WBD415 Audio Transcription

Is Hyperinflation Coming? with Lyn Alden

Interview date: Wednesday 27th October

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 talk to macroeconomist and investment strategist Lyn Alden. We discuss the rising commodities markets, if we are likely to see wide-scale hyperinflation and the pros & cons of Bitcoin futures ETFs.

“I expect the 2020s to be a pretty inflationary decade. Now hyperinflation has not been my base case in developed markets, but I don’t rule it out as a possibility.”

— Lyn Alden

Interview Transcription

Peter McCormack: Hi, Lyn, how are you?

Lyn Alden: Good, how are you?

Peter McCormack: I'm good, missed you last month.  How was your holiday?  It looked like you had a nice break.

Lyn Alden: Yeah, it was good.  I tend to go to Egypt every autumn to visit some family and friends, so it's like a workacation, like I was still working while I was there, but I wasn't doing interviews; partly because the internet's not great, but also partially to cut down on time.

Peter McCormack: Well, you deserve a break, you sometimes have to have a break.  I went away with the kids earlier this year and I made a promise to them I wouldn't work, and I managed to do it; I had two weeks off, apart from arguing on Twitter.  So, you deserved a break.  It looked like you had a nice time though.

Right, well in the time since we last spoke, the world seems to be getting madder and a bit more crazy!  I have no idea where we're going, Lyn.  There's lots of weird stuff happening today.  UK fuel prices are at their record level, reported at, I think it was -- actually, I just tweeted about it.  I think some people misunderstood my tweet, but it's an average of £1.43 a litre.  To translate into American prices, that would mean an average of $7.45 per gallon, which is pretty high.

We've also had a number of energy companies going to the wall, supply chain issues seem to be everywhere; what's going on, Lyn?

Lyn Alden: So, I would say it's a couple of things converging together.  I think it was our first podcast together where I talked about the long-term debt cycle and that whole idea playing out.  So, I use that as my big foundation for what's happening.  Essentially, basically so much debt has built up in the global system, especially among developed markets and China, and it's just there's so much public debt, so much private debt, interest rates are near zero. 

So, when there's a recession, when there's some kind of impact to the economy, they can't really take rates any lower, they're already about as low as they can get, some places even negative; so instead, they come in and they do large fiscal stimulus, which can boost demand so everyone can go out and buy more goods and services.  But the supply of some of those goods and services is still constrained.

Then the issue is, when you expand the money supply like that, through that fiscal spending, you can't really raise interest rates too aggressively, because you already have too much debt in the system.  So, they have this period where inflation runs way hotter than interest rates, and so currency gets devalued and you risk running into pretty significant inflation, pretty significant shortages.

When you combine that with the 15-year commodity cycle, so investors go through this period where commodities are scarce, they're very expensive, and so tons of capital rushes in to find more commodities, and that eventually over-saturates the market, because there's no price power.  So eventually, you kill the price of those commodities, and then they're super cheap and nobody wants to invest in them.

But eventually, that excess supply works itself off and demand keeps eating away at it until eventually, you start to run into scarcity again and you dry the prices up.  Historically, that's happened every two decades or so, and it's kind of a long-term cycle.  So, over the past ten years, you've been in this very commodity-abundant period, and that's starting to change, here in 2020, 2021, where especially we have not invested very much in energy, after both a long bear market, and for various ESG mandates out there.  So, different markets are starting to feel some of the consequences of that.

Peter McCormack: What's this long-term 15-year commodity market; I've not heard you talk about that before?

Lyn Alden: So, basically it's the idea, to quote natural resource investor, Rick Rule, "Bear markets are the authors of bull markets, and bull markets are the authors of bear markets", in the commodity space, because you're in an industry where your product is not unique.  If you're a copper miner, you're still in the same copper as anyone else's, so you don't have control of your own project; you can only control your capital costs and your investments decisions about when to make a new mine, or when not to.

So, when commodities are super cheap, and you can't really make money by building new mines, it's too risky, it's just not really profitable, there's not a lot of new capital coming into the space, so no one really builds new supply.  And eventually, after a long enough time, the existing mines get drawn down, they don't put new money into expanding them, and demand usually keeps ticking up over time.  So eventually, that excess supply works itself off and you start to get actual scarcity, and that drives the price up.

Then, because those mines often take years to bring online, it's not like an immediate function, it's not like they can snap their fingers and make more copper; so, we usually go through this period where copper prices, for example, are very, very elevated, and that gets worse and worse until it keeps attracting more and more capital to come in and find and build new copper mines to eventually alleviate that, and start that cycle over again.

So, that ends up being a very long-term capex cycle, and it applies to most commodities.  It applies to copper, oil, gas, uranium, agriculture, but usually agriculture is on a quicker schedule, because it's easier to rotate crop seasons than it is to build a copper mine, for example.  So, one of the issues is recency bias.  So, investors and policymakers look back over the past, say, five years, ten years and say, "Energy's abundant, we have nothing to worry about, we don't have to keep investing in it aggressively". 

