This is the full transcription of podcast 'Hidden Forces'.
Monetary Revolution Innovation in the Age of Financial Repression Nic Carter #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
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This is the full transcription of podcast 'Hidden Forces'.
Monetary Revolution Innovation in the Age of Financial Repression Nic Carter #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? This conversation you're about to hear was recorded last Friday, April 17th, and released on the premium subscriber feed last Monday. And I'm releasing it now for regular listeners of the podcast. I'm going to take lessons from how I did this episode and try to apply them to all of the stuff that I put out. Because I really did like the tone and looseness of the conversation. And I think that's because I wasn't going off some rigid rundown or template. It's the Grant Williams approach. So it worked. I took a lesson out of Grant's playbook. And by the way, shout out to Grant, who is back on the podcast Airways with his new podcast, eponymously named the Grant Williams podcast, rocketing up the charts on Apple Podcast with its gorgeous jacket art. Tomorrow, as usual, there's going to be another weekly episode released. We're back on a regular schedule until further notice. I know I released a bunch of extra episodes last month when markets were going haywire. But (1/97)
for now, we're back on schedule. So enjoy and please, if you're a fan of the show and you have not reviewed us yet on Apple Podcast, please take a moment to do that now. I know I've said this many times, it's part of the pre-roll, but it really does help other people find the show. And you can do it straight from your phone as you're listening to the podcast. I'm not normally an advocate of multitasking. I think we could all benefit from a little more focus. But in this case, you're doing me and other potential listeners a great service. So please, if you haven't done it yet, there's never going to be a better time than right now. And with that, please enjoy this special release of my premium episode with Castle Island Ventures partner, Nick Carter. What's up, everybody? What you're about to hear is an experiment in conversation, something I didn't prepare for that I recorded with Nick Carter on Friday, April 17th. Nick is a partner at Castle Island Ventures, a Cambridge, (2/97)
Massachusetts-based venture fund focused on seed stage investments in public blockchain startups. He's also the co-founder and chairman of Coinmetrics, a blockchain analytics company. And he's a regular columnist at CoinDesk, where he writes thoughtfully about the political economy and issues concerning Bitcoin and the cryptocurrency market. Nick's been on the show before. He was my guest on episode 97. He's thoughtful. He's interesting to talk to. And I like him. So he was one of a few people that I felt comfortable bringing on to shoot the shit about the world, about markets, Bitcoin, whatever. I've wanted to do more episodes like this, especially lately, since so many people are cooped up in their homes. But it's also because it's a lot of work for me to produce a regular episode. So much goes into it. So I like the idea of doing more casual type stuff, where I bring on one or more guests and we talk about whatever's topical or just riff on stuff that's in the news or on our minds. (3/97)
This fits that description. Neither of us prepped for this conversation. I literally emailed Nick earlier in the day and proposed that we do something. And later that afternoon, we hopped on a call and we did it. And it turned out to be a great conversation. I mean, it's, you'll notice we're more relaxed. It's more conversational. And we cover so many interesting topics. I'm really happy with how it turned out. And I'm really happy with how the subscription model has turned out. Just today, we surpassed a thousand premium subscribers. And I cannot tell you guys how happy I am that we stuck to this model. The last 15 days alone, we've added over 150 new subs, which means that not only have all of you continued to support the production of this podcast during what has been an enormously difficult period, but that even more people are signing up and they are doing it in record numbers. So that says to me that we are doing something right. If you like what you're about to hear, then I want (4/97)
to hear from you. I want you to tweet at me, comment on the Patreon post, write a podcast review. However, you want to express your feelings and thoughts about the program and this model of relying on each and every one of us to fund the continued evolution of this podcast. I encourage you to share the episode and to encourage others to subscribe to the premium content. This is the model for an audience like ours. And the more people who subscribe, the more resources I have to take this podcast to the next level. And with that, please enjoy this experiment in conversation with my guest, Nick Carter. Nick Carter, welcome to the inaugural episode of the overtime feed. All right, happy to be here. And thanks for inviting me back on. Yeah. I mean, I make it sound like it's some official feed, but well, I mean, it is the overtime feed, but I tried the last few days. And it's not the first time I've tried doing this to just sit in front of the microphone and talk and kind of give my thoughts (5/97)
about what I think's been going on or what I think is interesting. And I can talk for a while, but I can never, I never know how to end it. I never know how to stop. And at the end, I was like, yeah, maybe I just need to invite some people on who I think are interesting or have interesting views and we can just talk instead. Well, here I am. And, you know, I have opinions. Where are you at, man? You're in Boston, right? No, I left Boston. I fled. Yeah. So I live in downtown Boston. I, you know, I kind of figured Boston would be the epicenter of a lot of this stuff. And it sort of has been because of the college students. Yeah. They had this big biotech conference, which would cause a bit of a crisis. And I just didn't want to be in a densely packed urban area. So I'm in, in the suburbs of DC right now, which is much more pleasant. All right. That's, that's where you're from, Virginia, right? Or something like that. Well, it's, yeah, where I'm from is complicated. But yeah, this is (6/97)
