The Fed, Trump and the markets, with James Lavish

Transcript

GM, good morning. Welcome to the Milk Road Show, the daily crypto show that hits you faster than you can say. Wait, how is he already on his second marriage? I'm your host, Jay Hamilton. It's Wednesday, April the 16th. Markets are uncertain, yields are volatile, inflation is sticky, and score CPI came in low, but inflation is still here in many ways. What do you do? What What do you actually do right now? How do you make sense of all of this? Well, we've got former hedge fund manager and Bitcoin Opportunity Fund co-founder James Lavish joining us today to break it all down. We're going to talk about James' macro framework, what he's watching most closely right now, bond

yields, obviously going to be one of the core conversations right there, the divergence between Bitcoin and risk on assets. Are we seeing something happening there? And of course, how do you position yourself in your portfolio during these times of uncertainty? We're also going to dive into James' probabilities for the short term, the next the rest of this quarter, and talk about James' Bitcoin prediction of 180K, which he made earlier this year. Is that still on? Is that still possible? And what do we need in order to get there? At what point are we going to reach a point of a bit of point of no return as a result of all this gamesmanship and all this trade war talk? Before we jump in, if you guys are going to be traveling to any conference this year,

Milk Road is going to be at Consensus Toronto and Permissionless New York. We're going to have events there. Free beer. Come on out, meet myself, meet the team. Check the link in the show notes. If you want to sign up for those events, today's episode is brought to you by Moonay. Trade crypto fee free, fast, and on your terms. It's also brought to you by Coin Shift, powering top crypto treasuries with their yield bearing stable coin, CSUSDL. Without further ado, James, welcome to the Milk Road Show. Uh, thank you for having me, Jane. Good to be here. Always good to talk macro. I love it. Always a pleasure. Uh, okay. I I I'm I'm going to start with a a rather broad question, which is just h how are you making sense of all of this macro noise

that's going on right now? We've got, you know, a debt crisis. We've got debt to GDP that's totally out of whack. We've got Trump trying to create this entire new monetary and fiscal regime which feels maybe possible but also could take too long and we might go into too much pain. We've got China which you know who knows what's happening there. All these other countries seem to be coming to the table. I don't know. There's just so much noise out there. James, what what are you paying attention to most right now? How are you trying to frame it in your own mind?

Yeah, it's a good question and and really the word of the day is uncertainty and markets hate uncertainty and you can see that the markets being um you know quite volatile lately. You've had uh large draw downs in all all of the major um assets uh including bonds which is a little bit crazy and we'll talk about that in a second. But um you know the the NASDAQ has drawn down 25%, the S&P has drawn down 20%, Bitcoin's draw down had a draw down of 30%. Um and uh and even bonds uh you look at the 10-year that that has been extremely volatile. Why? Because of the uncertainty that's on the table right now. Um you know, we have a little bit of a a tariff tantrum going on and you've got the the markets are are not

receiving headlines very well. Um and any headline really moves the markets quickly. So whether it's Trump um threatening or levying an additional tariff on China, whether it's um the the the pause of the tariffs to allow for negotiation, you know, um the the markets are reacting almost in instantly. And this is a new thing, Jay, and this is not something that is typical when you get into periods like this. This is kind of new for Wall Street um in that now you've got uh these headlines that are hitting instantly across the world and it's like um it's not just the Wall Street professionals that see it on their

ticker tape. It used to be, you know, we had Reuters, um, you know, the and Bloomberg news scroll and you could see the headlines come across and then you'd react as a trader, as an an investor, uh, especially in hedge funds, uh, or on when you when we were on the institutional desk back in the 90s and early 2000s, that's where you got your news. It wasn't, you know, you got some stuff, it was kind of delayed on CNBC. They had to do the back check. They had to make sure there was and then how they want to deliver it, who they wanted to have on to talk about it. So, that was all delayed and it kind of it kind of delayed that uh that reaction. But now it's like you see a headline, boom, you've got a reaction before you even know it's real. Like I'll give you an

example about um I want to say it's almost two weeks ago now that you know um the Trump tariffs were were were put in place. They were they were going to go into an effect u within 10 days. And so about two or three days later, you saw a headline that said, "Oh, they're going to be paused for 90 days." source in the White House said and then the market reacted violently and short covered and started buying all these risk assets um off that headline. Turns out that the White House turns around and says, "No, no, no, no. We didn't say anything like that. Uh these tariffs are still going in effect in a few days. So just, you know, that's not true." And then the market reacted the other way.

So that's new. Um and it's also new for the market to react real time to Fed quotes. You know, you've got Kesh Karan coming in and and and saying that we've got Fed tools that we can use. Uh you've got anything that Powell says. The mark the whole the whole street is like what is he is he being dovish? Is it is he being hawkish? Is it going to be QT QE? Like what where are we? Where are we going? And wait, did he say inflate? Did he say transitory? Like what did he say? And the market reacts to whatever he says. This is just it's it's almost mental. And so, um, it's not an easy time to be an investor, um, in in this market. And it's funny because one of the one of my investors I was with, uh,

one of my investors this last weekend and, uh, she and her husband were talking to me over lunch and they were like, "H how do you how are you handling this right now? It just seems like it's it's psych it's neurotic or almost psychotic." And I said, "Well, we, you know, we manage our our our positions and our sizing and we manage our risks and that's the best we can do. I'm not perfect, but you know, um, we we try to do our best to to manage the exposures." And really, that's what it comes down to. So, when you're in a period like this and you're trying to figure out what is going on, the most important thing is to be a strong portfolio manager, a strong risk manager in order to manage your exposures. And that's truly what it comes down to as a fund

manager. But again, if you're an investor, what's your timeline? Are you are you um 20 or 30 something? You've got decades and decades until you have to worry about having enough money where you're not working every single day or are you you know in your sixes and you're thinking, I'm I got to retire in the next five or 10 years and I don't want to be working until I'm 80. Like where is your timeline? And so those things are important too. But um yeah, so that's kind of how we see the world and how I'm I'm seeing it right now, how I'm looking at it. But you asked in the beginning um at the end of your of your question there, what am I looking at?