But the problem is that by doing that, it becomes self-fulfilling, where we eventually have basically a commodity surge, where we've underinvested in a lot of these things.  Then, if we still are in the mindset where we're not going to invest in them, prices can get pretty high and persist for a while.  It might not be a straight line; some of these parabolic spikes, especially what we're seeing in Europe, might cool off at some points, but I think this is going to be a big story of the 2020s, where we've not drawn a lot of new energy supplies to market over the past five years.

Peter McCormack: Okay.  We'll come back to energy in a moment.  I just really liked what you just said there, "The bull markets are the authors of bear markets, and bear markets and the authors of bull markets".  I like that, just thinking about Bitcoin, because one of the things I've realised during this bull market is I actually prefer the bear market in some ways.  It's a lot easier to get work done and actually, that's the period where you define how you're going to perform in the bull market, in terms of what you've built as a business and whether you've had the ability to, say, stack yourself some sats for going through that market.  That's super interesting.

Okay, let's talk about energy then.  You talk about investment in the energy market.  I feel like, having spent a lot of time with some bitcoiners, and speaking to various experts in the energy market, there seems to have been a pullback with regards to nuclear, and a push for green energy; but it feels like the green energy markets themselves are, I don't even want to get into the, "Are they actually green?" because of some of the waste in the production, but it feels like nuclear is the most forward-thinking technology, is the most evolved technology we have, but there's been a pullback, there's been a lack of investment in that.  Is that what you're referring to?

Lyn Alden: Well, I was mostly referring to oil and gas, but we've had a similar issue with uranium.  So, with oil and gas, that's more mainly about that we've not put -- it's like we're trying to phase out the old technology before getting new technology in place that actually fulfils all the same needs.  So, we don't have, for example, grid level electricity storage that's affordable and that's widespread, that would make solar and wind more competitive, so they can be used for a percentage of the grid.  But once you start using them for more and more of the grid, you start to run into intermittency problems, you don't have that reliable baseload.

So, they need some sort of energy to bridge that gap, so it could be coal or natural gas.  Especially coal has environmental downsides, puts particulates into the air, which are known to be poisonous, especially when they're concentrated.

Peter McCormack: I think it just came out today, Lyn, that there's record carbon in the atmosphere.

Lyn Alden: Yeah, that's generally been a trend going up for decades now, and especially the last several years; they track that pretty regularly.  It's kind of up and to the right.  So, one of the arguments for nuclear is that basically, you get uranium, which is still commodity input, but it's pretty abundant, and you basically do a lot of capex.

So, for nuclear, the uranium is a smaller percentage of the energy of the cost, compared to the large infrastructure required to build those nuclear plants.  So, you build those nuclear plants, and they can last -- I mean, they originally lasted for decades, but the newer technology, a lot of those are extending their lives, they can go for 70 to 100 years of that plant being in operation, and it provides very clean, baseload power, no carbon emissions, no particulates into the air like coal.  The big downside is that over the past, say, five decades that technology's been in place, five-and-a-half decades, really is that there's been those three notable disasters, you could call them.

So, there was Three Mile Island, which was in the United States, and that was the least bad of the ones.  That one was, there was a radiation leak, it was a less severe one.  Then, by far the most damaging one was Chernobyl in the 1980s.  So, Three Mile Island was the 1970s, Chernobyl was the 1980s, and then of course Fukushima in 2011.

So, there's a couple of things worth noting about them.  One is that you had a number of dozens of maybe actual casualties from the disasters, but then you have a very-hard-to-calculate number of people that are impacted by radiation over the next several decades, especially from Chernobyl.  And then we don't know, of course, Fukushima; that's still playing out, that could still play out for decades.  But even the high-end estimates are fewer people killed than die estimated from coal worldwide every single year.

So, it's like the maths of airplanes where statistically, flying an airplane is very, very safe.  It's much safer than driving a car a long distance.  But every once in a while, you get one of these high-profile crashes.  So, people think of airlines as unsafe, whereas in reality, the way that that's distributed is nothing happens 99.99% of the time, and then something dramatic happens.  But when we add all those up, it's still way safer than a car.

Another key point is that even though those disasters happened in different decades, they were all built in the late-1960s, early-1970s, so they were all that 50-year-old technology.  Ever since Three Mile Island and Chernobyl, we've not put our best into nuclear.  That energy growth flatlined and not a lot of people went into researching it, so we stalled in that area and focussed on other areas.

But I started writing about this last year, and it's one of those things that became relevant faster than I thought it would, because now in 2021, we have some of these energy shortages, especially in Europe and China, and people are kind of turning back towards nuclear, to some extent; the narrative is shifting a little bit, because it really is one of the best ways to have fairly clean energy that's reliable.