where I've spent most of my life. Right. You, because if our memory serves, you did your bachelor's degree in Edinburgh. Masters, yeah. Masters degree. My undergrad was just up the road at St Andrews in Scotland. And one of the degrees was in philosophy and the other one was in foreign affairs. So undergrad was joint philosophy and IR. And then master's was in finance. Oh, that's interesting. So what was it exactly in finance? I, because I don't remember this. It was like a very quantitative course. It was called MSC finance. So involved lots of data. That was actually when I got the idea to start coin metrics. So that's where coin metrics began. So remind our listeners a little bit because people, even though this is a bit of a conversation, just so listeners that are coming. First of all, when was it when you were on originally on Hidden Forces? Would have been summer of last year, maybe. Was it? Was it that? Let's see here. Looks about right. I don't know if I remember correctly. (7/97)
Yeah, sounds about right. Yeah. So that was mostly about Bitcoin. You had a Pura Shard on the show before. I did. Who's blocked me on Twitter months ago. That's a shame. I'll never block you. Don't worry. I know. I know. I told him I don't negotiate with terrorists. No, I don't know if he blocked me after I said that or if he'd already blocked me and someone asked me what happened and I said I don't negotiate with terrorists. But no, I know. I know. It's fine. It's weird because he was on the show and there's no good reason to block me other than, I mean, I'm not even an anti Bitcoin person. Yeah. I mean, you always struck me as pretty crypto proximate. You know. Crypto proximate. I'm not sympathetic to the objectives. So. Listen, man, I mean, speaking frankly, I just like talking to people who have interesting things to say and I mean, in terms of like ideologically speaking, I used to be an ideological person. I think ideologies are ways of being intellectually lazy and there was a (8/97)
time when I was, I think intellectually lazy. But you know, I think the reality is that there's no condition in which I relying on a template is the ideal way to go through life. I do think that, right, you know, again, if like, if that's what you've got, that's what you've got. And then there are some templates that are better than others, but you know, at some point you got to break with that and you have to start introducing new stuff in. But yeah, you were a phenomenal guest unsurprisingly. I knew you were going to be. Yeah. No, I mean, you're going to be great. Hey, you were smacking between Raul Paul, who's always popular anywhere he goes. He's like one of those guys that just blows up your feed and David Webb, which is also a great episode. So and you were, yeah, surrounded by a bunch of, well, we were on a roll at that time. Yeah. So yeah, that was a great episode. I mean, I so much enjoyed talking with you. And so tell our audience a little bit about who you are just to give (9/97)
them a refresher. Yeah. So the episode was good because you know, I tried to make the case for Bitcoin or the existence of Bitcoin without being too dogmatic about it, you know, so I find myself fighting with the Bitcoiners a lot, even though I consider myself one. But yeah, more generally, you know, professionally, I'm a VC. So I work for a venture fund. We do early stage startup investments for the most part within the crypto industry, although that means we're investing in equity, not in tokens. I generally take a really dim view of investing in tokens, especially the you know, the more speculative stuff, which some of which resembles unregistered securities. I'm also the co-founder of a blockchain analytics startup called Coin Metrics, which just raises series A. And the objective there is to demystify the usage of blockchains so that normal folks could get a better understanding of what's going on on them. And I think of it a little bit like taking satellite pictures of Walmart (10/97)
parking lots so that you can infer information about the economy. You know, that's the thing I really like about public blockchains is that they are pretty transparent. And if you do a little bit of work, you can figure out what the key features of them are. You can find that macroeconomic data, although we're still in the discovery phase. So that's what I spend most of my time doing. And I also write about, for the most part, you know, the political economy of blockchains, people describe them as these totally amoral, you know, these automatons which just take inputs and produce outputs in a really, you know, mechanistic way. And that's true to a degree. That's certainly part of the teleology of public blockchains like Bitcoin. That's what they're meant to do. But they don't always do that. There is a degree of subjectivity and human oversight and governance. And I'm pretty interested in that because folks in the crypto industry have a habit of trying to hide the fact that there is (11/97)
human discretion in these systems because they really want to draw a strong contrast with these existing financial system. And I'm interested in the truth as opposed to taking a side, even though I am on one side, clearly. So I try and do a little bit to expose the fact that, yes, there is human discretion. They're not fully decentralized. I'm sympathetic to some of those skeptical schools of thought. So what's it been like to be in the Bitcoin community these days? Like how have people in crypto, Bitcoin, I don't know how much they differentiate amongst themselves. I've kind of, I mean, the Bitcoin community has become a more prominent community in the media. Like for example, Bitcoin podcasts have become the dominant form of podcasts and like a lot of the crypto stuff that was there early on in like 2017 when I sort of got into the space, a lot of those are just really dropped off the map. It's quite remarkable. One in particular I'm thinking of that was like very, very popular. I (12/97)
