This Is The Macro Reset | Nik Bhatia

26:59And it's not because I want to, it's just because I don't necessarily see the alternative. Like it seems like AI is almost going through specialization phases. Like programming seems to be the first one. It's now just like, if you're not using that as a computer programmer, you're just dead in the water. So again, like you're saying, it will get to the point and maybe it is already at the point where people using AI to make their production better is already happening. Like if everyone's vibe coding, so you become a prompt engineer essentially and you're making AI do your work. So then there's a team of developers that might be more junior developers that get laid off because you just don't need them anymore.

27:34But then as it goes through the workplace and it takes out accountants jobs and the junior lawyers jobs and all these different white collar jobs that end up getting disrupted. If you're a 40 year old accountant, 50 year old accountant, are you going to retrain to work on like road construction? Like these are the things that I find really hard to just say, yes, people will do that. And even still, like if you look on a road construction site now, there might be, you know, 10, 15 workers, whatever on it, on one particular road site. If that becomes one or two, like what happens to the other 12 or 13?

28:07I just, I really struggle with thinking the retraining thing is going to work because that's what people were told to do during COVID and that didn't really work out. Everyone became computer programmers Is it now they're losing their jobs to AI?

28:20Nik Bhatia:Yeah, you know, I can't argue with you, Danny, because we don't know what's going to happen. And I don't have a fatalist thesis on AI because when AI has replaced, let's say, 50 % of the accountants, the accountants that, you know, the 1 million accountants that have lost their job, are all 100 % of them going to fail to retrain? That's where I see, that's where I push back. So every marginal thing, like I have a couple friends who are attorneys. One of my friends, he's using Claude all the time, but Claude can't go into the courtroom. Claude can't do some of the stuff, so he's amplifying what he's doing.

29:10Nik Bhatia:And yes, I have friends that are entrepreneurs that are laying people off as well. So there will definitely be an adjustment, but I, I mean, it's just, you know, what you believe. And I do believe that there will be jobs like who's going to make all the robots. So people say, well, the robots will make the robots, right? Tesla's especially in their factory, but you still need people to do things. And, um, you know, like Elon says, if everyone's just going to be infinitely wealthy, we'll all have all of our time and everything will be free. I mean, I don't see that future either. Yeah, and I don't even, like he paints that as a sort of utopian future.

29:52I understand why, but I also fade that as a narrative. I think people without meaning is a very strange world. But I just, I struggle to see if AI is as disruptive as you think it's going to be and timeframe doesn't really matter. At some point, I think this is going to happen where it replaces the vast majority of jobs. What I don't understand is what happens to all the externalities. Like in the interim, even if people decide to retrain, even if people decide that they want to become a musician or a painter or do something creative, like there's going to be an interim period where people lose their jobs and they still have a mortgage, they still have credit card debt, they still have a car loan.

30:34Like what happens to the economy in that interim period? And I can't see a way that it's not catastrophic.

30:41Nik Bhatia:You make a good point because in the end, the defaults are what trigger a financial crisis. So if you can't pay back, not only do you default on the debt, but the bank that is issued to you or the mortgage-backed security holder that owns part of that mortgage is going to suffer impairment. that's why the federal reserve bought so many mortgage-backed securities between 2008 2012 because if there were defaults in the system and the banks were going to take those defaults then the whole system does collapse we are in a 350 trillion dollar debt based system 350 trillion dollars in just numbers you can't comprehend and you know my students have to think in trillions is what we do every every single class we show charts and we're comparing this seven trillion line item to this 38 trillion line item to the 64 trillion line item in the euro dollar system 15 trillion and on uh in offshore dollar deposit claims but another 60 trillion in fx swaps claims These numbers are large.

31:58Nik Bhatia:$350 trillion, the quarterly number that comes from the International Institute of Finance. It's a very large number. But the system is built to roll over that debt. That's where the liquidity framework comes from. What is the capacity for the system to roll the debt over? And when that gets hit, defaults, financial crisis, central bank bailouts, you go back up. That's just the system that we live in. And because we know that banks are incredibly levered, what percentage of people do you think need to lose their jobs and start defaulting on loans before it becomes an issue? Because I don't think the number is as high as 50%.