Peter McCormack: On the nuclear side of things, I recently spoke with Harry Sudock, and he was talking about new Generation IV Reactors, and I'm not sure if you've looked at that.  Also, I assume there's been a breakthrough in fusion, so there was an MIT project that achieved a major advance towards fusion energy.  So, it feels like stuff is happening, but we are way behind where we need to be, because we're having energy issues in the UK; I think there's been blackouts in China, in India; there's the issue with the grid that happened in Texas.  Have you looked much at these Type IV Nuclear Reactors?

Lyn Alden: To a moderate extent; it's not my key expertise.  But essentially, the market can shift towards these smaller nuclear reactors.  So historically, there were all sorts of security concerns around having smaller, more widespread nuclear reactors.  And because of the capex and regulation, it was more cost-effective to build a very, very giant nuclear reactor.  But theoretically, having these smaller ones can be very useful.

Then, of course, there's new generation tech out there.  There's also ones that are using technology that is actually pretty old; it just hasn't been used.  So, they're pulling some of those technologies out of the dustbin and dusting those off, and then looking into how they can apply those as well.  So, it's really an under-explored field, because it's not something we've aggressively pursued; whereas for example, semi-conductors, we're throwing our best at it, we're constantly iterating, growing that area very quickly.  Whereas nuclear, for example, the number of people going into nuclear engineering as a field in the western world is minimal.  So, it's just not been a big area of investment.  But I'm optimistic.

Peter McCormack: You're optimistic.  But you think energy is going to be one of the big topics of, I guess, the next decade, where we source our energy from and how tied it is, I guess, to the global economy, because if fuel prices are going up, air travel will get very expensive, I assume it's going to be linked to containers being more expensive.  Actually, I think I read about this, and I also think I saw you tweet about this; specific companies have stopped sale and production due to because energy is too high.  Isn't there a Dutch steel plant that closed down because of energy?

Lyn Alden: Yeah, that was aluminium.  So, aluminium is a very electricity-oriented metal to produce, to refine that.  So actually, it's funny, because that's often been compared to Bitcoin, where if a country has a ton of excess electricity, one of the things they could do with it is refine aluminium, because it's so electricity intense.  But the counter of that is, if you're an aluminium plant, you're one of the first things that has to shut down if electricity costs are very high, because electricity is a very big part of your expenses.  So, aluminium makers have faced some of the brunt.

But it's other manufacturers as well.  Anything that's marginal and uses a lot of electricity, if electricity spikes, some of those marginal ones start shutting off their demand.  So, that can help supply and demand, but also can hurt the economy, because that will show up in GDP and show up in -- so, you could get an aluminium shortage, for example.  I haven't closely covered that particular market in a while.  But for example, as different manufacturers shut down from electricity costs, then you can get higher inflation in some of those physical goods, because you have a cut to supply, while demand is still pretty persistent.

Peter McCormack: So, do you think these energy issues are transitionary as well, or do you think we've got other major headaches ahead; because a few of the things concerning me, just filling up a car of petrol in the UK, I mean that's pretty expensive.  That's going to cause a lot of hardship for certain people.  And I also think going into winter, and maybe not even this year, maybe next year, I think the UK regulator's going to have to up the cap for energy prices.  And with everything else getting more expensive but real wages not increasing, it feels like there's going to be a lot of pressure on households and household incomes.

Although, I say that, I think a note came out from Rishi Sunak, who's going to be upping the minimum wage in the UK, so it feels like this maybe more of a squeeze on the lower middle class?

Lyn Alden: I think so.  My view is that the energy narrative is going to be with us for the decade, meaning that the 2010s were all about abundant energy, 2020s is going to be much more about scarce energy or high-price energy environment.  That will still probably come in cycles, because if energy prices get high enough and it starts hurting demand, because people can't afford it, and if it causes governments to try to temporarily tighten either their monetary policy or their fiscal policy to reign in that inflation, that can temporarily put the economy into recession, because you can hurt demand. 

When you hurt demand, that can pull down energy prices, but then they end up stimulating again, and so then we go into the next cycle.  So, it won't be a straight line.  I would fade these parabolic spikes that you might see in, say, natural gas prices in Europe, or coal prices in China, because if price goes up high enough, that can bring on excess supply for a period of time, and also there's that function to potentially cut demand.  But I think it's going to be one of those things that the overall trend is going to persist with us for a while, because we have not invested much in it.

How severe it gets partially depends on how fast people are allowed to respond to it.  If you keep disincentivising investment in some of those, then that can keep the pressure up for longer.  Whereas, if the market is able to come in and make all those new supplies, then that can make it so that I think still the 2020s decade will have, say, higher energy prices than the prior decade, but they might not be as crazy as they otherwise could be.

Peter McCormack: What are you tracking with regard to inflation right now, because I know the inflation rate in the US hit a quoted 5.4%, I think it was; the Bank of England has just warned that UK inflation will hit possibly 5% or more, they think early next year.  I think we've just had 3.4%; we've just had the biggest rise, month-on-month rise on records, or something.  Also, nobody seems to agree with or trust these figures.  Preston Pysh, our mutual friend, I think he said recently, "The inflation rates are probably three times the quoted amounts".  What are you tracking or seeing with this?

