Bitcoin, Gold & the Coming Liquidity Pivot | Lyn Alden

21:15I think when someone over allocates a portfolio to levered Bitcoin, that's going to be a challenge.

21:22Peter McCormack:At the end of the day, it's kind of you want to own the core thing. And the extent that you use the others, that's kind of the accelerator rather than a core position.

21:31Lyn Alden:Yeah, it'll be interesting if Bitcoin price remains flat going down, it'll be interesting to see who does survive and who keeps going for who's still here in four years time. That's the big question, especially when it gets to that long tail. But a little bit earlier, you talked about global liquidity and you're saying it's not actually that bad. You see the chart of almost like the sine wave of liquidity. Where on that sine wave do you think we are at the moment?

21:56Peter McCormack:So I think it's, it's messier than normal. So global liquidity is, is still pretty good. I mean, basically there's been liquidity out of China, especially the first half of the year when the dollar was weakening. That was pretty good for global liquidity. Now that we've had the dollar kind of firming up a little bit, and as you have kind of some of the stock stuff rolling over a little bit, it's more middling now. The part where the pressure has been has been onshore US kind of base liquidity. That's where there's tightness. It's pretty similar to the September 2019 repo spike environment, which is to say It's one of those things that takes over macro Twitter for a few weeks, but then never reaches the scale where the average person knows about it because it's not that big of a macro fire.

22:48Peter McCormack:And so far, it's actually in line roughly with what the Fed expected. They thought that by around, and they've been publishing reports in the New York Fed, like these annual reports they do on their balance sheet, they've been kind of anticipating that sometime in 2025, 2026, they're going to reach a level of QT where they kind of run into liquidity constraints and that their plan after that was to go back toward expanding the balance sheet in line with nominal GDP. And so I think that we're kind of in that inflection point where we're not at the expansion phase yet, but we're at the point where they've already signaled that they're going to end quantitative tightening.

23:26Peter McCormack:And then some of the members are talking about potential expansion.

23:30Lyn Alden:So you talked about something there that was going to be one of my questions, which is like, why does macro Twitter care so much about the repo market? Because obviously in 2019, this was a big story. A couple, I don't know, about a month ago, there was an issue in the repo market. Again, it became big news on Twitter. Like, why is the watch so closely?

23:48Peter McCormack:So I would separate it in two buckets. I do think it's worth watching. For example, in my research reports, it's often something I touch on. We've been kind of anticipating something like this happening for a while. because when it does happen, it marks a pretty big shift. It goes from kind of structural multi-year balance sheet decreases to increases. It's also the first time potentially you're going to have an expanding balance sheet in this era without zero interest rates. A lot of people have it in their mind that the balance sheet won't expand until they cut rates all the way to zero. But if it's expanding for a different reason, not for the purpose of economic stimulus, but the purpose of facilitating liquidity, it absolutely can expand without zero interest rates.

24:28Peter McCormack:And that's what happened before 2008. That was kind of a general tendency. Now it'll be happening at a much higher reserve level. So one is it just kind of represents a structural shift. The part that I would generally disagree with is where the sensationalism comes into play. So when you have something that's happened, you have people coming out of the woodwork to say, oh, like there's a major crash going to happen, or the Fed's going to have to print a trillion dollars or a major bank is failing or, you know, like a liquidity tsunami is coming. You get that kind of excitement. Sometimes it's genuine in the sense that people want a reason to be bullish or bearish.

25:04And so they do that.

25:06Peter McCormack:If you're bearish, you say, look, it's all going to be a problem. So that's if you're bearish. If you're bullish, you say, look, it's a problem now, but they're going to come with all this liquidity. So the have that kind of like genuine emotionalism but then you also sometimes of course you know there are people that want clicks uh and will lean into uh these sensationalism because i know there are other people that want to know what's going on and they'll watch that episode or read that tweet or read that sub stack uh that kind of leans into sensationalism so i think that again the underlying pivot is real and substantial um but it's like less emphatic i would say and it's the the numbers I think are almost certainly going to be more mild than a lot of people think.

25:49Lyn Alden:So when this happened, obviously, the people calling this like the repo crisis, comparing it to 2019, you think it's more mild than that? And it's not like a huge systemic issue? Even the 2019 repo crisis was basically a Twitter crisis.

26:04Peter McCormack:Like it wasn't. So it happened. Then the Fed came in and did repo. Then there are people like myself and Luke Grohman that were saying, okay, it's actually not really a repo problem. It's a T-bill oversupply problem. They're going to go back to structurally buying T-bills. They did a few weeks later. Then you had kind of a mildly positive liquidity environment. They still weren't trying to stimulate with their balance sheet. They were just trying to put out the liquidity fire and they did. And that was kind of, it was good for asset prices until COVID hit a few months later. And then of course, everyone forgot about the repo spike and that became the multi-year thing.

26:40This is very similar

26:41Peter McCormack:to that, which is you have problems in repo. The difference is that now the Fed has a standing facility, so they're already ready for it. So it's even a more mild issue back then, which wasn't even a giant issue. It's one of those things that's like, it freaks people out because if unresolved, it is a massive issue. If overnight lending rates spike like that, it's a disaster. But basically anyone that's in the markets knows that the Fed's going to put out that fire. They have the facility specifically to put out that fire. And it doesn't take big numbers to put out that fire so that's where you get that kind of disconnect where you can theory craft why it's a catastrophe in practice it's this little thing that gets talked about on twitter and substack and and youtube and you know you'll see bloomberg headlines around it but it's not like uh it's not like the regional bank crisis 2023 it's not these kind of the bigger things uh and instead it's more of a pivot uh where they have the tools to fix the problem uh that all involve money printing because that's how these things go.

