Inflation, Liquidity, the Fed & Bitcoin | James Lavish

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33:11It took me less than 15 minutes to go through the application. And in just a few hours, I had the dollars in my account. It was super smooth. So if you need cash, but you don't want to sell Bitcoin, head over to Ledin.io forward slash WBD and you'll get 0.25 % off your first loan. That's L-E-D-N.io forward slash WBD. Yeah, it's crazy that they can say with a straight face that the consumer market is doing well, because all you have to do is spend five minutes talking to people and you know that's not the case. People are really struggling. And is the problem they're kind of faced with here that if they do cut rates, it doesn't actually make any meaningful difference to the people, like to jobs and things like that.

33:50And instead, it does just cause asset prices to pump and then inflation quite quickly. Well, I mean, our economy is very financialized, right? So you've got to it then. So now, so we're getting into the crux of it. So we're in a period now that appears that we're sliding into stagflation. We don't know for sure, but it appears that that's where we're headed and where you have rising prices and you've got a softening economy, you've got a softening job market. And that is, um, that is just an absolutely awful position to be in as an economy and as, you know, the Fed, like, what can they do if they lower interest rates dramatically?

34:32Well, that could, that could create more upward pricing pressure and rising prices and more inflation. And it could lag so much. It doesn't really help the job market yet. So then you still, you have even worsening price where you've got rising prices, softening job market and everything is, um, and, and it, that's a really difficult position for the middle class in particular to be in, um, you know, middle and lower demographics. So we get back in the eighties. I mean, the, the eighties were awful. I mean, I lived through it. It was brutal. We, we had to wait in line for three hours to get one tank of gas every two weeks, because, you know, if your license plate ended in an odd number, then this is your week.

35:17And, and even though next week is zero week. And so it was tough. We felt the pinch hard and we weren't wealthy, so we felt it. So that's a terrible position for the Fed to be in. So why do we see what is going on in the market? And that's why you've got gold ripping to new highs and asset prices like stocks and Bitcoin bumbling around or creating new highs. And so, or bumbling around new highs or creating new highs. And so you've got two different things going on. This is abnormal to see stocks ripping to new highs and gold ripping to new highs at the same time. But it's telling you that there's a strong worry about inflation and stagflation.

36:07And at the same time that stocks are saying, we're gonna see liquidity here. We're going to see expansion of liquidity and everything's okay, at least for now. So it's kind of a weird place for everybody to be. And that's why everybody is watching the Fed so closely. They're trying to figure out what does this mean? So like regardless of what Powell may do, because we know he's been pretty hawkish for a long time now, is there anything the Fed could do to try and get this under control? Or is this just a sort of nothing stop this train narrative and they're stuck between a rock and a hard place?

36:40They're really stuck. I mean, okay, so what else could you do? They've got really, they've got two levers, plus quasi-levers, which are acronyms. They've got two levers. They've got interest rates. You can raise or lower the target rate of Fed funds overnight rate, which kind of keys at least the short end of the curve. They've lost the long end, or they never really had control of it. So it's not really fair to say they lost it. I mean, the long end is the long end. It bakes in a lot of expectations of long-term inflation or economic uncertainty. And so it's hard to tell where that long end – it's hard for the Fed to do anything about the long end, except when they start doing QE and QT, where they can be buying and selling the long end of the curve to kind of keep it in a range if they wanted to, which is something called yield curve control.

37:32Um, so, but they're in a, they're in a tough spot here, Danny, because, okay, so what do they do? Lower rates, you could have more inflation. Um, don't lower rates, keep doing QT, and you could have the job market fall apart. Well, we have heard Powell say before that he's more comfortable with that set of problems than the other set, which is what Volcker had to come in and deal with back in the 80s. And you've heard, you know, basically you've heard Powell trying to invoke Volcker to say, I'm going to be like him. I'm not going to be like Burns. I'm not going to let this inflation run out of control.