Lyn Alden: So, lately I've been focussing a lot on rent inflation and owners' equivalent rent inflation.  So, in the United States, we used to include housing costs as part of the inflation basket, but then they eventually took those out, because they classified those as a capital asset, rather than measuring consumption.  So, that's been a controversial change to the CPI calculation, because housing prices soared over the past year, so if you still included that in CPI, we probably would have low double-digit inflation in the United States.  But because it's been removed, the actual headline number is somewhat lower.

If we go back and look at those, instead what they've put into the index is owners' equivalent rent, which is kind of a wonky way to include housing indirectly.  So, owners' equivalent rent and rent together are about a third of the CPI basket in the US.

Peter McCormack: What is that, sorry?  What is owners' equivalent rent?

Lyn Alden: So, what they do is they basically estimate the monthly cost of owning a home, living in that home.  So basically, it's a way to include your housing costs going up without actually including whatever the price of the house is doing.  So, it's kind of the smoothed-out, lower version of what's happening with actual housing prices.

So, there are actually some periods of time when that outpaces housing prices, like when the subprime mortgage crisis happened and housing prices fell; they fell a lot more than owners' equivalent rent did.  But on the other side of that, when housing prices go up very, very quickly, that doesn't really get reflected in owners' equivalent rent for a while.

In addition, owners' equivalent rent indirectly takes into account the fact that interest rates are lower.  So, if housing costs go up dramatically, if the price of a house goes up a ton, but if interest rates are lower, if mortgage rates are lower than they were ten years ago, then your monthly payment might still be roughly the same.  So, that housing inflation won't show up in that owners' equivalent rent calculation.

So, when you look at, say, rent price increases over the past year or two, from companies that focus on that, they're pretty significant; they're double-digit price increases.  Whereas, when you look at rent in the official CPI, it's somewhat lower than that.  And the same thing when you look at housing prices, they've soared in many areas, but the owners' equivalent rent has been very muted in comparison.

But ever since this summer, we are seeing the official CPI calculations for rent and owners' equivalent rent start to turn up pretty sharply.  So, that's something I've been focusing on, because that's a third of the official CPI basket.  The bond market looks at that, all these traditional financial markets look at that, so that's going to lead to some sticky high CPI numbers for at least a few more quarters.

Peter McCormack: So, how high do you think this could go, because we're used to target inflation rates around 2%, and I've experienced it creeping over 3%; we're seeing quoted numbers of 5% and plus, which is concerning.  If we got to 7%, 8%, 9%, 10%, I think that would be very concerning.  Amongst what you're seeing, how far do you think this could go?

Lyn Alden: So, there are a couple of metrics we can use to look at that.  Partially, that will depend on policymakers, fiscal spending, debt monetisation, that sort of thing.  In general, it's hard for inflation to exceed the money supply growth for a long period of time; that's the core of where price inflation comes from, is the amount of money in the system going up.

So, in the United States, for example, over the past year, the money supply is growing at about 13% year over year.  That's lower than it was in 2020, when you had that gigantic spike, but it's still at above normal levels.  In the UK, you're looking at a little bit lower than that, but still somewhat elevated growth levels.  So, that doesn't represent a near-term ceiling, but it's hard to have, say, CPI go above that for a long period of time.

You can also look at, say, producer price index.  So, if you look at producer prices going up, in the United States, somewhere around 8%.  So, if that were to persist for a while, you could see CPI continue to elevate.  And so, there are a couple of key things to watch, as far as that's concerned.  We also can go back to if central banks try to tighten and try to kill some of the demand, that could temporarily alleviate inflation.  But then they start that economic stagnation cycle, and they probably get it to another stimulus cycle.

So, long term, it will really come down to money supply growth, how much fiscal deficits happen that are then monetised in part by the central banks of the world.  So, that's kind of the overall key driver, I would say.  Whereas, everything else is around that phenomenon.  So we look at, say, energy scarcity, we look at other commodity scarcity, we look at supply chain problems.

Another way to think about it is, over the long run, you can look at that broad money supply growth, and then you can look at CPI growth, and there are some areas where you get pretty high divergence.  So, for example, in, say, the late 1800s in the United States, you had pretty rapid money supply growth, but it was a deflationary period.  That's because we had all this land that we were expanding into, obviously the natives, but that's a whole other story of history.  So, there's all this land they were expanding to, they found oil, they invented the internal combustion engine, they electrified things.  So, between the Industrial Revolution of the UK and then all this expansionary land in the US, you had prices be very, very low, because you had massive productivity gains, railroads, things like that.

Then similarly, in the 1990s and the 2000s, we've had another decoupling from broad money supply growth and inflation, and part of that's from globalisation.  So, wage pressures have not kept up with money supply growth, especially in the United States, but also in some other developed countries.  That's in part because all that extra wage pressure, instead the release valve ends up being, either in some cases automation, or especially for the United States and others, outsourcing.  So, we've kind of arbitraged the geography a little bit in order to keep wage inflation down, which obviously has all sorts of societal consequences; but also, keeps CPI a little bit compressed, compared to that broad money supply growth. 

