The System Is Broken, the Fed Is Trapped | James Lavish

31:37And that's gotten to be where it is. Okay, well, why does this matter? It matters because if you have this productivity boom, well, on the other side of it with AI, there is a casualty on this one. And the casualty is that young or entry-level data entry kind of clerk, simple math analysis, simple analyst, you know, the number of jobs that are going to be taken over coding. I mean, coding's dead. Like, to be a coder, like, the vibe coding thing is just, that's mind-blowing. you don't need to have somebody who understands code anymore. This stuff does it better and without mistakes. And so the thing is, it's going to cost people jobs.

32:36And as Jeff Booth says, and this is this whole thesis, this is what got me to understand and be and really dive deep into the Bitcoin rabbit hole and get comfort around it is that this technological revolution is deflationary. At the same time now, it's going to be really hard on some jobs. You know, you and I are on Twitter and we see this stuff. And we see what's happening in the AI world. Danny, the normal person is not seeing this stuff. I talk to people who are not in the know, who are just not on this stuff, who are just going to work every day. They're nurses or doctors or lawyers, and they're not looking at this stuff.

33:25They have no idea what's going on. Clodbot, no clue. You know, like that's so far down the road. They don't even know what the different, what Gemini versus OpenAI versus Grok versus, you know, Anthropic and Clod. They don't know the differences, the different engines, the different capabilities. They have no clue. They just hear AI and say, oh, yeah, chat GPT. You plug it in and get, you know, it's kind of like Google. Yeah. They have no clue what's coming. So anyway, so the point is, this is the whole thesis for Jeff Booth, is that the acceleration of advancement in technology brings the acceleration of this deflationary effect.

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36:01speak to anchor watch for a quote and for more details about your security options and coverage visit anchorwatch.com today that's anchorwatch.com but could you not have a scenario where um gdp actually increases quite significantly because of like productivity gains with ai and stuff even while employment is also dropping off a cliff like i could see a world where we have massive productivity gains but also huge rise in unemployment exactly and so you have a huge rise in unemployment, which will hurt GDP. Everything you're seeing is you're getting to do more and more and more for fewer dollars.

36:42That's deflationary. Well, the productivity gain will be because everybody's using these things and plugging them in and getting productivity out of it. But how much does that go? What are the gains in dollar terms? So we're going to need the the offsetting effect, which is expansion of the money supply. And so that's the scary part. Yeah. I mean, something I've said a load of times on the show at this point is I can't see a world where we don't have some form of universal basic income at this point. Like if AI does what people are predicting that it will and replace a large number of jobs, like you were saying with software developers, like one good developer now can probably replace 10 with like using AI tools alongside themselves so like if there's your productivity game so the company makes more money because that one person could do the do 10 jobs exactly and so that's where i'm like yeah i think you could get increased productivity with increased unemployment but then does ubi have to follow that because what are people going to do if they can't find jobs like the government isn't just going to let them sit and rot yeah that's a philosophical question that's beyond my pay pay grade you know um i don't i do expect something like that if you talk if you talk to elon that's what he believes he believes you're gonna have and he's gonna be like a wealthy universal income it's not just basic yeah that's one that i can't understand though i don't understand how that can actually make sense like how the math from that can make sense well that's that's it we have i think we have a long way to go and a lot of disruption a lot of pain to get there to be truthful and that's that's a that's not a cynical view it's just a it's a cautious view um yeah so anyway you cut it though anyway you cut it though danny that's the whole point of all this is that there's really no choice for these guys they're gonna have to print money at this point so with um wharf coming in potentially so actually maybe we should explain that so he's been nominated by Trump, but what actually happens next before he is the Fed chair?

38:48Yeah. So now he's got to go through a Senate confirmation, um, you know, process. And I don't know what that, what that schedule is, but that's what, that's what the, you know, the normal route is. Um, I don't, God only knows, God only knows that the Senate could come up with Who knows? I think he chose him because he doesn't appear like he's just going to be this figurehead that is going to do Trump's bidding and just lower rates. It doesn't appear like that. And the market's telling you that they believe that, you know, he's not going to. So as far as the gold and silver markets, that's what they were saying.

