#1010 - Will Inflation Bring Out the Fed Hawks? | with Mike Alfred

0:01Picture yourself on a beach, retired early and enjoying financial freedom. If this is your dream, then now's the time to level up your investing game, and Real Vision can help you. We arm you with the knowledge, the tools, and the network to succeed on your financial journey on your own terms. Take control of your future and visit realvision.com forward slash free. That's realvision.com forward slash free.

0:37Will inflation bring out the Fed hawks? Hi, everyone. Welcome to the Real Vision Daily Briefing. I'm Maggie Lake. With me today is Mike Alfred, founder and managing partner at Alpine Fox LP. Hi, Mike. It's great to have you back on the Daily Briefing. Thank you, Maggie. It's always good to be here. So you're on our platform often. It's been a little while since you've been on the Daily Briefing with us. So just as a refresher to kick us off, just sort of talk about your approach, what you focus on, and sort of the timeframe you're usually operating in. Sure. Yeah. So I have a hedge fund called Alpine Fox LP, but that's really just one of the things that I do.

1:11I invest my own money in private companies as well. I sit on boards, pretty active, engaged investor on the governance side, including serving on the board of Iris Energy, which is a NASDAQ listed, a Bitcoin miner, tickers IREN. And actually they just changed their name. But in the fund, I'm really focused on long duration value investing ideas with a focus on like real point-to-point investing. So I don't really care so much about what happens in a month or in a quarter. I'm more interested on what happens across two or three years before resetting. And so historically, I've covered healthcare, energy, staples, traditional tech, pretty much any sector that matters.

1:51But for the next year and a half or two years or so, I think Bitcoin and the sort of the crypto ecosystem with a particular focus on infrastructure providers, I think is probably one of the best risk-adjusted opportunities on the planet. So I'm spending a lot of time there, but of course, also eyeing out of the corner of my eye, how cheap healthcare stocks look and what's happening in the energy complex, et cetera. That's awesome. We'll unpack all of that. But I love that because it's, I mean, first of all, we're in a situation where I think there is a lot of conversation about whether the longer term trends are changing.

2:26Are we in transition to a higher inflationary, a higher rate environment? Are things shifting globally in terms of de-goldization? So there's a lot of big macro trends that I feel like everyone's paying attention to right now. And there's a lot of debate and division over. And then the fact that you look across crypto and digital assets is fantastic as well, I think, for this audience, because everyone's at the point where whether you're sophisticated and you've been in the space or you're new to it, And now there's an ETF and a way to access it if you weren't able to before, where people are looking at this and looking at things against the macro backdrop and saying, what do I need to do?

3:06Should this be in my portfolio? Should this be something that I am looking at or I am educating myself more on it? So you're at a great cross-section, I think, for us right now. So let's start on maybe the macro backdrop first. And we have all of this inflation data coming out this week. It's going to be a really important week to get a gauge on where we are. And it looks like rates, everyone's focused on rates again. We've seen that Treasury yields back up as the market's sort of rethinking the Fed. What are you expecting on that front? So you've got to unpack a lot of things there. I mean, obviously, back in October of the last year, we're at 5 % on the 10 year.

3:52And there are a lot of people that were way overly bearish at that point. I was not one of them. Go back and look at my tweets. I thought people got two negatives sort of right at the bottom. And I kind of said, look, like the yields are going to back off here, right? There's a lot of reasons for why that should happen. But since then, you know, we basically bottomed out. I think it was like 3.8 % or so in December. And we've been rising all the way through this year while the S &P is going up, while Bitcoin is going up, while a lot of risk assets are going up. And I think what that says is that rates are still not too high.

4:27And so I'm not really that concerned, to be honest. I think in general, inflation has sort of come down quite a bit from the peaks. I don't see major spikes outside of very short-term oriented things like a geopolitical problem in the Middle East leading to a spike in oil prices for short periods of time. It seems to me that enough of the US economy, for example, is slowing down at this point that inflation is more or less under control. And I think the bigger picture issues right now are the fiscal issues in the US, right? So the size of the debt, the national debt, the size of the deficits, the amount of money that was sort of pumped into the economy previously.