So, the combination of the growth of the internet, the grow of offshoring, has been a very disinflationary generation.  But there are signs that that's topping out.  We've seen, in 2020, 2021, if you have an extremely globalised supply chain, how fragile it can be.  We've basically sacrificed resiliency in order to make it as efficient as possible.  And we may be finding out that that was the wrong balance.  We went too far in favour of efficiency, and less towards resilience.

Now, I think there's a bounce back towards to resilience.  We also, of course, have growing tensions between the United States and China and so, I think basically this extended period of globalisation is probably behind us.  And so, adding to the commodity scarcity, this flatlining, or even partially reversing globalisation, is another inflationary pressure to be aware of.

Peter McCormack: Can we talk about Jack's tweet?

Lyn Alden: The hyperinflation tweet?

Peter McCormack: Yeah, so he put, "Hyperinflation is going to change everything.  It's happening", which I thought was a fair tweet.  It's got about 73,000 likes right now.  But I thought it was a fair tweet, because it wasn't geographic specific, and I think it's certainly possible that we're going to see a hyperinflationary event in certain countries.  But then he replied to someone, "It will happen in the US soon and so, the world".  What is the rate that is considered hyperinflation; is it like 40% or 50%?

Lyn Alden: So, it's often considered 50% a month, which is thousands and thousands of percent per year, because you compound that for 12 months exponentially.  You'd need extraordinarily high inflation.  So for example, even the high inflation of Turkey and Argentina is not necessarily considered hyperinflation, whereas for example, obviously the Weimar Republic was hyperinflation, Zimbabwe was hyperinflation, I believed Venezuela classified, for long periods of time, as hyperinflation.  But above a certain point, it almost doesn't matter too much.  Obviously, there's a difference between 25% in Turkey versus, say, 1,000,000% inflation in Venezuela; there's a different there.  But once you start getting into double digits, inflation becomes obviously a major issue in any market. 

Historically, hyperinflations tend to happen, there are two big ingredients that go into making hyperinflations happen.  One is some sort of damage to your productive systems.  So, that can include, for example, in Zimbabwe, they reorganised how they do farming, there's basically social conflict there.  That's a very long story, but you had a production collapse.  And of course, Weimar Germany after World War I, they were impaired in terms of the damage they sustained from the war and the economic consequences from that.

The other ingredient is when you have liabilities denominated in an asset you can't print.  So, in developed markets, they have a lot of debt, but it's in their own currency.  So, it's somewhat easier to "taper Ponzi", you can kind of do that over time.  Whereas, if you're an emerging market and if you, say, owe dollars, there's no way that your country can create dollars, other than earn them through trade.  So, you can pretty easily run into default scenarios and currency collapses.  Same thing for Weimar Republic; they owed war reparation, they were denominated in gold, and so it contributed to their being unable to service those debts.

Generally, in developed markets today, we don't directly see the ingredients of hyperinflation, but my base case for a while, the call that I've been making for the past couple of years, is that I expect the 2020s to be a pretty inflationary decade.  Now, hyperinflation's not been my base case in developed markets, but I don't rule it out as a possibility, because after a certain point, if people lose confidence in the system, if they don't want to buy the bonds, and if you start to see an out-of-control kind of deficit monetisation, then anything is possible.

Especially when you combine that with energy scarcity, or deglobalisation, or potentially any black swan event that could occur, like a natural disaster, or even some well-telegraphed events, like if China were ever to, say, invade Taiwan, then there's potential war between two nuclear powers, who knows what could happen there.  So, there are catalysts that I think could get the world to a more hyperinflationary type of scenario.  But my overall view's just been focusing on the inflation side, more so than the question of hyperinflation.

Peter McCormack: Yeah, I mean Jack's tweet, you could say, was slightly hyperbolic.  I mean, other people would point and say, "No, it's correct, this will happen [or] it might happen", but I struggle to see the idea that the US would enter hyperinflation.  But I think, like you said, you can focus on the actual inflation that's happening, risks of inflation, and as you rightly noted, Turkey and Argentina are both experiencing some very high inflation at the moment, and that has dramatic effects, it has dramatic effects on the local economy and the people that live there.

So, even if we were to see 10%, 15%, 20% inflation in the US and the UK, that still would be a very bad scenario for a lot of people, especially if this was something to carry on for a decade.

Lyn Alden: Yeah.  So, one of the big things that I focus on is the fact that because we're towards the end of this long-term debt cycle, where they pretty much have to hold rates low despite inflation, because otherwise the sovereign entities are insolvent, that opens the possibility of this spiralling out of control.  And so, if you want to make the hyperinflation argument, you would basically go back to history and say that no fiat currency's lasted particularly long.