39:33Yeah, the long end of the curve is still hanging in there. So that's the question. It's like it's kind of a battle between realities here. And my take is, like I said, is like there's just – heat is not going to have a choice. Eventually, we're going to have to lower rates. We're going to have to do QE. It's just math. I mean, it's not something that's trying to pump Bitcoin bags. It's just math. It's just the reality of the situation. So I was reading your newsletter, and that was one of the interesting things, because basically all you saw on Twitter that day is that Gold and Silver reacted, seemed like people thought he was going to be a hawk, which I find hard to understand, because if Trump's nominating him, I imagine they've had plenty of conversations, and I think he probably will do Trump's bidding.

40:21But you brought this chart up on the newsletter. Can you explain what this actually is? Yeah. So this is the different yields, right? And so you can see in here, it's the two-year, the 10-year, and the 30-year yields. And so they gyrated pretty heavily here, right? And that's the surprising part is that investors are trying to get a handle on actually what is going to happen here. Like, where are we going here with these rates? And they settled in just a little bit lower than they started out, but it's not that much. It's just the gyration was what was interesting. Like, look at this. These are U.S.

41:19treasuries and look at where they're going. Like, it's just like that's just it's crazy for them to just run around like you're up and down like that in one day. It's just not it's just not typical. And you're seeing that with with all these things. So this is the market trying to figure out what he's going to do. And where has it kind of settled? Has the bond market decided it's going to be pretty neutral, his appointment? Well, that's the other chart is if you bring up Fed funds, the Fed funds charts, you can see that the Fed funds futures, which are those two Bloomberg charts in there, the Fed funds futures, they didn't move around pretty much at all.

42:05And that was surprising. So if you think this guy's going to be a hawk or this guy's going to be a dove because of being nominated by Trump, then you would have expected the Fed funds futures to move, meaning the Fed funds futures will trade according to where investors believe Fed funds will settle out. So that's these two. Exactly. So before he was announced, this is like the day of the Fed meeting on Wednesday. So it's still showing the 128 meeting number there. But before that, you can see here on the left, the implied overnight rate. Looks like it bottoms out there at about somewhere about 3.1%.

43:04That's where it bottoms out there in the end of 26, beginning of 27. So 3.1%. So that says that the implied number of rates of hikes or cuts on the right-hand side, you can see that it's somewhere around 2.2 cuts. now you go to the next chart after he was announced and what do you have the number of cuts went it just it it went down a little bit yeah so on the previous one it's more like 1.75 and then after he was announced it goes down to about 2.2 and now it's yeah exactly so it's just It's barely, and then it's right at 3.1 % is where you're coming in on the ultimate rate. So it's like it was a non-event to the Fed Funds futures.

44:07So the Fed Funds traders are like, well, he's just going to keep doing what Powell's doing is what they're considering right now. And so what you're watching is real time, all these markets just trying to figure out what the heck is going to happen. And what's interesting about it is that the gold and silver, as far as the – if they were really being bought up for – because of worries about U.S. debasement, this is not just U.S. investors reminding you. Like, most of this is coming from central banks. I mean, they're buying 1 ,000 tons from the last three years, which is just, that's double what the normal high rate is.

44:54And so they're concerned about holding U.S. dollars, meaning they're concerned by holding U.S. treasuries, meaning that they're concerned about holding U.S. dollars because of that debasement. So for gold to sell off so steeply, that was a little bit of a wake-up call. and does that mean that oh hey we we have we actually are going to get this under control i don't think so so with the gold like the gold trade has been insane over the last 18 months or so do you think this is that trade sort of ending or do you think it's just taking a break well i don't think it's ending i just think it's just taking a break for sure Um, you know, you can't have something go, look, the old saying is trees don't go, they don't grow straight to the sky.