32:41Is it as low as 5 %? Like what kind of range are we looking at?

32:44Nik Bhatia:You know, right now we have a banking system that's leveraged about 10 to one, but that's in, that's what we can see. There's the private credit crisis that's going on right now. The leverage there is harder to see because the banks lend into the private credit operators than they lend out into the market. That is a leveraged play between the banks and the private equity, but less levered or less obviously levered between the private equity and the ultimate borrower. Five to 10 % is going to cause immense damage. It's just, that's what the nature of the system is. When cash flows stop at the margin, everything collapses because of leverage.

33:36And I know you're not a fan of the sort of inflammatory statements of like a big print's coming, but in that scenario, a big print's coming, right? Sure.

33:46Nik Bhatia:Yes. You can understand from the Fed's framework that that's what they will do. But the key to understand is that it is the government that does it. The central bank is simply the financing apparatus when the going gets tough. It's the government. So when, let's say, 5 million people lose their job, the government is going to put a ubi sort of program or unemployment insurance right even in during covid we had five years of unemployment insurance four years of unemployment insurance you'll get that type of program the government is who borrows and spends that money and if the interest rate is punished to the degree where it starts breaking the system that's where the fed comes in for financial stability.

34:47Nik Bhatia:So the Fed is reactionary. They don't actually control anything. And they're really just there to serve the government. The Fed, when it started to do QE, it was in response to what? The bank bailout. The bank bailout came from where? Congress. it i mean and cities bail out they came from congress and so it is the government who spends the money and the fed will just be there do you want to pay less in taxes and stack more bitcoin of course you do well by mining bitcoin with blockware you can under section 168k of the u.s tax code bitcoin mining servers qualify for 100 bonus depreciation this means every dollar you spend on miners can directly offset your income in a single year.

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37:25I've been told off in the comments for constantly saying I think UBI is inevitable. And I really hope you're right in this scenario. But I just can't see a happy ending to, or maybe not even, I think there's going to be a hard interim. And I do think UBI is probably the most likely outcome. It's definitely not that I think there's a good idea. I think in a situation like that, where 5 million Americans lose their jobs, the government has to do something. And that seems like the most obvious option.

37:52Nik Bhatia:So here's how I'll push back on that. The government already spends most of the money that it earns via tax revenue on Social Security, Medicare, and unemployment insurance and welfare payments, transfer payments. So the government and the tax base of the United States is massive in the$5 to$7 trillion range. Three and a half goes right out the door on these entitlement programs. You might not call it UBI, but it's a transfer payment. So transfer payments are already completely dominating our tax base. doesn't matter what you call it going forward. Maybe we'll dial up the unemployment insurance segment of it.

38:47But you can't stop paying Social Security.

38:52Nik Bhatia:And the government does have to figure out on a budget basis, Medicare spending, because it's out of control. and it's caused the US economy to bloat to almost 20 % of the GDP as healthcare. And that's way too much. So Medicare is a problem, but not in the fact that they're going to continue transfer payments, just that it's incredibly inefficient. But surely the impact on the real economy is different between Medicare, Social Security, and UBI, because UBI is money going into people's pockets that they then spend in the economy. Social Security is money going into people's pockets and spending into the economy.

39:31Nik Bhatia:It's the same thing. That's exactly what Social Security is. The government pays seniors, and then they go, and then they spend it. So it is the same thing. Unemployment insurance is the same thing. Food stamps are also the same thing. It goes to the person, then it goes back into the economy. So these transfers, that's why I'm calling them transfer payments. The health care money comes to the patient, goes to the doctor. Everything is a transfer payment. My point is that if two-thirds of our tax base is already going to transfer payments, is another one-third of it, like let's say now all of it gets eaten up via transfer payments, and then on top of that, you have defense and basically discretionary.

40:17Nik Bhatia:It's like the last thing left. And of course, interest. Well, it doesn't, like you could say that all of the transfer payments plus the interest is the tax base. Or you could say all the transfer payments plus the military is the tax base. Whatever it is, we're at a deficit. The deficit is between$1 and$3 trillion, depending on what year you pick in the 2020s. And here's the ironic thing about it all. The market doesn't care. And by the market doesn't care, I mean interest rates are at 4%. They're at 3 % in the front end of the curve, 3.5%. They're at 4%, 4.5 % at the very longest end of the curve.

