The Truth About Inflation with Lyn Alden

lynn hi how are you doing pretty good how are you i'm very good i've just had my first vaccine dose oh nice so if i collapsed during the interview bill gates has won right my favorite hour every month looking forward to this but lots i want to talk to you about uh i do want to do a good chunk on inflation i'm sure that's high on your radar um not much has happened well not much has happened with the bitcoin price since we start last spoke it's gone up and down but we're fairly flat from where we were but just before we start uh where what have you been generally looking at what are you looking at right now what's on your mind what you've been thinking about over the last month a couple things one is inflation-based effects right so we're entering and i don't know if you talked about this last month but you know for in case we haven't you know new people listening in um you know inflation's often compared year over year and so last year during april may and june inflation by most metrics dipped very low because you had the initial shutdowns things like that uh and so when you're doing a year-over-year comparison you can actually get some pretty high numbers because you're comparing to like a bottom of a dip whereas if you were comparing to say you know february to february it'd be less extreme because you're comparing to what was already a reasonably strong month you know it's kind of before the pandemic and so we're going to get some pretty high headline cpi numbers and there's all sorts of issues with cpi you know i i you know i have charts coming out showing how like you know most prices that we care about have gone up faster than cpi uh but even the official cpi numbers are likely to be you know over three percent uh during this uh this this base effect period and you could you could overshoot to four percent or you know potentially higher so i'm kind of watching that to see how the bond market responds to that that you know the topic is going to be the idea that is transitory that you know these are this is inflation spike and because of those base effects that's partially true uh but then you know if you're a bondholder you have to you know how sure are you that they're that they're transitory or how how big is the spike going to get how persistent is it going to be what's going to happen with ongoing fiscal stimulus uh and so this could be kind of an interesting period for you know bond market gold market bitcoin market uh just kind of see how this plays out the other thing i'm watching is that you know you know as the base effects you know the other side of that as we look into quarter three uh that's where you know some of the euphoria of really good year-over-year numbers right so so it's not just inflation that has those base effects it's also you know gdp growth and construction spending and retail spending and corporate earnings they all had a really bad quarter two of last year that was their worst point and so their quarter two here is going to be incredible uh but then once you get into like quarter three you know we pumped a lot of money into the economy uh you know some economies are not really kind of pumping a lot more some of them are even kind of just start to pull back and normalize and so somebody for it has propped up you know assets ranging from from tesla to dogecoin to you know all basically across the board it's good assets bad assets you know a lot of that's what's propped it up uh could start tapering and you know pose a challenge and the risk there is that even some good assets can can dip and and pull back if you get a broad market that kind of you know isn't being held up by tons of stimulus anymore right okay let's talk about some of these inflation numbers because there was a tweet that got widely shared i think it was last week with a list of different commodities and uh various items and and it was showing the year on your inflation rate the headline standout number was lumber and i keep seeing various tweets relating to that somebody saying uh you know two by four is now seven dollars this is ridiculous um but at the same time the energy uh prices what what also uh have massively arisen but i saw also jose wazenthal replied to somebody saying well what happened a year ago and we know that energy prices dropped uh quite significantly related to the covered lockdown so um have you been looking like which what are the standout uh what are the standout uh signals for inflation that you're actually seeing and is there anything that's been is slightly misleading and i say that because i think sometimes bitcoiners can cheerlead uh some of these figures as an indicator that people should be invested in bitcoin but but perhaps they're misleading yeah and i agree that some of them are misleading and it's one of those things where because it's a sensitive topic inflation there's kind of misleading aspects on both sides uh and that's it so you know the misleading part about some of those year-over-year numbers uh that that that joe was correct about is that you're comparing that one year where commodities fell into a hole right because china just like stopped buying energy stop buying copper they're the biggest buyers uh they were totally shut down uh and then you kind of exploded out of that that big that big kind of you know down part and so the year-over-year numbers are ridiculous uh but for example if you back up and you look at you know commodities over the past 10 to 15 years most of them actually are not all-time highs so lumber is you know that's been that's been like the it looks like a bitcoin chart and then you have um uh gold touched new all-time highs in 2020. uh it's been in a correction but it still touched it uh beef is at all all-time highs but for example the the overall if you if you take an aggregate of most commodities it's actually been in like a 10 to 15 year bear market and just because we had a period of you know in in the 2000s you had a period of you know china had a fast growth rate there was a lot of commodity demand we brought a lot of new commodity supplies online uh and then when china slowed down and the whole world kind of adapted to this you know we've been this period of commodity over supply and so i think a lot of those year-over-year numbers you know basically a lot of commodities are just getting back up to where they were before like oil is just back up to where it was before the pandemic uh there's some like copper that are that are elevated but still not at all time highs and then there are some that are all-time highs like lumber but then the funny thing is if you look at timber right which is you know before it becomes lumber it's timber that's actually you know not that expensive at all it's really about the bottlenecks of turning timber into lumber right so the the you know the the the basically the refining that has to go into cutting that up and and you know getting it treated and so a lot of that is about supply chain issues same thing we're having in the semiconductor industry where you know there's just not a lot there's not enough foundries to make the semiconductors and so on one hand kind of focusing on those year-over-year numbers can be misleading and can you know for for readers that know what those base effects are that could even turn them off of you know they think okay this it this you know people in this industry don't know what they're talking about um on the other hand you know people that are saying there's no inflation you know over especially over these several years are also misleading because you know cpi is a really crappy statistic for the most part and i actually have a chart coming out later today that just shows you know housing has gone up faster than a cpi food has gone up faster than cpi healthcare has gone up faster than cpi tuition's gone up faster than cpi uh you know uh the the cover price of the new yorker magazine has gone up faster than cpi a lot faster and so you know basically we've had a couple deflationary areas like consumer