45:46Um, and so it was due some sort of pullback. I did not expect it to be so violent so fast. It was due a pullback though. Um, do I think it's over? No, not by any stretch. um i would what i would what i would hope and expect though is that as gold and silver kind of settle in and and the volatility decreases and they get into a trading range that's where anybody who's been playing them for momentum obviously there were some players that were playing momentum in them uh once that happens then they get bored and hopefully that's when they rotate back into Bitcoin. Well, that was going to be my next question.

46:26Like when does Bitcoin get his run? Yeah. So, well, I'm wary of Bitcoin here. And the reason is because we haven't had a sell-off in the general market. It's like Bitcoin, what I, if you looked at Bitcoin the last number of times we had a big sell-off in the general market, then Bitcoin kind of front ran it. And then everything and kind of followed. And so I expected, oh, Bitcoin's sniffing out the MAG-7 being overvalued here and the general market's going to sell off. It never did. So Bitcoin sold off, but then gold and silver ripped higher. So there was like this, a negative cascading effect there where Bitcoin kept selling off and kept grinding lower because Bitcoin and gold kept grinding higher.

47:15So it was like people were rotating out. anybody who was looking for momentum was rotating out of Bitcoin into gold and silver. Not anybody, but some people who were. And so here's my concern is that we get some sort of steep market drawdown because of an event, Danny, that causes that typical everything correlates to one trade where you walk into the hedge fund office, you walk into an investment fund, you say, just sell 10 or 20 % of everything. I don't care. Get it off the books. I need liquidity. Why would you do that? Because you need to be ready for margin calls. Even if you're a hedge fund, you're on portfolio margining, meaning that you're getting haircuts that are as low as maybe two, three, 4%.

48:00And with certainly five or 6 % with your blue chip stocks, meaning that you only have to put up five or 6 % and you could borrow 96 % against it. Well, they move those requirements kind of dynamically during periods of stress. So if you expect there's going to be a period of stress, you're selling stuff over the weekend. Well, what can you sell? Bitcoin. So Bitcoin goes down over the weekend. Everything correlates to one, meaning gold and silver go down along with stocks. That worries me because if that happens, Bitcoin's still not safe here at 78. it will go into 60s and test that, possibly test that lower band of the power law in whatever it is, high 50s now.

48:50So that's actually a good question, exactly where it is. So, and if you look at it as of today, if you're looking at the power law for 211, it's 52.6, 52.7-ish, somewhere around 50 to 55 ,000. I would expect that it would test that if we get a steep drawdown in everything, because markets correlate to one, this is something that investment funds and hedge funds will be able to sell. And you sell what you can, not what you want to. So does that mean that there's pain coming? Well, I don't know. I mean, but I do believe, Danny that uh that bitcoin over the long term is going higher if things settle out here and this market resumes its march upwards I would expect that bitcoin will join in that's my expectation that we will go back and test our um all-time highs again this next year but that's a lot of ifs I mean 58k gang might be right I mean that memes are reality If that happens, it'll be absolutely hilarious.

50:06But one of the things that... Trump is pretty cooked, I think, in the midterms. With everything that's happening, it seems, at least from afar, he can't really win the midterms unless something extraordinary happens in the next eight months or whatever it is. And one of those things has to be the economy absolutely flying. So he's going to do everything in his power to make that happen, I imagine. Bitcoin must do well in that scenario. So is that one of the things that's kind of you're holding out hope for? Well, I mean, I'm wary of that, that them juicing the economy, lowering rates, heating it up, because then you're going to have inflation again.

50:46Inflation doesn't come on right away, though, as we all saw. You, you, you, you print money, you buy bonds and it filters in through the Cantillon effect and it kind of filters in that way. And so it takes time. It certainly won't happen before the midterms. Even if they started printing today, it would be difficult for that to happen. So I don't think he's worried about that. He's more worried about, oh, let's keep the economy juicing and we'll manage it. We just won't let it get out of control like Powell did. That's what he's thinking, I bet. And so he's going to play that game. He's going to try to walk that tightrope.