And the thing I'm looking at mostly to I'm really keyed in on is not Bitcoin, it's the bond market. I'm really keyed in on the bond market to figure out what's going on there because that is the most important aspect of all of this. And that's the one that's going to tell you, you know, what kind of reaction we're going to get from the Fed and the Treasury. That right there, that volatility is not normal. This is this is extremely abnormal because why? Well, this is the 10-year US Treasury. This is this is literally the benchmark bond not just treasury the benchmark bond of the entire world and this is trading like this a volatility in it that's nuts if you can bring up the uh do you have the

move index as well the ove the ove is um it's a it kind of measures the volatility of of bonds and it's known as that's it right there it's known as the uh and if you go out a little bit like maybe go out five years or something. Yeah, even more. Um, it measures the volatility of the bond market and this is kind of like the VIX of the bonds and you know, you could see how it's been spiking recently. If you get up over 140, 150, like that is a massive u volatile move and uh and you could see back in 2023 we had that happen. If you even go out further, you can on like a weekly maybe you can see that this thing

really um this is where you want to pay attention because when this thing gets out to like you're seeing like 160 like that is a you can see where it went in 20 in 2020 right you can see where it went in the great financial crisis like it is it is starting to tell you there thing there there are problems we're we have issues and so that's another thing I'm keyed in on. All right, that was a long answer, but that's kind of what I'm thinking. So, when you when you when you look at this right now, what do you what are you thinking about where we could go from here? I mean, with the with the bond yields, we saw bond yields lowering, which

obviously Bessant and Trump and they want, they need to lower the bond yields in order to refinance the debt this year. It's a big problem and we can talk about the debt problem in a second as well because that's just such a massive problem that I'm not really sure what the answer is. And maybe Trump's plan is the answer, but maybe it's not. I don't know if we have the patience to go with the way he's approaching it right now. But when you when you look at it, we had bond yields coming down and then they spiked back up seemingly as a result of China selling a bunch of their bonds, which sort of says who's buying these bonds in the long term. I I'm trying to wrap my head around where where does this go from here? What are the what are the scenarios that how do we get this

bond yield to come down and can is it possible? Well, let's start with why do they want the bond yields to come down? They want the bond yields to to come down because we have a problem with the amount of maturities that we have that um are occurring this year. You know, if uh if you look at at the uh US Treasury um maturity schedule, and I'm going to try to see if I can bring it up here on on Bloomberg as I'm talking through it, though. um you've got somewhere around $9 trillion of of debt that is u that is going to mature this year. And that's a big problem. Why is it a big problem?

Because we've got to refinance that debt at the same time that we're still we're still um running massive deficits of of near $2 trillion. I know that the Doge Commission is doing their job. They have been doing their job and they're doing it well. But the uh the reality is they're not going to be able to get us into into a uh a surplus here. That's just not that's not um that's that's not realistic. And so if you bring this so I'll bring this up. I'll try to share this with you. Okay. Um and so what is important here is that you've got this amount of of treasuries that are that are now coming. They're maturing. Okay.

Can you see this window? Is it showing this? Is it sharing this one? You see it? Yeah. There you go. So, you can see right here, this is this is the number of treasuries that's that are that are maturing now um in 2025. Okay. And they've got to refinance all of this. That's the problem. And then you've got another um $3.7 trillion of treasuries that are that are maturing in 2026. Why are why is that the case? like what's what's happening here? Well, what's happening is um that the the back back in the pandemic when when we printed all that money um Yellen was

kind of put in a corner and she had to refinance all this debt and she had these massive deficits that were running and so what did she do? She was like, "Well, I don't want to refinance this at 4 and a half or plus percent on a, you know, or even if it's three and a half, 4% on a on the 10 year or 20 year or 30 year. I need to pull that in and kind of keep it shortterm with the hope that they'll be able to refinance it at lower rates when the Fed lower rates later." Well, the Fed hasn't lowered rates enough yet. They lowered it at 1% last fall, but it's still pretty high. Okay. So now you've got Besson who came in who was extremely critical of Yellen for a good reason. Why? Well, some people say,

"Well, Yellen didn't know, you know, that that the rates are going to be high, so she was the doing the best she could." Well, Yellen was a chairman of the Fed before she was the uh Treasury Secretary. She knew damn well that when we print $5 trillion and dump it into the market with an absolute money bazooka that that's going to cause inflation and that's going to cause the Fed to have to turn around and raise rates to battle that inflation. So, she must have known that this was coming. Why didn't she react earlier and and refinance that debt further out on the yield curve earlier?

Meaning issue debt that was longer term so you lock in lower rates. Well, now we've been sitting on these these, you know, uh, three some odd percent average rates for years now. And now Bessant comes in. He's like, and he was very critical about it. And now he came in, he's like, yeah, he thought that these rates were be coming down, too, but they're not. Okay. Now, why are they not coming down? We're seeing evidence that the that the um the economy is slowing down. We're seeing evidence that inflation is coming down. We're seeing evidence that uh unemployment is going up, but why is why is the Fed not lowering rates? Well, the Fed's not

lowering rates because they're terrified that we have a resurgence of inflation. Now, this is where it gets a little bit sticky and this is where it gets frustrating. It gets frustrating that the Fed knows all these things that I just said and they have said for years and years and years. Powell says it over and over and over again. He said, "We're data dependent. We would rather lag the market and lag the economy, but use the data that we see even if it is lagging by one, two or three months because that is something we can really key in on and it will it'll we'll be able to defend position basically that we have lowered rates because look unemployment is up or look uh inflation is down but they're not being data dependent now because the

last two times that that uh the Fed spoke or or Powell spoke he mentioned mentioned to Trump tariffs and he mentioned the fact that well they're expecting inflation to go higher because of tariffs. Well, that's not data dependent. That's speculation. And will prices go up because of because of tariffs? Well, maybe. We don't know exactly what the tariffs are yet and where they're going to be levied and what exactly they're going to be levied on. We we we have an idea that it will be inflationary, but we don't know and we don't know how bad the economy is going to downturn here at the same time.