don't hear much about it anymore. So I don't know how those two communities mix, but how has that overall community dealt with or interpreted what's been going on in the broader economy these days? Well, the probably number one thing that's happened is this feature of Bitcoin that was the case historically is not the case today and it's caused a lot of anxiety and gnashing of teeth and that's, I'm referring to the correlation between Bitcoin and traditional financial assets. So from 2010 when Bitcoin first got a market price to January 2020, Bitcoin was completely uncorrelated from virtually any financial asset you can think of in terms of its return profile. And its correlation with the S&P 500 never entered any meaningful positive zone. And that was touted as a really great attribute to have. It's like, oh, maybe this thing is a really powerful portfolio diversifier. However, in mid-March when there was this rush to liquidity, there was this really sudden sell-off in financial (13/97)
assets, Bitcoin and crypto as a whole was not exempt from that and sold off really, really rapidly at the same time. And those correlations rose to levels they'd never been before and stayed there. So Bitcoin has kind of moved in lockstep with the S&P 500 for the last couple of months, which is really shocking actually. And it has defanged one of the bullish narratives for Bitcoin, which is that it's a really excellent portfolio diversifier. Maybe it's even a safe haven. So that is not the case. And there's some consternation over that. I did feel that it was a bit of a poison chalice or it was a risky narrative to spin because you can't stop an asset becoming more correlated, especially as it becomes more financialized, which it has been. So to some degree, it was to be expected that the correlations would rise over time. But yeah, so one of Bitcoin's key narratives has been dented really thoroughly. So even though Bitcoin is right now, we're like pretty ardent that there's like some (14/97)
extreme monetary mischief going on, you know, out there in the hands of central banks. Bitcoin itself has had a bit of a narrative setback for sure. And I would say that's actually caused a lot of people that might otherwise have had a position to reconsider it. So it's being pulled in two directions right now. So the Bitcoin community is heavily influenced by the Austrian school. There are people like you who are more nuanced, but I think this has probably played a role in a lot of the confusion in the community, it seems to me, around what you call monetary mischief, i.e., for shorthand, the printing of money or the expansion of the Fed balance sheet and the creation of federal reserve liabilities and the expansion of the monetary base and the lack of immediate inflation. Where is the community in terms of its intellectual development when it comes to economics? Yeah, as you say, it's heavily Austrian in nature and monetarist, you know. So inflation is everywhere and always a (15/97)
monetary phenomenon, right? Uh-huh. And there is certainly a bit of confusion as to why apparently there has been no inflation in response to this extreme monetary issuance. But of course, you know, the denominator is changing as well. There has been a deflationary shock and also there has been a rush for dollars globally as most debts are dollar denominated. So it's not that eminently surprising that there hasn't been inflation because I guess the deflationary impulse, you know, very much outweighs the issuance. There's definitely a feeling that inflation may yet recur if we enter a political regime where entitlements grow and barriers to that spending disappear over time. You know, maybe the economy recovers, but the extremely high rate of spending stays high. That would be the circumstance that I think where it is plausible that we could get a reprise of inflation. But yeah, the fact that we haven't had any has also definitely been a source of certainly confusion or sort of (16/97)
amazement in the Bitcoin community. You know, to be fair, I don't think there's any one school of thought that really does a perfectly good job of explaining where we are from a monetary perspective right now. It seems like the MMT school maybe has the upper hand. Sictoral balance, view of money. Yeah, there's no apparent consensus right now over what's going to happen. You can be fully monetized the debt. Yeah, that's a bizarre. I mean, I actually literally tweeted out today. See if I can find exactly what it was. I was reading through the Financial Times. I contacted you this morning sometime to see if you wanted to come on and you said sure. And then I was like, let me take a cursory look at the news headlines and see if there's anything interesting out there. And there was an article by the Financial Times highlighting, it was an interview or some sort of feature of Stephanie Kelton, who is kind of the face of modern monetary theory, who is out with a new book. It's coming out (17/97)
sometime, I think this summer. Good timing. Yeah, maybe. I mean, I think it would have done well if it came out last year also. I don't know, what do you think would be a good time for MMT? Because that is an interesting question. What sort of external environment would be most habitable for MMT? But I tweeted out, I read it and I tweeted out, let's all get prefrontal lobotomies. And I can't say that it was a well thought out thing. But what I think I meant was just basically like, when I read MMT, like there are parts that make sense and then there are other parts that make zero sense. Like the example being replacing open market operations and reverse repos with the IRS and taxes. So, IE, if you want to reduce the money supply, just raise taxes as opposed to conduct monetary policy. It's like obsessive compulsive, kind of hyper focused and missing the bigger picture. That's how I interpret MMT. But I'm curious when you think would be a good time for MMT because it seems, for me, MMT (18/97)
