. We've seen that in a couple of different short-turn downturns, when the markets drop and Bitcoin drops; it's just a blip and it outperforms these other assets that we're talking about. I actually think it's prudent for governments to hold Bitcoin on their balance sheet, for central banks to hold it, and I think central banks should start doing that instead of things like gold.
I think we talked about this once a couple of years ago, "Hey, should I hold a little bit of gold with my Bitcoin?" I was like, "No"!
Peter McCormack: I'll tell you why I've considered having just some gold allocation, because I'm irresponsibly long Bitcoin, 95% in Bitcoin, long-term deep-cold storage, I keep stacking, I keep stacking. But if a correction comes, that's going to hit my net wealth hard, if you see a 30% to 50% correction. So, I have considered a few times of just having a small gold allocation, because I don't believe that is a risk-off asset, I don't believe that drops 50%.
Steven McClurg: Yeah, it doesn't drop 50%, but gold also isn't correlated, and that also means it's not negatively correlated either. Look, I think the thing that people should be buying right now is land and houses. If you want to diversify --
Peter McCormack: Well, that's what I'm going to do, yeah.
Steven McClurg: -- Bitcoin and real estate, that's it. And then, if you get cute, like I sometimes get a little cute, I'll buy art and classic cars.
Peter McCormack: And guns!
Steven McClurg: And guns!
Peter McCormack: You can't really do that as well in the UK. I think the governments holding Bitcoin on balance sheets really interesting, because we have one doing it right now. When we're watching El Salvador stack sats, we're seeing Bukele announce that they're stacking, they're putting it on their balance sheet. I did wonder if there were any others doing it secretly.
Steven McClurg: I don't know. It would be interesting.
Peter McCormack: There's no incentive to tell anyone, if you're in a stacking strategy.
Steven McClurg: Well, there's no incentive to tell anyone. But at the same time, any government that is borrowing money, issuing sovereign credit, usually reports all of their assets, so I think we would know, especially for larger governments, if they were holding Bitcoin. But it is possible, I suppose, that some governments are stacking and not telling everyone.
Peter McCormack: So, what do you think this means for currencies over the next, say, decade, because we talked about it last night when we were having those lovely whiskey sours; we were talking about, I mentioned Balaji had talked about currency wars. We are seeing some sovereign currencies collapse, it's happening in front of us. We're seeing Bitcoin grow to, I think it's the sixth largest currency in the world right now. We are seeing a lot of conversations about CBDCs, especially out of China, but there are many other countries looking at that as well now. We have the US dollar, which I'll tell you a really interesting thing about the US dollar.
Despite the inflation, I get paid in dollars by all my sponsors, because they're all American, and it's outperforming the pound at the moment. A couple of months ago, I was getting 0.72; now I'm getting 0.74. So, what do you think is the future for this, because obviously, if we're in a time of inflation and tension and global tension and geopolitical issues, I don't think any kind of physical war is going to be beneficial to anyone, but the idea of currency wars seems kind of interesting? You were saying last night that you think the dollar only loses at the moment.
Steven McClurg: Yeah, it can only lose from here. The dollar's been so dominant for the last few decades that it can only lose; there is no more gain for the dollar. And I'm going to say something controversial, and probably most people won't agree with me, but I think the renminbi -- and we know that China's working very hard to create a central digital currency, and they will do that with the renminbi, hands down; they're doing it. And they've also been working very hard to align themselves with a lot of commodity-producing countries in South America and Africa and Southeast Asia.
Peter McCormack: Belt and Road?
Steven McClurg: Yeah. And when they're the major trading partner of these countries, it can almost force them to then accept their digital renminbi, and I think that's what's going to happen. It's not even a think; I know it's going to happen. It all depends on how big it gets. Now, some of these other countries that are a little bit more independent from a major trading partner like China, like El Salvador, or even Panama, or some of these other smaller countries that rely heavily on the dollar, I think they'll move to Bitcoin.
So, I think those are really the two currencies that have a chance of becoming a little bit more dominant. It could take decades for the dollar to lose its position, but it could happen.