40:57Nik Bhatia:Where's the crisis? Where is the bond vigilante? Where is the market forcing the hand of Congress to stop spending the money or to stop signaling that it'll all be okay because we'll do some transfer payments at the margin? This is an impossible question to ask because the market is not just one person. But why do you think the market isn't seeing this as an issue? Do you think it's that they don't see this as a likely outcome? And is the bond market always right? Yeah. Generally, yeah, I do believe the bond market is right. And this is actually why I got into Bitcoin in the first place. My market is the repo market, as we talked about.

41:44Nik Bhatia:That's the market I started, cut my teeth on. When you trade repo and you see the size, for example, right now, the SOFR volume is about$3.5 trillion,$3.3 trillion. That means that every night,$3 trillion, just to simplify it,$3 trillion in money market fund cash goes to the dealer balance sheet to fund their treasury inventory every night. The cash goes to the dealer. The next morning, it comes back. When it comes back the next morning, some of that cash is spent into the economy. Some of it that's spent in the economy somewhere else comes back in, and then it goes back to the dealer and it goes back.

42:30Nik Bhatia:Three and a third trillion, Danny, is about two to three times the Bitcoin market cap. The whole Bitcoin market cap is half the size of the overnight repo roll of the dealers. people don't understand how large the wealth of the world is when i traded treasuries you learn one thing everybody needs them and it's not that whole thing of everyone needs them it's like they need water danny it's not like everybody needs stocks or everybody needs, you know, Toro belly or everyone, you know, needs oil. In fact, not everyone needs, in fact, not everyone needs oil. Yes, oil is an input to almost everything in our economy, but even oil on a macro scale, or let's say at least in an investment portfolio.

43:37Nik Bhatia:Nothing is like treasuries. It is so needed that the US government can spend anything it wants and its interest rates don't go above the companies in its own domicile with much better economics. products meaning do you expect apple with all this debt to default well no if you look at their cash flow and you look at how many iphones they sell you know that there's always going to be money or i say always but in the next five years you can project it out still apple's bonds get purchased 30 50 and uh who did the hundred year google did the hundred year and then amazon did 50 year. But those interest rates are still higher than the United States Treasury borrows at.

44:31Why does everyone need it? You said like they need water.

44:36Nik Bhatia:Because of layered money. Everything else is a lower layer. Everything else has a degree of counterparty risk that cannot compare. We, you know, you think about gold and gold for 5 ,000 years of having this store of value and first layer money principle, all of that got transferred to treasuries. And yes, gold is, if you measure it, gold is now in the$40 trillion range as a market cap, which is larger, the same as treasuries. So you can make that argument that now gold is of that similar value, but not everyone needs gold. In fact, most people in the financial system don't need it. They like it and they want it and they're buying it and the price is going up.

45:27The price is going up because of this treasury dynamic also, which is that the treasury doesn't

45:34Nik Bhatia:get punished. So you have to, other things like real estate gold have to go up in response to the fact that the treasury is going to be able to continue to do things and just borrow and borrow and not get punished by the market. Now, there is a point at which that stops becoming true. And 2022 is a great look at that. Because when we talk about tame inflation, that being part of my thesis, it's part of my thesis because in 2022, it became untamed. So we have this recent example and two-year window of complete chaos in the treasury market. Basically, some of the smartest people, I'll say Jeremy Grantham for one, I know this because somebody I like a lot sent me this article in 2022.

46:31Nik Bhatia:Jeremy Grantham said, hey, we're going to a 1970s style inflation. So you had some of the pros of the industry. I faded that too, but you know - It was funny because I remember that it was really a game of two narratives then. It was people saying it's either going to be like the 1940s or it's going to be like the 1970s. And maybe it's worth explaining the different dynamics there and what actually has played out since. The 1970s was a demand shock and this was a supply shock. That's basically the main difference. the 40s with the war spending is much more similar to the demand shock and that fiscal basically the fiscal engine behind the inflation and that's what i about the fed to go back the fed isn't really in control it's the government that spent the money that caused the inflation the fed is the reaction and the fed enables the fed is the enabler we don't have to diminish that.