is a political thing, first of all. It's really not an attempt to understand the economy. Well, I think it's misunderstood. I'm not an MMT fan by any means. I think there's a descriptive element and then the prescriptive element. Yeah. And the descriptive element actually find to be somewhat compelling. It's certainly a curious inversion of many concepts that I thought were true and that I learned in my undergrad, you know, economics classes. The fact that it's loans that create deposits in banks, for instance, and that taxes are a tool to check inflation. It's very interesting to me and it seems to me like we're in this curious half measure world right now where we've gone from a world of ostensive fiscal restraint and a monetary authority that was unwilling to fully monetize the debt. And now we're in this in-between space where in reaction to this staggering crisis and a leader who is politically not too beholden to the old school of conservatism and two parties that aren't really (19/97)
interested in fiscal conservatism. We've entered this MMT proximate regime. We're not fully there yet. You know, the Fed isn't directly financing the economy. You know, there's still this notion of federal debt and so on. And there's still a theory about being repaid at some point. But if you look at the Bank of England, for instance, England is financing their expenditures with monetary issuance now. Obviously, you know, Japan has been doing somewhat related experiment for a long time. It does seem to me that we might as well just go to the logical conclusion here because I don't think there's a way back realistically. I don't think we're ever going to have a politician able to reimpose fiscal conservatism. It seems like a quaint idea. And now we have a lot of pundits wondering, well, if this was possible, if we could have untethered issuance like this without apparent inflationary effects, why weren't we doing it before? Like what social programs went unfinanced because we had this (20/97)
excessive conservatism? That seems to me to be the current orthodox view. So I have a lot of thoughts about that. I completely agree that there is a prescriptive component of MMT and there is a descriptive. And the descriptive component is, I think, great. And then it offers a much better view of how a monetary system operates than Austrian theory does because Austrian theory is so much based on a gold-backed monetary system, which is not what we have today. So I think in that sense, I agree. I don't agree though with the idea that taxes can be a viable mechanism by which to reduce inflation. That seems, you know, just asinine. It's like you're going from like airplane to going by camel. Like, you know, I mean, how does that work as a better way to do it? Right? I mean, it's already imperfect. Inflation is a nonlinear phenomenon, which actually gets me to point number two, but it's a nonlinear phenomenon. So by the time you see it, the genie is already out of the bottle, you know, (21/97)
potentially. So it's bad enough, the mechanisms that you would use today to try to kind of stop inflation on our heels, but the idea that you're going to raise taxes and taxes are also so political. That's another aspect as well, which is MMT doesn't seem to take into account. Or maybe they do. I don't know. There's only so much of it I can take, but the freedom of action changes when you cohabitate Treasury and the Fed, or if people think have the impression that you can, that your scale of action is much different. If people think that you can do more, they'll expect for you to do more. And I think that kind of makes it harder for you to curb inflation if you're going to hurt people. Yeah. But inflation is nonlinear. That's the other thing. And you don't see it until you see it. And then once you see it, then you're in a whole new paradigm. You know, then you're in 1970s. Yeah. Yeah. And then it's like it's too late almost. Yeah. And that's probably my critique of MMT, which I didn't (22/97)
mention before, is I believe that there's political constraints to it, like very real political constraints. And if you normalize the notion of monetary issuance as a way to finance the economy, then people are probably going to rebel a little bit at the notion of taxes, because they might at that point, and you see it in the crypto community for sure, people will say, well, why do we have taxes if you can just pay the budget by printing dollars? And it seems like such a strange, like juvenile objection, but I think it's true. You still have to maintain a sense of authority and order to the system. And if you become completely untethered, then it sort of falls apart. And as you say, the other thing is if you open up the Overton window or like the design space of the government as this ultimate tinkerer, which is omniscient and omnipotent and can finance virtually anything, you're always going to get a demand to finance endless entitlements, spending, stimulus, infrastructure, or (23/97)
whatever, even when it's not strictly warranted. And so I think you just enter this terminal cycle of massive expenditure. And I'd say we're in it in terms of you look at the size of the government spending relative to GDP. It seems to be growing virtually every year. And you depart from having a genuine capitalist economy. And you have something that looks more socialist, not to say that pejoratively, but just the scope of government expenditure and its influence on the economy grows, which I think has this zombifying effect on society, which is really my issue with bailouts, is that effectively you have the government determining what the allocative outcomes are and not the free market. Yeah, I'm kind of thing that I focused on of all the things that you said was this. I tend to describe what our economy is. I guess it depends on how we define terms. Like, is a capitalist economy a economy that has to be strictly free market in every single way? Well, then of course we're not a (24/97)