27:40And then the question is, how judicious are they

27:42Peter McCormack:going to be with their tools? How are they going to frame the use of their tools? And basically, we're gradually going to go back toward a structural environment of rising base liquidity rather than we've been in an environment of kind of flat base liquidity in the US. So we've had a falling Fed balance sheet, which has been offset by money coming out of the reverse repo facility. This is like all this plumbing stuff that I think we've talked about before. But the point is the outcome is that it's been almost perfectly flat base liquidity. But we've had rising broad liquidity. So broad money supply, all the IOUs that are built on top of that base liquidity, that's been in a pretty good shape ever since 2023.

28:27Peter McCormack:And now we're kind of entering a period where base liquidity is going to start kind of rising as well, maybe early next year, for example, maybe mid next year, I would say probably the latest, but we'll see. And that does mark a transition. I think the numbers are going to be mild.

28:46Lyn Alden:I'm interested to know what that means, because you say like quantitative tightening coming to an end, it'll go back to some form of QE and that might be in line with GDP growth. But that's the first time that's happened with higher interest rates or first time in recent history at least um what does that actually mean for the market like what does that what will be

29:05Peter McCormack:different at first not a ton it basically it means banks kind of have less anxiety on their liquidity uh it potentially frees up lending it's more about what managing what won't happen so for example if the regulators say okay there's this much you have to have these liquidity requirements um and then they don't expand the base layer the the balance sheet what happens is you kind of reach like a limit of how much lending you can do as a banking system. And then you got to stop making loans. Kind of like how if you had a gold or a Bitcoin based system, if you're over your skis in terms of fractional reserve banking, there's no bailout on the way.

29:42You have to actually manage risk and liquidity.

29:47Peter McCormack:And so you would have basically banks saying, hey, we're at our liquidity constraints. We can't make loans. Or we can only make loans as you replace other loans. But instead, because they're going to go back to increasing the balance sheet, it allows that type of lending to continue. So it's more about being anti-deflationary than it is like some sort of inflationary stimulatory jolt. On average, the expanding balance sheet does have positive correlations with asset prices. Doesn't mean it's always like that. I mean, if you have an AI CapEx-fueled market, that's disconnected from the balance sheet.

30:25Peter McCormack:But it is one variable that has historically been pretty positive for asset prices broadly, including Bitcoin. And basically, it just goes back to that kind of rising structural period. It also is generally good for banks because then they'll have more reserves that are also paying them interest. and it's just generally kind of pro-liquidity, slightly anti-dollar and a slight upward tilt on other assets. But then it's just a question of magnitude. It's not the same thing as the Fed coming in in like 2020 and printing trillions of dollars. Their estimates for how much they're likely going to increase the balance sheet when they get to that point are pretty mild in line with nominal GDP.

31:11In addition, they are specifically trying to only buy treasuries.

31:16Peter McCormack:So they're still going to continue letting mortgage-backed securities mature off their balance sheet, which means they're not really coming to help with the housing market. And part of a really dovish cycle is they cut rates and they also buy mortgage-backed securities in an effort to try to lower mortgage rates. And if you get really low mortgage rates, you can have a big refinancing cycle. People can take their money out of their home equity, especially in the US, because we have all these long fixed rate mortgages that are not super common in other parts of the world. And it's kind of a free lunch for consumer spending when that happens.

31:52Peter McCormack:Of course, it shows up elsewhere, but from the refinance consumer's perspective, it's all upside. And basically, because I don't think we're going to get to a lower low in mortgage rates, partially because of the Fed, partially because of other factors, that whole thing's off the table. So I think that the stimulus is just generally going to be weaker going forward, but instead what will be notable about it is the persistence of it. So it goes back to the nothing stops his train thesis, which is more about duration than magnitude. So I think that basically we're going to get to a period where it's a more grinding higher Fed balance sheet, but not really in that explosive sense most likely of course certain wars or certain certain totally unpredictable outcomes could always trigger a an extra liquidity boost but the structural backdrop is toward a more kind of gradually inclining uh fed balance sheet uh rather

32:45Lyn Alden:than these kind of multi-trillion short-term injections so when i talked to people about this like one of the common things is that once the feds start doing qe again it's going to have to be a scale much bigger than we've ever seen before. It sounds like you're kind of fading that narrative and saying they're going to be able to do this at, you know, three, 4 % a year or whatever it is. Will they be able to keep that going at a low rate for a long time, do you think?

33:10Peter McCormack:Potentially, yeah. So my base case is that it will be generally slower. You're starting from a higher, when they started QE back in like the 2008-2009 period, like bank cash was something like 3 % of total bank assets in the U.S. It was the most highly levered the system was since literally 1929, right, in the U.S. We're starting this period, much like September 2019, we're starting this period from a higher kind of liquidity threshold. Now in 2019, of course, what was coming was COVID, right? So you lock down the economy and then giga stimulus, everything. Assuming we don't have a crazy war, a crazy like economic so taking those just things off the table because that's you know out of the scope just normal macro stuff there's no particular reason to expect that this next one's going to be bigger than the one we had in the in the prior kind of extreme cycle 2019 and this time are more liquidity driven reasons for the balance sheet to go up rather than intentional stimulus and sometimes 2019 gets lost in the noise of COVID because it was so kind of close to that but this I mean assuming again something like a COVID level thing doesn't happen which is which is external it's likely to be far more gradual this time and it's different than QE1, QE2, QE3 or kind of COVID QE it's more like what was happening in late 2019 alone before these other big variables hit.

34:46Lyn Alden:Okay. And so what does this mean for things like inflation and markets? Because you've been talking for a long, long time now about the fact that we're in like a fiscal dominance era and monetary policy has less of an impact on the economy during that. So what does this mean for maybe particularly inflation?