So, this is where it gets this is where it gets a little bit dicey for traders and how they're trying to figure out where's all this stuff going, right? And that's why you've got massive uncertainty in the bond market. So, now you have these tariffs that come on. Okay. So, why are the bonds selling off? Why are rates going higher? Remember, when bonds sell off and they get lower in price, that means the that the um the yield goes higher because you're paying less for a bond that has the same coupon on it. And mathematically, that just means that the yield of the bond that you bought in the market is going to be higher than that coupon because you bought it under par. If you buy it under

100, that means that you're getting a better you're getting a better yield because now you divide that yield by the amount that you paid for it. Okay. So, why are they spiking higher? Is it because China's selling the treasuries? Well, we don't have evidence of that, but we do know that we've got a few things going on that could suggest that if China sells those treasuries, it could cause massive turmoil. And that's what people are worried about. So, they want to get out of some of these issues before those bond yields go up in their face and they wind up losing money like they did back in 2021, 2022. Because remember, and I'll see if I can bring up

um another chart for you because this is what people are a little bit scared of. people are scared and investors are scared that we have a huge spike in uh in that um in in the in the treasury prices. And if that happens that we would have uh we would have a scenario where people lose a lot of money or you know investors lose a lot of money because of it and that's what that's what people are worried about. That's what people are very worried about. So the question is you know what what will happen between now and then and how bad is it going to

get? Well, is China actually selling? I I have not seen the evidence of that. Like I said, however, um you have a a big problem in in front of us that has to do with this thing called the basis trade. And I'm sure you've heard of that, but I'm gonna pause there and we can go into the basic trade in a second if that sounds good. Yeah, let's let's keep rolling. Keep going, James. You're on a great road. So So here you go. So let me let me let me share this um let me share this uh chart again. And I didn't tell you I was going to keep doing this. Sorry. But here we are. So it's all good. Share away. So you see this chart? Yeah. Give me this.

Look, this is what this is what uh investors are worried about. Investors are worried about this draw down that occurred and they don't want to get caught out on this. Again, who's really worried about this? Well, the ones that are really worried about this are the these hedge funds who have this this thing called the basis trade on. What's the basis trade? You've heard maybe some of your um some of the listeners have seen me write. Yeah, they I wrote about this in my uh newsletter recently. The basis trade is is is pretty simple. It's an arbitrage. An arbitrage is where you buy one security, you sell another one short against it, and you and you lock in that that um that differential

between them because one is essentially the same as the other, right? And so you've got this arbitrage between the two. And what you do is you buy one, you sell the other, and you trade around it. Um, sometimes you can collapse that trade. You can deliver uh the the long to the short in order to um close out the trade. That would be, you know, if if you get to parody, then you've made all the money. But you can trade around these things. And so what happens is these hedge funds, they buy a treasury and then they short a treasury future against it. And there's a little bit of arbitrage in the in the price between those those treasuries and the yields between them where you can kind of trade around and make a few basis points.

Doesn't sound very interesting, does it? Well, here's where it gets interesting. It gets interesting when you take that treasury that you've bought and you loan it out, right? So, you you go and put it um you put it in a repo market. It's a private repo market to another hedge fund or a bank or whatever. You loan it out and you get cash for that. You get that cash and you turn around and you do that trade again and again and again and again. And you do this until you lever this thing up 20, 50 or 100 times. Oh, now that basis point is 20 basis points, 50 basis points, 100 basis points, or two or 3% depending on how many basis points you grabbed. Right? So now this gets interesting. Okay, what really

really gets interesting is the fact that these these geniuses have put this trade on to the tune of about a trillion dollars. This trade is so big now that they're a little bit scared. Oh my god, these tariffs. Oh my god, China. Oh my god, what if they start selling these treasuries and that what happens? Well, the spread blows out. The spread between the futures and the and the um and the the real treasury, okay, blows out and they get hurt. Not to the tune of one basis point, but to the tune of a 1%, 2%, three. And so that's this is where it's not just one basis point. This is could be this could be like a 20 30 40% loss on on one of these trades. And

that's, you know, when they've got it levered up so big. So, uh, they start getting nervous and they start unwinding this thing. Well, that's kind of the worry. And I think that we saw bits and pieces of that last the last week and a half, two weeks. So, why is that important? It's important because you've got something called the Brookings Institution. The Brookings Institution, for those of you who don't know it, is a it's a think tank. Okay. the think tank which is really just it's kind of a tacit research arm of the Fed.

Why do I say that? I say that because there are a lot of former Fed officials that work at Brookings Institution and uh the Brookings Institution has been well known to uh do research on on like Fed tools and implementations they can use and then suddenly those things go into effect. One of those things that that some of you have heard me talk about is the SA the SAM rule. Well, Claudia Som worked over at the Brookings Institution and came up with this measure of unemployment that says when unemployment does this certain thing which is goes up more than a half a percent uh from its lows that that I'm simplifying it but basically goes up more than a half a percent from its lows

of a of a cycle then you're in a recession and it's been 100% right um for the last number of recessions since the rule came into effect or the since they started looking at the rule. Well, now you've got the Brookings Institution that's looking at the uh at the basis trade and they just put out a white paper and it said, "We have a solution for this for the risk of this basis trade because the basis trade could blow up Wall Street." If for those of you who don't know what I mean by that, back in 1998, this is why they're so worried about this thing. Okay, back in 1998, you had this firm called Long-Term Capital Management. Long-term Capital Management is a firm that was run by a couple of uh of geniuses

