2023 Recession: Is it Happening? with David Duong

Transcript

bankless Nation macro is on the menu for the special live stream that we are doing whatever happened to the recession that's the question on my mind and on David's mind we're gonna ask that of our next guest was it delayed was it canceled or maybe it's already here and we just don't know it yet David we have that head of research on from coinbase uh and our guest's name is also David so I am between two Davids on today's episode introduce this topic for us I don't know yet I can't wait to experience the David effect but why are we talking about macro and uh who do we have on today yeah the the time for Macro for like Jesus sorry 2022 was the year of macro macro has you

all flustered yeah it has me all flustered right and okay for a while it was the theme that we wanted to talk about it's macro macro macro the last time I think we talked about macro was the Silicon Valley banking crisis I don't even know if that's considered macro but all of a sudden macro seems to have been gone from the Limelight and so the question is like why are things so quiet are things are we in the all clear did we get the soft Landing is that what this looks like or are things a little too quiet uh why are things quiet like there's many different things to talk about that are going on in the macro land uh the state of inflation uh wire Equity is so high uh is what's the FED going to do when they meet in a few weeks here at the end of this month uh

and what's to deal with the correlation between crypto and stocks uh yield and dollar at all-time highs can we start to pattern match some of these things and what can it tell us about Q4 2023 and 2024 and Beyond yeah I feel like this is uh things these are quiet a little too quiet I feel like this is the part of the horror movie well where everything is is quiet and you're just in the suspense you're just waiting for the next shoe to drop so maybe that's part of it uh David before we get in though we got a quick PSA and this PSA is for ourselves this is all about becoming a bankless citizen so you're listening to this episode of Bank list which means you are an enjoyer of the podcast at least we hope you are you're you're not a um just listening to this out of pure

hate uh there is the potential for you to become a bankless citizen we don't often talk about this on the podcast but there are a slew of tools that you unlock by becoming a bankless citizen one of which is the a premium feed the citizen premium feed we call it this is a dedicated RSS feed with bonus episodes and it's completely ad-free as well and you get that as a result of becoming a citizen there's also some really cool features that we've added here lately including the token Hub which is our bearable neutral rating on our website for various tokens we've just rolled out an airdrop hunter that is an opportunity to see which um which air drops which

potential quests you can go on and potential protocols you could test out for airdrop eligibility and I think this is probably my favorite new feature this is a bankless claimables you put in your eth addresses basically it tells you what you can claim on chain I I didn't know this actually but I just recently looked this I have apparently 103 dollars in one of my youth addresses here that I can go claim yeah uh what else would you say about citizenship David what are the benefits of a bankless citizenship yeah I bet a lot of people are listening to this podcast on their podcast player that premium RSS feed the ad free RSS feed also goes there so Ryan's showing it on his screen but most people just listen to the ad free RSS feed natively in their podcast player that is a link that

you get only as a citizen uh and just all of these perks and and things in the bank list app that we've put together is really just meant to be the toolkit to help you live a bankless life to help you navigate the world of crypto uh navigate away from the traps and just do it in a much easier way so it's supposed to be a much more fluid way to live in the world of crypto I just moved it there but absolutely yeah one of my favorite Parts too is the uh the bankless community that you get to to join when you become a citizen and and meet everybody on Discord to participate in our Live Events all of these I've got my own uh my own channel inside a discourse called ask David anything where you are allowed to ask me anything I will answer them really

anything anything my friend yeah I actually prefer the non-cryptal questions yeah there's a there's a link in the show notes if if you guys want to check that out um David going to this episode I have just one overarching question for you before we bring on David here and introduce him um to the bankless nation which is uh why does macro matter so there there are many people in crypto who I know just don't pay attention to macro at all they just that's a you know Superfluous thing it's not relevant to crypto markets would you make that argument or you know why are we even doing a show on macro in general like we must think it's important why yeah certainly well what Finance is is a big gigantic mesh network of interconnected

variables uh and so crypto is a story of crypto growing up is becoming a relevant macro player uh bond yields as we've known in 2022 and 2023 do does impact the valuation of our assets uh the macro conversation is a regulatory conversation which is the Bitcoin ETF conversation and so all these variables are worth considering when we make informed Investments about the future because macro is is about predicting the future yeah I agree I also think that understanding macro helps you understand crypto better in the same way that understanding crypto helps you understand macro better we are of course creating a new Financial system and we we should learn lessons from from the old one if we're going to move past it and build a better Financial system so

guys we'll be right back with our conversation on whatever happened to the recession but before we do we want to thank the sponsors that made this episode possible including our friends over at Kraken Kraken is our number one recommended exchange for 2023 go create an account Kraken Pro has easily become the best crypto trading platform in the industry the place I use to check the charts and the crypto prices even when I'm not looking to place a trade on Kraken Pro you'll have access to Advanced charting tools real-time Market data and lightning fast trade execution all inside their spiffy new modular interface kraken's new customizable modular layout lets you tailor your trading experience to suit your needs pick and choose your favorite modules and place them anywhere you want in your screen with Kraken Pro you have that