electronics or things that you can outsource to china those have been you know globalization technology uh they've really pushed down the cost for things same thing you know your cell phone can now do what you know 10 of your electronics could do you know a decade ago so that's been that's been the deflationary area but then pretty much anything you can't outsource or that isn't automated has gone up faster than cpi and for most household budgets that's still where they spend most of their money you know housing education for their kids or themselves uh health care costs you know either through themselves or through their employer which eats into their compensation total those are the areas where we spend most of our money and so it's one of those things where we actually have had pretty significant inflation over the past you know 10 20 years but that year-over-year number is still somewhat misleading for how fast it's been some of the things i'm looking at are the producer price index uh which is which is kind of a precursor to inflation uh that's that's been spiking uh you know it's just the overall kind of uh you can look at the bottlenecks in the industry like we talked about the semiconductors uh we talked about lumber uh you know we've seen that in shipping over the past few months uh where just you know there's only so many containers and container ships uh and so we have had various supply chain issues and so that that's how i'm monitoring it where it's often the case that the truth is in the middle and that's what i'm finding here with inflation as well that that we are getting an inflationary impulse from this physical spending uh but it's not like inflation is you know out is absolutely massive uh in that 12 month period yeah i did i did i don't even know if i retweeted it myself i did take a step back and reconsider it and thought is this misleading uh are we getting look there is a fear and a risk of inflation but are we cheerleading this as bitcoin as a way to support our thesis on bitcoin i worry that we do that sometimes and i was trying to theorize with you know what is going on here with lumber is it because house prices are going up that there and i know out in the us for example uh a lot more properties are built uh built using wood is there like an increased demand for house bill building or is it anything else i know for example here because of the lockdowns a lot of people have been doing work on their houses so i spoke to a friend who's a plumber he said they've never been so busy there's so much demand uh and because of that there's demand for electricity electricians there's a demand for uh uh plasterers there's a demand for carpenters so is this just some pent-up demand that could and and peop you know the economy is finding a place for people's money to go because like they can't have holidays you know they're not going out to restaurants and to dinner i kind of wondered is is it part that also is it part pent up demand with the economy the economy starting to pick up again as people come out of lockdown is it a temporary inflationary event based on supply and demand less so than an increase in the money supply yeah so lumber does have some of those temporary issues and so as you point out basically uh you know in many in many countries especially united states there's been a movement from cities to suburbs uh and this you know this big kind of uh grab for for a single family homes uh that that you know in the us at least and some other countries are made up a lot of wood uh and then there has been a lot of remodeling and there's a bottleneck in terms of how many sawmills out there are able to turn lim uh timber into lumber and now there's also a money printing component because for example if you didn't have the fiscal stimulus if you didn't have the the stimulus checks the unemployment benefits then fewer of these people would have been able to afford it there would have been more solvency events and so the prices would not have been able to go up as much as they did okay same thing you know i've often pointed out that over this course this pandemic personal incomes are up even though unemployment's down and that's because we did various aid programs to keep people floating and you know so that allowed them to keep spending and do things like that and so there is an element where the fiscal stimulus was a part of these prices going up but for these these individual things that are going up way too much like uh you know uh semiconductor shortages or lumber uh prices that's that's also due to uh specific supply chain issues that given enough time should be rectified so for example i wouldn't i wouldn't buy a lot of lumber here and hold it for five years because you know there's a you know however long it lasts anyway but basically there's this this has capacity to eventually address itself whereas there are some other areas like say copper where you can't just bring a lot of new copper to market uh and so you know mines take a decade to bring online uh they've actually you know been harding it's been challenging to find big deposits uh and so there are areas where uh there are commodity bottlenecks and actually i find that you know when it comes to economists predicting inflation you know i think the big blind spot that a lot of them have is the the like the long-term say 15-year uh commodity cycle where you have these periods of there's tons of commodity demand so a ton of people go out and find new commodities then they oversupply the market then we enter a long bear market uh and then no one does any no one does any capex or at least capex goes way down because it's unprofitable to you know to do all the expiration and bring these mines up and then eventually you get really tight commodity markets and then you know price starts going up and then you're like oh no and then we're behind on our capex and so you you have to spend years kind of keeping up with that and so that that long-term commodity cycle has a big impact on inflation especially when you also consider different policies that are increasing the broad money supply which is what we have seen over the past year where the broad line supply has gone up a lot and that certainly has been a a big factor for prices so it's a mixed and complicated a more nuanced picture than people may be uh maybe believing that that's happening there that that's fair so are there any can can you go back to what was it you were referring to a moment ago yeah they said there's something you were looking at that's the precursor to inflation uh the producer price index okay what what is that telling you it basically yeah it's basically kind of like you know what does it cost producers to make things uh and also you can look at uh you know uh different uh there are surveys that are done every month and also you can find out that companies are you know talking about inflation in their supply chains uh and so basically before inflation reaches consumer prices it's often you know shows up earlier in the supply chain where it costs it you know producers are selling their products to other producers more right so a company buys from another company uh those prices start going up and if the company can't pass those prices on the consumers then they get a margin squeeze uh and so uh basically there's there's kind of like precursors you can watch about inflation and some of those they tend to be bigger swings than than the final number uh and so during a during a recession they can fall a lot more than inflation can and then during booms they can go up a lot more but they generally tell you that the direction of what's what's happening with inflation you know a couple months in advance uh and so that that's kind of the stuff to watch and again part of that is related to supply chain issues that are that are kind of localized due to you know we made an unusual a number of changes over the past year like like our housing choices suddenly changed you know more rapidly than normal things like that but then it's also due to the increase