35:03Peter McCormack:The short answer is not a ton because the fiscal side is way more impactful. What this mainly does is it keeps disenabling the fiscal, which was always part of the nothing stops is train thesis is that, for example, when the fiscal authorities keep running these deficits, when eventually banks get kind of tight on how much treasuries they can hold, and as you start getting strains in either the treasury market or the repo market, that's when the Fed comes in and they keep the party going. Back in the global financial crisis, a lot of people thought that the balance sheet expansion they were going to do would be inflationary, or some even said hyperinflationary.

35:40Peter McCormack:and for the most part it wasn't and the reason was that money didn't really get out to the public it wasn't helicopter money it was recapitalizing the banking system which is why I've described it as anti-deflationary rather than outright inflationary and during 2020 when they were doing this latest round of the massive balance sheet increases some of the people were saying look, all the people said it'd be inflationary last time it's not going to be inflationary this time either whereas like One thing I was focusing on is this isn't like last time. This was literally helicopter money. This was massive fiscal spending that was then supported by all this QE.

36:19Peter McCormack:And that's why we had that really big inflationary impulse. It was a huge increase in the broad money supply, all this. The type of QE that we're likely to see going forward is more like older QE, which is that it's not combined with necessarily any new fiscal stimulus. Now, those could be separate decisions by the administration. They could send out a check that they call, say, a tariff dividend, or they could do another tax cut. They could separately decide to do something fiscally. But they already have this kind of structural large fiscal deficit. And mostly what this change with the Fed does is it just keeps that train going.

36:58Peter McCormack:That part's already there. So I do think that part of the reason we have above target inflation right now, based on most ways that they measure it, is largely because of the fiscal side. And it just keeps that going.

37:11Lyn Alden:So is this really entering a period of much healthier economic and balance sheet growth?

37:18Peter McCormack:I would say no, not particularly. But it's not emanating from the Fed. The fiscal side is sickly in the sense that we have basically a two-speed economy right now in the U.S. and certain other parts of the world, which is the deficits are largely – if you're on the right side of fiscal deficits or AI CapEx, you're doing great. If you're not on the right side of those two things, you're pretty much in a world of hurt. And so there's very... Right now, consumer sentiment in the US is near record lows, even as the stock market is near record highs, which is a pretty unusual environment. It's something you tend to see in fiscal dominance.

37:58Peter McCormack:And so basically what this means is that state continues, which is right now the fiscal deficits are flowing towards social security, Medicare, defense, and interest expense primarily. Those are the four biggest buckets. And then to some extent, it then trickles out from there. Like, you know, all the DOD and defense contract employees, of course, they spend their income into the broader economy. And healthcare workers spend them into the broader economy. And social security recipients spend that into the broader economy. So that's who gets it kind of first. And then the Cantillon effect, it kind of gets out there.

38:31Peter McCormack:That's a stimulus for certain parts that are either directly or indirectly in the line of sight of it. But if someone is, say, a young family, not really on the right side of deficits, homes are expensive right now because mortgage rates are pretty high while also home prices are elevated. They're feeling and they're getting all the inflationary effects from the fiscal stimulus and in some limited pockets tariffs. they're not they're doing pretty bad right now on average unless they just happen to get a great new job or something so the the average there is pretty weak so it it instead of being like a big macro crash or anything like that it tends to manifest in just growing dissatisfaction where people are like well i see the stock markets all the time high but i'm struggling and you get more of that is is my opinion set to continue um now the extent that ai capex eventually runs into kind of constraint.

39:24Peter McCormack:That could be a rollover period for the market. But the actual fiscal and monetary situation is mostly maintaining the status quo with the exception that the Fed balance sheet has to kind of gradually pivot in order to keep that fiscal train doing what it's doing.

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42:07Lyn Alden:There's an amazing lineup of over 200 speakers sharing Bitcoin insights and innovation from all over the world. And if you're looking for the ultimate VIP experience with exclusive networking plus premium food and drink, then grab the Whale Pass and the Whale Night Party even includes surfing, so you know I'm going to be there. Tickets are on sale now. Use code WBD to get 10 % off at checkout on all pass types. The website is mina.b.tc and use code WBD for 10 % off. So if this fiscal dominance era sort of drives greater and greater wealth inequality, um i know you say nothing stops this train but does something have to stop it eventually like do they have to move from a fiscal dominance era into i guess the opposite is a monetary dominant

42:50Peter McCormack:area uh so the short answer is that if they eventually stop it it's because they accelerate it so much that it kind of gets it gets the next like 10 years done in one year right that that's kind of how it's death by fire rather than death by ice, which is that they can't really stop it until there's a pretty big reset in terms of the debt values and in terms of global trade flows. And as things get worse, that actually tends to accelerate the train. And when I use the nothing stops this train kind of approach, it's basically the time horizon from an investment standpoint is like 10 years, right?

43:32Peter McCormack:So it's not talking about what's going to happen in 2070 is talking from now to like the mid 2030s where you have some degree of visibility beyond things like that or or like just total like political non-linear moments that type of thing is is a separate matter but basically it's that because of demographics because of voting patterns because of polarized congress because of the nature of the fiat system that has to grow or die and then now it's more funded by the fiscal side rather than the bank lending side, you get into this pretty persistent state of running it hot, but only for part of the economy.

44:10Peter McCormack:And the other part kind of gets dragged along with the inflation and kind of some of the fiscal boost. And people keep wondering, well, manufacturing activity is flat. Inflation's hot. Obviously, both commercial and residential real estate are struggling. And it's like, well, who's winning? because like you know they see hot gdp numbers but they're like well it's not here here here here and the answer is primarily those on the right side of fiscal deficits and ai so that i guess

44:42Lyn Alden:that kind of brings it back to the balance sheet expansion you said that the it's going to be all treasuries not these mortgage-backed securities and um trump's recently come out talking about like a 50-year mortgage do you think that is all part of the same picture there and it's really like a way of attempting to help the housing market without directly like cutting rates and offering and buying these mortgage-backed securities?