capitalist economy. Is a socialist economy an economy that's socialistic in every single way? I.e. because the Soviet Union wasn't really communist, it was socialist. I mean, the way I learned what communism is in a strict economic sense, it wasn't communism, it was socialism. It was the state owning the means of production. And there were capitalist elements too. Like you had entrepreneurial black market capitalism, right? Sure, sure, sure. I mean, again, yeah. So there were elements of capitalism within the society, but the structure of the official structure of the economy was socialistic. The pockets of capitalism were the exception to the rule. They sort of manifested as a result of imperfections in the application of the model. But like, what we have today, it keeps moving in a direction of, again, I don't think it would be even be correct. This is one of those things where we're needing new word to describe what we're seeing because what we've been seeing, and it's something (25/97)
that I've been talking about recently more and more. The first time I've talked about it, but it's been coming back to me because we're in another one of these cycles. The last time we were in one of these cycles was 2008, where there are these, I think you've been writing about this as well. You have these bailouts of the largest corporations, of the preferred interests in the society. And we've had these cycles now a number of times. And I'm curious to hear what your take is on this. I think that what we're really seeing at a top level is that we've seen an accumulation of wealth in a denser proportion of the population, a smaller number of people accumulating more and more of the wealth due to many reasons, regulatory, taxes, technology, globalization. There are lots of factors. And monetary policy has played a role, but it's one of those interesting things where it's also, is it the dog wagging the tail or is it the tail wagging the dog? Because the growth of the wealth gap and the (26/97)
accumulation of wealth in smaller and smaller hands, the only way that that can happen and has happened is through debt finance. The only way that you can manage that is by the expansion of private sector debt. The expansion of private sector debt can only go on for so long without having to lower interest rates because the burden of the debt becomes onerous. And so in order to make it carryable, you've got to lower interest rates. And the lowering of interest rates and the expansion of debt causes asset prices to rise. It's upward pressure on asset prices. And eventually it becomes harder and harder for people on the sort of outskirts of the wealthy or the savings class, right? If we think about this as sort of the debtors and savers, the savings class, the people on the outside begin to be unable to hold on. It's almost like the centrifuge is flying around and they're getting flung off and they're getting flung off into the side of the debtors. And eventually all of these people, the (27/97)
only way that they're able to actually save anything is by putting it to the stock market, which is exactly what's happened. So increasingly the vast majority of society has to move into the stock market if they can put their money anywhere, if they have any savings. And so now you turn savers into speculators and all of these speculators that are invested in the stock market. And the stock market has gone from being a financial utility to what Ben Hunt calls a political utility to now being a political liability. And every time the stock market goes down, it is a fucking crisis because if the stock market collapses, people's entire life savings are wiped out because that's where people save their money now. And on top of that, there are a lot of other factors because the entire economy has not become conditioned on the idea that stocks always go up. And the authorities are invested in this process. But I don't know, that's my general sort of point of where we're going. So you get to (28/97)
this point where the government effectively has to own the entire market because if the market collapses or asset prices drop, that sort of collapses an increasingly core assumption of market participants, which is that the markets will not go down and that the authorities will not allow them to go down. So allowing them to go down would wreck the economy. And I couldn't agree more. This is why I'm so glad you had Mike Greenon who explained the particular mechanisms through which the stock market became a savings device and how Congress encouraged that to occur with specific regulation. I learned a lot in that episode. I mean, I'd had an intuition that from the 80s, I would say onwards, America got progressively more financialized, but it was really eye-opening to see how specifically employers were encouraged to funnel their employees into 401Ks and treat the stock market like a savings device. I think the outcome of all this is that you have managers, directors of public (29/97)
corporations, the largest corporations, can hold the economy hostage in a sense. They can really, they're in a very strong negotiating position relative to policymakers here. They know that pensions need, they have a required rate of return of 6% to 8%. They know that American savers own 401Ks. They don't own CDs or cash. They've been forced through the shadow inflation, in my opinion, far and excessive CPI. They've been forced to hold financial assets, as you say, to become speculators. Then on top of that, you have this cult of passive investing, thanks to this really warped version of what Bogle was preaching, where people looked at historical models of stock return from the 1880s to present and decided that there was premium of equities was 5%, plus inflation. We had this guaranteed return of 7% real, 9% nominal over the last 100 years, and that you were guaranteed to achieve this return regardless of your starting position, as long as you held equities for long enough. I just (30/97)