in the broad money supply uh and so that those are a couple things worth watching as it relates to you know estimating inflation a couple months out and what's the producer index showing you last i checked it was it was something like seven percent year over year uh which which you know that that points to uh cpi likely touching over three percent uh potentially touching over four percent uh you know as we get these these spring reports and so april inflation will be reported in may may inflation reported in june uh and so we'll see what the headline numbers are and and some of of course like you know that the bond market and other big markets kind of care about the official cpi character uh numbers even though those generally understate uh based on you know the typical basket of a household expense it's the cpi a fair measure of inflation because one of the things i struggle with inflation is i think it's one of those things that's quite relative um it it may be a good measure of the general cost of living the changes in the cost of living month or month for people but for example someone like my uh my children doesn't really affect them but what does affect them is if house prices accelerate to such a rate where where maybe they're in their 20s and they will want to buy a house it's really pushed it out of reach for them um so is the cpi a fair rate of calculated inflation should we have multiple calculations i think there should be multiple kind of measures of inflation and in some sense there are i mean that's why there's things like producer price indexes are useful uh you can also just look at you know what is the raw you know commodity index doing so it's what are commodity prices doing that's one of the big factors of inflation uh generally you don't have strong inflationary periods without commodity prices also uh going up a lot uh but like i said over the past decade the problem is that you know the thing the big areas of spending that most people spend their money on have gone up faster than wages uh and have gone up faster than the official cpi and so that includes housing that includes food that includes you know healthcare tuition child care things that you can't outsource or that are not deflated away by by technology and smartphones and things like that and so whereas you know on the other hand your tv got cheaper your computer got cheaper but those are generally pretty small percentages of a household budget and so some of those other you know things are really important another factor that's weird about housing is that you know obviously cpi does not really take into account most asset prices so it doesn't take into account asset price inflation in the stock market or private businesses it only partially factors in real estate but it does it in a weird way and so you actually have a thing where you know houses have gone up faster than inflation in most markets so so they've outpaced inflation but then for example because we've been in this kind of multi-decade trend of lower lower interest rates including mortgage rates the actual monthly payment to afford a house hasn't really gone up that much uh even though the cost of the house has and so that can that can push down kind of the quirky wonky uh you know the the cost of owning a shelter uh however it's unfortunate that that doesn't change the fact that people stop to take on more debt relative to their income in order to afford that house uh and so basically it just means that you know of of the monthly kind of you know uh plan that they're doing more of that at least goes to the house then goes to interest uh to the bank uh but it's basically those those policies are still propping up uh housing prices and so an ideal case would be you know to have have for especially for new people entering the market for housing prices to be you know cheaper than they are especially on a a ratio like you know housing price to to median annual wages is there any risk whereby we come out the long-term debt cycle and i don't know what point that would be but interest rates will then start to go up and people might be trapped with payments they can't afford on houses they've taken on with these low interest rates is that a is that a serious risk is that a serious concern for central banks when setting interest rates well that was a huge that was a big factor in what caused the subprime mortgage crisis uh you know back in 2007 which was that these people they bought it you know they were there's predatory marketing you know really dumb like uh you know uh things by banks and then and then people bought into houses they couldn't afford uh and so a lot of what the way they did it was they had a really really low uh variable rate uh and um and so after like five years that had like a contract of thing where it could bump up to a market rate and suddenly they couldn't afford that house anymore uh which they really couldn't afford it from the beginning but now they literally couldn't afford the payments uh and so that that triggered this cascade of defaults that happened uh and now so that's not a problem for people that have say 30-year fixed-rate mortgages or even 15-year fixed-rate mortgages i know different countries all have different kind of practices for what is normal for for a kind of a housing financing scheme and so it is a factor for variable rate mortgages um and so generally after long-term debt cycle usually interest rates normalize but there's always a big question of of what is you know what is what is a normal interest rate and if obviously it changes based on on what society is doing what demographics are like whether there's a period of kind of uh you know technology boom happening like you know there's p technology doesn't really happen linearly right we have we have these big discoveries like you know that using oil or the internal combustion engine or electricity or the internet and smartphones or as you have these kind of bursts of of of growth and that can kind of you know temporarily suppress uh you know costs for for you know a number of years uh but over time you know interest rates you know should eventually normalize but i don't i wouldn't expect at any time very soon uh and it's one of those things where you know if you had a theoretical environment like you say say the free banking era in the united states where you didn't have like a centralized yield setter then you have different institutions setting different rates which is actually kind of what we see in the in the you know the crypto lending markets where you have different entities setting rates some of them are more conservative than others and so you basically are willing to accept a lower rate other ones are you know push that more and so you kind of saw that in in banking systems uh in some in some periods of time whereas lately we've had a more centralized rate setting mechanism uh which doesn't necessarily correlate with the actual you know what the cost of capital otherwise would be right okay last question on inflation um because you mentioned there the producer rate uh at around seven percent would hint to a maybe three or even four percent cpi inflation rate what numbers are concerning i know it's for different people what what numbers would be starting to say i don't know if it alarms you lynn but makes you really kind of think okay there's a there's a problem here um uh what numbers do you think concern the government or do they not i mean is it is this what we've talked about previously where they want higher rates so uh they can clear their debts um what numbers perhaps should people listening be concerned about it's yeah so for me it really depends on yeah it depends on what assets you are focusing on and so you know from what i'm looking at the math shows that you know about three percent cpi this spring is kind of just the the entry fee right so that's that's like from base effects alone and and kind of moderate inflation you should touch around three percent now if you were to get five percent yeah that that's that means there's like