5:06I think there's a lot of focus on the Fed and maybe rightfully so. And I guess if that's what you do for a living, I guess you can do that. But I'm not sure that's what's actually driving the action. So inflation, I think it'll probably not be that surprising. It'll probably be down year over year, right? But probably surprise some people to the upside. And there'll be certain people in the Fed who say, look, we should keep rates higher for longer. Maybe we should do fewer cuts. There'll be some people that don't say that. But I still think they're going to end up cutting at some point between now and the end of July, simply because they're kind of locked into that by the election cycle, the previous signaling, what the market believes.

5:48And so there's kind of two things about the Fed that I don't believe. One is that they actually know what's going to happen in the future. And the second one is that they're not a political organization, right? I actually think they are. And the more they tell me they're not, the less I believe them. So I think rates are coming down. I think the good news, though, is if rates don't come down until, say, July or August, September timeframe, we probably have another good year for most risk assets out in front of us. And I think, you know, there's some positives there. So when you're talking about the fiscal and just to that point of headlines today, you know, Biden's new stone student loan forgiveness plan could erase 20 million.

6:27So, you know, there's talk on that again. And listen, talk is talk is we know that it's a quagmire getting anything done in Washington, especially in election year. It's very unlikely things get done or if they do, it gets tested and overturned. But just from a headline point of view to speak to that fiscal sentiment you're talking about. There's also talk about the Chips Act, you know, who gets what factories are getting help. So you're still seeing that all move to the pipeline. What is the impact of that from your perspective when you're looking at what kind of investments or how that hits markets?

6:57What part of that are you watching? I mean, I think at the highest possible level, my fundamental bets right now are that politicians will not stop intervening in markets, right? Like if I want to be really simple and straightforward, right? I don't think they'll stop printing money when it suits them. I don't think they'll stop running deficits when it suits them. I don't think they'll stop being profligate in general. And I think that benefits any ideas that can take advantage of kind of a cheaper money, high liquidity environment that we're in. And look, last year, Bitcoin was up 156%. The S &P was up like 24%.

7:35So about 6x more than the S &P. So far, year to date, Spot on. S &P's up right around 10%. Bitcoin's up right around 60%. I expect that sort of dynamic to continue where unless the politicians change their mind and adopt austerity all of a sudden, and they direct, you know, Janet Yellen calls Jerome Powell under office and says, hey, you know, we really want you to keep rates higher and we want you to raise them. That would be the one thing that could actually slow this down. But the odds of that happening in this environment when the Fed has, when the Treasury has a lot of debt to refinance, like it's much more likely that Yellen's calling Jerome Powell and saying, look, we need you to bring the rates down by the midpoint of this year, simply because we can't have, you know, poor and middle-class people struggling in this environment.

8:28We can't have unemployment go up too much, right? So there's all these, yeah, they say they're looking at inflation and that's like one of their fundamental parts of their mandate, but the reality is they're going to tolerate higher inflation, in my opinion, if it means it keeps the existing set of politicians in office. So I may be too skeptical, right? But I just don't, I'm not sure a lot of this stuff matters. I think it's ultimately noise. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

9:00Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments. S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond.

9:32With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus500, it's trading with a plus.

10:01so when you expect something like bitcoin and we'll you know we'll get a little bit more into what parts of that market you find most attractive but when when you think that'll benefit that backdrop will benefit something like bitcoin are you saying that risk assets will benefit that's just supercharged? Or are you more on the, it's a hedge against fiat devaluation type of situation, exponential gold, if you will? Yeah, maybe a little bit of both, but also neither. I view it a little bit differently. I kind of view it more as a defensive asset in a world where almost everything can be printed.