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the show notes bankless Nation I would love to introduce you to David Duong head of research at coinbase leading coinbase's institutional research effort efforts for their institutional clients David both speaks macro and crypto which is why we're having him on the show today we haven't done a macro show in a while it's been a little quiet out there is no news good news or is it a little bit too quiet David is going to help us answer that question David welcome to bankless hey thanks a lot David thanks Brian so I want to start with that that question we haven't done a macro show in a while why why not everything kind of seems to be going all right the economy is not falling apart we don't seem to be having that uh recession that we were so

worried about at the start of the year how does the whole idea that everything seems to be going all right check out with you how to just five check on that statement uh everything's going fine and that's my segment so uh no um uh I think the expectations at the beginning of the year were that we were going to get recession because there was this recency bias in people's minds right the big signal that people kind of look at at least in the finance world for weather recession is coming or not is this idea of the inversion in the yield curve and the curve inverted and so we said well recession's coming let's all panic the problem with that is that doesn't tell us anything about the timing of when these recessions occur

like the timing for when you see the curve actually invert and when a recession happens can be anywhere from 120 days it could be 400 days so we are still well within that window of possibly seeing it but a lot of us kind of look at indicators like well the labor market seems to be doing fine like we just got some jolts numbers let's say we have 9.6 million job openings available in the United States so compared to 2001 when we had four 2008 when we had four the previous kind of recessionary periods like that seems like a lot and it is the problem is that the changes in these things like the the Delta uh are actually already peaking or if they have they've already peaked in

many of these cases and we're actually moving down and the other big problem is that the relationships that we're familiar with uh traditionally in macro they're not working and I think this is actually the biggest challenge because generally things happen like the FED High traits and then the economy weakens right and of course there's long and variable lags which is that talks about but this time around the fed's hiking rates and the economies doing pretty well like the housing market like housing prices are rising you don't see that when mortgage rates are at seven percent for example or you know in the last few months the dollar has been very strong but oil prices keep Rising that is not a traditional relationship generally when the dollar is strong you don't see oil prices or Energy prices like this right now you know you

mentioned yields yields have been the biggest concern for a lot of investors they've been rising but up until Q3 for example gold prices have actually been stronger which is again that's not something so like you have all these historical relationships that just don't work right now and I think that's more concerning uh more than anything else one one question David here about this yield curve inversion um you you seem to maybe be preparing us for uh for for some sort of discussion on um like a recession is only a matter of time I feel like that's maybe part of what you're implying so the the yield curve inverted and historically that has been a sign that we're going to get a

recession right and and you said that doesn't necessarily tell us when we'll get the recession could be 100 days out could be you know many hundreds of days out and we just don't know but does it actually guarantee that we will get a recession how about the case where yield curve inverts and we don't get a recession are is that a possible forecast or do you think a recession is is pretty much a guarantee it just is um the only dependency is on the timing and the when so I will say this and this is probably gonna hurt all the macro analysts whoever will come after me we don't know anything I'll be completely like Frank about that we we really have no clue you know like the the best part about

inflation is that like you know oftentimes the fed's like oh you do this and then inflation's gonna come down or go up depending on what we wanted to do like a lot of there's actually Papers written by former fed officials who basically say what I just said who basically we have no clue how inflation works by the way like we said all these things we have no clue how it worked okay can I ask yeah can I ask a higher level though that like if we have no idea you know how any of this works or what's going to happen then why do a macro show why are you in you know macro at all like doesn't this go back to the intro if like why talk about macro why can't we just put the blinders on invest in kind of what we know and just ignore

the chaos that's going on outside because no one knows anything about anything a big part of that has to do with it's a social science you know it's it's a one where we testing because a lot of depends on human behavior and a lot of these variables I was talking about in terms of why don't these historical relationships work well all of them have an answer to it um all of them it could be geopolitical it could be that you know for example the economy is doing very well right now because I believe that the government is spending significantly like we are seeing a lot of fiscal stimulus inside of this economy that's propping it up and this is different from what we've seen in previous Cycles like right now the US government is acting Pro cyclically which is to say it's working

actively working against the FED in terms of the fed's attempts at cutting rates and trying to you know get the economy weaker so that inflation actually comes down like the reason we've had this all these odd Dynamics can be explained and we have to try to explain them but the problem with it is that a lot of times we don't know what the final answer is like with the reality until X post until after the fact like until we actually see it happen we're like we're just kind of guessing so David we can't necessarily use history uh in order to kind of predict the future but you are saying you are saying it is possible to kind of gather all of this data and look at what's going on and actually read the tea leaves and and and and actually create some uh predictions a predictive

model on what might happen next that's right you know like I think that the you know and this is I'm not an economist um you know I've trained as an economist and I've had these things but like I'm actually a strategist which is a little bit different because I generally use what I understand in terms of the economic variables and what's going on in the macroeconomic environment to kind of inform my decision making as far as Investments are concerned um but I will say that you know oftentimes what we kind of get with these kinds of variables like we have to understand like where does it where could it work out of sample and where are the changes from what we're used to in history that is making this situation

possibly different from all the others that's that's kind of what we're always trying to analyze in order to kind of get a better understanding of what kind of trading environment are we in to trade crypto or any asset I think the answer to Brian's question is like why why do we do macro shows to me like people that look at the macro landscape it's it's they're all looking everyone's looking for a story to be told here's uh What uh oil is telling us here's what yields are telling us here's how this part of the story fits to that part of the story and ultimately it's a prediction of the future which means that to some degree all the stories will be wrong in some sense some will be more wrong than others some will be on Target and so I guess David we're bringing you

on here as a Storyteller to see the story that you are are seeing in all of these different variables and one of them that you painted that I think is a place to start this story is All of the government fiscal spending that has happened uh since the Silicon Valley banking crisis but maybe also even earlier than that uh if we accept that as the beginning of this story can you walk us through through that story why is this an important part of the story of the economy yeah so you know like and to your kind of point I would say like the only guarantee we have at the end of all these things is that half of us will be happy and half of us will not be happy like someone's gonna get a right based on our call and someone else some of us will not uh so I mean there are