Peter McCormack: It feels like what China's doing, my understanding of the Belt and Road Initiative, is they build infrastructure projects, they offer huge loans, and I'm perfectly aware that a couple of these countries, these African countries, where they've had ports and things built, now can't afford to pay it back. So, it feels like while the US has been out in the Middle East fighting endless wars, that China's been implementing this soft imperialism throughout the world.
Steven McClurg: Yeah, that's right.
Peter McCormack: It feels a bit tricky. And I'll tell you why I worry. I like the fact there's no war, I prefer the fact there's no war, but at the same time, China's an authoritarian state.
Steven McClurg: Yeah, and they're killing people.
Peter McCormack: They're killing people, they have Social Credit Scores, they're wiping out the Uyghurs, they censor content, they've essentially co-opted Hollywood and the NBA. The idea of China being an internal issue for the Chinese people is false; they are spreading censorship around the world. I think Lithuania's just advised people to chuck away a certain manufactured phone, because it's got built-in censorship on the phone.
Steven McClurg: Interesting.
Peter McCormack: Apparently, it's not turned on. But they're exporting censorship to the world. So, that's my concern, is what kind of world this takes us into, and I'm not sure the US has really set a great example over the last few years with the Middle East, but at the same time, I'm not sure I'm not sure I really like the idea of a world which is dominated by Chinese politics.
Steven McClurg: The US has been doing this. Most country's debt is denominated in US dollars, for the simple reason that it gives you the most access to capital markets. If you're a small country and you don't denominate in dollars, maybe you denominate in your local currency or some other currency, yen or euros, you just don't have so much interest. If it's denominated dollars, you know you're getting paid back in dollars, then your capital markets opportunity is much more massive. So, that's been happening all along, first of all.
With China coming in, and I'm sure they want country's debt to be denominated renminbi, and they'll force that, because they'll be the only lender with all of these infrastructure projects. So, I think China's just using the US playbook. But you're right, there are a lot more issues with China.
Peter McCormack: It's a mad world we live in, Steve. I mean, I guess this is why we all promote Bitcoin and encourage people to hold Bitcoin and ultimately, if that becomes the biggest currency in the world, then perhaps that takes some strength away from China, takes some strength away from the US and puts some strength back into us as individuals. But I feel like we're going through really weird times.
I feel nervous about an impending storm, which I think perhaps, like most people, the first 35 years of my life were relatively easy, fairly stable economy most of the time. I know we had the odd recession and my dad will say, "Well, you don't remember when you were 4 and this happened", but generally speaking, very stable times. I feel like we're heading to really quite unstable times, and I don't know how to prepare for it psychologically. I know financially, but I don't know how to prepare for it psychologically, or where we may go.
I don't really have a question there, it's just something on my mind, because I've got children. You've got children, right?
Steven McClurg: That's right.
Peter McCormack: And it's like, my son starts college next year. He goes into the adult world, if he doesn't go to college next year, in three years, and I just keep worrying about what kind of fucked up place we're bringing them into now.
Steven McClurg: It's certainly been a concern of mine for the last 18 months. I've got children that are the age where they're finding their tribe, they're trying to figure out who they are. And the majority of the last 18 months, they've been locked up in the house and can't go anywhere and can't see their friends and can't go to school, and communicate through Zoom, and it's not healthy. By the way, I don't have a solution either! People are dying, and you've got to weigh these things, and everybody falls on a different part of the spectrum on what they think is happening and what they think should be. I don't know, right.
Peter McCormack: Yeah. Well, I am starting to think those, what do they call them? Preppers! I'm starting to think those people who've decided to build themselves a nice house in the middle of nowhere, with their chickens and their vegetables, I'm actually starting to think, "You're onto something. This is such an easier life without the stress of Twitter and without the stress of being surrounded by people going crazy".
I was in New York the other week and one of the things I noticed is that New York, ever since I started going -- first time I went was in 2002, and New York was an interesting place. I went to Brooklyn and it was kind of scary, and over the years New York became a very safe city while I was there. I'm sure it was even worse before me. But this trip that we just had there, there were crazy people everywhere, and I don't mean it like I'm somewhat of a snob looking down on people, but just people lying jacked up on the street, drunk, homeless. And I just feel like, I know it's bad in LA now, and I just really worry about a lot of this stuff.