45:05Peter McCormack:I do, because I think left to its own devices, the housing market has ended like a generational cycle, which is to say you've had lower and lower interest rates, both in the short term and the long term for 40-ish years. And I think that's structurally behind us. We kind of bounced off zero, now we're, let's call it sideways interest rates, let alone up. Let's just say we're in a sideways band now. You don't get lower lows, which means that any sort of refinancing cycle, like anytime we get moderately lower mortgage rates, the only people that are going to refinance are like those who took out a mortgage fairly recently and volumes have been low there.

45:44Peter McCormack:So any sort of refinancing cycle is very weak. So normally when the Fed cuts rates and when the market pushes down longer term rates and sometimes the fed helps with that by buying longer term longer duration securities when you get that lower rate cycle it does a couple things obviously um you know businesses can take out kind of cheaper loans now and invest in things they might not have done to higher rates um but the biggest one of the biggest things is the consumer kind of homeowner market can refinance their homes and spend more without really sacrificing anywhere else uh and that's done uh that to the extent that that happens it's only that kind of smaller, tiny refinancing cycle rather than a big one, which means when they cut and as things stagnate, it doesn't fix the problem like it did in prior cycles.

46:31Peter McCormack:You kind of have a longer term stagnation. We've already seen, for example, like usually manufacturing PI, it looks like a sine wave where activity's soaring for maybe 18 months and then it's kind of contracting for 18 months and then it's soaring for 18 months and it keeps going through the cycles. is it kind of mirrors the liquidity cycle. And this has been like the longest stretch. We had the longest inverted yield curve in US history, combined with like manufacturing kind of like stagnated and just stayed down. It didn't collapse, but it just stayed weak for like three years. And obviously housing has kind of been in a similar boat, commercial real estate, a lot of private equity ran into headwinds in this environment.

47:14Peter McCormack:And it's on one hand, it's held up by the fiscal spending. It's stimulatory. It's run it hot. It's like pre-stimulus before recession. So it kind of prevents the bottom from falling out, at least for the economy as a whole. But there's also this tight lid on the top too. So you get that more stagflationary feeling where you have F-tier consumer sentiment, but you still have inflation above target, even though a lot of areas are kind of grinding to a halt. and they have a few pillars holding up the whole thing. And that's the fiscally dominant era. And so it feels sickly to a lot of people because it is sickly.

47:58Peter McCormack:And you're more likely to obviously get rising social discontent in those types of environments, not just in the US, but globally. And I think that's kind of probably the biggest story we'll be facing over the next several years is kind of how both policymakers and the public deal with this situation that is kind of structurally different than prior cycles.

48:18Lyn Alden:Could you actually argue that the 50-year mortgages are another driver of wealth inequality in the sense that if you own scarce assets, gold, Bitcoin, equities, whatever, and you're essentially shorting the dollar over a longer time period with a 50-year mortgage, you'll potentially do quite well. On the other side, if you are like low income and you would take out a 50-year mortgage, you just have longer paying off interest and all that part of it.

48:42Peter McCormack:To some extent, I think that on average, I mean, the whole kind of the whole modern system, it's really rewarded those who have taken out, like have good access to long term debt and use it to buy scarcer assets. And the 50 year mortgage, in some sense, is no different. I generally like the 50 year mortgage concept is making a lot of headlines. I generally view it as less impactful than what other people seem to think. if you kind of do the calculations for how much it can lower a monthly payment on the same house, it's not immaterial, but it's not like a game changer. And it's kind of like an artificial extension of what I just talked about, which is they basically ran out of runway with the 30-year mortgage.

49:28Peter McCormack:It's like we're almost certainly not getting lower lows in that. It doesn't mean we could get lower than we are now, but it's not like the series of ever lower lows for 40 years, which is lower highs and lower lows. And because of that, it really kind of puts a cap on real estate appreciation, also puts a cap on housing affordability and all this. And so this is like a way of saying, well, we can't fix that. So let's try this like Band-Aid. We don't even know if that's going to fully get into effect. But even assuming it does, I think that at most that gives you like another half cycle. And maybe not even that.

50:07Peter McCormack:It's just like it's not as big of a factor as a structurally falling interest rates and that kind of perpetual refinancing cycle. And so it benefits those who take out as long and low of a mortgage as they can buy a property in a place that ends up being better than average. Like it's a rising environment, for example, like a city that's going from a tertiary city to a secondary city, for example, kind of a booming area. But I don't think outside of kind of more limited contexts that it'll have kind of macro scale significance.

50:41Lyn Alden:The other part I wanted to touch on was the Fed. So they've obviously were tipped to be doing rate cuts going into the end of the year. I know that the next one in December is sort of called into question now. What do you think will happen with interest rates? So first answer is,

50:57Peter McCormack:I think that that's one of the kind of the minor catalysts for why Bitcoin might have sold off recently is that the market had to kind of readjust to slightly less dovish fed potentially for the remainder of this year now one rate cut is not like a giant story but when the market was expecting a and then they get b even if b is not that different it does have to kind of reprice things and when you already have a spooked market for other reasons and you get these repo issues stuff like that it's not that surprising to see uh frictions in especially the most volatile parts of the market. So there's that.

51:31Peter McCormack:I generally don't have great insight in what they're going to do in a given FOMC meeting. Mostly whatever the market says is almost always what happens. And then the problem is it's recursive. The Fed governors do look at what the market is expecting. And if the market is way off course of what they're intending to say, that's when Fed speakers usually come out. And if the market's too hawkish, then they'll come and say some dovish things. If the market's too dovish, they'll come in and say some hawkish things. And they try to get it a little bit closer to what they kind of are already anticipating what they're going to do.