there's more than uh people are expecting uh and so there's there's numbers like that to watch out for now from the government perspective you know they uh the obviously different different central banks have different policies right now for example you know the the they generally are looking for more inflation and and it's their it's their way of measuring it and so for example the federal reserve uses core pce uh which you know kind of like the cpi basket is not a you know it's not a fantastic gauge of inflation but from their perspective they want that to run hot and so their the fed's long-term average average annual inflation target is two percent a year uh the way they measure it uh it generally undershot that for most of the past decade uh and so now they want to overshoot it you know a certain period of time so that they can have it so that it you know in hindsight average two percent and that's again that's the way they measure it and so the challenge for them is you know it looks really bad if say pce is like three percent and they're say we're still going to hold interest rates at zero right because that means if you're if you're holding money in the bank then based on the way they're measuring inflation you're you're losing three percent a year um and so there and also like there's concerns of well if okay if inflation gets out of control you know is this is the fed gonna let that how how are they gonna let it run and so they have a delicate balancing act of trying to they're you're gonna push the narrative that it's transitory uh and uh they're also gonna push the narrative that they you know quote unquote have tools uh in case um you know inflation gets out of control now the problem is that their tools are also things that would crash a lot of these bubbles that we see and that so that's that's that's kind of goes back to how you know as we look later this year we have to be kind of you know we have to be mindful about some of these central banks maybe trying to taper some of their some of their activities because they they could start causing some some fun activities in the market you could say uh where where you know the bulls and bears gonna wake up a little bit and things don't operate so smoothly uh and so that that's how i'm kind of watching that play out and another factor is that you know when we look at inflation it's the idea of transient inflation but that implies that prices go up and they come back down right so that that's what you that's what you think of when you hear transit inflation but what history usually shows is that inflation often comes in bursts so the rate of change of inflation is transient but then it it inflates but then it stays up to that level and it's like a new plateau so for example if you look in the 40s you had three inflation spikes and they were they were transient in terms of you know what what the annual inflation rate was so it didn't keep accelerating but it never came back down it just it just went up to that new level and stayed there and of course you can have individual things come back down like you know for example i think lumber will not be at this level permanently as an example there will be individual things that come back down but for example we're starting to see companies like coca-cola or proctor and gamble uh raise prices and i don't think you're ever going to see those you know they're not going to be like in 2022 like oh the pandemic's over we're going to go ahead and reduce our prices no we've we've permanently increased the amount of money in the system and so a lot of these prices will be sticky even if they don't go up at the same rate every year well and we're also seeing shrink-flation a really good tweet the other day an email newsletter from marty bendt where he shared something from a guy he was shown i think it's just a packet of kitchen roll that had gone from 160 sheets down to 140 sheets very sneaky and easy way of getting away without increasing your rate so you see much of that as well yeah that one there are analysts uh pointing that out and so i know jason burak has has pointed that out a lot straight the idea of shrink inflation uh and there are a bunch of analysts that follow that that one you know the tricky thing about that is it's hard to measure uh and so in theory the cpi baskets are supposed to adjust for that sort of thing they're supposed to have a like by like you know kind of comparison uh but in practice you know i don't trust that to actually be happening uh and so i even posted a thing where you know the economist has the famous uh big mac index where they just track the price of a big mac uh and it's it's iconic it's funny uh but also it's it's useful in the sense that it requires multiple commodity ingredients uh plus labor and energy to make it uh and so it's actually not a not a terrible you know inflation measure at least at least kind of one of them uh and so that has gone up faster than cpi it's gonna you know not not quite as fast the broad mine supply has gone up but it's gone up faster than cpi but then of course some of the questions from commenters is like what was the big mac the same as it was 30 years ago you know and so you know probably not uh and so you know if they if they if they turn around the margins if there's less beef in it you know if there's if there's if they've added a couple processed ingredients things like that and so it is really hard to you know track a perfect um you know kind of apples to apples comparison and that's one of the reasons that one of the rawest commodity consumer price inflation measures is raw commodities because that you know copper is still the same as copper and oil's still the same as oil and gold's still the same as gold and so that's those input costs are important to watch and that's one of those things where we have gone up a ton in the past year uh but that we still you know the 2010s were a decade of consolidation and bear markets for commodities and so the the risk is that as we look out to 2020s this whole decade i i think we could see another decade that looks more like the 2000s or the 70s or the 40s we have a rise in general commodity prices wow okay the next topic i wanted to cover with you is uh biden i know you've touched on his uh tax proposals over the last month but generally speaking i mean he's been off in office for a few months now uh have you got a read on how he's doing have you got a read on uh the economic policies from uh from his um i don't know what you would call it in the u.s i mean we could we call it the you call it an administration right um what's your read on the performance of the administration so far you're getting indicators of policy direction well overall i mean they seem to be trying to channel the the fdr concept of kind of government going big on uh you know aid and you know fiscal spending and things like that and that's that's that's that's obviously going to be a controversial thing because there's some people that are that are loving that some people that are that are hating that um and you know and so we've obviously the vaccine rollout united states has been one of the most successful ones so as the united kingdom uh and so you know they have that and that was also set in praise before so they continued to they accelerated it uh that that's been you know that's been uh you know one of the areas where the united states has been doing very well in terms of uh you know the fiscal spending the big controversy coming up is that uh how we define infrastructure uh and so it's it's actually a pretty bipartisan issue in many countries including the united states that we need that we need some degree of infrastructure spending that basically united states for example you know most of our our interstate highway system was built in like the 50s and 60s uh and it's just it's a lot of those bridges are still the same it's just kind of like it needs a lot of work our roads are not very good if you look at kind of third-party measures of infrastructure equality around the world the united