really two reasons why I think the US economy has been doing so well and I say that because oh like a lot of the other places in the world things are not going well like Europe you know they're suffering from some countries suffering from stagflation for example China's economy is not doing very well they're going through a period of deflation uh you know so the U.S has been exceptional in fact that's what we we say this is a period of U.S exceptionalism which in part explains why the Dollar's been doing so well for example um I think there are basically two main reasons why that has happened over the course of 2023 number one is a lot of spending So currently uh we have the inflation reduction act we have the chips act we have the infrastructure act

all these things have amounted to trillions of dollars that we are going to be spending like I think over the next few years we're going to have about 2.1 trillion dollars more in terms of outlays that we need to to pay for um because you know we needed to have these things right but it's a bit different than what we're used to so I think that's number one the other big thing is we've seen a very large labor productivity move and you know what that basically means is during the pandemic we actually had huge declines in labor productivity I mean like we all suffer because not a lot of people like I don't know who was going to the office maybe like the you know the the people who are who are needed

like nurses and doctors and things like that but for the most part a lot of us weren't there so there was a very large productivity Spike over the course of 2022 and into 2023 and this has kind of propped up the US economy and and that did exist in other places but only certain countries have the ability to actually physically fiscally spend their way and and kind of uh boost the U.S economy we were one or rather boost their economies the US is one of them okay so uh if we take the idea that there's a United States government is doing a lot of spending you've named a few of the acts the bills the inflation reduction act there's billions and billions of dollars being pumped by the

government in into the economy and it circulates around the economy and it's being like kind of forced in right it's not happening of its own uh causes it is an exogenous force on the economy by the government that could potentially stop or not I don't know but that's the question to you is like is are we concerned about these the ceasing of the government doing this artificial pumping of blood through the economy like what's the state of that so that is part of my thesis behind why I would expect a recession to materialize probably in the first half maybe in the first quarter of 2024.

um it's purely a guess on my part uh but I would expect that that stimulus is coming to an end I mean there are going to be lingering kind of latent aspects of this for example like uh you know certain states are going to be receiving uh apportionments of government a federal uh funds in the beginning of 2024 and I think that they have until 2025 to use that so some of those things will probably keep the conditions for you know the the you know economic situation probably easier in terms of having some liquidity available and things like that but ultimately a lot of that is starting to lapse already so I

would guess by you know first quarter of 2024 that's going to end and if that if this story is is correct if that is one of those things that it's propping up the U.S economy right now then I would think that that's where we're going to start to see things turn well that's really interesting and I want to come back to that prediction but so you're saying one of the ways to interpret this this data that you know the the Strategic interpretation is that a recession is still coming yeah we did see the yield curve inversion uh fiscal spending has really propped this up in the U.S to this point we've been outspending you know other countries uh but that could start to turn in uh 2024 maybe the first part of 2024 the first quarter the first half of 2024 which is

very interesting because 2024 is an election year for the US does that factor at all in in your analysis here David yeah that's what's a bit unusual about this because typically you don't want to time you know if if all things being equal you would love to have that spending during an election year right and there's a lot of conspiracy theories about also how the central banks operate and this isn't just in the US of course this this happens in in a lot of countries I don't necessarily ascribe to those views in all cases um and I certainly think the U.S you know in the US the fed's independence is pretty impeachable unimpeachable rather um but uh you know a lot of the spending was approved at a

time before the midterm elections when the Democrats had control of both houses and that's why like trying to extend that Beyond this period of time is much more difficult but the way some of the spending has been characterized in terms of you know Federal funding that goes States for example the fact that that carries over into 2024 and 2025 I don't think that was an accident but it is the case that the US is out spending uh say Europe where maybe some of the you know the the economy has been less bright and we're outspending China as well are you seeing that in the data is is that the case that we're outspending these other jurisdictions

these other countries it's different for each place you know like Germany's going through aestheticflation kind of environment right now or at least I believe they are you know China has been unwilling to kind of provide the levels of stimulus that a lot of investors would have liked them to um in part because they're kind of stuck because in the past a lot of that spending has been around infrastructure for example and now they have a lot of ghost towns and other places like they've kind of already overspent and their big problem right now is private debt which has been redistributed among like kind of local governments and other places so it's become a mix of public and private debt in some ways like they're they're the problems kind of

Exist Elsewhere um but the US has been one place where they've definitely had the Firepower available to them while many other countries have not can we talk about that David why why does the U.S have the Firepower available to it to spend more this this idea of this this period of time has been a period of U.S exceptionalism with respect to kind of the economy and also with respect to the amount of money we're able to find and pump back into the economy why is that where are we getting this money is it simply a matter of the us having the world's Reserve currency status and we're kind of eroding that are we like people are just willing to buy U.S bonds

or have been thus far our Treasury and that kind of thing is that what you know why the US has been exceptional with respect to its its level of Firepower it's able to inject like what are the reasons here I think that's a big part of it but I would kind of separate into two things number one is the mindset and number two is the ability right and the mindset I think previously like for you know a very very long time like the whole mindset around fiscal spending was tax and spend and this is what's fairly prominent I mean it was not unquestioned globally like this is how you do things if I want to spend I need to actually have the capital raised in order to spend that money pretty obvious or at

least you think so because a lot of times we make these parallels of like well you run a government the way you run a household right I'm not going to spend this stuff unless I'm able to get credit for it I.E I can borrow in the market and be able to borrow that money to buy a house for example well similarly if the US government wants to spend on whatever let's say it wants to increase defense spending well I'm going to pass that on and try to like tax people more or find other ways to actually raise those funds but something changed right what what really kind of changed the thing when we had a modern monetary Theory kind of positioned as an idea and it came prior to the pandemic but when the pandemic actually happened all of us were like well this is a this