52:02Peter McCormack:So rather than try to play that game, I kind of focus on the longer term. I do think that within 2026, we will see a handful of rate cuts. Whether or not we have one in December or not, for me, is like a coin flip right now. And it's more about what happens next year. And so yeah, I think we'll see mildly lower interest rates while we're also going back toward balance sheet increases, but I think that they're largely separate variables. You don't have to have one to have the other.

52:29Lyn Alden:I think you're right in that whatever happens next year is going to be the most interesting thing with the Fed. Jerome Powell is going to be done. I don't think we know who's going to step in yet. I know there's people sort of guessing who that's going to be. But if it does become someone who is essentially like a Trump stooge and is just going to do whatever he wants, what does that mean both in terms of like fiscal dominance and just Fed independence?

52:53Peter McCormack:So obviously, it'd be a reduction in Fed independence if that were to happen. Fiscal dominance in general chips away at Fed independence. Like the fact that the Fed is going to go back to increasing their balance sheet in line with nominal GDP, one of the challenges there is that the fiscal deficits, the size of them, contribute to nominal GDP. It's one of the inputs into that. So basically, the Fed is kind of indirectly saying our rate of balance sheet increases will be partially dependent on how big the fiscal deficit is. And so that's already at least a minor reduction and a kind of a persistent reduction in Fed independence, I would argue.

53:30Peter McCormack:Now, what they mean generally by Fed independence at the root layer is that there's at least some separation between near-term rate decisions and the election cycle. So it'd be very bad if an incumbent administration could say, okay, cut interest rates right now a ton because it's got an election coming up, and then go back and maybe raise them. That's kind of the cycle they try to avoid. There's no such thing as pure Fed independence, more like how acutely can the Fed kind of operate on their own terms. Now that, again, you can call in the question the entire purpose of the Fed, should a central board of 12 people be setting interest rates?

54:08Peter McCormack:I would argue no, but it's still the case that you have a somewhat independent board doing it. Even if they replace a couple of governors at a time, you still generally are likely to have some degree of independence where they don't want to look like a total sham, especially because it can backfire. If they look super dovish, the bond market could freak out and say, well, I don't want to own any duration yet. So if they perceive the Fed as acting too political, they could sell off mortgages, the market, and you could get higher mortgage rates even if you have short-term rates, which is not what even, let's say, a hypothetical Trump, Stooge, Fed, they wouldn't want that.

54:48So they always have to project some degree of kind of pseudo credibility to say, here's what we're doing now.

54:55Peter McCormack:So I wouldn't expect like just a 180 degree change in what they're doing. But that's separate from the fact that because they're in fiscal dominance, like they're going to go back to increasing their balance sheet, even if inflation is above target, because it's just it's keeping the treasury market kind of liquid. And I mean, they can also they have other variables they could tweak. I mean, they can tweak the supplemental leverage ratio, which sounds really wonkish, but it's almost like a shadow QE for banks. It just kind of frees up some of their liquidity constraints that they have and allows them, it kind of, for them, acts like QE.

55:30Peter McCormack:And so there's various levers they can pull, but all those levers have in common is that they allow kind of the existing thing to keep going without causing acute liquidity constraints. So just the trains keeps going, the fiscal deficits stay high, the Fed doesn't go out of their way to stimulate, but they do keep a lid on little fires that pop up. And it just keeps running at this kind of stagflationary pace.

55:57Lyn Alden:And Lynn, is there anything else on the macro side that you want to touch on? I just have a few questions on goal before we close out. Right.

56:03Peter McCormack:The other one would, I guess the final touch would be AI in the sense that if you get like a rollover in really big asset prices, whether it's NVIDIA, Apple, Microsoft, things like that, I'm not predicting it. But that's where you can get kind of a disconnect where the Fed could be stimulating, the fiscal could be stimulating. But if you've got a multi-trillion dollar destruction in just kind of capital, that wealth effect can reduce then consumer spending. You can have things like Bitcoin get caught up in it, which is why when I say nothing stops his train, I'm talking about the fiscal deficits and the liquidity to keep fueling the fiscal deficits.

56:47Peter McCormack:sets, which over the long run does have implications for asset prices, but it does have implications for asset prices on a year by year basis or a quarter by quarter basis. You can get all these crazy fluctuations. Valuations do matter in the longer run. And instead, it's more of like that macro backdrop that gives you a foundation that other analysis can then be done on top of.

57:10Lyn Alden:On the AI side, there's a lot of talk of like AI bubbles. There's these sort of circular deals between NVIDIA and Oracle and all these major companies. Do you think we are potentially in a bubble in the AI side?

57:21Peter McCormack:I think we're kind of in this like euphoric kind of local bubble phase, most likely. But then I think the underlying trend for the most part is real, which is that this is a pretty big transformation, especially white collar types of work. Kind of like how if someone asks, was Bitcoin in a bubble in 2017? It's yes and no. It's like a local bubble built on a structural thing. That's kind of how I view AI right now, maybe less extreme, but it's kind of saying, sure, I think certain things are overdone. Sure, I think euphoria is high, it's crowded. Some of the deals have become somewhat incestuous in that sense, and you get that kind of circular aspect, which can be frightening.

58:03But I do think that when that kind of washes out, I think that still sets the stage for growth.

58:09Peter McCormack:So I do think that, you know, when we look back for 10 years from now, you know, will there be quite a lot of data center activity running AI that's doing all sorts of stuff for us? Yes. And in bigger numbers than they are now, but that occasionally you front run and kind of pull too much forward and have to cool off for a period.