38:14I'm going to keep a lid on it. even if it means that the job market suffers from it and we have some casualties there with the job, with unemployment. Why is he okay with that? He's okay with that because he knows he could turn around and flood the market with capital and shore it back up. And they would rather have a situation where they don't let inflation get out of control, rage out of control, which that would just, that would, um, that would create a problem with the borrowing, the amount of, of interest they have to pay on borrowing. Cause they're, you know, the, uh, the, the government is running at a, on a$2 trillion deficit, they still have to borrow.

39:01And so unless they make, unless they have inflation run to insane levels, um, they're still going to run in deficit. So they can't let it get out of control. So, um, so what's the other side of that. Well, you could do QT or QE. Well, what happens, Danny, if they start printing money and buying bonds in the open market again? Is there any talk of that? Is that even likely? Because I don't hear much about that. No, there's no talk of it yet. But here's the point is that it's very difficult, but he's more comfortable. He said they have tools to deal with that. There's an exact quote. We have tools to deal with that, meaning we could just flood the market with capital like we've done before, like we did in the great financial crisis, like we did in 2021, 22, you know, they're more comfortable with that because in the long run, just allowing for the expansion of the money supply or pushing for more expansion of the money supply, not just out of creation of debt through banks, but actually going out there and printing money and buying bonds in the open market, that in and of itself means that you debase the currency and you make it easier to pay back old debt.

40:08Like it's a playbook. It's what they want to do. The question is how hot will they let inflation run? That's the only question that's in my mind. They're going to have to let it run. Just how hot? We don't know. If you had to speculate on that, what would you guess? Like, do you think anything under sort of 5 % they'll be okay with? Anything under 4 % I think they're going to be okay with. They start getting really nervous. If it ticks up here three and a half, three, three, seven, they're going to get nervous. But no, I mean, I do think, Danny, that we we will get into a situation where the economy will grind lower.

40:48And whether we have it's when do we have the next event? Like, what is the next Silicon Valley Bank? When is the next, you know, Ukraine that bleeds out into a larger global crisis? When is the next, you know, market shock for something that we can't even dream of because that's why it's called a black swan. So that's the question. And when that happens, they're not going to just print another four or five trillion. They're going to be printing, you know, seven, eight, 10, 12 trillion, in my opinion, to shore it up because the leverage is that much larger. We are so indebted. We have$324 trillion of debt out there.

41:37The entire world is indebted. So that denominator has just created a problem. And so you're going to have to print more. And when you do print more, that just means higher inflation. So what are they going to be comfortable with? I think under 4 % they would likely be comfortable with. They wouldn't panic. But they're going to create where we're not going to have 9 % inflation. We might have 12, 15, 18 % inflation for a period of time. It's going to be and it's going to take some, it's going to be very painful for some people. So is there a really like weird, perverse incentive here where they're kind of desperate for the next black swan to give them an excuse to do something more drastic?

42:25I'm not that cynical, so I hope not. I'm not saying they create it, but like, are they looking for an opportunity to do something more drastic? Well, I mean, look, we know the incentive of our leaders is to get reelected. it's a structural problem in Congress that we have no term limits, Danny. So their only incentive, truly, is to get reelected. And that means to tow the party line, get the party support, and all shore each other up. Whatever that party line is, they gotta say it in order to, you know, get reelected, which is extremely polarizing in this country. But they'll do that, and so that's their incentive.

43:08That means that they're not gonna cut spending for their demographic. And it also means that they're likely not going to raise taxes on their demographic. So those are two solutions that are pretty much taken off the table. They try to trick each other into doing those things, but they don't do it. So those are two solutions to the debt problem taken off the table. The third solution is just allow for inflation and not worry about it. Just make sure that it's not so bad that it, that people are up in arms over it, you know, and they don't want, they don't want people revolting over it. Um, so that, that's, that's the true incentive.