is a catastrophe like we like this is a World Health crisis like just get us out of it and to be fair all of us were kind of culpable in this all of us were kind of just saying like rescue us we don't care what you have to do spend this money and just get us out of it and so we printed money effectively we're saying like forget about tax and spend that's not going to be like we'll just spend whatever we have to and we'll figure it out later and that was the kind of thinking and part of what's embedded in that thought process at least uh in the U.S is that yes we can issue like we you know we can issue whatever bond that we need to kind of pay for this because we control the reserve currency of the world to some extent

meaning we could print ourselves out of it if we need to like functionally this is known as monetizing the debt in some ways shape or form um we are seeing the remnants of that happening right now and and possibly like it may continue into the future because effectively we're saying if we need to you know get more money we will borrow more um but I think we're creating problems for ourselves because while the US Remains The Reserve currency of the world and I'm not a conspiracy theorist I do believe that you know the the dollarization story that a lot of people pause it I think that it is not something that's going to just happen suddenly nor in the short term not binary no it's it is a process and it's

going to be a you know it's probably going to happen sooner or around later but it's a decades-long process it is not a like within the next five years kind of process um well regardless of that I think the you know the the US government kind of perceives well we can issue this debt the problem becomes who's going to be buying all this debt because right now U.S treasury bonds are used as collateral globally and we need it like people people have the dollar in their reserves central banks in other countries primarily because well when they buy Goods or move Goods the dollar often acts as an intermediary within the balance of payments like you need the

dollar somewhere in order to kind of pay for goods that you're either buying or selling or whatever you know like uh often to Dubai but you know you need it for some purpose used inside of trade um you don't want to just carry dollars so you often carry treasuries because it's a yield bearing asset rather than just having dollars so that's kind of where the function it plays in the world and that's still the function of plays even though I I think uh you know you're not seeing the dollar having as strong a place in countries Reserves it's still very moderate like for the most part people are carrying dollars there but it's not going to last forever and the world is changing there's yield curve control that's being removed in Japan

for example so Japanese buyers who are the largest buyer of Treasury Bonds in the world um you know that's not going to be there like probably in the near future for example who's going to replace that so there's a concern that they might need to be filled possibly with the FED to even step in and actually buy that again currently we're in a period of quantitative tightening but will we need to flip the quantitative easing probably fairly soon the way I understand this is that like this the fact that the United States dollars the global Reserve currency produces this very large reservoir of power that uh money printing can tap into right if everyone else is using our currency base well then that gives us

more affordances to actually be able to do the fiscal interventions that we've seen in 2022 and 2023 like the ones that we were talking about I want to ask about like your perceived equilibrium that the economy would actually be in if it weren't for the fiscal intervention um like if you took out the variable of fiscal intervention like what would the economy be looking like because over a year ago everyone was worried about the recession but then the recession never came and so like one percent perception might be is that well we just kicked the can down the road using fiscal intervention but then another angle might be like yeah we did Kick the Can down the road and we also kind of spread out the recession over a wider period of time which is what you kind of call a

soft Landing where do you stand between these two things we just we just the recession is going to be just as bad and we just kick the can down the road and as soon as we stop fiscal intervention we're gonna be hit with a full weight of a recession or the kicking of the can down the road is the spreading out of the recession and that's what you call a soft Landing so had it not been for the fiscal stimulus that we got I still think that we would have been in a fairly slow moving train because it takes time for a lot of what the fed's doing to actually percolate into the the broader real economy as they call it um just take housing for example you know like housing has done pretty well all things considered whereas if you saw the more 30-year mortgage rates were

somewhere around seven to eight percent you would have said well things should have slowed to a crawl at this point but there are other mitigating circumstances that have stopped that from happening right because one thing is Supply like 82 percent of homeowners for example have a uh current mortgage an existing mortgage that's somewhere below five percent so if you have that and you see that current mortgage rates are seven percent or eight percent you're gonna say well I I don't wanna I'm not able to go out and buy another home to replace basic one I currently have because I I'm not you know I'm not going to switch my five percent mortgage for an eight percent mortgage for example so you're just sitting on that now typically speaking that would still create

negative flows in the economy because people still aren't moving things demand of course has been constrained on that side but then Supply kind of gets constrained so that that's so far balancing it out but real kind of money sloshing around the system doesn't you know it's not great it's not a good feeling the pandemic also changed that a little bit and so that's a factor that we've never had to consider before as well because one of the things that we saw during the pandemic that's extended beyond that is well if I'm not going anywhere and I'm sitting in this house anyway I might as well make that this house I'm living in as nice as possible right so hey let me like redo my living room let me like uh you know upgrade my kitchen for example and so we are seeing spending on that side which is kind of

offset the inability for people to kind of buy and sell homes so you know like these things have definitely kind of eased things such that like higher rates hasn't necessarily impacted immediately um so all things considered I would have said that we would have already seen a bigger slowdown at this point in the U.S economy um but I wouldn't have expected us to necessarily be in a recession at this point I want to drill into the rates conversation because that is more or less a focal point for the entire world like the the rates of the bond market the the treasury yields so high treasury yields plus actually like dollar strength kind of dictates everything uh I'd say like the it's kind of the

epicenter of of the global economy why are these things so high uh and what what's your kind of like um just take on the state of these things so if my narrative around government spending is true and basically we are pro-cyclically keeping the US economy afloat for example among other things right like I can explain some of the other stuff around like labor markets and other things later but let's just say assume that first thing is true well then that means the FED themselves have to keep rates somewhat higher than they would have had otherwise right because

like like we said if we expected the economy would have been slowing down at this point because of what the fed's doing well now they got to work extra hard in order to keep uh to keep the economy down so inflation stays or at least goes down in the trajectory that they wanted to which is the two percent Target that means rates are on the higher side and the yield is there on four on the higher side and that's probably the biggest component to it like it's always kind of the FED decision that kind of factors into it but then there's other stuff as well the supply is definitely a very big aspect of well if the government's borrowing more typically in a normal situation added