The structure that we've had in place since the 1970s, which is that the entire world is on a fiat currency standard, is very unique in human history, and it's only so far a 50-year experiment.  So especially, this is the first time that the fiat currency system is tested with an inflationary environment while we have this much debt in the system, and real interest rates are this low.  So, the last time we went through this was the 1940s in the developed world, the 1920s, 1930s and 1940s.  Back then, they had a gold peg, so a lot of them had to break their gold peg, but then they re-established their gold peg at a lower level, and eventually of course transitioned to the Bretton Woods system.  So, they still had a tether to commodity-based money.

Whereas now, we're going through a similar phenomenon, but in a purely fiat currency regime, and so there are a lot of big questions about how they're going to navigate this.  One of my overall views is that basically, I would position for hyperinflation similar to how I position for inflation anyway.  And so, my overall view is basically have hard, scarce assets, productive assets, or good monetary goods; so, some people prefer gold, some people prefer Bitcoin, some people prefer a mix of both.  So those combinations of, say, commodity producers, hard assets, good real estate and then good monies is the protection either way against a full range of inflationary scenarios.

If you get into extreme inflation, or hyperinflation, then you also have to consider personal security, a kind of prepping type of mindset; basically, have resources available that as society goes through very difficult periods, that you're positioned to meet your basic needs for a decent period of time if you have to; if you have pretty severe breakdowns of supply chains, and some of these other shortages.

Peter McCormack: You said, I think it was one of your tweets, you said, "This is more like the 1940s than the 1970s"; what did you mean by that?

Lyn Alden: So, that goes back to the idea of the long-term debt cycle.  So, in the 1970s, they had actually already inflated away a lot of the debt from the 1940s and going into the 1970s.  So, in the 1970s, there were a couple of issues.  One is that the United States did not have enough gold to back the Bretton Woods system anymore.  That had been building up for decades.  By the time 1971 came, they already messed up, there were already too many dollars outstanding compared to how much gold they had, and so the system was unsustainable.  So, that system broke.

In addition, energy production, oil and gas production in the United States, peaked.  So, the United States became more reliant on importing oil and gas and of course, you had oil embargos and political issues like that.  So basically, that combination of devaluing the currency, defaulting on the gold standard and devaluing the currency, combined with real resource constraints, basically lack of energy, created a very fertile ground for inflation.

The only saving grace was that debt, as a percentage of GDP, was very, very low throughout the developed world, because they had already inflated a lot of that away; bonds were already considered certificates of confiscation, so valuations were low, debts were low, both public and private.  And so in the United States, Federal Chairman, Paul Volcker, was able to come in and say, "We're going to jack interest rates up to 20%.  We're going to maintain confidence in the system.  We're going to put real interest rates back into positive territory, and we're going to show the world that we mean business about stabilising this, even if it means putting the US and other parts of the world in a recession", and hurting that demand, in order to cool off some of that inflation, and use their top-down approach.  That set the stage for 40 years of more stable policy, because they built confidence in that system.

If you go back to the 1940s, the big difference was that that was the aftermath of World War II, so the developed world had tremendous debts as a percentage of GDP, especially on their sovereign entities, so their governments.  So, when fiscal spending's that high and sovereign debt is that high as a percentage of GDP, then even when they got inflation, they said, "We can't raise rates, because then the government itself is insolvent".  What they did is they held rates low, even though inflation ran high.  

So, that's how the 1940s were different than the 1970s.  Basically, there were different constraints there, so even as they denominated their own currency, their debt as a percentage of GDP was very high, so their only choice was to partially inflate it away.  Back then, they were able to thread that needle where they were able to inflate it away without hyperinflating it away.  So, if you were holding Treasury bills or Treasury bonds in the United States, you lost 30% to 40% of your purchasing power over a decade.  If you were in most European countries, it was worse, because the countries were more damaged by the wars, including countries on the winning side, like France and the UK, let alone countries on the side that sustained more damage.

So, those currency devaluations were often even more severe, but most of them avoided hyperinflation, but it was still a very traumatic event for currencies.  And there was no guarantee that they would be able to thread that needle.  It was possible that more countries could have hyperinflated if things worked out differently.  So, that's the main difference between the 1940s and the 1970s, is that debt is so high in the system that everyone expects the Fed to tighten and try to rein in inflation, whereas they were kind of constrained from doing that, because their policies over the past few decades that encouraged all that debt accumulation in the first place, they built this bubble that now they're trapped under.

Peter McCormack: So, the bondholders and the peasants are going to be paying off the debt for them through inflation?

Lyn Alden: Generally, yeah, people holding bonds or cash historically, in this sort of environment, are the ones that end up paying a lot of that.  So, it's obviously also damaging for people on fixed incomes and beneficiaries are generally people that own hard assets, people that have, say, debtors.