43:49So when you ask, do they want something? Well, I think what the treasury wants is for Congress to figure out how to rein in spending somehow. That's why they keep putting out pieces that are like, Hey, look, we can't keep doing this. This is, this is unsustainable. But good luck. I just described why the incentives are wrong. It's not going to happen. So, yeah. So here's the issue and why they wouldn't want. They don't want to have something catastrophic because when you have something catastrophic, your deficit blows out and it could be multiples of what it was. If you just do the simple math, we spend$7 trillion.

44:32Most of that we're spending on programs that are signed into legislation. They're mandatory spending, right? So Social Security, Medicare, Medicaid, and then you've got defense spending, which is not going to get cut. And you've got your debt. You have to pay the interest rate on your debt. And that's over a trillion dollars now. So when you add those up, you know, you're you're already at over five trillion dollars. You're you're over five and a half or six, six trillion dollars. So even if you cut out all the other spending, it doesn't leave much left. Yeah. But when you do go into a steep drawdown, because we're so financialized and because you see jobs just get, you know, the jobs fall off a cliff when you have some sort of black swan driven event that I don't even know if we could tell we could say the housing crisis of black swan because a lot of people saw it.

45:32Most people ignored it. But when you have something like that happen, you fall into a great recession like that. Well, what happens to your denominator and your numerator? So you've got, first of all, you've got your spending. That$7 trillion could go up by somewhere between 10 % and 20%. If it's really bad, say it's 20%. Well, now you're spending$8.4 trillion. And then you turn around, and on the revenue side for Congress, or for the Treasury, sorry, is$5 trillion. Well, you could have a 10 or 20 % drawdown there. So let's say it's 20 % and you get $4 trillion. Well, now your deficit is, you know, what did we just say?

46:148.4 minus 5, you're at$3.4 trillion. You've almost doubled your deficit on a drawdown. So they can't really have that because now you're spending, now you're borrowing over$3 trillion a year, which we're already spending over two, you know? And those numbers could easily get out of hand really quickly. And so, um, they, they can't really have that. And that's why they turn around the money bazooka and they try to stop that as quickly as they can. Um, but, and that's, and so do I think that they, they secretly tier it on? No, because of that one issue right there, even a V drawdown, it is painful.

46:53And so they got to hurry up and get money out there in order to monetize their own debt and make sure that you get more money out into the market and keep the charade going, keep the Ponzi going. I mean, it's insane. Is there almost like a gravity to close to 0 % interest rates here that they're constantly trying to fight? Because it seems like all they have left is really to cut rates. Do you think we'll see sort of close to 0 % interest rates again in like the midterm, like let's say the next five years? I mean, in the next five years, yeah, I could see it's going all the way back down to 1 % or so.

47:29I could see that. You know, it depends on the, of course, it depends on the economy and just how deflationary things like AI start becoming and how many jobs are rearranged, you know. But their incentive, like, especially when you talk about the interest on their debt payment as part of the budget, like, they need to get that as low as possible. Well, you heard Scott Bessent last year just absolutely hammering Janet Yellen, about not terming out the debt, which meant that he was like, you had your chance to term out the debt and you didn't do it. Okay. What does he mean by that? Well, so she was, she was the, she was the chair of the fed once.

48:12So she knew exactly what was going on when they printed that$5 trillion. Like she knew exactly what would happen, that there would be inflation, that they would have to raise rates and that would cause a problem for the treasury. Yet she didn't term out the debt. She kept issuing the same levels all along. She could have been issuing longer term debt at much lower rates, but she didn't do it. And so then Scott saw that the Fed lowered rates by 50 basis points. He's like, oh, here we go. I'm going to be able to get my debt turned out pretty quickly here. And so he started really hammering her and saying, we're going to solve this problem.

48:53We're going to be the ones who solve this problem. And he came in and nothing against Scott, you know, like this is the, this is just the reality of it. The, the Fed was like, nope, we're done cutting rates. Now that Trump's in office, let's see what happens. We think that these tariffs are going to be inflationary. So we got to hold off and see what happens. Well, they should have been cutting rates. If you're looking at, if you're looking at the jobs numbers, they should have been cutting, cutting rates this past summer, June and July, you know, know, they should have been cutting rates there, but they didn't.