Supply doesn't necessarily negatively affect the yields too much but in this case we can see the trajectory already is going towards them borrowing more like for example they changed like last quarter they said they were originally going to have uh something like 700 billion dollars worth of of uh bonds that they need to either roll over or issue in terms of new debt and they borrowed a trillion dollars so I mean these things are starting to really kind of eat at that as well and then probably like there's going to be these other smaller elements that are pushing like yields higher like you know there's convexity hedging that a lot of investors do which means that they're basically looking at the curve and saying like I want to be in the less the stuff that's less sensitive to higher

interest rates so let me do that and that you know creates some lumpiness in terms of what they're buying and selling in the curve itself okay so uh just to be clear that I understand your answer you think that bond yields are going higher so there's been a lot of conversations around this recently you know like uh Larry I think was on the tape very recently saying that he thinks 10-year yields are going to be a five percent Jamie Diamond said that they were gonna be in the seven percent kind of range I would expect that probably very short term which would probably last through like you know Q4 for example we will see that bond yields are going to continue higher because we are still in this environment of you know fiscal spending

kind of property of the economy the economy doing well and I don't think it's a Goldilocks scenario but it's fine I think then you're going to start seeing things really moderate beginning and probably first quarter of 2024 and keep in mind I'm talking about nominal interest rates it's a very different thing to be talking about nominal versus real interest rates real interest rates just subtracts the impact of inflation and I think that is what people are missing because what well what could happen and this is just one potential state of the world that I think is perhaps most likely if inflation increases and I'm talking about headline inflation because right now Energy prices are on the way up um and a lot of that

it's not artificial but it's kind of manufactured by the market dynamics more so than actual forces of supply and demand so I don't think it's going to last forever but let's say like short-term inflation goes up because Energy prices go up well that's cyclical right I mean a big part of that is just cyclical inflation um you know the FED has no control over Energy prices not really like the fed's whole stick is that they need to get demand down they don't have controls for Supply which is really what's impacting the energy Market the oil market right now well your real rate if that headline number is higher is going to still either remain stable or you know maybe possibly go a little

bit harder but not much higher like we're right now we're looking at 10-year wheel rates it's somewhere around 2.3 and I'm using like the you know Break Even 10 10 year which you know it assumes investors have a very long horizon or able to predict the future over 10 years which we can't but anyway that's the best measure we have so let's say it's it's around that that could remain stable all things being equal because if inflation headline inflation keeps going up and the 10-year keeps going up you just kind of balance those two things out but by the time we get into the beginning of 2024 into the first quarter 2024 assuming the economy starts to kind of soften assuming Energy prices like I like I believe do not last and I think we are already on a

disinflationary trend um then very lightly the FED actually doesn't have to do anything here because they can just be like well our job's done economy is going pretty well like the core inflation hasn't moved it's just headlines moving higher but we don't control for that anyway so like we're fine so so David I I know in the the back half of this episode we're going to ask you about some other asset classes and we we covered uh bonds but we want to talk to talk about kind of stocks you know equities of course and we want to talk about crypto obviously because you know that that's what bankless listeners really care about coming to this episode and and how macro might affect that but one question I had for you is about this uh asset class that we often disparage I

think in crypto circles um Fiat um cash and I I recently read a ray dalio piece um called it just just extolling the virtues of cash right now cash is no longer trash you know cash is is back again and his case for this is basically like you know um when you compare the you know the valuations of of stocks uh when you look at kind of the bond market and then you look at sort of cash and the um liquidity and all of the options you get on top of cash and then of course if you're you're able to generate some kind of a yield on top of that cache ideally a real return you know say a five uh to five and a half percent well it cash

seems like a fairly attractive asset to you to hold uh and that's the posture he took which is he said is much different than how he felt about cash in you know 2020 when rates were uh very low uh what's your what's your take on cash do you think uh cash is is back cash is now King it's no longer trash you think maybe in crypto we underestimate the value of um of cold hard US dollars yeah uh I like what uh Ray dalio said because basically he was disparaging of bonds but very uh optimistic about holding cash and that's your opportunity cost right around five percent five and a half percent like holding cash that's your opportunity cost that you have to beat

right now if you want me to take any greater risk and that goes for any risk asset but it's really important for people on crypto to understand because you know if I believe that holding a long duration asset isn't going to pay me as much as five percent then why am I doing it I I need to kind of get that plus probably some premium because you're telling me I gotta hold something for a while in order to see the benefits of that thing to materialize um I do I think that holding cash is a pretty good Prospect you know like it's very different from what we're used to over the last uh you know decade at least in terms of well you know like I might as well get into anything else

because just holding cash I'm losing money because the problem generally arises that if I'm just holding dollars I'm losing money because of inflation like like if we say that inflation is typically moving around like two percent well then I'm losing two percent every year if I'm not invested in something I gotta I gotta make above that now we're saying like well for the most part you know like in inflation is down to around like the three handle for example if we're talking about five I'm making two percent real return or two percentage points for real turn like it's uh it's it's pretty good you know all things considered like why do I need to do it um

take for example Equity risk premium for example the the extra return that you get from equities over that interest rate over the risk-free rate for example right now it's about one percentage point above that which is probably one of the lows we've seen in a very long time like two percent or one percentage point you know like like which one do would I rather be in to do nothing I get paid more like I think that that is that they can like this is the big draw with cash right now yeah that's funny and my two favorite assets right now are crypto and cash and I I feel like there's not a lot of space in my at least my own personal portfolio for any anything in between those two things because they're just uh they're just crushing it right now but