47:36Nik Bhatia:The Fed is the enabler, but it's the government that does it. And that fiscal deficit marginally faded, and then inflation marginally faded. So what would cause the world to stop needing treasuries in the way that they do today? That's my point. There's nothing. There's nothing. You can go to option A, option B, option C. We can go through all of them. We can talk about gold, Chinese government bonds, German government bonds, Apple's bonds. I mean, whose bonds do you want or what asset do you want? Whose deposit? Whose counterparty? There is nobody. There is no structure of the dollar system without treasuries at the center.

48:29And it just doesn't exist. But if we went out 50 years, you think this is still the case?

48:38Nik Bhatia:I mean, that's really, you know, a really long time. That's a really long time. My point is like, you seem to be super bullish on this idea, but like, does it at some point, does it break? Does the US dollar dominance break? Like, even if it's the last Fiat currency, this is like the dollar milkshake thing. Even if it's the last one to break, does it still break at some point? I instead of looking 10 years in the future of 50 years, let's look at now. The United States, the last 10 years have been filled with the BRICS narrative. Yep. Or the digital renminbi or, you know, cross border trade between China and Russia, China and India, all of these things.

49:20Nik Bhatia:Those are the narratives. So what are what is the system in which it changes? Maybe a Chinese system. maybe a uh an sdr system so that was a special drawing right the imf it's a basket so you tell me are we going more toward a dollar dominant system more toward a basket system or more toward a chinese currency system i would argue the dollar system has gotten stronger over the last year and i would also argue that there were the chinese system and this idea of BRICS cross-border settlement, a lot of momentum since 08, 09. The first headline I remember reading, China and Russia traded currency for oil or currency for energy.

50:09Nik Bhatia:And that was 2010, 2009, 2010. I remember that. So it's 15 years ago. But the United States dollar is still 90 % of global transactions, 90 % of FX pairs, and The Basel system, Basel III, is getting deeper and deeper ingrained. The breakdown of the World Trade Organization disrupts any momentum that the multipolar system was trying to work toward. So the only thing left you have to challenge it is China. Yeah. So if you, I mean, that's why list out the potential challengers. There's gold, there's Chinese government bonds, there's German government bonds, there's euro bonds, which don't really exist yet.

51:06Nik Bhatia:Right. Euro EU denominate, like EU issued eurozone bonds. I mean, they've done some, but it's not really a market or like a BRICS bond or like a BRICS gold back token Bitcoin or Tether Gold, right? And so that's why Bitcoin is so exciting, Danny, is that when you think about what is the base for future collateral and future banking, Bitcoin has a role there. And you can see it, like I can see the path to the United States trying to direct capital into Bitcoin instead of into treasuries to make it less vulnerable to the rest of the world owning treasuries. But that doesn't mean that treasuries will not take the same place within the financial system.

52:02So when you look at the things that are going to strengthen the treasury market, people always talk about stable coins here. They're still pretty small, but they, they're substantial. Um, how much of a role do you think that'll play? I know you've just written a piece on this.

52:16Nik Bhatia:Yes. Stable coins are going to be very important because take the simple example of, I know you travel a lot. U S dollar paper cash is good. Most places, like if you go to Europe, people won't really want your dollar, your dollars. You're in Africa. Right. Yeah. So, so, you know, this in, and you know, on the ground that this is the case that people always want dollar cash. Why? Because they want this store of value. They want this, they want dollars and paper dollars are the easiest way that normal people abroad can actually hold dollars. So imagine now that they can hold stable coins. It's similar without paper.

53:01Nik Bhatia:That's, That's like a good starting point to see how large the market could be. If you just unlock that type of demand with stablecoins, you create a few hundred billion or a trillion or two trillion in new treasury demand that stablecoin issuers will funnel into treasury, treasury repo markets, T-bills, and that should help the market. but I believe it's the vision is much greater than that. And this is what's exciting. I feel like I was behind the government on this because now that I understand the genius act better, what I can understand is that somebody knew, somebody knew this was going to be the plan, which is that you have to get stable coins into the, the collateral base of the world and the world's banking system so that they can also use stable coins, not just treasuries, to basically borrow against.