10:44Everything can be debased. the politicians in the Fed and the ECB and the Japanese Central Bank, they can't change the monetary policy of Bitcoin. And so it kind of fights back against this sort of infinite printing idea, this modern monetary theory type of approach that everybody seems to have embraced as something that can go on forever. There seems to be a generally pervasive view amongst policymakers and others globally, like the Illuminati, that you can sort of print money forever. And that will lead to sort of infinite growth without any drawbacks. And I'm just not sure that that's the case.

11:23And I think rather than calling a hedge, I just call it a defensive exposure that's sort of the antidote to the prevailing view that everything that's happening sort of around the world right now makes sense and should continue as is. That said, obviously when there's a ton of liquidity, that liquidity needs to find a home. It's finding a home right now in homes, right? That the real estate market, in spite of 6%, 7%, 8 % mortgage rates, is continuing to do very well, particularly in the West, right? So California, Nevada, et cetera, like they're on fire. I mean, I just look at some of the data and I can't believe it.

11:56I would have thought if rates went from 3%, 3.5 % on a 30-year to 6.5%, there would be a slowdown. That's not at all what I'm saying. So people are still buying homes. People are still buying stocks, right? People are still out spending money, travel, trips, food. I went out to this walkable promenade, no joke, by my house this weekend. And it was busier than I've ever seen it. You couldn't get a parking spot, lines around the block. I get that people could say that that's exactly what happened before the 2008 crisis. I get that. But we do not have strippers with 12 homes this cycle. So it's not being driven by the same factors as before.

12:33So I look around, I think anecdotally, pretty obvious to me that We're not in the midst of a very large slowdown. And so it didn't really make sense for the last two or three years for them to keep rates low as long as they did and to run deficits as high as they did and to basically give the fiscal stimulus at the size that they did since the pandemic. I think that was an over-response. I think it was politically driven. I think we're still trying to digest that excess liquidity. So I think a lot of that will end up in Bitcoin. It'll end up in stocks, it'll end up in real estate. I just think Bitcoin, because it also has a technology S-curve for adoption, it's newer, it's less understood, and it's more misunderstood.

13:17It's more of a contrarian, non-consensus type of opportunity. It has more upside, right? Like, everybody knows real estate's a good asset. So, like, I'm not saying anything new there. Yeah, that's an interesting way to put it. I want to, Kevin Kelly and Raul sat down for their monthly insider talks, pro-crypto insider talks on our platform. And they were talking about Bitcoin this cycle. Let's play a clip from that, and then we'll talk on the other side. We're just in the middle of the run, right? Normally, there's a pause around the all-time highs, so Bitcoin's doing that. We'll talk a bit about what's been going on in memes and all the other stuff in a bit.

13:56But generally speaking, it's kind of steady as she goes. We've got a bit of correction. We get through whether it's before the halving, after the halving, in the next week, or who knows? we'll start to see accelerated price action again. The next phase will be, my view is the next phase is Bitcoin 100 ,000 and the others going through their all-time highs. And that's when it sets off the silly season I call the banana zone. So it's all ahead. It's just a patience game. And we're all so impatient because you kind of know where it's going. You're just wasting for it to happen. It just takes bloody forever.

14:34And then all gets crazy and, And you can see that whole interview, the March edition of their monthly chat on the platform. If you are not a member or not a pro crypto member, do so now. A lot of good alpha in there. So, Mike, what are your thoughts or how are you thinking about this cycle? Because we know and there are plenty there are some people probably listening to this where like they saw what happened last time. In fact, Deutsche Bank had a really interesting poll. I think I saw this on Reuters, where more than half of the people they polled believe that cryptocurrencies are now an important asset class.

15:13So that sort of skepticism, this is a bunch of, you know, ridiculous, whatever, that seems to have gone away. And they're like, no, this is the real deal. This is around this day. But a third of them expected Bitcoin to drop to 20 ,000. That's a pretty big decline from here. So I think there's sort of less skepticism, but still a lot of fear about what these cycles look like. So what are your thoughts about what's happening this time around? It's a really good setup, I think. Two things. One is that Bitcoin dropped below its previous all-time cycle high for the first time in history. And then secondly, very recently, Bitcoin went above its previous all-time high pre-having, which has never happened before.