states is is you know pretty weak in that regard um and so uh overall there is infrastructure work to do to give you know uh you know a lot of those uh materials better uh replace lead pipes uh that you know people drink out of uh have faster internet uh more widespread access to fast internet uh things like that that can actually boost productivity so you put like a dollar in and you get like three dollars of economic activity out because you're allowing people to work more just just a question on that is there also another incentive uh to to invest in these infrastructure projects during tough tougher economic times just to create employment um uh to create jobs i know that's something the the that's happened quite regularly in the uk and during recessionary periods we tend to have seen our government invest in infrastructure projects yeah the general idea there is that you know that tens those recessions tend to be periods where you have a lot of people looking for work uh sometimes you have lower prices uh it's not really this this time it's not really the case because of the you know the aid we've had but in most recessions you have lower prices because there's less demand for commodities and so they come and say well if we're going to build a hoover dam this is the time to do it uh and so you get people to work you you make you make use of the fact that there's kind of that extra capacity in the system and that kind of goes back to that that classic economic idea of kind of trying to have a counter-cyclical uh spending policy uh to smooth things out uh and now the the the kind of the controversy and this current uh the current administration is how you define infrastructure and so in addition to those obvious forms of infrastructure there's also things like child care or or things that you know a lot of people don't have access to child care and so that can actually impede their ability to work and so there's a desire to like put money into that to basically expand child care make it more affordable for people but that doesn't fall into the traditional idea of infrastructure and so uh the the basically the way the politics are working united states right now is that they're able to pass things they have a tightly divided senate so there are 50 people that caucuses with republicans 50 of the caucus with democrats and then when that's the case which is very rare actually historically we have that perfect 50 50 split the vice president is the tie-breaking vote uh so that that's obviously the democrat uh kamala harris uh and so that the thing there is that there are you need every single democratic vote in order to do that so if even one is not on board uh that person has a lot of power and so there are there have been uh especially one uh kind of centrist democrat that has kind of put the brakes on some of these programs uh and then there are a couple other that are also you know there certainly if you were to get into things like raising long-term capital against taxes from 20 to 40 percent uh there'd be a handful of democrats uh that would that would not support that and so overall you know the big question later this year is uh and kind of all the way through the midterms is to what extent will they be able to pass an infrastructure bill and so the republicans are proposing you know kind of a more strictly infrastructure build that's several hundred billion dollars and then there's biden's bigger plan which which which broadens the definition of what infrastructure is uh but that has some challenges getting through the senate we talk about some of these tax proposals as well so the u.s corporate tax rate from 21 to 28 am i right i i've read this in your report but i haven't actually researched the number is is this taking it back to before donald trump didn't donald trump reduce the corporation tax level oh my god yeah it brings it to the halfway point and so the headline tax yeah the headline tax rate was 35 uh uh under trump it went down to 21 and so this would bring it up to 28 which is the midway point uh between those two numbers uh and when donald trump uh reduced the corporation tax is this uh is this a what was defined a trickle-down policy that if they're paying lower tax rates they've got more money to invest more money to grow the economy like was there any impact on that scene from donald trump reducing those rates uh so that's that's the idea of that kind of policy uh that that ideally they would invest more uh one thing i read at my newsletter back then it was years ago i was like basically most of that is going to go to share buybacks and dividends because we actually had we had previous examples where you know there's a say uh like under under uh bush for example there was a tax holiday that let corporations big money back and that flew into share purchase and dividends because you know in many cases corporations are already investing the amount that they think is appropriate uh that basically they have a reasonable confidence that they can build a new factory and that they will be able to have demand for that those products and services and that they're not kind of you know not investing for lack of more capital and so when you when when they have extra capital uh they put it into dividends and share buybacks uh which is very good for say me as a shareholder uh and so you know google for example just had an earnings report and they announced that they're going to do a 50 billion dollar uh you know share buyback and that was great for the stock price uh and so that tends to not be an area that has a lot of uh you know economic impact at least long term you get that kind of growth spurt for a year when everyone's excited but that's not super persistent and it's one of it's one of those challenging things like in general i'm in favor of low corporate tax rates but that's not the same thing as as saying that if you lower it we're going to get a ton new jobs right now i just think uh you know different uh places have to be competitive to make sure the corporations want to be in their jurisdiction uh and you know kind of allow them to function uh but it's you know this is how it works out where where some types of of tax cuts have bigger impacts than other ones and so for example if you cut payroll taxes you know we've had this this thing over the past you know couple decades uh part of the reason that the you know the big fang technology stocks have done so well is that they're not very labor intensive except for amazon uh and uh and so we have a general if you look at a long-term trend corporate tax rates keep going down right so so it's not even just a headline number the actual effective corporate tax rate after the headline number and various loopholes and deductions and things like that that keeps going down and down and down whereas payroll taxes have gone up and up and up and then have gone sideways and then also the cost that they have to pay for their employees health care keeps getting more expensive and so we have a general trend where it's actually it's very costly for either a corporation or a small business to hire someone right because we we tax we have high payroll taxes on them and their their cost of supplying healthcare is extremely high uh and so whereas the other hand the actual kind of bottom line uh is taxed very lightly and so if you happen to be uh not a labor intensive business like let's say you're you're apple all right and so you know a rather small portion of your expenses go to labor uh then you know you that's basically a very good situation for you you can do very very well in that environment same thing for say netflix right so netflix is mostly this digital company uh they have very few employees per per you know revenue that they get uh and so that benefits those types of companies on the other hand if you're a labor intensive company uh then you're actually your tax rate is kind of high and you know you when you include those those payroll taxes and other sort of of kind of burdens and so that's that's why it had been an environment