49:21And here they are. So, um, he didn't get his chance and he's been frustrated. They've all been frustrated. They want the Fed to start lowering rates to do exactly what you said, but here's the issue, Danny. Like I said, they're not setting the 10 year. What happened when they cut rates by 50 basis points back in the fall of 2024? Well, the, they cut by 50 basis points and the 10 year yield went up by 50 basis points. It went the opposite direction. Why did it do that? Because the market knew that it was kind of a political move here for them to say, yes, we conquered inflation, you know, all's good right before the election.

49:58I mean, it was ridiculous. Let's just call it what it is. And then to just stop, you don't do that. You don't just cut 50 basis points and stop. That's not what you do. You cut 25 and wait, or you cut 50 basis points quickly because you're going to cut another 50 and then 25 after that really quick, you're going to be really ratcheting down. They didn't do that. So it was an odd move. If you go back in time and look at the way the Fed makes their moves, it was odd. So, you know, so that that was the Fed then turned around and said, no, we're going to wait and see if these tariffs are inflationary.

50:36We're going to be data dependent here. Well, now they've got themselves really painted into a corner. So we'll see what happens. But they should have been cutting already. But the problem is, I think they're really scared about that inflation. We saw it get up to over 9 % that they admitted to. Yeah, and realistically, it was probably 15 or more. Well, I can tell you they tried to double my auto insurance this year just because they just tried to. And I was like, I had no speeding tickets, no accidents. I mean, perfect record. I'm a middle-aged male driver, which I'm like, I'm the right demographic here.

51:16And you're trying to double my rates? Like, this is just insane, you know? So in one year. So it's kind of crazy. One of the really interesting things that Scott Percent came out and said, I don't know, this was probably three or four days ago now, was he blamed the Fed on the wealth inequality in the us and again like as bitcoin is this something people have been talking about for a long time that we know this um but it was interesting to hear him come out and say it do you think that was kind of just political posturing because again they just want to ratchet up the pressure on drome powell or do you think there is a meaningful like demand for change there there's a truth to it there is a truth to it i don't know um i honestly i don't know scott well enough um i I mean, I don't know him personally, um, to know what his real intentions are on, on changing the nature of the Fed.

52:08But, uh, you know, he's a wall street guy. He knows exactly what's been going on. He's seen it all his career. He is right. And so whether or not he's trying to really change it, he's right. The Fed manipulating the money supply, manipulating access to capital has absolutely cause what's called the Cantillon effect, you know? And so, and that comes from this economist Cantillon who figured out that those who are closest to the money spigot benefit the most. And so who is that? Those are JP Morgan's and hedge funds of the world, you know, and they really benefit from this. So that, and the people who have capital, the wealthier demographic who have capital that are with those banks.

52:58Yeah, assets. They have assets, that's right, too, and investments that are with those large banks or with the Fidelis, that they're benefiting from that expansion of the money supply because it goes into their assets and it goes right to their bottom line. It's super interesting. The probably one question that I would have to ask is, like this whole conversation really has been about the Fed. Do the Fed even matter anymore in any meaningful way or is it just a signal to the market? Oh, no, sure, they matter, absolutely. Absolutely. In fact, they matter way too much. You know, they control the overnight lending rate that all these banks are tied to.

53:42So that creates a situation where we don't have much, we don't have much capital in the reverse repo anymore. There's actually drained. But it does, it causes the cost of capital to go up for everything. So, you know, that's one thing. And then actually flooding the market with money or siphoning it out, you're manipulating the money supply. It's like you're going into the middle of it. We're all playing Monopoly. We're all on the board. and you know if if you already own most of the hotels and i don't own any and you you all of a sudden you put you flood the the um the you you flood the the market with money meaning you put more money in the bank it's just going to benefit you you know and so you're just printing more monopoly money but you take it out it's going to you know it it that's that's the thing it's like you're injecting and taking out money in this game and it affects different people, different players in a different way.