51:25It's a tough one to walk, as we've experienced. but you don't have to come in with a bazooka. You don't have to print$5 trillion, I don't think, unless there's some sort of credit issue or a credit event or black swan, then you're gonna have to print more than five. You might have to print 10. So, and that's the scary part. And on the backside of that, of course, Bitcoin will not benefit, but it will reflect the devaluation of the dollar on the other side of it. That's what it will do. Yeah, I mean, with the political incentives as they are, I think they would deal with inflation after the midterms if they thought juice in the economy would actually win them in the midterms.

52:10But we will see. It's going to be an interesting year. You obviously follow the liquidity cycles pretty heavily. Michael Howell, he's your guy on that. Where are we at in terms of liquidity cycles? Yeah, well, and that's the thing is that Michael believes that we're going to top out here this year. And that global, because when you look at it, it's not just M2. You got to look at the global situation. And if you have the ECB tightening, if you got the UK tightening, if Australia starts tightening, they're big markets. And so, but it's not just central banks. It's the full-on liquidity and meaning the borrowing And the volatility, if volatility rises in bonds, well, that means that there's a higher requirement for collateral, which is an input.

53:08You know, obviously, central bank buying, central bank QE, central bank QT, those are all things, the interest rates themselves, and then the shadow banking. And so all you need is some disruption in the markets in that general cycle, and you'll get a contraction of the money supply. But he's been saying for a long time that he's thinking that we're going to be topping out here in this next quarter. And so we'll see if he's right. But he's more of – and I like him, Danny. I like his analysis because I don't know exactly how he calculates it. It's proprietary, but he does liquidity. And that includes all the debt and financing and shadow banking where the financial firms are lending to each other.

54:02And that's repo market stuff and all that. So that all matters. It's not just printing money. So M2 is useful. It's the biggest component of all that, but it's not the only one. Yeah, I need to get him on the show. you have to do an introduction for me because i'd like to get into that i'll intro yeah absolutely i i like michael i'll intro him to you it sounds like you're pretty cautious though going into 2026 on bitcoin this is well look you know we're are you know that i i co-managed the bitcoin opportunity fund with david david foley and we're we have to be exposed because that's what our We're on a Bitcoin standard.

54:42We own Bitcoin instead of dollars. That's part of our thesis. That's our operating measure. And so we're looking for the best opportunities we can find out there. We're finding some opportunities. We're picking away at them. When we see some of these things draw down so steeply, we're picking opportunities. We're not buying every single treasury, Bitcoin treasury company. There's just, there's a handful that we think, that we feel comfortable with, that we feel can execute on the plan of basically creating Bitcoin through fiat arbitrage. And MicroStrategy is one of them. I can't talk too much about it because I'm on the board of directors of Strive now, but Strive is one of them.

55:36you know, MetaPlanet, obviously, 21, Jack Mahler's company. Those are, those are ones that we, we feel I have, have, and I, you know, not to not call out any of the other ones, but those are, and then, you know, we own some out in, in some emerging markets like Oranger down in Brazil. So there are some that we feel are well positioned and we are exposed to. The good news is that as tumultuous as it's been, especially for the Bitcoin treasury companies, is that because we're a hedge fund and we operate in the capital markets, we are able to buy these in the private market and get them at close to or under 1M NAV to the underlying Bitcoin in the company.

56:26So, you know, we have exposure to the Bitcoin, but we haven't been hurt by the contraction of that multiple of MNAV on the underlying Bitcoin. So that's the good news. But to answer your question, we are cautious. And we have some interesting hedges on to protect against that downside volatility, which we expect there to be volatility here. It's insurance. It costs money. Uh, it's difficult to do without either just throwing away money, burning the money or getting yourself in a situation where you're not really protected. Those are, it's a challenge. Um, but we've done this for many years and we, you know, we've both been doing this for about 30 years.