that's actually been challenging to hire people or for people to keep a big percentage of their paycheck so the next thing uh is the long-term capital gains tax uh rising to around 40 percent uh i know this isn't particularly popular you don't think it will pass through but do you get some indication here about the direction that the the administration's taking rather than whether this policy itself will get through or do you think there will be a compromise and what's really going on here because it's this continual gradual um increase in taxes across the board but a tax is really going to solve the economic problems that the us government has right now so in general you know that's that's a very big jump that they're proposing which is why i think it's it's unlikely because if you go back to that 50 50 split uh you know there'd be a bunch of of uh you know senators that do not support that large of an increase my base case assumption would be that they'll probably get a small increase through they might get you know a 25 headline corporate tax rate they might get a bump up to 25 maybe even 30 percent long-term capital gains taxes i doubt they're going to get that 40 number especially because when you factor on state taxes uh you know there are some states that would be over 50 percent uh for those uh and and those include some of the some of the blue the blue states uh and so it's gonna be tricky to get some of their their senators on board or even some of their representatives on board uh for that type of increase uh and so the general trend we're seeing uh you know with this administration is they want to say tax the one percent at a higher rate uh and then they want to provide you know more more support for for you know those other programs we talked about like infrastructure or child care services like that and obviously when you have that kind of dynamic you you can have that controversy between people of different political parties uh and kind of you know getting something like that through the senate uh and so it's you know that's it's one of those challenging political things yeah and it also feels like there's a very kind of interesting social like yeah let's not say experiment but there's this interesting kind of migrationary test going on in the us right now where people are realizing hey i can just move probably a bit more than they realize you know pre-pandemic where most people were fixed due to where they were we've had this move to people work well certain companies being able to offer homework a lot more but also people just a little bit better for some of the major cities and we've seen people moving to the likes of florida and uh wyoming and uh texas are you seeing uh an impact of this is this something you're measuring or looking at it at all yeah there has been a migration uh towards some of these more suburban uh or some of these uh you know sunnier or lower tax state that that's certainly been happening another thing that's the kind of opposite anecdote to that uh you know economists have generally been surprised because a lot you know in economic models you kind of always assume like perfect rationality like everyone's a robot and just kind of optimizes uh what makes sense and economists have all like there's been this trend where people move for jobs less than you'd think and so you know if if your local factory shuts down you think okay people will move to where the jobs are uh but actually a pretty small percentage of the move and that's because in practice it's kind of that network effect where you know you're say you say you have a spouse right and and so they still have a job and you say you lost your job or you uh you know say you work mobley and you can go somewhere else well unless both of you can move that that's a challenge and then of course if you have parents in the area so say if a kid and and the grandparents help take care of that kid sometimes uh are you gonna have them move too uh same thing with friend networks uh and so obviously over time as we get more digitized it's easier to move it's easier to keep in touch with people it's easier to work from different locations uh but it's not as easy as you know a lot of people are able to move are people that are you know that have the means to do so that they have the they they basically have the money to move they have the money to they have the option to work from home uh they they have that kind of more mobile choice whereas a lot of people are actually it's sticky and it's actually challenging to move because it's like you can't get everybody kind of separate from their jobs at the same time go find new jobs and it's actually a pretty big challenge that's fair okay i'm going to do a bigger bit of a switch now because there's a whole another topic i want to ask you about and this was somebody more asking me to ask you about this but we often hear that the gold market is uh uh manipulated by paper gold and i've seen some commentary uh regarding there isn't enough gold to support all the paper gold claims i mean i don't know about this myself i'm sure something you've looked at um i think something we would possibly therefore care about is uh paper bitcoin and claims to pay for bitcoin and is there a chance that bitcoin could be manipulated in the same way um sorry that's i'm not sure if there's something you've looked at at all it's something we should be concerned about i think it's something to watch and so yeah basically when it relates to when it relates to gold the paper market is quite large relative to the physical market and so one thing for example that you see during these big price movements is that often you know like let's say in march 2020 right so we had a big sell-off across the board gold fell uh you know the paper gold price fell but if you actually were buying gold coins uh they either stayed the same or got more expensive and were actually hard to find and so if you want to get if you wanted to get gold in your hand in a week uh that that price didn't go down whereas if you want to buy a gold etf or buy gold futures uh where you you cannot redeem it uh and you know or at least it's it's very challenging they basically purposely make it hard to redeem it so some etfs you can't redeem it at all uh futures you you can uh but it's kind of like the exception to the rule right so it's like this long process to actually go through and do it uh and so uh those paper markets are meant to make it more efficient but they also means that that more people can have exposure to gold or think they have exposure to gold than they actually do so for it's one of those things where it's like musical chairs where if everybody demanded physical gold at the same time there's not that there's not enough gold for that all to happen at the same time and so that has expanded you know basically you have that flexible supply to meet that perceived demand and then most people are satisfied with that they think they hold gold and it's one of those things where you know most decades that works uh but there have been periods in history where like a gold pool can fail uh because you know everybody kind of demands at the same time uh now with bitcoin it's easier to settle right so you don't have the transportation cost you don't have the auditing uncertainties of you know proving a bar is real uh and so because bitcoin is has you know that technology allows it to transmit more uh it's there's less of a reason to have it to be so centralized uh and and there's less friction that kind of dissuades people uh from being able to you know do that approach uh and so you know as it relates now the the paper market is a smaller percentage of bitcoin's market capitalization uh then is the case for gold and so that's that's something to monitor to kind of see that that continues to play out or if if it becomes more and more paper-ized for lack of a better word okay let's talk a little bit about bitcoin and then i'll let you go um i'm gonna quote you here just took something from your report interestingly bitcoin both broke