54:46If you have assets, it's great. If you don't, you're toast. It just causes rises of pricing, rising in prices, and then you don't have the money to keep up. And the problem with the lower demographic, right, is that every incremental rise in everyday goods is painful for them because the vast majority of their paycheck is going to those things. It's going to rent and gas and food, you know? And so, and energy, their air conditioning if they're in a hot climate or their heating if they're in a cold climate, and that it's painful for them because it means they have no discretionary income to go do anything else or to invest.

55:32And so when you have the wealthy demographic is like, oh man, my, you know, my, the gas is now$4 at the pump and it used to be two and a half. They're not thinking that. They don't even look at it. They just pump the gas. They don't look at what the price is. They don't look at their grocery bills that closely. They're like, I don't know, maybe I spent a thousand or$2 ,000 a month on groceries. I don't know. They literally, they just are, it doesn't affect their every day. And it really doesn't affect it enough to impact the amount that they're investing or have invested. So that's the problem is that that's, and here's where Scott Bessent is.

56:14And this is where Trump's mind is, I believe, is that he needs the Fed to lower rates soon. um he wants him to lower rate soon and to get out of the the qt business to um to ease up access to capital because they're worried it's going to start hitting the the middle income demographics so middle class and which there's not a big like middle class has been hurt really badly here um but if it starts bleeding into middle class that really hurts a that hurts a a majority of the economy. And so you can't depend on that top 10 % anymore to keep going. And so that's kind of the issue. And that's what they're concerned about.

57:01Is it not already hitting the middle class though? It feels like, I don't know for how long, but for the last five years, maybe post COVID, probably before, like the middle class have been in a really tough spot. They've been squeezed. Yeah, absolutely. They've been squeezed. So how it's hurt them is that they haven't been able to invest in as much, you know, put as much capital away. Um, and so that's how it is. It's hurting, made, made them tread water. You know, um, that's what I see with my middle-class friends who are just, they're just feel like they're treading water. They're the two income families, all their money goes toward, uh, their rent or their mortgage and their groceries.

57:38And that's, that's the problem is they're treading water. So it has hurt them. But the lower demographic is really struggling. That's where you're seeing the delinquencies and the credit cards, just the complete sabbatical on paying their student debt, you know. So that's definitely the first red flag. There's a quote in Gigi's book, which is taken from Alice in Wonderland. And I think it's the Red Queen or someone like that, who says, here you have to run as fast as you can just to stay in place. And if you want to go anywhere, you have to run twice as fast as that. And it is like the perfect analogy to this Fiat Ponzi financial system that we live in.

58:20This is why you have these two camps here. You've got gold running to all-time highs and you've got central banks buying gold. They're not buying U.S. Treasuries. That is a structural problem. And we're recognizing that, which is why the stable Coin bill is so important to get the ability to tuck in liquidity spots where we, you know, little pools of liquidity that the Treasury doesn't currently have access to or has access only through something like Tether, but, you know, they want more. So that's an issue. So you've got gold ripping at all-time highs. And then on the other side, you've got the markets waiting to see what happens with the Fed.

59:03But yeah, I mean, that's kind of what everybody's focused on. But also, I'm looking at things like, if you look at credit spreads, you know, from corporate treasuries to the 10-year, they're low, you know. There's not a lot of angst there. If you look at the term premiums on the 10-year, they moved up to over 85 basis points. They're all the way back to 60 today because people are calming down a little bit about the worry about a ripping inflation. They're calmed down about that, you know? So, and you look at these things and then you look at the VIX and the VIX is, I mean, it's down around, today is at 1471.

59:45I mean, it's bouncing around the bottom here because there's a lot of either complacency or confidence that we've got, you know, we've got more runway. And so to bring the whole Fed conversation to the end here about the Fed is when the Fed cuts rates, typically they're way behind the eight ball and they cut too late and we're already in recession and you see the markets draw down steeply. But every once in a while, they cut while the market is modestly expanding and just it's starting to grind sideways though and they get it right. And so that's positive for risk assets for things like gold and Bitcoin too, because it's, it's, it's expansionary and you, um, and that expands liquidity.