57:15And so we've seen a lot of markets and we've seen a lot of situations and we've got some interesting hedges on that we feel will help mitigate some of that volatility. so that's a long way of saying that we would not be surprised at all if bitcoin goes and tests these levels again but the good news is that when you do things like that danny and this is what you know listeners um ought to have in their in their head is that when you protect against volatility like that what happens is you can why you wind up making money on that hedge on the way down, then you harvest that and you turn around and you plow it back into what you believe in in long term.

58:01And so you can then, what happens is you're buying convexity because you're then, you're buying these things on the dip and you're purchasing securities that will give you convexity on the upside, meaning that it's a form of leverage that doesn't expose you too far on the downside. And so you're already buying them at a very attractive price and you've made money on the downside and then you're going to make money on the way back up. That's the way we're, we are, that's our goal in our operating and our mechanism here. And so we're cautious. We're not just plowing everything in every single dip.

58:45We're being aware and trying to be nimble without being cute. And it's a pretty fine line to walk. Yeah. So are you doing this with like options on iBit and stuff? I had David Dredge on the show recently. I don't know if you know him, but he talks a lot about this. Is that the kind of stuff you're doing? Is it option contracts on iBit and things like that? Yeah, we've done options contracts and all kinds of stuff. And it's sometimes we do it on securities that we feel would be proper hedges for a general market downturn and give us a little bit more beta exposure, which would be more like Bitcoin.

59:21Because the problem with IBIT is that the options are expensive, or that's a challenge. It's not a problem. It's just a challenge that the options are expensive. So you have a choice. You can either just buy insurance on the downside, you just buy puts, or you can do some sort of put spread where you're buying this insurance, but you're also selling the insurance past the level that you're comfortable with taking the risk of. Because I don't think that Bitcoin's going to 20 ,000. So to be hedged under 50, under 40 ,000, it doesn't really make sense to me. And so you can harvest some of that on the other side.

59:59And what happens is you wind up giving yourself a better risk reward of that insurance. that doesn't come without challenges though. It's not just like, oh yeah, that's a great idea. We'll do that. Because what winds up happening, Danny, is that as you're still far out on some of these options, you have what's called theta, which is that time value that's embedded in that option. And so even if you get, let's say you're protected down 10 % down to down 20%. Well, if the market goes down, you know, IBIT goes down 18%, that's great. You've captured 100 % or you've captured 18, you've captured 90 odd percent of what you expected to capture without the cost of the options.

1:00:54And then you just cover them, right? Well, you can't because there's still time value embedded in that short option. and so it's really difficult to stick the landing there and so you wind up trading around them a little bit to make sure you get the best out of you harvest the most that you can out of it and that's and that's that's where you have to be nimble and not cute is what i'm talking about yeah this is this stuff's way too complicated for me like i i only vaguely understand options like there's no way i'm touching any of this stuff in fact yesterday i significantly increased my dca and i'm uh i'm tempted to take out another bitcoin backed loan like the i'd taken out a Bitcoin back low when it's 126 ,000 is obviously higher risk.

1:01:37But like down here, I'm starting to see, well, I'm very tempted. We'll see. I might do another one. But I always caution people to be aware that you're, you know, when you're collateral is, you know, you're buying something on margin and that collateral is that volatile asset that you're buying. It's just, it is dangerous. And so you have to do it with money that you're very comfortable with. And it's about position sizing, right? Like if you do it with a small enough part of your stack, then you can always cover the potential margin call. Like there's ways to do it in a sensible way. There's ways to do it without, yeah, sensibly, without taking undue risk and without being risk wiped out, being wiped out.

1:02:19Yeah, so. Yeah. Well, I'm like eternally permabullish. Like I really struggle to see a scenario where Bitcoin's not, you know, significantly higher in a year's time, but I'm often wrong. So don't take that with a grain of salt. But James, this has been awesome. I'm with you. I believe that what we are experiencing right now, Danny, is an information or a knowledge arbitrage. And so people just do not yet understand how Bitcoin is different and why it is the ultimate store of value and the ultimate debasement asset. They just don't understand it yet. There's a lot of confusion there. You know, the, the, the, uh, mainstream media puts out confusing and, and hit pieces about it all the time.