David we have a lot more to cover in the the back half of this episode what are we going to talk about yeah ultimately why do we do macro shows it's well because we want to understand what's going to happen to risk assets since that is the the punch line that we will inevitably get to on this episode uh but there are some conversations that we need to meander through to get there uh the October 31st November 1st fed meeting is on the table we're gonna have to talk about that uh there's also some consumer Behavior stuff Consumer Credit uh and also at the very high equities Market we need to navigate through these conversations in order to understand what's going on with risk assets so we're going to get to all of that in the second half of the show but first a moment to talk about some of these

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they have come down recently I think there are seven percent off of their recent Highs but their recent Highs are almost their all-time highs I would sure love it if my crypto portfolio was seven percent off of its all-time highs that would be nice uh there's a disconnect there between the crypto markets and the equities markets um so there's two questions here why are equities so high and why is the correlation between crypto net equities so low and what does that tell us so right now I think there are a lot of people who are worried about the equity markets more than uh you know worried about it going weaker uh rather than a continuing uh its current strengthening Trend um it's been doing well primarily

because of growth right like U.S stocks well any stock really likes growth but U.S equities in particular have done very well because if you look around the world and things haven't been doing so well even other countries want to get access to our U.S stock market because they're like well that's one place where I'm actually getting some kind of Attraction and that kind of goes against the thesis I was saying earlier before the break about well if Equity risk premium so low and these things look expensive why am I still in it um you're still in it because maybe you expect that that growth is going to actually materialize and hire activity above and uh beyond what you were expecting from the earnings of a particular stock or a particular company for example but the challenge right now is well we have this higher yield and

oftentimes times what really matters when we're trying to kind of look at the performance of a stock is we look at the discount rate because you have to Discount whatever you're looking at like if there's a dividend for example I discounted over the period of time over which is expected and I bring it back to PV let's present value and then I say like is that sufficient for what I would like um if that tenure rate is going higher does that mean that Equity prices need to come down and I think this is the big you know problem people are wrestling with right now because people are looking at the spike in the 10-year yield and saying well like this is very bad for equities and historically we don't know whether that's true like it hasn't always

happened that way where just because tenure rates are higher we've seen that you know the equities necessarily needs to perform worse and by the way this is just also the last 17 years where we've seen rates not being somewhere in that range of one percent to four percent like before that like rates like the median kind of like uh performance of rates a tenure was somewhere around like four to eight percent so like I think a lot of people are scared right now or nervous about rates creeping out four point seven percent will it go to five percent all this kind of you know like but we this this is just the last 17 years where we haven't seen this since 2000 like uh seven or so like it's been clear

so I think that's something you got to keep in mind too that like it's this is a newer development but this has happened before in the world the second part of your question was correlations well then why have correlations been so low and actually more recently I will say that on a risk adjusted basis crypto has outperformed equities so we've seen this this has only really been the last like two three weeks or so but like Bitcoin those things are actually doing much better than the NASDAQ in stocks and I'm talking when I say risk adjusted I mean that I look at it on a standard deviation basis right like I look at it relative to where it's been over the last like the average of the last say three months or so and this is kind of

where we're at a big part of that has to do with inducing credit elements inside of crypto like earlier this year for example you guys mentioned at the top of the hour the banking crisis well Bitcoin did very well for various reasons during that period of time um obviously existed as an alternative to the traditional Financial system but also a lot of those guys that were in Silicon Valley Bank for example as depositors have to be in Tech and were very amenable to buying something like Bitcoin for example so that was a big factor later on in June we got the applications for each uh Bitcoin spot ETFs um so that's been a big factor and that's helped put a floor uh under the performance of Bitcoin in particular um as a result you know like you aren't

seeing that anyone who wants to sell their Bitcoin because even though liquidity has been fairly poor and that's not just in you know crypto that's also been true of Trad five as well well how many people do you see saying man like uh I really need to sell my Bitcoin right now because I think that the stock Mark's weakening not many because all of us are probably kind of looking at the same thing and saying if there is a you know ETF spot Bitcoin ETF uh that gets approved well like you know Bitcoin could do multiples higher than than where it currently is um certainly certain percentages and I'm not saying that I like that I have a number in mind but if it's going to perform higher I don't necessarily want

to sell my Bitcoin right now so I think elements of that are keeping the correlation pretty subdued at the moment okay so the the idea that crypto prices have just like lost in comparison to equity prices you are kind of saying well that's been true up until recently and now there is a case to be made for that inverting is that true yeah well insofar as the relationship I think that this is the challenge because the correlation is low people are assumed that that means there's no directional impact that means that like it's the magnitude of the impact as well as the direction that really matters directionally speaking

crypto still does tend to follow like stocks to some extent it hasn't always through the course of this year like certainly there's meaningful kind of change between what we saw in 2022 when the correlation was at like upwards of 70 to 80 compared to where we are now which is you know coefficient to around 20. um well you know that does suggest that there are periods where it's not even moving antenna but it doesn't need to reverse necessarily it could still kind of move directionally the same and I think that could be true particularly uh once we see the FED pivot and move to an uh you know an easy monetary View and and that will happen and I think that

could be beneficial for both crypto and stocks um but I think we have seen that crypto prices have been so washed out as well just doesn't really take a lot to actually move prices higher from here sure kind of hopping around here just to get some loose ends out of the way uh student loans have started uh payments again this is a new thing as of just I think like last week or the week before um so like for for the first time since covid since student loan payments were paused during covid due to covid uh students have started to have to pay the pay their debts pay the interest on their debts uh how will this impact the economy yeah I mean already we are seeing that