58:29Lyn Alden:Yeah, that makes sense. When I had Luke Groman on the show a couple of months ago, we talked a lot about AI and the impacts that that might have on the economy. And I don't actually know what the term is for this. It's almost like a black swan that you can see coming at some point. Like if AI does start replacing a meaningful number of jobs, how does the economy sort of cope with that? Well, on one hand, it's just like prior kind of productivity cycles, which is like when

58:57Peter McCormack:hydrocarbons started to become used at scale and we made like the tractor, like one farmer could do the work of like 10 farmers. Right. So what that does is that freed up the other nine farmers to go work in other areas. So instead of 80 % of the society running our agriculture and 20 % doing other things, over time we would have it so that 2 % of people can feed everyone. The other 98 % of people can do other stuff like build technology or take care of things or do healthcare. And what this does is it kind of is like another version of that. It's saying some percentage of human labor can be replaced by basically pure energy combined with hardware.

59:34Peter McCormack:So you say, okay, well, we can take electricity and GPUs, and that can replace some percentage of especially our white collar labor force, which is disruptive when it happens. But then it frees up people to do other things. In general, we want machines to do a lot of the routine stuff for us so we can do other things. Where people get spooked is when you have machines so good that like a lot of people can't find any work that they can do that is better than a machine. So even though tractors replaced farmers at farming, or at least allowed one farmer to do the work at 10, those people could still say, okay, well, the tractor is doing that.

1:00:10So I'll go research medicine or something, right?

1:00:14Peter McCormack:You had other types of work. Where that game could change is if you have machines that are so good that people, meaningful percentage population, not just certain, say at the current stage, there are disabled people that have trouble being economically kind of functioning in any capacity. But if the kind of the percentage of population has that happen to them and it becomes a very meaningful percent, that's when you get kind of an unforeseen territory. What does that look like? People have talked about UBI. People have talked about revolution. That's where it's a hard to predict outcome. But in general, there's that difference between what happens in the kind of disruptive near term versus structurally what we want, which is we do want machines and energy to replace as much work as possible to free people up.

1:01:05Peter McCormack:And there's that kind of march toward that end wherever possible.

1:01:09Lyn Alden:Yeah, I think the scary part of this is that it's not only going to replace sort of manual labor. It's, you know, it's almost everything like accountants, teachers, finance people, people working in medicine. Like it seems like across the board, it's going to replace a pretty decent number of jobs and and what's left i guess is the question and this is why like ubi at this point i don't know if i'm being doom here but just seems baked in the cake like i don't i don't know what other outcome there could be yeah i think there are pockets that will end up

1:01:38Peter McCormack:demanding and i think i think the silver lining is that basically there's a huge difference between data center ai and portable ai aka robots um i mean the human brain runs on 20 watts of power In order to do that in a data center, you need megawatts of power, like the same amount of processing power. Now, obviously, certain things a computer can do really cheaply, like a calculator. We've had that for like a century. But in terms of all the things a human brain does, the amount of bandwidth it takes in from the environment, all the automatic processes that are running, and then on top of that, a conscious decision-making process that can help handle edge cases.

1:02:16Peter McCormack:And then it's a self-healing robot as well. That's super advanced technology. um and so i'm actually kind of like especially in timelines like i robotics certainly will play a bigger role in our life we already see if you go to japan i mean robots play a bigger role in in their a lot of their functions than here so first they just get to japan and then you'll get further than that so we are going to get more robotified um but for example the idea of a robot coming out to your house and like uh fixing your hvac system right and basically going out into the field dealing with all the edge cases, that I think is an extraordinarily long way off.

1:02:55Peter McCormack:It's data center AI that I think is the star of the show right now, which is basically displacing a lot of white-collar work. The bonus is that it allows each remaining white-collar person to kind of do more, because rather than just all those tools running completely autonomously, it's basically extensions of a person where they can have some data collection do something for them. They can have this thing edit their thing better, you know, faster and cheaper than a human could and all that stuff. But there's still there's still decision makers and governors in that whole process. And so, yeah, I think we get disruption of white collar stuff a lot quicker.

1:03:32Peter McCormack:And ironically, I think you can get kind of a boom in some, especially in the field, blue collar stuff. So it's easier to automate things in a very controlled environment like a manufacturing floor. It's much harder to automate things out in the broader world where all those edge cases come into play. And then when you have, say, a massive number of robots, a massive amount of data center, all of that has really high turnover. GPUs have to be replaced. None of this is self-healing. This is like literally a constant replacement cost. A lot of it relies on, you know, kind of semi-rare materials that can run into shortages and get expensive.

1:04:07Peter McCormack:you could have environments where a society starts pushing back on robots and lead like vandalizes robots if they find them kind of out in public and almost like kind of forced keep keeping human the loop so i i think that will happen too i i think there are kind of basically self-correcting loops both positive ones and some negative ones um that especially in terms of like all work across all fields, I generally fade that sort of hyper bullish thing, at least in any sort of investment or kind of planning time horizon. I'm not talking about what happens in the 50 years or next century, but what happens in, say, a 10 to 20 year period, data center AI is a much bigger deal, in my opinion, than like portable AI and basically in the field.

1:04:55Peter McCormack:So I think that there's kind of a potentially a forced shift toward you know people kind of doing more physical work and also communities somewhat being more self-sufficient if a whole kind of area gets kind of disfranchised by iai that's a lot of people out of work well that's a lot of people that together are out of work so it's like someone's got to build the home someone's got to uh do all this and and they don't have enough i guess if there's robots they can't afford the robots to come in and do it so they got to work with each other. And you kind of almost restart the whole, what an economy is.

1:05:28Peter McCormack:And of course, the challenge there is the path dependence along the way. As you have societal breakdown, as you have deterioration of the social contract, and then more extremism or whatever, based on that, that's where I think the real issue is, rather than that, say, AI replaces 99 % of jobs in sort of a generation. That's not what I'm concerned about. It's more like what happens when it replaces 10 % of jobs and those 10 % of people are really angry. That's, I think, the actual, the thing I worry about rather than that kind of more extreme scenario.