think that's totally nonsense. I think we're going to find out over the next decade as we have this unwinding of leverage that that's not true. Your starting position matters. The valuations matter. When you buy a security, you're buying a claim on cash flows and the amount of cash flows that you're purchasing per unit of price, I guess, that actually matters. You can't just blindly pile into the asset. As Mike Green said, since we have this rotation into public equity, it structurally became a bigger part of the American saver of their portfolio. It also just returns and it encouraged people to pursue this strategy. You have the parabola gets steeper and steeper as people reevaluate their expectations based on the prior performance. That's where we are today. His insights on passive, for me, they've moved the needle more than anything else that I've learned in the last so many years. I compare them to reading Shoshana Zuboff spoke on surveillance capitalism and having her on the show (31/97)
in terms of what that did for me as far as data privacy and surveillance and differentiating between technology and the logic, the economic logic that animates the technology. It did the equivalent of that, but for finance. I think logic attracts the position itself to capitalize also on a meltup, which may well come prior to any meltdown. It's against about this idea of flows. The flows are dominating increasingly the price movements and that nothing else matters. What simply matters is, do I have cash? If so, then buy. Yeah. I think we might be in the midst of a meltup right now. Obviously, you contrast the performance of financial assets with the apparent reality and there's a huge contrast. Some people are outraged by this. They say, how dare the stock market go up? But to me, it's just a sign of the time. If we're reflating this bubble, probably we have some ways to go, but I'm still of the school of thought, especially in my discipline where your entry price really matters. We (32/97)
can't afford the venture math doesn't work. If you're overpaying, you just fundamentally can't achieve the IRR that LPs expect if you're massively overpaying. From our point of view, we're very sensitive to valuations. Sorry about that. That's my dog. All right. We're very sensitive to pricing. I think public equity investors should be as well, but you really rarely hear people talk about PE ratios anymore. It's a much more automatic thing. As you say, I got my paycheck, so I'm going to put it into the stock market. What do you think the interesting story is? What do you think people will be talking about in the fall? I think it'll still be the lingering effects of the virus. I doubt it's going to be a short-term snap back to normalcy. It's an important, obviously a great point that you're making because there's a huge chunk of the economy that needs to things to be normal in order to function, and not just the airlines. I use Greece as a classic example because they've done a (33/97)
phenomenal job of containing the spread, which is essential for Greece, not only because it has an impaired hospital system as a legacy of its recent prolonged crisis, but also because it's a tourist economy that depends on people not being afraid to go there because they're going to catch coronavirus. I think 25% of Greece's economy is tourism. That's enormous, but the problem is if people aren't going anywhere, then there's no tourism economy. How long can Greece as a country, as a sort of paradigmatic example, exist without going into economic collapse and political chaos in this environment? Yeah, it's not a good thing to be that exposed to tourism, obviously, when a tale event like this comes around. I am optimistic that our technological tools will give us some solutions here, whether it's an effective treatment, a vaccine faster than we expected, extremely accurate sensing, warning, maybe more sophistication in the tracing. I'm partial to biology, Srinivasan school of thought, (34/97)
that we're going to get red zones and green zones. We'll get areas where policymakers are fundamentally better or more prepared to take extreme measures to stamp out incidents of the virus locally. To preserve that advantage, they'll want to close their local borders or keep them extremely regimented. I think it'll happen on a state-by-state basis, probably in the US, maybe even city-by-city basis. Definitely going to happen on a country-by-country basis. Unfortunately, I think travel is going to be very much impaired for the foreseeable future. There's definitely even a more extreme version of that take where we look back on the period 1990 to 2020 and think that was a historical aberration in terms of being able to travel in a truly unencumbered way globally, because the Soviet Union prevented free travel. China was closed for a long time. Maybe that was the last time we had truly globalized travel. That's such an interesting point, because I thought about it from the economic point (35/97)
of view that airfare became very cheap over a prolonged period of time. This crisis might potentially put a cap on that, but you're making another really great point, which is the opening up of the Soviet Union, especially the Soviet Union. People could travel to China in the 80s. They probably needed some special visas or something. People could also travel to the Soviet Union, though. I think it was harder to go to the Soviet Union than it was to go to China, correct? China was only meaningfully opened in 71, right? Oh, yeah. If I'm getting that right. Then the Soviet Union was much later in 89. Obviously, there was a lot of chaos. You probably didn't want to be in the form of Soviet Union for a while there. Yeah, I'm sure you were a bit broader. Probably at least until 92. I actually wrote my undergrad thesis on the Nagorno-Karabakh conflict between Armenia and Azerbaijan. That was a really bloody conflict that actually helped catalyze the collapse of the Soviet Union. People don't (36/97)
know that really. That was one of the first nationalist movements and that kicked off all these other local nationalist movements in those Soviet nations, I guess. And the Caucasus and the Balkans? Yeah, and Georgia had their kind of irredentist movement. The Baltics were early. Then you had Central Asia. You had Ukraine. It was like this cascade. The final stages of the Soviet Union are so interesting. Nobody really expected it to collapse. The US policy, the diplomacy, the elite in the US, they didn't really have this expectation. And then in the 90s, it was like the decade of jubilation because the US became this unipolar hegemon. But it wasn't like they could really take the credit for the collapse of the Soviet Union. In a sense, they were taken by surprise as well. Yeah. I mean, Bush famously learned about it on CNN. I had a professor who told us a story about how he was in Berlin right before the fall of the wall and he was having a conversation with a East German and he had (37/97)