like defaults are rising loan delinquencies are rising um and I think student loan repayments are just another aspect of that I think in and of itself it probably wouldn't have been like a hugely negative detriment to the economy but in conjunction with everything else that we're seeing I think that it's pretty meaningful and you know that kind of goes back to what we were saying before about mortgage rates and housing and just Credit in general I think that the situation has so far been able to be okay for the most part you know like for example if you roll back to March a lot of us were looking at the regional Banks and saying oh oh crap these guys are all sitting on like commercial real estate

loans and other things like that portfolio could be problematic it's still problematic nothing has changed about it it's just that we've been able to kind of ignore it because we put a Band-Aid on the situation now that vanity is starting to come off and I think that all these things like in conjunction with with the whole like situation like of the credit situation uh writ large I think that's where we could see a problem for the banks materializing like we aren't done with that situation yet I think that there's still another leg of this we just have taken a pause on this so does this uh maybe student loans starting up again maybe contribute to your recession case and uh you know the early 2024 yeah yeah I I definitely

think that this factors into what I'm seeing with the FED what I'm seeing in with the US economy for example uh you know I think that come November the FED is very unlikely to move because we will at that point have seen like the completion of like the writer strike in Hollywood the United Auto Workers strike you have student loan repayments I mean all these things are factoring into Q3 and they had just revised their estimates for GDP growth higher so I think these these uh factors are going to undercut that view and you know keep in mind too that like their whole approach and I think a lot of people like the pushback I get uh you know because I don't have the consensus view I think um a lot of people kind of push back and say like are we doing okay

though like I said like yeah is consensus view that we actually have achieved to soft Landing that recession is probably not going to happen would you say that's the consensus fee right now the consensus view is definitely that we haven't achieved it not past tense but we will achieve that is the expectation right now the expectation is that come Q4 like the FED will have done everything in its power to basically Land This Plane safely which is to say it's slow the economy enough to keep inflation down but it has averted of recession that would be like their definition of what a soft Landing kind of looks like and a lot of people believe we are in fact in that Goldilocks scenario and they point to a lot of things housing's okay labor

Market's okay except that when you kind of dig into the data like and you go on a micro level piece by piece it doesn't really look that great you kind of brought up the stuff already with student loan repayments for example labor market data like people aren't getting paid what they were getting paid six months ago you know you see new entrants to the market you know there were headlines from Walmart even on the on the White Collar side of like people coming into like Goldman Sachs or whoever like those jobs like for new entrance into those of those companies they're not getting paid what they were getting paid a year ago and that's a big part because even though we are seeing that number take up slightly in terms of the job openings like the quits rate has actually stabilized and that suggests that people have far less ability to

negotiate the salary they want like under being underpaid being like you know like under employment is very different from unemployment and that is still a problem that actually is rising in the U.S so we might still have a lot of unemployment so that that's why you David have the The non-consensus View right now of hey this this Landing is going to be a lot bumpier than we thought and I'll probably we'll start to feel the bumps in uh q1 of next year in the form of uh of recession uh so let me ask you let's walk through your concept all the way to conclusion okay so let's say we get uh some form of a recession in the first half of of 2024.

um okay what does this mean so what does this mean for uh well first of all how deep of a recession are we talking about and and how long uh and then also what would this mean for fed rates in this in this scenario yeah so I would say quarter to quarter to quarter this is kind of broadly where like uh this is broadly how I'm thinking about things and I have higher conviction you know in what I expect for Q4 versus like first quarter 2024 and first and second quarter of 2024 makes sense right like the farther the future kind of goes out the less of a crystal ball I have and I don't think I have a great crystal ball in the first place but like I do think that probably I'm very constructive for Q4 and I still

think that's going to materialize and I think stock like crypto and maybe stocks but mainly crypto is going to do well in the back half of Q4 but the first quarter is very very murky for next year because I think that's the point at which we're actually going to see these things really hit right um whether it's going to be like temporary or not the energy prices are still going to be a constraint on just spending on in the manufacturing side and you know like we're all going to be moving further and further away from all the production that people just kind of put in place because you know those the physical stimulus this is that I was kind of talking about well I think part of that had to do with if I was a manufacturer right now for example I was getting subsidized by the US

government like you know like maybe they were they let's say they were going to give me like a million bucks they'd say hey put in two million dollars of your own money and we'll talk and that's what they did and then like we had this support coming from manufacturing well that's all going to end and that ends in the first quarter for example we'll get some residual spending like I was kind of talking about but it's not in my mind going to be a good quarter but then I think the second quarter of 2024 it becomes a little bit more clear again and it's still uncertain I think that it's still kind of hard to predict but my guess is the Fed will probably need start cutting rates or at least move themselves on the path of cutting rates probably by May or June of

next year because the economy won't be looking so hot because it'll feel very much more like we're headed towards a recession or are in a recession already yes yes I mean there's two things number one of course like the main objective of the FED is to Target inflation so all of this like is irrelevant in so far as it gets inflation down um but also you know it cares about Full Employment and there's also other concerns and this is where kind of the fiscal situation becomes difficult to kind of get a handle on because a lot of there's a lot of theory that goes into well the government's spending more inflation kind of goes in more which is of course why rates are higher and why

the FED needs to maintain a hawkish tone but once that kind of comes off you allow for that to happen but what if things were already disinflationary like one thing that I think people don't realize is like you know and I'm not trying to be a crackpot about this you can actually look at the data like San Francisco fed actually published data that looks at the breakdown between cyclical inflation and acyclical inflation and cyclical inflation is aligned with the business cycle acyclical inflation is everything else acyclical inflation peaked back in January of 2022. the FED started hiking rates in March 2022 so already that component of inflation was already on the way down well before the FED started