1:06:01Lyn Alden:Yeah, that's a scary scenario anyway. But I mean, it's good to hear that you're bullish on humanity, at least for the short term. I needed to hear that, Lynn. Before we close out, can we just very quickly touch on gold? Because if you'd have asked me a year ago if gold would have this insane bull market while Bitcoin was flat, I would have put that at pretty low probability. Why do you think that's happened? What's going on there?

1:06:25Peter McCormack:Well, it's funny because I've been a gold bull, but I'm surprised as well that it hit 4 ,000 this year. When it still had a 2 ,000 handle on it, I was kind of eventually looking forward to the 3 ,000, but I didn't think you'd kind of just race right to 4 ,000. So I'm happy it did, but wouldn't put it as my base case, especially given the size of the market. It's a huge kind of multi-trillion dollar market cap increase in it. There's multiple shifts happening. One is ever since 2009, you've had a gradual shift towards sovereign reaccumulation of gold. So prior to then, you had a multi-decade kind of divestment of gold among sovereigns and toward treasuries.

1:07:08Peter McCormack:Starting in 2009, that gradually reversed. It got kicked into overdrive in 2022 because then you have potential risk of confiscation or freezing of assets. If a sovereign is holding their securities of another nation, they're not really sovereign assets. and so there's kind of been a shift toward that then there's the increasing awareness of fiscal dominance and decreasing awareness that nothing stops this train which says well if if if this is just going to happen for 5 10 15 years maybe i want to own some gold that's the one that's got an established track record so big pools of capital already know what to do with it they don't have to research it they already know what gold is um and then in addition this is not really even though the stock market is near all-time high it's it's because it's so narrow it's mostly not even a risk on environment like i mentioned before we've been in an usually long period of kind of like like flat yield curve pmis like purchasing managed indices of like manufacturing and other other signs that are just kind of like in stagnation um outside of ai the stock market is pretty flattish, kind of consolidating.

1:08:20Peter McCormack:And so it's not a very risk-on environment, even though liquidity is good. So when you have kind of pretty decent liquidity up until maybe very recently, and then you have kind of stagnating, broader economy, the Fed's still trying to tighten things where it can, the things that have taken off has been AI, gold, uh like kind of the what the market ironically looks as low risk they they view ai is low risk even though the pockets of it that are obviously not but they viewed as low risk because they viewed as like a sure thing it's like okay that's cycle resistant let's let's go to ai then they say gold okay that's low risk um bitcoin until pretty recently was in that bucket was benefiting uh from liquidity um from kind of gradual adoption um but as you have kind of like a flattish environment, Bitcoin cooled off.

1:09:10Peter McCormack:So I think basically gold's behaving kind of, you know, rationally, just a little bit, you know, these things tend to not be linear. So you tend to overshoot to the upside, then overshoot to the downside, then overshoot to the upside. So this did overshoot to the upside faster than I would have thought. But I think it's a gradual realignment for things we've talked about in prior podcasts, a more multipolar world, less kind of a focus on every country just holding one country's bonds as the reserve asset and saying, okay, we'll hold those, but we also want to hold these other, say, three things.

1:09:42Peter McCormack:We want to hold gold. Maybe we want to hold another trading partner's currency around the margins. Smaller ones might say, well, let's look at Bitcoin a little bit. You get that kind of gradual broadening of assets that are viewed as kind of reserve assets. And gold, as the incumbent, has kind of been the chief beneficiary where we're talking about the markets being increasingly spooked about these tens of trillions of dollars of sovereign debt. So whether it's the US, it's Europe, it's elsewhere, the market is kind of long-term, says, okay, what's the end game here? And you have gold, which is a much smaller market, despite being huge, than those sovereign bonds.

1:10:22Peter McCormack:It only takes a small, gradual spillover for investors to start kind of going into gold. They don't have to do a ton of research because they know what gold is.

1:10:31Lyn Alden:Yeah. One of the things I found really interesting is the kind of retail FOMO around gold. Because as we were saying earlier in the show, there's really not been a huge influx of new retail participants in Bitcoin. But I don't know if you saw the pictures going around Twitter and stuff of people literally queuing on the street outside gold shops. I think they were actually here in Australia. Has that surprised you? And like one of the things we talk about often in Bitcoin is like the unit bias. Obviously, the unit bias for gold is lower, but as a market, it's huge compared to Bitcoin?

1:10:59Peter McCormack:So the short answer is it hasn't surprised me because so back when gold was like 3000, one of the interesting things at the time was that it was not retail driving it. So when you looked at like interest in gold ETFs or interest in physical coinage, it was kind of lukewarm. Whereas the price was going up anyway. And it was because sovereigns institutions were driving it. It was kind of like gold moment of like the treasury company thing right it's like big pools were interested in it china and india were interested so their retail was interested but kind of the western retail was like they other things are going on when the mag 7 was soaring no one's like they're like yeah gold's okay but you know i'm not really interested in it it's only really in in kind of the second half of this year uh where we're retailed western retail did start to fomo into gold so that's kind of a later later stage portion of it.

1:11:52Peter McCormack:So first, first institutional, then retail. And that's generally how things go. So if anything, if you'd asked me last year, I'd be, I'm surprised there's not a little bit more retail FOMO than there is right now. But then I would also not have guessed you've gotten a 4 ,000. But when you do get a 4 ,000, I'm not surprised that, yeah, you start seeing lines outside of gold stores, either to buy it or sell it. Because actually both tends to happen. There are people that need money and have, you know, a gold ring and they want to go sell it. And there are other people that are then FOMOing into it is how these things tend to go.