themselves who uh who won uh the Nobel Prize in math for coming up with the the uh Black Scholes um uh option pricing model. Well, these guys started a hedge fund called Long-Term Capital Management and uh and that hedge fund was doing arbitrage. They were doing interest rate arbitrage. They were basically doing a very similar uh trade to the basis trade and among other things. They were doing it with convertible bonds. They were doing it with merger arbitrage. And they were what they had done is they had gone out and used swap lines with the uh with the various uh hed investment banks, their their prime brokers. And they went out and borrowed money and did these

things over and over and over again to the point where they were levered up what we believe to be over 100 to one on their trades. the street starting. So what happened is 1998 these guys they have um they have a billion dollars worth of now remember this is 1998 they have a billion dollars worth of capital and they have a hundred billion dollars worth of positions 100 to one that's kind of similar to this trillion dollars now okay it was so big back then well the Russian ruble gets devalued suddenly those the the interest rates and and treasuries the those trades blow out and you have these guys starting to get hurt on this trade the street gets worried and what happens when the street gets worried? Well, the sharks start start to

circle and they start to sell those same positions and they start to short those positions and they and they're forcing long-term capital management to capitulate, which they did. And they turned around and they were they were they were going to wipe out they were basically going to take down Goldman Sachs with them because Goldman had so much exposure with the with the uh with the derivatives as we understand it uh back then. Well, that was a big problem. The Fed had to come in, the New York Fed had to come in and and engineer a uh a bailout with the other investment banks to help them to make sure that they didn't they didn't go under. Okay, so this is why the Fed is so nervous. The Fed is nervous because

oh my god, what if we have another long-term capital management on our hands here? And the Brookings Institution says, well, institution said, well, we have a solution. And here's the solution. Instead of just printing money and saving the bond market if this starts to go um south, what we'll do is we'll just take the whole trade from the hedge funds. And what I'm talking about is taking the long side and the short side and putting the entire trade on their books. It's absolutely utterly [ __ ] mental that they're even considering this. Like this is just insane. Like now the Fed's going to be a hedge fund, right? Oh my god. So that's how big this is. That's how scary this is. It's mind-blowing. Okay, so why are these bonds trading down last week?

Because people are worried that this basis trade is blowing up and the Fed hasn't said anything yet. They haven't said, "Well, we're going to come in and save them." However, we did have Koshikari say this last week. He said, "We have plenty of tools that we can use to help make sure that there's liquidity in the bond market." Well, maybe that's one of the tools. And then there are other ones that they that they've been talking about as well. But anyways, so that's kind of what's been going on the bond market as people anticipate what could happen. Okay, I I want to so much to digest here. I I want to I want I want to continue with a little bit more on the

Fed and what what what they can do and what we think they might do and what the market is pricing in. They're meeting coming up in a few weeks, May 7th, I believe. Uh I want to chat about that and then I also I I I want to come back to Trump Bessant and the administration and you've done a great job of explaining what they are really trying to do and what their ultimate aim might be because I think if we understand that then we can understand is it achievable and in what time frame might it be achievable and it helps us understand how likely are they to to to push all the way through on you know,

onshoring all these jobs back in America is is a great idea in many ways and you can argue whether it's good or bad, but the time it takes to do it and like will the market allow allow that and last that long like that's my big question. So, uh so but before we touch on that, let's talk about the Feds. So, you mentioned uh this and you put out a tweet the other day. Let me pull this up here. um where you were talking exactly about this which is uh Kashkari said that the Fed has the tools to provide more liquidity uh and you said you know choose your phrase of translation all roads lead to inflation nothing stops this train the Fed will print again what do you think the the Fed is setting up for right now and

what's the market pricing in what are your predictions of what they're going to do next year yeah well there's a couple things so um they could pro provide more liquidity in in lots of different ways that could come in lots of different acronyms like the BTFP uh the bank term funding program. What they came up with when uh when Silicon Valley Bank was collapsing, uh they came up with this thing that said anybody any of these other banks that have that have liquidity problems, well, they can borrow against their treasures without having um a penalty and with it being, you know, basically interest free and all that. So, um that's Qi, not QE. What I'm talking about here is Kiwi, not QE, where they provide enough liquidity, they expand

the money supply or something that it causes inflation. We know that inflation is caused by the expansion of the money supply. It's obvious. Um, and so that's why anything they do will lead to inflation in my opinion, even if it is something called the, you know, there there's there's something called the supplemental leverage ratio. And uh and back back uh last year, I think it was beginning of last year, uh ISDA, the uh the the International Swaps and Derivative Association, they're the ones who kind of advise uh the Fed on on on derivative exposure and that kind of stuff. So, but they are they also work

very closely with banks and banks um work with them on on their uh they they so they understand the bank reserves and uh and the dangers of reserves getting low. Well, back then they they started talking about maybe we should change the leverage uh rules where the banks don't have to hold they don't have to um list US treasuries as um as an asset that's a risk asset because it hurts their leverage ratio and it and it prevents them from owning um more bonds. Well, they're talking about possibly scrapping treasuries from being included in that ratio, which means that banks could basically own unlimited amounts of bonds

and they would be considered basically be considered cash like riskless securities. You saw the chart that I just put up there. They're not riskless. Like that's just utterly absurd, you know? I mean, I actually I'm still sharing it. Like you show me you show me that like that's not riskless. I'm sorry, but that's not okay. So I mean it's just insane. Now the reason they say it's riskless is because they say that yeah but if you hold them to maturity that the US has never defaulted on those. Okay let's let's just talk through this for a second. That's true.

That is absolutely true that that the bank that the US has actually defaulted momentarily before. It's like 15 minutes or something, but they they rectified it pretty quickly and that was during a one of those um the debt sealing um problems that we've had over the course of the last five decades. Um but they do default on these. They default on them every day. It's called a soft default. And that soft default is inflation, expansion of the money supply, meaning that the the dollar is being debased. Meaning that when you pay back those bonds later, you're getting paid back with dollars that are worth less than when you lent them out. That's that's a default. And so um it's true they don't hard default. They never have hard defaulted. Who would hard default if you

can print money and just pay that out instead? Right. So no no country would would hard default. So I with that I agree with the soft default. I disagree uh with them being riskless. I hard disagree. Why why do I hard disagree? because there is there is no guarantee that these will not default in the future. Do I believe it's going to happen in the near term? No, I don't. You know, um some people are further along the the curve on that. Um my one of my uh investment partners, Larry Leard, just wrote a book called The Big Print. It's a great book. People, anybody who hasn't read it, I strongly suggest you go out and take get a copy.