So, for example, in say the 1970s when you had high inflation, anyone who held real estate did really well, because you had this fixed rate mortgage and you had real estate, and the real estate appreciated.  So, there are kind of winners and losers across the income spectrum.  But the general theme is that cash and bondholders take the big hit, and debtors and those holding scarce assets generally do pretty well, as long as their debt is not structured so that they are at risk of liquidations; because you can have a very volatile event.

I believe it was Dan Oliver had this chart, and I heard about it because of Luke Gromen, that they showed gold in the Weimar Republic, the price of gold in marks.  And of course, it went to infinity, more or less, because the currency hyperinflated, but it wasn't a straight line.  So, if you had callable debt, there are multiple 80% drawdowns in gold during that passage, because there was a period of time where German officials made it look like they were going to stabilise the currency, and they reined it in for a little bit of time, but then it broke again.  So, gold would have another huge leg up, and then it would crack.

So, the key is to have long-denominated debt, like a mortgage, or say how Michael Saylor's tried to construct his balance sheet, rather than the short-term leverage that is callable.  Or, put leverage aside and not use it, but just have those real assets that whenever the dust settles and people have to reconstruct a new system, that you have things of value that people will want in the future.  It could be money, it could be productive assets, like hard goods.

Peter McCormack: It sounds like it would be bad for pensions as well, though, because they tend to hold bonds, right?

Lyn Alden: Yeah, it would be not good for most pensions.  The tricky part for them is they have to meet these target return expectations, but they also have to minimise volatility.  So historically, they've held a pretty good amount of bonds.  And so also, if you look at, say, investors in Europe, they tend to have more bond-heavy portfolios.  It's been a big facet there.  So, there are large pools of capital that would be very impaired by bonds doing what they did in the 1940s, which is basically having negative interest rates, when you factor in inflation for a lengthy period of time.

Peter McCormack: So, how's Lyn Alden preparing for this?

Lyn Alden: So my approach is, I like some degree of diversification, so obviously I have a large Bitcoin allocation, I still have my gold allocation, and then I have a range of productive equities, so oil producers, gas pipelines, some healthcare companies, some real estate companies.  Basically, anything that I think is producing something productive, generating positive cash flows, has a sustainable future-proof business model, and then some of them have good fixed-rate long-term debt associated with their hard assets as well.  So, that's my overall combination.

Obviously, also real estate, as long as you're not buying bubble valuations, is a very attractive way to have exposure.  And then you have, say, a long-term mortgage attached to it, so you have that non-callable -- it's essentially a long-term fiat currency short, essentially.

Peter McCormack: So, property, gold, Bitcoin and then productive assets.  I'll probably stick with property and Bitcoin.  Let's talk about Bitcoin.  We had an all-time high a few days ago, it hit $67,000 after a really crappy mini bear market.  I was pretty happy with that, I'm sure you were pretty happy with that, as you've just said you have a large allocation towards it. 

It feels like Bitcoin is maturing very, very fast this year.  We have the ETFs, and I know they're futures ETFs, and we should probably talk about those, because I'm sure you've got a view on that.  Some people were very positive for them; some people said they were negative.  But it feels like we have a fast-maturing Bitcoin market?

Lyn Alden: Yeah, over the past couple of years, we've had a big insurge of institutions, so it's gone mainstream in the financial markets, to some extent.  It's still a very small allocation among retail and among institutional portfolios, but at least it's not considered a joke asset anymore like it was years ago.  So, there's a lot of interest in that space obviously.

The Bitcoin ETFs signalled a few things.  They've already existed in other countries, so one of the overall long-term risks, or FUDs, depending on how you want to look at it, that people have around Bitcoin is, "What if it's banned?"  So, the SEC coming out and approving Bitcoin ETFs, and we've also had the Fed Chairman saying, "There's no intention of banning cryptocurrencies", basically some of these large pools of capital want more regulatory clarity, so that helps them when they see that.  So, there are many of us that cared less about regulatory clarity and we just want to own good assets, so we bought that ahead of time.  But there are other pools of capital that they want to see that SEC approval to some extent.

Now, I personally don't like futures-based commodity ETFs.  So, these have existed for oil, these have existed for agricultural products.  I'm not a fan of them, and that would apply to Bitcoin as well.  So, I'd rather have, if they're going to have an ETF, I'd rather have them have a spot ETF where they actually hold the Bitcoin in cold storage.  Now, you still have counterparty risk, you still have other issues like that, but at least that kind of ETF should track the price pretty well. 

For investors that want to hold it in a brokerage account, either because it's an IRA, or it's because they have assets in that account, that's the institution they feel comfortable holding with, I would have at least preferred to see a spot Bitcoin ETF, which again you see in some other countries.  But the United States so far has been approving this futures-based route, which I think in the long run, is not going to be very beneficial for shareholders.

Peter McCormack: Do you think it's just a test though?

Lyn Alden: Yeah, there's different ways -- so, some of the issues with spot ETFs is that, in theory, you can have those crazy candles, where you have an issue on exchange and suddenly, Bitcoin spikes down in price and then it comes back up.  So, I think they're worried about things like that, whereas futures are a more regulated market.  But the problem is, futures don't track the underlying Bitcoin, and you kind of bleed out some of your capital by rolling those futures over time.