15:58So we're seeing like an expansion of the ranges in which Bitcoin moves. I largely view the move from$16 to$70 as just a rebasing at a new fundamental level. So I personally don't think the bull market, the real meat of the bull market has even started yet. Historically, you start to see significant movement within a few months, three to six months post-having. We've got the having coming up in a couple of weeks here. And I think at that point is where you really start the clock for the bull market. My personal expectation is that the peak of the bull market won't actually happen until at least the middle of 2025.

16:36I think statistically that's where you should be looking for between kind of the middle of next year and the end of next year. I think there's a small chance that we peak early because of the ETF demand kind of pulling forward some of the demand for Bitcoin. And then there's also a small chance that the peak isn't until 2026 for the same reason, because the structural demand dynamics have shifted with the lower supply that you have most having. So I think we're more in the second or third inning at max. I don't think we're middle innings yet. I think I'll probably be looking for that kind of vibe in the mid to late summer.

17:12Like that's when I think we'll start to know for sure what kind of cycle we're dealing with. And again, I would separate Bitcoin from crypto. I would tend to agree with people who think most of crypto is still not investable. It's not institutional grade. It's not something you have to have in your portfolio. I think it's largely speculation. I think Bitcoin gets lumped in with a lot of that stuff. And it gets lumped in also with things like meme stocks that also, in my view, have little kind of long-term fundamental value. And Bitcoin is quite unique because it is backed by real-world energy, right, and infrastructure and data centers.

17:47And one thing I'd call out that I think is really important is that the Bitcoin data center business has largely started to converge with the AI data center business, a business that Sam Altman at OpenAI and Elon Musk and others are now saying is going to want to be one of the most scarce commodities in the world. I tend to agree with that. I think compute in general is going to be one of the most scarce commodities in the world over the next five years. And compute is largely fungible. So if you build a large-scale data center and you plug into the grid and you have a lot of power, you could plug in NVIDIA chips and you're an AI data center.

18:18You could plug in Bitcoin miners from Bitmain, now your Bitcoin facility, or you could split it and do 50-50 or 80-20. And so I think a lot of people aren't looking at this the right way. Like the real shortage in the broader kind of Bitcoin ecosystem is in infrastructure, right? It's the infrastructure, the real world infrastructure that actually makes these technologies scale. And I think AI is actually helpful because a lot of traditional investors understand AI. And it's a largely consensus trade. Like you won't find a good investor anywhere in the world, even value investors, who will argue AI is just hot air.

18:51They may tell you NVIDIA is overvalued, and I would largely agree that it's probably fully valued, at least at this current price. But they'll never tell you that AI is not a thing at all. The difference between AI and Bitcoin is there's still a big chunk of traditional investors who think Bitcoin is total hot air. But functionally, they're backed by the same thing, which is large-scale compute. That is such a fantastic point. So let's break that down a little bit. But are you, so do you invest in, and I'm thinking about how to word this because we have some folks who are super sophisticated and I'll get to some of those questions who are in this space and haven't been investing in this space and do it directly owning Bitcoin and Ethereum and Solana.

19:37And then we have people who do not have this in their portfolio at all and are still on the learning journey. So I want to make sure we take everybody along here. Do you, when you're looking at Bitcoin, believe investing in Bitcoin itself, which we know is not impossible, but not super easy for everyone? Or do you think through the ETF is fine? So I've advised a lot of people on this exact question, including very recently. And I think it depends a bit on your level of technology sophistication, right? So if you're a 80-year-old real estate investor who's made tens of millions of dollars in real estate, but really doesn't like to use your laptop even, then you're probably never going to self-custody your Bitcoin.