Um and he believes that we're closer to the the um the collapse of of this whole debt system than I do. And so they aren't riskless. But let me get back to the point here. The point here is that there are ways that the the Fed and the Treasury can create more liquidity. And that's one of the ways. And when you create a way to um for the banks to hold treasuries on their balance sheet without any um without any any risk measure whatsoever, well, that just creates the ability for for um for more debt. That creates the ability for more leverage. And more leverage equals more money in the system equals you know further expansion of the money supply equals further uh inflation which means further debase in the currency which

means soft default every single day. So that in and of itself is is the issue here and that's why I say that all roads lead to inflation. Okay, nothing stops this train. Why does nothing stop this train? Because we're at a point now if you listen to Lyn Alden talk about this very very well read and and well spoken on this point. I will try to to uh not um you know butcher her her words because um it's really important for you to listen to what she has to say about this. But the bottom line is that we are in a we're in a system that is dependent on debt now. And because we we are at 120% debt to GDP, it's virtually impossible to stop that. Is it

impossible? No. Nothing is impossible. Okay. There's a very narrow uh escape to this and that has to do with bitcoin and that has to do with uh you know saving our treasuries with uh having enough bitcoin on the balance sheet of the US treasury that the confidence in in the US treasury remains which means that the confidence in the US dollar will remain. So the funny thing is that people talk about the that bitcoin ruining the dollar it it destroying the dollar and treasuries when the fact is it could save it. Okay. But either way you look at it, nothing stops this train. There's going to be inflation. They are going to have to do something to help make sure

that there's enough liquidity in the in the Treasury market because the whole world, not just the US, but the whole world depends on US treasuries being solvent and being liquid and tradable. And if they're not, well, then the the carousel stops. um you know the uh you're caught without seats and and the whole thing collapses. So that's the big problem right there. So So the Fed the Feds the Fed's got the ability to do what they need to do in the short term to provide liquidity. They can lower rates. Inflation is low right now according to CPI. It might not be low if you walk into the grocery store. It depends on who you ask. But the Fed has

those abilities. That's an point though. That is actually an important point. The point is that once you have inflation, it's embedded in the price. The price is not going down again unless you have a of of like everyday products, right? Like you know, sure commodities might come down, oil might come down, those types of things might come. But you're saying, which is true, right? You know, is all of a sudden the table that I brought from Home Depot or wherever going to come down in price? No. That's the new sticker price. They're not they're not going back on that. That's right. Trump. Is this going to be a moment that we look back on decades from now as a significant shift in the US

economy? And if that is the case, is Trump have the patience required in order to see this type of a shift through? And and is he willing to take on that much pain? Good question. Um, Trump understands that he needs Congress on his side and we've got midterms coming up. We're going to be deep in the deep deep in the heat of battle midterms in one year from now, right? And so the question is, does he have the stomach?

Well, I think it's less stomach and it's more, you know, does he does he have um does is is he um able to navigate this within that time frame? That's really the question. Mhm. I think honestly I think that a lot of people are expecting the scenario where he pushes this to the absolute limit. The stock market breaks. It breaks down again. It breaks down to the point where the Fed cries uncle and has to lower rates and then he wins. Because if the Fed lowers rates, they're going to not

going to lower it by 25 basis points. They're going to be take 50 basis points or full percent out. Boom. Boom. Boom. because they know that oh my god the economy is collapsing now. Why would the economy collapse because we are so financialized. We are so tied to this stock market. We are so tied to the prices of these stocks and our homes. And so if the if you have the stock market collapse, you got the home market collapse, you've got everything correlates to one, which means that every single thing goes down in price. Well, that that is that's drawing liquidity out of of the market. Why?

Okay. So, when you have um when you have margin, when you have the entire stock market is a lot of it is based on margin, liquid and leverage that we just talked about. Um maybe it's not 100 to one, but it it a lot of it is two to one. Well, when you have leverage, you have margin. Uh when the stocks go down, what has to happen? Well, you have to sell some of your stocks in order to put up more collateral, which means you take money out of the market. It just it removes liquidity out of the market. And it's not just stocks, it's also bonds.

When you have when you have volatility in bonds, that raises the amount of the uh collateral that you have to have on in order to to borrow against it, which removes liquidity out of the system. raise the amount that you have to have in that uh in that position in order to borrow against it. You can't borrow more. So that means that liquidity comes out of the system. That means that uh that you know you've got liquidity, you've got money literally coming out of the system and there's less money to go around which means there less money for goods and services which means that the goods and services fall uh the demand falls and you get into this spiral where you're in a downward spiral in the economy and you're going into or

suddenly deep in a recession. Now the you know we saw an extreme version of this in 2020 when they decided to just shut down the whole economy of the entire world. Again another genius move by our uh globalists but we decided to just shut it all down and see well let's see what happens. Yeah. Well we saw what happened. We saw it happen and it and it meant that every single central bank in the entire world had to print so much [ __ ] money that we had to keep the entire uh thing going that here we are still battling inflation from it five years later. And when you go to to the stock when you go to the market, you go to the the grocery store, you go to, you know, buy um a car, you go to pay the insurance on your car, you go to pay the

insurance on your house, all this stuff is so much higher than it was before and you're struggling because they printed so much money. And so what am I worried about? I'm worried about that they're going to do it again. That's what I'm worried about. And so my worry translates into positioning myself to not take it advantage of that as much as protect myself from it. That's why we love Bitcoin. Like truly, that's why I love Bitcoin because that I think is the pristine capital or the pristine asset to protect yourself from all this nonsense in the future. Is it volatile? Yes. Will it continue to be volatile?