out and broke down since then which was somewhat expected uh you set two different uh price ranges uh uh so i guess i guess because we're in a bull market you your expectations that we would break out but if we didn't break out then perhaps support would fall but we've been through both my view is a little bit slightly different um i've been watching these liquidation events uh with interest because i follow one of the the bot alerts that alerts you at the point where there's a liquidation event some points my twitter feed is completely overtaken by these alerts like it's incredible the amount of liquidations happening and i'm just wondering is there potentially too much leverage as the too many people trading with too much leverage and too much risk too much risk in the system and that's that's making it easy pickings for those who can move against them or counter trade them yeah and so yep going back to that that point about the breakout or breakdown yeah my basic like basically we were watching this kind of bitcoin consolidation play out and so if you start making lower lows that's not good for kind of the technical signal uh you obviously want to start making higher highs and so there are certain kind of uh points i was watching and i was like okay if it breaks below this level that's a little bit concerning if it breaks above this level that's great my base cases it would break out and then the funny thing that happened was it broke out and then it then it broke and then it went below the range and then it so i was like you know this is actually a mixed signal here we have to keep watching this and so that one of the risks to watch out for is that you know during the 2013 that that kind of previous bull market the one you know two bull markets ago you had that kind of double double cycle anyone who looks at that long term log chart you had a big blow off top then you had a really deep and long correction then you had another one and so that you know the question of this cycle is is it gonna look like 2017 where kind of just keeps going up with you know 30 corrections uh or is it gonna have a a much weirder kind of pattern where it goes up and then it has like a you know six month or longer kind of big correction and you know just because you know we have investors that are that are price sensitive and kind of you know they don't want to have a big drawdown it's just kind of useful to watch that and see what's happening and obviously different different people have different um characteristics for how they want to trade it or huddle it and so you can have like a strategic holding but then also you want to focus on what the tactical price is likely to do over say a six to 12 month period uh and so i just tracked that for readers basically see how does this asset class compare to what other asset classes are what are the risks you know how how bullish are we would say a six month view uh compared to the long term view and so generally what we saw with this with this latest liquidation was was mostly good news in the sense that we cleared out some of the leverage uh and it bounced off of kind of those those areas we'd want to see it bounce like where you know there's those metrics that determine like the sopr like the that ratio the spent output profit ratio do you want to explain what that is uh it's that it's that measure that shows basically if that starts going below one it means that that a decent amount of people are now selling at a loss so they're selling below their cost basis and generally if you look at bitcoin's history that only happens uh in bear markets usually in bull markets uh when you go down and touch around one or slightly below one that tends to be a bottom of a correction and you start you know because very few people are willing to sell at a loss in a bull market and so if that were to start breaking down you say okay actually now we might be in one of those those those bear markets where you're kind of you know not having that that very strong uptrend uh but this latest correction did you know kind of bounce off that that range once once that ratio got slightly below one which was good to see uh and so you know i i still remain bullish on bitcoin in a tactical sense uh let alone that that longer term sense uh but you know there are certain levels to watch to make sure that that thesis kind of stays intact and i think you know these these inflationary base effects and things like that over the over this next quarter are likely to be beneficial for the protocol for prices in general uh and but we i think as you get later this year there are some challenges related to you know potentially broad selloffs that could occur in asset classes uh just because so many asset classes have been been bid up to high levels there's so much speculation and things like you know we saw the nft craze we saw the dogecoin craze in traditional markets you see you know just tons of securities that are trading at extremely high valuations uh and so if we start to get some degree of tapering uh or some degree of of let's say there's gridlock and there's there's no fiscal spending coming and so suddenly some of the justifications for the market to just keep going up and up and up start to you know not be there anymore uh then you could get kind of a broad self and asset classes which could you know circle back and touch bitcoin as well but this is why i think the uh part sale of bitcoin by tesla is super interesting um i think it triggered some bitcoiners and thinking thought elon you i thought you were a hotline you know you meant to huddle forever like the rest of us uh and also elon claiming this was a test of liquidity which i i know well you laugh at it and i i part by it and i was discussing this with dan held yesterday um i've got a slightly different theory around it in that i don't think elon musk cares about bitcoin the way big some bitcoiners do i think he cares about money or cares about the impact of a crappy dollar or inflation against his ability to run his business uh i think i think that's an important point i could i i can see why he has the incentive to buy bitcoin because of that but i could also i also think his primary his primary concern is tesla spacex you know his various company and ultimately that that whatever the value of the bitcoin he bought is now i mean he bought 1.5 billion say it went up to 3 billion i don't know whatever but i can imagine he's just sat there like some uh some docile hodler but yeah waiting for a 10-year thesis to play up to seller i think he's him and his team are very much probably analyzing looking at previous cycles and saying well look this bitcoin we're holding you know it could be flat now it could go up to a hundred thousand we should start planning to uh to exit part of our position because we need these funds to run our business i don't think that is a i don't think it's beyond the real possibility that he's looking at purely as a trade and how do they maximize this trade over a year versus him being a philosophical long-term hodler yeah i think you know yeah i don't i don't really buy the idea that it was like a a liquidity test uh because you he tested liquidity when he bought it that was kind of a big a big test and you could do metrics to analyze what what liquidity should be i think it goes back to you know it's actually hard to say because the funny thing was he only sold part of the position uh and bitcoin was only part of their cash balance to begin with and so there's actually you can phrase it in such a way that it's a big position or a small position for them and what i mean by that is you know the the funny kind of meme out there is that that tesla made more money by buying bitcoin once than they made in their entire history of net income of selling cars because they've always been operating at a loss or you know very recently they're kind of in that break even mode where if you include the tax the the basically the credits they get for for renewables they're kind of that break-even point and they're starting to