1:00:31And then sometimes the, the, um, cut when it's just, it's, it's too early and it rips higher. We saw in the eighties, but I think that we're right now in the period that they could start cutting and it's not dire yet. And if they do stay in a program of cutting, it'll keep this thing going for a while. So that's why everybody's eyes are on the Fed to try to figure out what they're going to do next. And if it's going to continue, if they're going to continue on this program, or if they're going to hit pause and stay back and say, remain political and say, we're going to see what the data says. One of my favorite things about Bitcoin, because so this show is going to go out the first morning of the FOMC meeting, but you don't even need to watch it.

1:01:15All you need to do is look at the price of Bitcoin, you know what's happened. Like Bitcoin's gone up five grand in the last like three days or something. We already know, like we know what's coming. That's like a real free market dynamic that I love. All right, cool. This has been great. I assume off the back of this meeting, you think that's insanely bullish for Bitcoin if they start cutting rates again. What do you think like the rest of this year will look like for Bitcoin? Look, I've been, I've thought that we could hit 150, 180 sometime this fall for a long time. I'm kind of surprised how hard we bounced off that 120, 125 level a few times here.

1:01:55And so does that give me pause? No. Do I think that the four-year cycle is over and bring it all the way back full circle to your question about Bitcoin in the beginning? I mean, I think it's changing. And one of the things that we didn't talk about is because of just the sheer amount of institutional capital that's coming into the space. And what happens is when you get institutions that decide that they need an allocation to this thing, they start rebalancing their portfolios around it. And so if they want a one or two or 3 % position in Bitcoin, if Bitcoin goes down, they buy some more. If it goes way up, they sell some because they want to keep it at that 3 % position.

1:02:28And that does dampen volatility. And that's going to continue to happen more and more and more as Bitcoin is continued to be adopted by institutions. And so, but I still think that we have, like Bitcoin, it can be extremely volatile to the upside too. So people sometimes forget, all they see is those 50, 60, 70, 80 % drawdowns like, oh my God, this thing is volatile to the downside. Remember, it rips higher too. And there was, I don't know if it's true this year yet, but over the last number of years or since the beginning, you had like almost 90 % of your returns in Bitcoin could be captured in just 10 trading days a year.

1:03:12Like it really has violent moves higher. So that's an interesting thing to remember too. So I still think that we can get 130. If we don't hit 130, I will be shocked. but I still think we can hit 150, 180 by the year end. You know, it wouldn't surprise me in the least. That trading day - I don't really love price predictions, but you know, I'm super - That seems relatively, that doesn't seem too outlandish. Like I could totally believe that happens as well. It's funny that stat on like you get, you can capture all the gains in sort of 10 trading days a year. I do wonder how this cycle is changing that because this has just been a grind.

1:03:57Like it hasn't been like previous cycles. Yeah, we haven't had that blow off top, like you said. We just haven't had it. It's almost not been a bull market yet. I'm ready. I'm ready, James. But this has been great. Thank you, man. I always love talking to you. Anywhere you want to send anyone before we close out? No, I appreciate it, Danny. Just remind people that I'm the co-managing partner of the Bitcoin Opportunity Fund and we are investing in the space. So if you're an institutional investor and you want to learn more about it, just come to Bitcoin opportunity.fund and reach out and we can, we can set up a call or something and see if the fund would be right for you.

1:04:34And, and of course I write the newsletter, the informationist like you were talking about, and that's just at jameslavish.com. There's a free version that you can get each month and, and it just simplifies one complicated financial topic every single week. So, yeah. And if you can part with the stats, buy it, cause it's one of the best newsletters in the space. James, thank you, man. This has been good. I appreciate you. I really, it's always good to be here, Danny, and look forward to this fall. It's going to be fun. It is going to be fun. I'm sure we'll speak soon. Thanks, James. All right, man.

1:05:24Thank you.