Yes. Do I expect to go up in price? Yes. You're going to ask me where I think it's going to go. I will tell you that I think it's going higher. I said a long time ago, I think it's going to go to $180,000 this year. I do still think that's in play, especially if what you just said that Trump decides to push this to the hilt, right? To to to put it on tilt and, you know, and and shake up the the pinball machine where everything breaks and that's it. You've got to come in and reset. And that reset is not a$5 trillion dollar print. It's a 10 or 20 trillion dollar print. And oh my god, you better be in in the position to save yourself from that because it's going to be a V-shaped recovery. And so that's my concern because if if if we have this

this pain continue and we go into this recession, uh we're going to have we're going to have even more debt. The the debt's going to increase because nominal GDP is going to decrease. Taxes go down. Taxes go down. Claims for unemployment, the claims for social security go. Yeah. Go up. you know, and and and sure, okay, tariffs is a revenue source, but what are we talking here? Like a few hundred billion dollars, like it's it's not enough, right? Like when you look at and sure, Doge could decrease by I don't know, a few hundred billion as well.

Maybe 500 billion would be like an incredible target for them. In my mind, I don't see them cutting by more than that. I don't know about you. And the hope the hope is though, Jay, the hope is that the you know, you're bringing back manufacturing into the United States. You're creating more productivity here. That's going to take so long. It's going to take so long. Yeah. It's not going to happen overnight. You've got you've got regulations. You've got to get approvals. You got got environmental approvals. You've got to get, you know, and then you've got to source the site. You've got to buy the site or lease the site. And then you've got I mean it it doesn't happen overnight. Like that's not something you know. You don't have Microsoft coming in say we're gonna bring all these people back. We're gonna go Yeah. That Coca-Cola. I mean that's a

lot. That's a lot. So yeah. and and and I understand the chip. I mean, the big one is the chips, right? I was gonna say the big one is is AI and and tech and robotics and having that supply chain being in America and not being so reliant on our partners who hey, if if if AI continues at the rate that it's going, we need to be able to I say we I'm not even American. I'm Canadian, but America needs to be able to control. I mean, I'm basically an extension of the US at this point. Uh, needs to be able to control a lot of this supply chain because there's there's a lot of risk there. Uh, okay. Um, so one probability is Trump pushes this so far he and the

Fed comes in and saves it. Do you is that is what are the other any other scenarios? Is that my base case? Well, is that your base case? What are the other scenarios right now? You know, it's not really my base case. It's more of my fear that uh that that could happen and we have another 2020 moment. Um no, my base case is that he's going to use this and he's going to threaten um other countries. He's going to use his big sword here and he's going to um find ways to win. He's going to win back a little bit of balance here for us, for the United States. And so um that's what I think is going to happen. And I do think that, you know, he knows he he's not a stupid man. People think he just

acts off the cuff, but he doesn't. He like he's he's he really is thoughtful about this stuff. If you talk to the people behind the scenes, they'll tell you that he really does have a plan here. Um it seems diabolical, but he does have a plan. He's willing to do things that most other people are not willing to do. He's willing to be hated, you know, but um look, I don't agree with exactly everything he's doing. put it there, you know, but um I do believe that he the the the the market is not looking great. It is overvalued, right? The stock market is overvalued by pretty much any measure you can you can you can uh use. U you do have a ton of fear.

You've got a lot of uncertainty, which means that people are bearish, means that the confidence is very low. Um and uh and people and investors are positioning themselves accordingly. That's kind of a contrary indicator. Remember, if people are bearish, that means they're already out of the market. If they're too bullish, it means they're already fully in the market and there's nobody else to come in. So, it's it is a counter, you know, indicator. But, I do believe that we're going to go going to get into a period here where we um where we have strong we have just choppy markets for a while.

But once some of this stuff gets resolved, the interest rates come down, interest rates on mortgages come down, interest rates on cars and other things come down. That all helps to lower it all helps to lower the uh the cost of insurance, by the way. Um because insurance prices are are are also keyed off of interest rates in in many ways. And so, you know, that that will help um the economy. It'll help stabilize it. and then you'll kind of, you know, see uh it it uh hopefully recover. Now, that I don't know how long that takes. I don't know if that's a three month, six month, 18month period because this could take a long time. This could take right

through the midterms for that to kind of play out. But um you know you've seen I've been watching the uh interest rate probability monitor of Bloomberg and trying to figure out exactly what uh what traders are thinking and uh and I'll one more thing I'll I'll I'll share this one more um image here and to give people an idea of what I'm talking about. This is the this is the interest rate probability um monitor for Bloomberg and we've seen here this is uh this is December right so this is the this is Fed funds futures don't have to understand this math don't worry about it all you have to do is look at this

this is what this is what the probability say there's going to be three and a half cuts between now and December by December 10th by that meeting here are the meetings you got one in May one in June one in uh July one in September, one in October, one in December. This is saying there's going to be three and a half cuts. One cut is 25 basis points. Okay, it's basically saying that, you know, that's 89 U basis points is the implied amount that's coming down. Okay, so that's what that's what people but this has been as high as um this has been as high as four and a half or four and a quarter, you know, um recently. So that's the crazy thing.