Steven McClurg: I agree. I mean, I spent most of my career going to New York once or twice a month, and it was odd for me; for the last two years, I've only been to New York once, twice maybe, and I think I was legitimately scared for my life when I went. I stayed in a hotel by Central Park and went to a dinner a couple of blocks away and then I was like, after dinner, I usually like to go walk up a few blocks and enjoy the city.
I walked a few blocks and I was like, I'm turning back around to go back to my hotel, this is not a safe place. And these are neighbourhoods that I'm used to walking in. I know the area and everything had changed, things were boarded up, people on the street selling all kinds of things that you hadn't seen since the 1990s.
Peter McCormack: Dude, yeah. Down by Times Square, they were openly selling weed and cocaine.
Steven McClurg: Oh, absolutely.
Peter McCormack: Openly! And in my head, I was -- look, I have no issue with drugs. I've clearly had problems with drugs, and all of New York smells of weed now, but I was just surprised that people were just brazenly selling cocaine. It was, to me, a reflection of what's changing in the city, and I couldn't understand, because it would be very easy for a plainclothes police officer to walk down and arrest these people for selling cocaine.
Steven McClurg: Yeah, that's right.
Peter McCormack: But it's not happening. They feel perfectly comfortable to offer drugs on the street.
Steven McClurg: By the way, there might be a cop standing on a block a block away, or standing on the street a block away, with somebody openly selling cocaine, and they don't want to touch them.
Peter McCormack: Why do you think that is?
Steven McClurg: I think the police in the United States are in a really awkward position right now, given the events of the last couple of years; and second, it's just not worth it. There are no tourists to protect, is it worth getting in a scuffle now? It's just not.
By the way, what's really interesting is, I've only been in New York, I think it's once in the last two years. I could have this wrong; maybe in the last 18 months for sure. But it's not even relevant for me to go to New York anymore. I know there were a few events a few weeks ago, Mainnet and SALT, and I opted not to go, I had other things that I was just busy doing. But outside of that, Miami has become the relevant place to go. The people that I do business with have all gone to Miami.
Peter McCormack: It's funny you say that, because I went to New York -- because when I used to come and travel with the podcast before COVID, I used to have a journey. I would go to New York, then I would go to somewhere like Florida or Ohio, then I would go to Austin, then I would go to LA and San Francisco, and I would just collect up all my interviews. We went to New York for one specific interview and got another couple there, otherwise I wouldn't have needed to go. I mean, I didn't need to go to SALT or anything.
But I was explaining to you last night, I'm expecting to start coming out to the US and doing a lot more interviews in person. Previous to the last couple of days, my two main places were going to be Austin and Miami; they were the two main places to go. I think Nashville's going to be added to the list! I've become a massive fan of this place.
Steven McClurg: But we're still third?!
Peter McCormack: Yeah, you're still third! But even thinking of considering taking my kids to New York, it's not the tourist destination it was, it's kind of lost its edge. And San Francisco, I've got zero reason now to go to San Francisco.
Steven McClurg: Everybody's in Austin.
Peter McCormack: Yeah, which proves the federal system works.
Steven McClurg: Yeah, exactly. Well, that's the thing. If you notice where the migration patterns are, and we've noticed this, San Francisco's relevant people have moved to Austin, relevant people in New York have moved to Miami, relevant people in Southern California have mostly moved to Nashville. Now granted, LA's never been -- that's where I live, but it's never been really a financial powerhouse. There are a few big firms, but it's mostly entertainment, so it's a mix of finance people and entertainment people that have come here.
Peter McCormack: Nashville's fucking great! The food's great, the people are great; I haven't even looked at the properties yet, but I assume it's going to be better than Austin right now, because a lot of people have gone there.
Steven McClurg: Yeah, Austin was already expensive. Nashville's getting there really fast.
Peter McCormack: I'm going to need to get one here soon, man. Well listen, Steve, good to talk to you. Thanks for dropping in and doing this. I'm sure I'm going to be talking to you again in a few months' time, and wish you all the best and thanks for the hospitality.
Steven McClurg: No, thank you so much. Thanks for drinks last night and thanks for having me on your show again.
Peter McCormack: Not a problem, man.