said, all you Americans, it's fine. The wall will be here forever. And within a few months, it was down. Yeah, people don't appreciate how rapidly fragile systems can fail. I don't think it's likely to happen, but we're seeing states reasserting themselves relative to the federal government. That's happening right now as we speak. And I think it's entirely possible that maybe the Chinese regime isn't as... They don't have such an iron grip on power that we think they do. There certainly are regional tensions, especially between the core and the periphery in China. The world is looking now like it's becoming a multipolar balance of power once again, but it's an eminently plausible to me that we have a new spate of vulcanization and the virus is obviously a very potent catalyst for that in terms of being an accelerant for the localization of the world. Supply chains, absolutely too. Supply chains, yeah, of course. I mean, Europe is the one place where it seems most likely to happen. Of (38/97)
course, it could happen in China. If it happened in China, it would be like an atom bomb going off. The level of tectonic resistance there or pressure buckling is so much greater or maybe in the Middle East between Saudi Arabia and Iran. But Europe is... On the one hand, it's interesting because I wouldn't describe it as fragile. You could easily describe it as fragile, but there are a lot of strong bonds between the nations in Europe that make it difficult to break this apart. I mean, Macron, the big article on the FT today I haven't written for me now was, Macron warns of EU unraveling unless it embraces financial solidarity. Obviously, the French citizens don't want to fund the budgets of Southern European states, although France's finances aren't as great as Germany's or some of the other nations in Europe. You know, I think there is a deep historical commitment to the European project. And I wonder if the Europeans can find a way to hold some semblance of the project together for (39/97)
diplomatic and defense geopolitical reasons and maybe unbuckle some of the monetary components that make it so difficult, make it so unworkable. You know? I mean, I don't know. Yeah. Tough one. There's this, obviously, this very popular theory that financial interconnectedness brings political stability, which is going to be tested now. Yeah. One of the most popular empirical theories from international relations is this democratic peace theory, which has the implicit component of free markets, institutional interrelationships. Yeah, democracy's never going to war. And there's the humorous corollary, which is no two countries with the McDonald's have ever been to war with each other. And then you look at the fact that the UK's biggest trade partner before World War I was Germany, and you think, well, it's still possible. And you look at the incredible interconnectedness between the US and China, and you see that relationship unraveling. Yeah. 100%. So the thing about democracy's never (40/97)
going to war, first of all, democracy's themselves, the greatest democracy in the country, the United States has been bombing and going to war with countries for nonstop. So I understand that the theory compares- With other democracies, though, yeah. Right. I understand that the theory compares democracy to democracies, but that doesn't make any sense. I mean, I think what's happening there is democracy has become very popular recently, or maybe it's waning in popularity now, but it had a 100-year bull market. And that coincided with Pax Americana, where America was the sole Hegemon or shared power with the Soviet Union, which that was a stable arrangement. So there just fundamentally wasn't a lot of interstate warfare. There was a lot of intrastate warfare, that's for sure, which that model doesn't really capture. So it might just be, like Taleb would say, you just don't have enough data to come to that conclusion and something like war is fat-tailed. So- Yeah. And the other point you (41/97)
made about the economic interdependencies being, how did you say it? How did you express that? That it is believed to be an inhibitor for conflict, I guess. Yeah. I mean, that was Norman Angel's theory, the Great Illusion before World War I. That didn't work out. But also like it's been, the economic interdependence has been at the core of European expansion and integration. That was one of the principal assumptions underlying EMU's capacity to expand successfully, which was that economic crises would be causes for further integration. And we're seeing that those were assumption dependent and under certain assumptions that worked. So dude, the other thing that we forget about, I'm sure you've contemplated, is that the institutions that we live with today, institutions are created during periods of different psychosocial awakenings. And the European Union is very much a bull market project. Certainly EMU. EMU was a bull market baby. And the latest phases of EU expansion came during (42/97)
either the full flown bull market. I mean, I think the Treaty of Nice was 1999, was it? And then the last treaty was before the 2008 crisis, the Lisbon Treaty. What do you think of that? I think institutions get created or entrenched when there is some power shift and the dominant power now has the bargaining power and the ability to endorse and guarantee an institutional arrangement, which is certainly the case with all the Bretton Woods organizations post-World War II. And the US is very much pulling back from those obligations that is unambiguous. And not only that, they are almost rejecting some of those institutions, which aren't useful to them because their stature within them has been reduced. The WHO is a great example. The US is by far the largest supporter financially of the WHO. And yet it seems to have been captured or infiltrated. I don't know the right word exactly by Chinese interests. Look at the popular discourses it relates to the UN. Americans for the most part hate (43/97)