report an actual profit mainly from those credits uh but they basically made more money uh you know from bitcoin from this whole business selling cars for this whole time and so it's kind of a funny metric in that sense on the other hand you know they weren't like micro strategy where they you know microsoft you put like their virtual their entire treasury into bitcoin uh whereas tesla only put a a fraction of their cash balance in any way uh and so i i i'm kind of surprised that they were willing to sell it so quickly because you'd think that you know that that bitcoins their hedge that they're just kind of gonna let it run and i figured maybe if it goes up 5x or something like that they might be willing to sell it uh but it's kind of funny that they that they trimmed it after you know kind of a 2x or whatever the number was i don't even think it went up that far since their buying period but i could be wrong i think it's somewhere in that 2x area and so yeah we'll see how it plays out i mean elon claimed that he didn't sell his personal holdings uh he claimed that tesla was testing liquidity uh you know we'll see we'll see how that plays out we had another announcement of a company that added bitcoin to their balance sheet as well yeah that's about two percent though right yeah and i think that's that's going to be the norm i mean that's what square did you know the the number of companies that want to be like microstrategy i think are very few and far between uh whereas you know a lot of those companies we talked about before if cpi is is let's say even two percent uh and they're getting you know near zero percent on their cash or t bills which is where they hold their their corporate treasuries they basically have a melting ice cube uh and then there's always the risk that inflation goes up to like eight percent one year and you know i mean like like basically there are tail risks to their their big cash positions uh and so if they put a a small percentage in a bitcoin and that goes parabolic uh well that that kind of you know defends the rest of their cash position uh and yet if bitcoin goes to zero uh then it doesn't really care because they put two percent in uh and so that that's the risk reward that a lot of those corporations are kind of attracted to uh and so uh that that's i think that's what you're generally gonna see for for corporate treasuries because most of which won't be hardcore philosophical toddlers like like sailor yeah i mean i i think sailor is i think in you know i i don't really like answering for somebody because really only he knows but just just thinking it through i think originally it was an idea and he's become uh quite of a a vocal supporter of bitcoin and i think he's become more philosophically driven over time but but he also there is a game theory game theoretical incentive for him to promote bitcoin as well so i'm not always sure with him but i i i i mean i wonder if he's kind of like i wonder how much time he's spending on bitcoin versus microstrategy these days and and yeah is there the incentive for him to work on microstrategy much anymore you know he's probably way more incentivized to work on bitcoin and promote bitcoin in some ways so i don't know right it's all super interesting okay final question gbdc uh premium is down to minus 19 which um uh seems a lot and quite scary for for some people and some of those have been critics of people who've been trading the gbtc premium but you're saying that makes it look attractive because help me understand this lin so i'm pretty sure that uh grayscale holds the bitcoin uh in reserve that support the price if there is the if it's such a negative that seems like um it seems like a good buy because you're no you don't own the bitcoin as such but you're you're essentially buying something that is not it's being massively undervalued essentially yeah you're buying something you know 80 cents that they cost a dollar yeah now now so but it depends on what your purpose is so for example i i like i like self custodian bitcoin for example it's one of the pros of it uh but for example there are people say you have a roth ira uh you know that's an american like a retirement account for example we over to the brokerage uh you know you can stick gbtc in your in your roth ira as a percentage of your assets and that gives you bitcoin exposure uh that's tax-free uh and you know so that so gbtc used to be a very unattractive vehicle for that because you basically would be paying like a 30 premium over bitcoin to have the privilege of having bitcoin in your roth ira now you can buy it at a discount and it's not the same thing as self-cussing bitcoin because you do have counterparty risk you have to assume that there's not like some catastrophic uh theft uh of gbtc's uh bitcoin uh which is you know it's it's unlikely but it's it's not another realm of possibility uh on the other hand you know for for people that have been you know investing in closed end funds for a while these discounts are not unusual uh and you know people are kind of used to arbitraging them uh and so that that's i'm kind of approaching it like that where i look at that and say you know there are ways that the that you know gbtc can do to to eliminate that that almost 20 discount it doesn't mean it can't go lower i'd be surprised if it went below 20 for a long period of time but you know we've never really had this situation bitcoin before so it's you know it's possible my overall case is that i think that's the market sending a signal that gbtc's fees are too high because you know back when gbtc was like the only game in town they could get away with charging pretty high fees uh and having a premium and people would still you know uh pay for that but now that you have a bunch of new funds uh you have a canadian etf you have a bunch of other ways that people can access bitcoin in addition i mean the exchanges and and these other platforms like swan and there's all this basically the ease of buying bitcoin has gotten better and so the the the kind of selling point for gbtc to exist in the charge as much has gone down and so if they were to reduce their fees as possible that would that would uh you know reduce the discount that people are paying and then in addition the the long-term thing is that if they if they do get permission at some point to convert to an etf uh that would eliminate the um uh you know the the the discount and so you'd have you know practically overnight you'd have a you know if you go you'd have like that big gain there uh and so it's kind of an arbitrage on basically the probability of etf conversion or a fee reduction there's also things they can do like they could uh like sell bitcoin and then buy back gbtc shares that's what some closed end funds do say they hold a basket of stocks and for whatever reason that whole basket of stocks is trading at a discount to nav that's it's pretty deep they can sell some of their shares and then buy back units of their own company and that's actually creative to people that that own it uh and so there's this there's kind of those wonkish things they can do there if the if the discount gets deeper and deeper to the point where it gets silly and so it's kind of something to watch for people that care about kind of arbitrages over time brilliant amazing update lin as ever i always learn so much for you okay cool well listen i'm gonna let you go um i uh once i had something else to tell you what's that gonna tell you oh you're not gonna be in miami are you that's right not this time no not this time not this time well look hopefully we'll see at some point uh in the u.s this year um i've found a way to get in i'm going to be in the u.s in a couple of weeks very excited about that so nice congratulations thank you thank you well listen have a great month and i will see you i'll see you in may yep sounds good bye you

Channel: What Bitcoin Did

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Keywords: Bitcoin

Id: 5uG_deqyFZs

Length: 59min 35sec (3575 seconds)

Published: Mon May 03 2021