1:03:07They commingle it with all the other cryptocurrencies and they just call them all the same thing. And so I have friends who say, I own that. I own Bitcoin. I own the, the, uh, the Solana one. And it's like, they just don't get it. And it's okay. It's not their fault. They're, they're just not interested in doing the, doing the research themselves and they're listening to mainstream media and getting their their news off of Facebook or their research off of Facebook they're just not getting it and so there is an information arbitrage that you and I are experiencing right now it feels bad and it makes you feel like am I an idiot am I just stupid that I'm how early am I here and the answer is you're still pretty early because I think that that Bitcoin is going to trade above a million dollars in early 2030s.

1:03:562032, 2033, I would be very surprised if we're not touching million dollar Bitcoin. That's me. That's my thesis. That's where I believe this thing is going. But I also believe that part of that is that knowledge arbitrage will close. And as that does, you're going to have the Harvards and the Yales and the University of Texas and the the CalPERS and the Texas teachers and the every pension and fire fund out there taking positions in Bitcoin as a core asset. And when they do that, it's that that's when that knowledge begins to really spread and people like, oh, so Bitcoin is different. Okay. So Bitcoin is different.

1:04:41It's not just this moonshot thing. It's digital gold. Okay. Then I should probably own some. And funny enough is I think that that's going to be a much healthier rise for Bitcoin in price and a much more stable rise. It's not going to be this massive volatile thing. It's going to be like people, oh, I get it. Okay. I get it. Oh, okay. I understand now. I understand. I understand how it's different. And then we'll feel vindicated and, uh, you know, we'll look like we're 143 years old when we're, when we're just in our fifties or in your case thirties. I mean I'm looking forward to feeling vindicated again but I'm with you I think like I could see million dollar Bitcoin by the mid 2030s and it's really not that far away so you want to buy it now and sell it to them later exactly just hold on tight James this has been awesome man I'll see you in Vegas in a couple of months maybe we should run it back absolutely but thank you for coming on the show tell everyone where to go to find a newsletter I think it's one of my favorite newsletters in Bitcoin so people should check it out thank you Danny it's called The Informationist You can find it at jameslavish.com.

1:05:46It's on Substack. There's a free version that you get one full piece every month, and then there's a paid version you get all four. It comes out every Sunday morning. So I really enjoy writing it, and it's a great community. We get a lot of comments in there and some banter, and it's good. So it's something that I didn't expect to become what it has. You know, when I when I was talking about this with with my wife last night, she's like, well, like, how did you even come up with the idea of it? And I was just thinking, well, do you remember that book? I think it's called How Things Work. And it's it's this big like coffee table looking book that's got photos of like elevators or buildings or very tall buildings and structures or airplanes.

1:06:35And and you see a cross section of it. Really cool drawings. and see how everything works in there, but it's really simple. And so it's, and I was thinking, my vision for this thing was, it would be kind of like that in a newsletter. And now, you know, with the ability to make infographics much more easily with, because I understand Photoshop and all that stuff and with AI, it's a big help. It's becoming more and more like that. So I'm having more fun with it than ever. So there's that. And then of course, if you're an accredited investor and you're interested in owning exposure to Bitcoin and Bitcoin companies in a little different way, we have the Bitcoin Opportunity Fund 2 just launched and perfect timing actually for people who want to get exposure to this thing.

1:07:30And so if you're interested, just go to bitcoinopportunity.fund and reach out and we can jump on a call and see if it's something that would be appropriate for you. and uh and kind of talk through it so and that's it awesome i will make sure there's a link to the newsletter in the show but thank you james i will see you soon man you're welcome danny always good to see you and uh and talk to you see you in vegas soon

1:08:09Thank you.