moving around that people are trying to figure out where are these where is this interest rate going to be and where is this going to bottom out and you can see here that people are now figuring that's going to bottom out here somewhere around 3.2 too. Um, and that's kind of where we're going to base out. That'll be the long-term neutral rate. That could be a lot lower. We don't know. And that's the big question is where does this where does this go? How much does the Fed really move? And how effective is it? Um, you know, so that's uh that's that's what I'm kind of I'm watching the bond markets. Like I said, I'm really watching bond markets to see get some clues there and the health of the uh the the health of all the markets because they're keyed off that bond market quite a bit. I'm

watching gold and seeing what that's doing because that's that gives you an idea of how much people are worried about how much investors are worried about risk. Gold is a good indicator of that still. Um and another one I'm watching is Bitcoin. I'm watching it decouple from risk assets here and that's very interesting to me. And so that's an important data point as well. Yeah. Let's let's I want to talk about Bitcoin before we wrap up here, James. So let's talk first about the decoupling. This is uh um the decoupling of Bitcoin from the NASDAQ and risk assets is something that I feel like has been said many times over the years. Oh, it's finally happening now. And then you wait a few days. For some reason, Bitcoin always seems to to follow the

stock market when this when the drop happens by like two to like two days to like seven to 10 days. And I can't exactly explain why. Maybe it's because of weekends or something like that and 247 trading, but um talk to us about the decoupling and then let's let's lead into your thoughts on on Bitcoin. Yeah, I think part of it is what you just said. Part of it is that look, you cannot deny that Bitcoin has been treated as a risk asset for years here. I mean, it's just what it is. It shouldn't be. I I believe that it's not a risk asset. I believe it's a riskoff asset. Um, just like gold, except a better form of that. Um, however, it has acted like that because people don't

understand it very well and they still consider it just this technology, this nassent technology that um, they're not sure if it's going to if it's really has any value or if it's just speculative. And that's one of the big problems. But why is it trade so much on the weekends? Well, the reason is especially over the last um like two weekends ago, you saw Bitcoin plummet um at the same time like over over a Saturday Sunday and uh and there was really no headlines. It was on very little volume. Why did that happen? Well, it happened because it was really it's what we call a buyer strike number one where there were no buyers of it, but there was this need for sellers.

Sellers needed to get out of it. Why were they getting out of it? Because there was a huge fear if you remember just a couple weeks ago there's this huge fear of there being a big black Monday. Black Monday. Oh my god it's going to be black Monday 1987 all over again. Ah let's get So what happens when a black Monday happens that the just what I talked about earlier today is you get margin calls. It means you got to put up more money for the positions you have. You have what's called a haircut on your positions. And for the very very like for the these huge blue chip companies the haircuts can be minuscule. It could be like if you have if you have certain portfolio margin agreements with your prime broker, you can be like just five, six, uh, 7% of the whole position.

That means you can borrow 93 to 95% of the of the position and only have to put up 5% as collateral. Well, when you have a haircut, that hair when you have a a margin uh call or when you have, you know, volatility that enters the market, then that that pushes that haircut up. That means it might go to 10 or 20 or 30%. Well, that's a lot more margin that you have to put up, which means you got to come up with a cash. You got to sell something. If you don't have cash sitting in your in your bank account, you got to sell something. Come up with that. Well, what trades on the weekends?

What's trades 24/7? What's very very liquid? Bitcoin. you can turn around and sell Bitcoin and get ready for your margin call Monday morning and have the cash sitting in their account because you put yourself in a position where you're not going to have to sell other things that are down on Monday. You can sell Bitcoin which is still up from the from the Friday. Maybe it's down a couple percent, three, four, five percent, but it's not down 5 10% which is what you're scared about in a in a market crash scenario. And then it snowballs where you're selling something, it begets selling, it gets worse, you have to put up more margin for it, you know, and these big hedge funds cons are, you know, get concerned with that. So they sell Bitcoin because it's easy, it's liquid, it trades 247.

It's right there. So that's one reason that it decouples on the weekends. Yeah. I've always When's the best time to buy Bitcoin? Sunday. Sunday evenings is often one of the best times. Or Yeah, exactly. or when Jane Street comes out and does their um you know their their daily algorithm. And then another thing is the um you know it's the reversion to the mean on that exact opposite. So during the week when the market's doing something, Bitcoin may do something different because it's already had its move. Well, we saw Bitcoin draw down over 30% from its all-time high or about 30% from its all-time high. I'm not using I'm just using peak to trough. I'm

not using closes, but somewhere around there and the and the market had only you know only been down 10%. So now Bitcoin's kind of I believe found a local bottom here. Is it going to be the bottom forever? I I can't say that. I mean I'm I'm not going to predict that. Bitcoin Bitcoin is volatile. So are the markets and who knows? The headline risk is massive right now. But it has found a local bottom and so it continues to decouple here. How long that lasts, we don't know. I would like it to last for a long time because that would make it uh make me much more confident in the full decoupling which I think is going to require a lot more understanding of exactly what Bitcoin is and more

companies and investors in these companies, the CIOS of these companies, the CFOs of these companies willing to use Bitcoin on their balance sheet in order to fight exactly what I was talking about with the risk of the treasuries. And when they do, when they start adding it to their balance sheets in their treasury themselves and they start removing allocation from the bonds, that's when it really fully decouples and it's game over and Bitcoin wins, which everybody on the show would assume is inevitable. And I think everybody listening would agree with that. So, we don't need to get into that discussion. Uh, I want to just wrap with Okay, so if your prediction at the beginning of the year was 180K Bitcoin

and I know you like me hating hate making predictions, you know, they're like buttholes, everybody's got one, you know, it's not not not helpful. So, everybody listening, do not hold us accountable to our predictions. Uh, but there is this belief that Bitcoin is going to finish the year higher. You and I both agree on that. There's there's no doubt there. How high? Okay, we'll see. What needs to happen? Is this is this a an inevitability where you think Bitcoin finishes higher no matter what? Because both either the Fed or Trump is going to blink to the point that we're going to get either liquidity from the Fed or we're going to get Trump backing off

tariffs because he gets to the point where he's like, I actually don't want this much pain. It's gone too far. uh or is or is is it could we get to a point where this does spiral and Bitcoin doesn't finish the year higher? That's a good question. Again, um I I I lied. I'm going to share one more thing. Um for those of you who did not see my discussion with Michael Howell, um I had I had discuss we got him coming on the show next week. So, great. This is his newsletter. Michael, thank you for letting me uh you know um use this uh publicly. But Michael talks a lot about global liquidity and he's got a great um he's got a proprietary model that he uses and it a lot of it of what I just