1:12:25Peter McCormack:And, you know, if Bitcoin can have a cycle like that, where if you break the four year cycle, you have an up year, institutions are positioned and it starts to rip, you can bring in retail. So it's like just because retail is not here now doesn't mean they can't come later. And unfortunately, retail tends to be kind of the later phase of a given bull run. Now, but I think I view gold in a similar way that I would view AI, which is that it can get into a local bubble, but that I still think it's structurally fine. The last time I gave a warning of that sort was back in 2020, gold, of course, had a very big moment.

1:13:02Peter McCormack:And I was like, I could see it taking a breather here. It took a little longer breather than I thought, but then it did this whole kind of next doubling that it did. um and i i view it kind of similarly which is sure it's over at skis right now um but i don't view it as like structurally overvalued if anything it's going from being just kind of structurally undervalued just like back closer to like what i think makes sense um and so um yeah i just view gold and bitcoin as kind of two different assets gold still because it's the incumbent it has more of a risk off aspect to it it's got more of a sovereign interest in it whereas Bitcoin is still kind of collectively lumped into a tech play, even though from those that deeply understand it, it does have digital gold, digital cash attributes that can be viewed as risk off as well.

1:13:49Just the price action tends to correlate more of the risk on type asset.

1:13:53Lyn Alden:That makes sense. Okay, Lynn, last question. Bitcoin's just above$90 ,000 now. I'm not asking for a price prediction here, but just like directionally over the next 12 months, what do you think, how are you looking at Bitcoin?

1:14:05Peter McCormack:My guess is up. I don't have a view of the next quarter. I always do try to avoid price predictions. When I get quartered into one, like for 2025, I was like, yeah, anything under, like, if we don't hit 150, it'd be a little disappointing. Of course, we only got to like 125 or so, so it's on the disappointing end. I do expect that, you know, in 2026, we'll be back into the six figures. I mean, anything can happen between now and year end. and whether it's 2026 or 2027 I think we'll be seeing new all-time highs most likely and it's funny when I watch Twitter sentiment when Bitcoin is absolutely soaring I get sometimes dunked on by Bitcoiners saying why do you own any gold?

1:14:48Peter McCormack:why do you own any stocks? why aren't you 100 % Bitcoin? and it's like well because I like some degree of diversification here and then when Bitcoin's crashing I get the gold bugs coming out saying oh like they should just own all gold They're like, why do you own any Bitcoin at all? And it's like funny how that emotional trend goes. And one of the ways is to say, okay, well, you don't want to de-worsify so that you own a little bit of everything. You still want to have opinions on assets and you can make concentrated bets. I mean, I'm quite structurally bullish on Bitcoin, for example. But that's also why I own gold and I own equities that have nothing to do with Bitcoin.

1:15:25Peter McCormack:Because there are different size markets, different performance kind of patterns that they go through. And for me, it's not just about owning what I think is going to be the fastest horse. It's okay. I'll put extra on the fastest horse, but I want to own a handful of horses. And so when you structure a portfolio like this, it's like, well, okay, I'm disappointed in Bitcoin this year, but I'm enthused by what gold did. And if you structure a portfolio that way, you take the edge off for a lot of these things. And so I think we'll see a rotation at some point well i'll be disappointed in the gold side of my portfolio and i'll be enthused about the bitcoin side and then probably it'll repeat again so um yeah nothing's really changed around my view of any of these assets it's just they they catch on at different speeds and they have different correlations and like i said before i think that a year ago or you know six months ago some percentage people bought bitcoin for maybe the wrong reason that they you know they bought it because they think Uncle Sam's going to buy it, rather than buying it for its own qualities and kind of the longer term story of what it is and what it changes.

1:16:35Peter McCormack:In addition, I think the broader crypto space is basically out of narratives. And that's basically dead weight now. So other than Bitcoin and stable coins, a couple small tech rails to run that kind of stuff, at a macro scale, there's really no there there in the broader crypto space. And so I think that that's part of why kind of the whole space is bearish. A lot of people that own Bitcoin own other assets. And they view it as not just a bad cycle, but that there's just what's the next narrative? You had ICOs, you had NFTs, you had DeFi, you had meme coins, which is basically the most cynical narrative is saying that we're just flat out saying there's no there there.

1:17:19Peter McCormack:Then even that kind of eventually rolls over. and you know there's really no kind of you can always be surprised by another one kind of coming out of the hat but i think a lot of that is kind of tested almost every directional narrative that it could and is kind of set for structural stagnation so bitcoin has to kind of decouple from that dead weight to the extent that it's going to keep kind of reaching higher highs

1:17:46Lyn Alden:i totally agree with that i mean the altcoin side of things i think is is over um i don't want to speaking too definitively because you never know what might come out. But I've started having the text from the people sort of close to me who might have bought Bitcoin for the wrong reasons, being like, is this going to go down to 50k and all this stuff? And I obviously have no idea, but the best message I think is just do nothing. If you're not sure, just do nothing. Just wait, because I know that 90k is not going to be the top of Bitcoin forever. Lin, I always love talking to you thank you so much for doing this um i'm going to see you at cheat code in march yeah i

1:18:23Peter McCormack:missed last year but i was there the year prior i believe so definitely i definitely think it's worth going i love the conference uh and it's great to see everyone it's going to be fun we've

1:18:32Lyn Alden:got you announced as a keynote and jack mallers at the moment we're going to be dropping some more speakers soon so cheatcode.co.uk there's my little shill um lynn where do you want to send anyone uh who wants to find out everyone knows who you are but who wants to find out more uh just check

1:18:44Peter McCormack:out lynnodden.com everything that can be found from there or at lynnodden contact on twitter or broken money on amazon or elsewhere but uh thanks for having me