54:10Why do they care about using stable coins as opposed to the sort of euro dollar shadow banking system that we have today? And just really briefly, for anyone that doesn't know what the euro, like we shouldn't go into this in too much detail because it's a whole

54:22Nik Bhatia:rabbit hole but just very quickly what the euro dollar is sure uh u.s banks if you have a checking account in the united states you have a dollar deposit you can also have a dollar deposit in london but the the united states government and the fed don't have any regulation or jurisdiction over that so you have this whole dollar system going on outside of the united states and all these banks are banking people in dollars dollars are being sent from country a to country b united States not involved. This is the free riding also that we talked about. Free riding off the dollar system outside of the United States is commonplace.

55:00Nik Bhatia:Everyone just uses it. That's the Eurodollar system started really in the 50s because the Russians didn't want to bank in New York, right? And because they didn't want that risk. And this just grew completely organically and is a huge market. It's very hard to know how big the euro dollar market is exactly. Do you have any kind of idea of the scale? We do know that there's 10 to 15 trillion in deposits. So those are easier to see. What we have a more difficult time seeing is the FX swap market, which is how many dollars are lent out against existing foreign currency. So a foreign currency holder can post that currency and borrow synthetic euro dollar funds against that currency.

55:53And we have some

55:54Nik Bhatia:numbers. 58 trillion is one. It's really tough to measure. Yeah, it's really tough to measure. But there's a whole dollar system outside the United States. By the way, they also use treasuries. because when they get dollar deposits, they have to have something in reserve against that. So owning a deposit at a New York bank is one way to have some of it. Paper in their vault, paper currency is another way, but might as well just own some treasuries, especially because the treasuries can, they can post as collateral and then free up liquidity if they need it.

56:34Nik Bhatia:So But the United States doesn't really have any governance over the system. And that's the subject of my paper is how the United States can reassert governance over the offshore dollar system with stable coins. Okay, so let's get into that. How do they do that? Okay. So the paper will have a lot of the details, but the simple explanation is that if you can get stable coins into the hands of companies that export goods to the United States, so we pay for our imports with stable coins, you actually start circulating. tokens that have United States governance. That's the key. And that's what I saw the Genius Act laid out.

57:33Nik Bhatia:It's not in there, which is interesting. Between the lines. It is between the lines. But if you can see that, and that's part of the reason that the Bitcoin Policy Institute had me write this paper, because I have advantage of the offshore dollar system. And I also have advantage of the treasury market, the T-bill market, the repo market. So I can see the relationship between the fact that the United States imports a lot and the fact that the euro dollar system is robust. There's a direct relationship between these two things. So if we can insert stable coins in the middle of that, you have the chance to really change the ballgame.

58:13So what is the actual difference for the US government in that situation. So on one side, you have the Eurodollar shadow bank, no real insight into what's happening there, no real governance control over that. What changes with the stablecoin? And what does that allow the government to do that they can't do with the Eurodollar system?

58:30Nik Bhatia:So you said it when you said when we don't have oversight over it, we can't really see it. So if you put dollars into a system that you can't see, you can't see what they're using it for. You can't see how much they're leveraging it. I see. That itself is a massive risk to the country. Think about the national security implications of two companies engaging in trade between each other in dollars with their local banks. And let's pretend that that activity is going against the national security of the United States. We would have no idea and no control over it and no way to say, hey, Russian bank, stop transacting with this other bank in dollars.

59:14We don't have control over that.

59:18Nik Bhatia:And it is fair to say that stable coins are a way for the United States to exercise governance outside of the country where it hasn't been able to. Do stablecoins fix structural over-doll evaluation or trade deficits? No. By themselves, they cannot. That's not the tool. It is revolutionary to get a token into the world's hands that the United States has some governance over that at the margin can eat away from the Eurodollar system's ability to multiply and fund activity that is counter to the United States. That's the free riding problem. That's what, as an American, that's what I can see is a problem.