hiking rates so really what the FED has been trying to get down is cyclical inflation and that just peaked about two months ago so like already like this is moving the trajectory that the FED wants it to be so it's really not a crazy idea to think that the FED already could be in a place where it's thinking about cutting rates or wants to cut rates but it won't say that and it won't move that like all things being equal like Jay Powell is actually fairly dovish and another point is like he controls this board and I think this is something that well understood especially from people who aren't fed Watchers on a day-to-day basis like I care what other people are saying on that board don't get me wrong

it's important but like he controls that board he controls what that board is going to do and that is a power of this Central Bank in particular I mean it happens for a lot of central banks out there in the world I just cover merger markets you can kind of see which ones do which ones don't but in the U.S like a lot of them will fall in line with what he wants and I do believe that he is dovish and that is his bias so that like actually yeah he's dovish but with the tough guy Clint Eastwood Paul volcker type of front but he's dovish in the back I think that like his bias is to be dovish but the rhetoric is hawkish because that's where they need to be right now and so fascinating how this

game works right this business in the back yeah well he doves in the back I guess oh there's something called verbal intervention too which is fantastic which is the idea that sometimes it's not even what they have to do in terms of actually cutting or hiking rates it's what they say in order to move the markets it's it's a lot of a lot of Chess that goes on so verbal intervention is that just what we call Bluff yeah that's one word phrase it yeah so so what happens in this scenario David walk us through we talked about kind of fed rates and we talked about kind of you know the economy and recession what happens to our risk-on assets maybe more specific because I'm actually not sure what crypto is I guess I'd more quality risk on asset we talked a little bit

about equities but what happens to crypto in this environment when we're looking at uh 2024 uh q1 and Q2 because let me tell you David uh 2024 was supposed to be the year of the bull okay for crypto at least you know the start of an epic Bull Run um what what do you see in the cards uh can you bring us back down to earth in the signals that you're looking at with it with macro if this story comes true then how does it Bode for our crypto Assets in 2024 yeah one thing I didn't really address was the timeline in terms of how long the stuff will last and how deep it's going to be and the truth is I I don't know I don't think anyone really does you know like my best guess would be

that it's gonna be a model recession that's not going to last too long um and if that's going to be the case then we start seeing the FED cut rates then actually that could still be a fairly like uh decent time for crypto in particular you know I think that we could still see that uh you know assuming that the regulatory situation kind of manifests in a way that's amenable to this uh you know like the crypto could actually still do fairly well I think that some of those things are going to be put into Q4 for example you know expectations surrounding uh a Bitcoin spot ETF for example or things surrounding the having for Bitcoin um perhaps but maybe not inclusive of what's going on with the dencoon fork

but like I think that those things will probably be placed better for a lot of people people into like November or December of this year rather than being played in the first quarter of next year for example so next year I think it will still be a fairly volatile period which to say like probably uncertain like I really don't know like I think like for me like first quarter in 2024 is still very much a black box but I think we'll come out of it into a better more constructive world in the second quarter of next year okay David I feel like I've gotten a lot of questions in my mind answered and I want to maybe turn uh back to kind of where where David Hoffman might the other David on the David on my left uh began this episode

with how weird this macro environment is and and you also um said the same David David on on my right and this this was a a tweet that we pulled out for our weekly roll-up last week from uh Kobe Essie letter the Kobe SE letter current situation one stocks are falling like a recession is coming two oil prices are rising like there's no recession in sight three interest rates are rising like we have 10 inflation four gold is falling like inflation is gone five housing prices are rising like rates are falling six commercial real estate is falling like it's 2008 nothing adds up here and I think David I want to make sure I

understood you as we kind of close out this episode I think your Theory of Everything Is the reason why all of this stuff is weird is we have had some pretty unprecedented circumstances on the back of covid particularly with respect to the US anyway fiscal stimulus and that will that has artificially distorted a lot of things and has led to a lot of you know the results that I just read out and that will start to kind of dry up uh in the beginning of 2024 and um we will get back to a situation that is uh more in line with with kind of reality once that that drying up actually happens is that sort of your

theory of of everything your theory of why things are so weird is it basically like yeah covid fiscal policy spending that's why it's been so weird in the US that explains one through six of the things that that I just mentioned um yeah how would you sum this up the pandemic definitely created some unanticipated certain like outcomes um you know physical spending was a big product of that but also like the late the way the labor market kind of works changed significantly as a result as well because what we saw was a lot of uh baby boomers for example leave the the job market and as a result you know like we are left with higher job openings than they would be previously at least

anything that we've encountered um in very recent economic history um so there are elements of that that are creating kind of strange effects that make it difficult to kind of interpret uh the data you know I think that we're interpreting the data or finding new ways to interpret the data in the context of how the pandemic has kind of affected our lives and we haven't really fully kind of materialized it but there's other elements too that we haven't even talked about you know like AI is a big one like like the way artificial intelligence is probably contributing to the disinflationary trend isn't being well discussed like when I talk to people in economic circles for example they want to talk to me about demographics and their right to because they're saying

like hey we don't really have as many uh young workers in the economy anymore like the birth rates are declining and this isn't just in the U.S it's declining globally outside of a few pockets and maybe some developing countries uh but you know like when I look at it AI is also going to be a very big effect that's going to displace workers and probably lead to Greater efficiency and lower input costs so you know like that's something that isn't well understood in terms of how that's also going to impact us and therefore what's going to impact the fed and therefore how we're going to be impacted in terms of the like asset classes and investing yeah that makes sense well I I'm coming out of this episode bullish on the the

two assets that I was bullish on coming into it which is uh crypto and cash uh you know for me for my portfolio of course none of this has been Financial advice and David you've been so kind to lend us your macro brain on today's episode want to thank you very much for that no thanks for having me bankless Nation gotta end with this of course I'll re-articulate none of this has been Financial advice uh crypto is risky you could definitely lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bank list Journey thanks a lot