that they have financial obligations to these entities, which they feel are not yielding them meaningful benefits. And it may be the case that these aren't providing the returns in terms of soft power that America expects. And I think this next decade is going to bring us the decline of importance in these Bretton Woods organizations. That much is very clear to me, both through their own defanging, through the US pulling back, and through potentially China creating viable alternatives. Well, you saw that China expelled the New York Times reporters, I think the Washington Post, a bunch of major... That's one more escalation. Or one more... The Cold War was all about building avenues of conversation or a contact or discussion to be able to reach the other side. What we're doing is we're stripping those away one by one. It's quite concerning, dude. It's very dramatic. It also means that we have no ability to fact check their numbers on the virus, for instance. I think the next hammer to (44/97)
fall is capital markets relationships between the US and China being severed. What does that mean for you? We have a mostly US LP base, so it doesn't affect us per se, but it seems to be coming. I think it will occur, actually. And I'm not sure the US is ready because the US investors have always had this view that they can profit from Chinese growth. For the most part, that's been wrong. They've been exploited in a number of ways. These companies treated American capital markets like piggy banks. They broke into an arcade and just stole all the toys instead of playing the game you were meant to. It's highly exploitative. We see endless accounting frauds. You see really weak governance. And it's like there's a new high-profile accounting fraud every week now, luck and coffee just being the most recent one. Is there ticker L and K or something? Yeah, something like that. That was a super high growth, really exciting Chinese company. It's like the Starbucks of China. It turns out that (45/97)
hundreds of millions of revenue was just fabricated. The other thing we see is converse when Chinese investors take meaningful shares in American companies. They use that for political leverage. We've seen a ton of controversy over that in the last six months, which maybe people have forgotten a little bit. But large American media tech companies being co-opted or being muzzled or being censored due to the existence of Chinese folks maybe covertly doing the bidding of the CCP, but definitely exporting CCP kind of values, which had a really disastrous collision with the US. I think ultimately there will be a political demand to sever capital markets relationships between these two countries. And US investors are going to have to just come to terms with the fact that no, they can't participate in Chinese growth. They can't profit from it. That was always an impossible dream. It was never going to be allowed. I think it's going to be obviously really disruptive when it does occur. (46/97)
There'll be a lot of gnashing of teeth, a lot of really upset investors. We talked for listeners who are interested. We talked about this, both aspects of these stories with a number of guests, but specifically I'm thinking of Kyle Bass. I remember what episode that was. I'm trying to find it right now. The other one was with Anne Stevenson Yang, who's come on twice. That's kind of the China hustle or these companies that have used US capital markets to take out enormous amounts of money and who will, many of them will default on those loans. Of course, China also owns a huge amount of US debt and they could begin to sell that. Public debt. Yeah, there's certainly the currency competition element here, although I think the dollar is just so fundamentally dominant globally that there's no risk currently to the internationalization of the renminbi or something. Yeah, for sure. It's funny how that was like a big story in 2008, 2009, 2007. Peter Schiff is a good example of someone who (47/97)
talked, I don't know about internationalization of the renminbi, but he's actually a good example of this point about not to call out Peter, but he's a very strict Austrian and he's had a very US-centric focus on the value of the dollar and just looking at it as a one-to-one equation. Like you mentioned, Milton Friedman's quote inflation is anywhere and always a monetary phenomenon and except it's not one, two, there are other people's monetary policy matters also. And it's just monetary policy. It's also the credibility of financial markets, the breadth, depth, and regulatory framework of those markets. The outstanding liabilities denominated in the currency, which is being printed, all of those factors matter. Yeah, and if there's anything we've learned is that the one universally safe asset in the eyes of investors is the dollar or treasuries. And there's plenty of countries that would love for there to be an alternative to SWIFT or to the kind of New York-centric correspondent (48/97)
banking system and to those US-administered financial rails, especially because they politicized them like crazy. They use them for partisan or political objectives, military objectives even, but there just really is no alternative. So difficult to bootstrap an alternative because money is the ultimate network effect. So I don't foresee that changing anytime soon. And you're right. I mean, people talk about inflation, US individuals having to bear the cost of inflation, but it's this rapacious foreign demand for dollars, which means that in theory, we can have really extreme levels of issuance and our debt can still be considered attractive. I believe that there are limits to that. Might even be reaching those limits soon. You know, there's actually an intersection with crypto here. Something people haven't really noticed is tokenized dollars that circulate on public blockchains, kind of public blockchain infrastructure for the most part, Ethereum. Those have swelled in size from about (49/97)