So, it is possible this is a test.  The more conspiracy route is that basically, if you have a large enough futures market over a spot commodity market, it is a way to potentially influence the price a little bit, or even suppress the price a little bit, so that's one of the things that some people are concerned about.  Overall, I'd like to see, for example, Grayscale eventually convert into a Bitcoin ETF, and they obviously have plans for that.  So overall, definitely a spot ETF would be better.

I think obviously, people should at least consider self-custodying where possible.  But if you are going to have these regulated products, I do think that eventually they should move towards having a spot one as well.

Peter McCormack: And, have you got a price target for the year?  I know this is a question everyone hates.  Is there any chance that you might scale out of Bitcoin at some point if prices get to a certain point, or are you a ten-year, multi-decade Bitcoin hodler?

Lyn Alden: So, I plan to hold my allocation for the very long term.  I don't plan on selling any cold storage Bitcoin.  I have a little bit of GBTC, I have a little bit of miner equities.  I would consider selling them, or trimming them, in a parabolic spike and reallocating a little bit differently.  But the cold storage Bitcoin is not something I plan on touching.

As for price targets, I tend to avoid specific one-quarter or two-quarter price targets; that's more of a trading call than a macro investor framework call.  I am on record saying that I wouldn't -- last year, in 2020, when Bitcoin's market cap was maybe a third of a trillion, I was on record saying I think it could hit over $1 trillion, so we crossed that mark.  And then once it did there, I said I could certainly see over $100,000 by the end of this year.

Now obviously, we've been in a correction for a while.  I still think that's on the table.  It could be 2022, so I don't have a strong opinion about timing, that's more of a trading call, but overall I'm still very bullish long term.  So, that's kind of my main focus, is that it's an asset that I want to hold for many years, rather than something I want to focus on what is the quarter-by-quarter price target of it.  But I do think that a six-figure price target is eventually on the cards.

Peter McCormack: Yeah, and especially with what we spoke about happening over the next decade, very uncertain times with inflation, Bitcoin is one of those things you want to hold.  So, yeah, I have no plans to touch my deep cold storage either.  Okay, one thing to finish on today.  Can we talk about aikido? 

Lyn Alden: Sure!

Peter McCormack: I loved that tweet thread.  I read it and I was like, "Yeah, do you know what, you're so right".  Because, I give airtime to people who can be dicks, and I shouldn't, but I really liked that thread.

Lyn Alden: Yeah basically, so for people who aren't aware of that thread, I just put out that I have experience with martial arts and mine were the more traditional styles, like what we know of MMA today, so kickboxing, jujitsu, submission grappling, that sort of thing.  But we also learned, we had these traditional karate, traditional jujitsu, traditional aikido aspects that we were at least familiar with.  And the whole point of aikido is to use your enemy's energy against them.

So, it's something that I would think about when I'm in, say, a sparring match, right, that if I'm against a smaller opponent, or a similar-sized opponent, that I can rely on my strength or my speed.  But if I'm against a larger opponent, my strength is less of an asset, and it's more about speed and then trying to figure out how to use their own momentum against them.

An example I use, if I'm sparring against, say, a larger man, because it was a co-ed martial arts school, is I would do this thing where I would push against them really hard and eventually, they'd push back and overpower me, but I was waiting for that moment.  Then, I would grab them and pull them down, so it's mostly their own forces now; they use that surge to counteract my pushing, but now I'm just pulling them.

So, on Twitter and online debates in general, instead of coming out and saying, "You're an idiot [or] you're dumb", I try to let people hang themselves, you could say.  I let people be their own worst enemy and just try to stay polite and engage them, and still push back on points I disagree with.  So, I was just putting out my philosophy a little bit as it relates to online communication, because I feel like a lot of people are different people online as opposed to offline, and I think it would be a lot easier for a lot of people if they still acted online in a similar way that they act offline, at least in most ways. 

So, you can still say when you disagree with something, you can still be super honest, but just realise that sometimes the best outcome is when you're calm and your opponent is the one that's freaking out, looking like an idiot, getting aggressive; it doesn't really work out that well for them.

Peter McCormack: It's a great thread.  I'm going to include it in the show notes so people can read it.  Well listen, Lyn, lovely to see you again.  Like I said, I missed you last month and I think everyone missed you.  I got a few emails saying, "When's Lyn back?  Has she gone?" and I was like, "No, she'll be back soon".

It's great to have you back, great to see you.  Your Twitters have been on fire recently.  You are subtly quite savage at times, especially with people like Professor Plum, and I love to see it.  So, yeah, great to see you back and I will see you again very shortly.

Lyn Alden: Yeah, we'll see how this goes.  Hopefully it's a decent quarter and thanks for having me back on your show, always happy to be here.

Peter McCormack: Brilliant, thanks, Lyn. Take care.