talked about with volatility is embedded in in his model and it's really important. So if you look at global liquidity and this is really important here global liquidity is on the upswing you know risk assets follow that. Um, and so what's really important about this is if you if you look at Bitcoin and global liquidity, there's there's a lag here. If you guys can see this, right? Um, and maybe I can share it on this. So, it's a bigger one. Sorry. Um, no, I can't share it on there. But basically, you can see here that global liquidity um, and Bitcoin follow lock step. However, there's a lag of uh of about 3 months for Bitcoin, I believe, like 10 or 12 weeks. So, that's that's

stag this whole chart is staggered to show that. So, look at what's happened with liquidity here. So, we had this we had Bitcoin kind of get ahead of itself. Liquidity had dropped. Bitcoin got ahead of itself. Went over went over 100,000. Okay? And then it came back down as as this liquidity is going up. So here's why I think that's important. This this this relationship is important. The relationship is important because of the of this this global liquidity. Okay.

Where we had this we had a if you look at here in in October I think of of 2022 is when global liquidity kind of bottomed out and it's been rising ever since. Well, Michael contends that there's a five to six year cycle of liquidity and that we're going to hit the peak of that cycle at the end of this year and fourth quarter. Okay, so liquidity is going to rise into the fourth quarter. How much it rises depends on just how everything we talked about. How much are they going to add liquidity to the to this system? Because it needs to be there. It must be there to continue this debt charade, right?

So, how much is added? How much pain economic pain do we suffer in between? and uh and how quickly is added I don't know but it all things being equal liquidity continues to rise Bitcoin continues to match that liquidity in a 10 to 12 week uh lag and so we'll see Bitcoin kind of peak if this is if if you know liquidity does do what it's what it's been doing over the last number of cycles and it and this five to six year cycle plays out through the end of this year well then that would tell you that Bitcoin is going to hit its its all-time high somewhere between the fourth quarter and the first quarter next year. And so, you know, that's a very it's a it's a it's a really good

way to look at it because all comes down to liquidity in my opinion. And so, um, we're going to have expansion liquidity. It's just a depending it's just a question of how much how much. Yeah. Yeah. It feels it it it feels inevitable that we're going to have this expansion of liquidity which will funnel down to Bitcoin and Bitcoin rises along with with other risk assets as well as liquidity flows through and that's why you know when people ask me like how are you positioned in the hedge fund? Well, I'm positioned long and very I mean I'm I'm exposed to Bitcoin and Bitcoin related company the I mean that's all we do is Bitcoin Bitcoin related companies

public and private but I do have hedges on just in case we see a a strong draw down in the general market you know um in order to protect myself from that from that momentary draw down and be able to have liquidity to go in and take advantage of it. That's where it's really important for people to understand is that the volatility is a gift for Bitcoin. If you have access to liquidity, it allows you to continue to add to your position at better price points. Even if you're just doing it on um you know, a DCA, if you're dollar cost averaging into it, it helps. So, yeah, I've been saying for a while now, anything below 78K, I'm a buyer right now. That feels like a great number if

we a few times we have hit that. James, uh, before we let you go, I want to ask you quickly about Bitcoin Opportunity Fund. You guys have just launched your second fund. Tell us a little bit about that. Yeah, so the fund fund one is closed. Uh, we we closed it because it has public and private uh investments in it. We decided to open a second fund because we had a lot of people come in and ask if they could add to their first uh uh their their first You're doing well, my man. That's great. Yeah, the first fund was it did very well. was um in in about five quarters it was up uh over 80% net net to to the investors about 85%. So um so that was great. We had investors asking if they could add to their um their investment and so we

ended up and some people who missed the first fund. So we ended up uh opening up the second fund right as uh the market turned down but we've done well. We've raised about 20% of the capital that we that we're hoping to raise uh already. So that's good. and uh and so it it basically the Bitcoin opportunity fund invests in in public and private investments in in the Bitcoin ecosystem anywhere in the ecosystem. And so um our you know we we are a little bit different than VC. We'll do some early stage stuff. Um we don't do a ton of it, but you know we like to say that we're we're focused on real companies with real revenues and real profits. And that's that's really our core focus. Um and uh and so that's what we do. And the

second fund is open. Um, you know, so if you're an accredited investor, then just go to www. bitcoinop opportunity.fund uh give us your information. We'll get in touch with you or or send you uh some stuff about the fund and uh and let you know um you know what it looks like and whether we think it would be right for you. We're happy to jump on a call to do that. Um but uh this fund is is open. It's going to remain open. The difference is because of the nature of it being open uh forever, we you you have to be an investor in the fund at the time we make a private investment in order to get an allocation of that private investment because we have to side pocket them to be fair to everybody in in in the uh in the fund. So that's

the only big difference. But otherwise, we're super excited. I can I mean we are very confident in Bitcoin long term. We uh enjoy the volatility and and uh you know it it doesn't help my sleep cycles but but doesn't help the sleep cycles doesn't necessarily help liquidity in the short term as it's a sponge just just taking liquidity out of the markets on a regular basis but but there is there is some benefits and I mean what what I love about your fund is there in in in the crypto space we all talk about investing in tokens early uh the challenge is all the the Bitcoin economy, all the opportunities to invest there, they're not happening early

through token launches right now, they're all happening through traditional fundraising. So, if you want access to all of the financial products that are happening and being built around the Bitcoin economy, and there's a lot, you know, insurance products, meanwhile, recently just raised $40 million and like the list goes on down and down the list. Uh the only way to get access to those is through a fund either to be a VC yourself or to through a fund uh like yours. So we'll throw the link in the show notes. Everybody can definitely check that out. James, appreciate your time today. Thanks so much for joining us. Thank you for having me and uh I look forward to the next time. For sure. Thanks for listening in everybody. Have yourselves a wicked awesome day. We'll see you again tomorrow.