20:17And there's a good chance if you buy it in Coinbase, you're going to get hacked, you're going to lose your account, you're going to lose access, etc. And so for those types of people, just buying the BlackRock or Bitwise ETF, right, in your brokerage account is actually the lowest risk thing, right? And there's different dimensions of risk. The primary risk for an individual is that you lose access to your holdings, right? Because these are bearer assets. They're not like stock certificates. It's not like a bank account or a credit card or anything like that. If somebody gets access to your assets or control over your account, you have no longer have control over those assets and you will, you will lose them.

20:55And so I think... Those old bear bonds, remember those? They used to sell in the, you know... They're digital bear assets. And so for my kind of risk frameworks, I think for most people buying the ETF in their brokerage account is actually going to be the most accessible and safest way. If you want to follow kind of some of the fundamental principles of Bitcoin and unbank yourself and have no counterparty and sort of be able to go off the grid, well, then of course you need to learn about cold storage, self-custody. But that requires a bit more sophistication than a lot of the people deep in the industry would like to admit.

21:30And so I think the ETFs do enable quite a bit of additional money flow from less sophisticated folks who know they need exposure. They understand at a very high level that there's something here, but they've historically not wanted to take the risk of owning it directly. And I think that's fine. We're gonna take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:58Yeah, that's a great answer. And we have, for those of you who do want to try to figure it out and play around with, even if it's splitting it up a little bit. We've got the Crypto Academy. We've got another session dropping on that to sort of walk you through what to do, because it isn't that easy. What about that thing you mentioned now about compute power being scarce? So is that your favorite way of playing this? And is that what you're talking about if people are saying, oh, by the miners? Are the miners that people are dealing with compute power? Or is that a completely separate group where you're really doing more of that infrastructure play, as you say, that can swing other way?

22:39What does that look like? Is that the area you favor? Because it seems like that would be a way to play the Bitcoin potential you see without having to go through buying Bitcoin itself. Or maybe not. It absolutely is. But it's an advanced way of doing it. And it won't always work for everybody in every situation. Right. And so at the very outset, I would just say, if your desire is to have exposure to Bitcoin, the cleanest way to do that is just buy Bitcoin or buy the ETF. Because every other attempt to outrun Bitcoin is potentially going to introduce new risks that most investors candidly are not equipped to deal with.

23:19As a more advanced investor, again, somebody who's highly engaged, I'm on the board of one of these data center developers. I was on the board the month before they went public. I've participated in all of the strategic and capital raising exercises with them. I've seen them build the team. I've seen them acquire the sites, right? So I go really deep into the details of what actually helps these companies be successful. And for someone like me, what I'm looking for is some sort of multiple of return on the Bitcoin return. And the way to think about this really simply is that these businesses operate on margins, right?

23:53So if you have a cost of power, an all-in cost per Bitcoin to produce a new Bitcoin, that's like, say,$30 ,000 all-in, and the Bitcoin price is$60 ,000, while you're a 50 % gross margin business, that's an okay margin and the stock will trade at whatever it trades at. But what tends to happen every cycle is the price of Bitcoin goes parabolic, but the cost to produce Bitcoin as an infrastructure provider stays somewhat fixed. So let's just say hypothetically Bitcoin goes to$150 ,000 and your cost of mine is still$30 ,000. Well, now all of a sudden you're what? An 80 % gross margin of business and so on and so forth, right?

24:31As the price goes higher. And so what happens is the market tends to mark these equities up because they get tremendous operating leverage at higher and higher Bitcoin prices. And so historically through a full cycle, let's say Bitcoin 3Xs or 5Xs from trough to peak, oftentimes the miners will do some multiple of that. They'll be up 10X, 20X, 30X. Again, with a lot of lags, with a lot of volatility and with a lot of unpredictable outcomes, which is why you need to be really smart. And so I don't like my mom doesn't own Bitcoin infrastructure stocks. Like my father-in-law doesn't own these. They just own straight Bitcoin as they have for many, many years at my direction.