1:00:16Nik Bhatia:When I wrote about the Eurodollar system in both of my books, I was writing about the fact that we don't have any, it's outside of the purview. That's the term I used, I think, in layer money. The offshore dollar system, it's outside of the purview of the Fed. Well, who cares if it's outside of the purview? That's not the point that I see anymore. That's the key. It's that you're using it for things that are not aligned with the United States objectives. And so it is a very US focused idea. It does challenge, you were asking like, how does the world work without the Eurodollar system? The truth is it doesn't.

1:01:04Nik Bhatia:So you can't just kill the Eurodollar system, but you have to find a way. You can slowly bleed it. You have to find a way to mitigate the risk. It's funny because like when you look at Tether, where it came from and where it is today are very different. But if the US government were going to do this intentionally from the very start, I don't think they'd have picked the team at Tether that they have. Because Tether's full of Bitcoiners. I know they do their stablecoin thing, but Paolo's a Bitcoiner. And I wonder how much they feel their hands are tied to Tether. And that this has become almost too big to fail for them.

1:01:41So they have to bring it into the system, even if they maybe wouldn't necessarily want to.

1:01:45Nik Bhatia:You're talking about the US government? Yes. Okay. So Tether is part of the problem in that Tether has popularized stable coins more than half the market. And it's the original, and it has the best network effect. But it's part of the problem because outside the government. So you have USAT, right? Their new Genius Act focused token. What are the odds that USDT market cap slowly bleeds into USAT over the coming years as just like part of the plan, I would say decent. That's non-zero. You might not agree. No, I was just thinking about it. I don't know if I disagree, but I think the thing that I always struggle with is why anyone in America would want to use a stablecoin.

1:02:30It's not for Americans. Exactly. So in that scenario, if like the vast majority of adoption of Tether is going to be in the global South where people are trying to escape hyperinflating currencies or even just like high inflation currencies. Does USDT not still grow faster?

1:02:45Nik Bhatia:So here's the thing. USDT has, man, you're making me like give away the whole paper. Here we go. Sorry, guys. USDT has established somewhat de facto genius coin properties, meaning it owns a ton of treasury. it owns it it's participating in the t-bill market and short-term collateralized obligations repo etc it is participating in the repo market to a very heavy degree so it's already trying to act like what the genius coin stable coins will be and if it can if it can act like that it can maintain its market but it can also maintain that uh hey we're trying to be we're trying to be on the cutting edge because if genius act stable coins have certain aspects of backstops or regulation or you know uh regular um disclosures they're going to be more legitimate on the market than tether how long has the tether fud they're not back they're not back always gone on.

1:04:00Nik Bhatia:Now they've done their best to, you know, self audit and disclose, but how much do we really know? And how much can we disclose in the United States court regulatory operation? We don't know. So the United States has to respond to Tether. Genius Act is basically the Tether Act. I mean, that's basically what you can call it. You can't hide from the fact that Tether won the first part, right? Clear victory for Tether. How does the United States respond? Does it enable a system to grow Tether or does it try to create something to challenge Tether? So I would argue the Genius Act is there to challenge Tether.

1:04:43Nik Bhatia:How long will it take for Tether to fall below 50 % of the global stablecoin market cap? 40%, 30 %? I don't know. But I would argue that it will diminish as the United States is able to kick this thing off. Do you think there's a chance that at some point the US government decides that this private company is too big to fail, cannot remain a private company? Maybe there's some kind of economic shock and it becomes part of the US government. Tether? Yeah. So Tether is not a US company.

1:05:22Nik Bhatia:Or USAT. Right. So is there a path to the US forcing Tether to do in-kind to USAT? Yeah. I mean, there's absolutely a possibility. And there's no way to know whether Tether hasn't already planned to do this. So I would watch USAT closely and I would guess - I just don't know what the incentive for Tether to do that would be when they print so much money. Okay. This also has to do with the alliances we were talking about earlier when we were talking about Liberation Day. What is the incentive for Vietnam to raise the middle finger to the United States? It's similar to Tether's incentive to do it.

1:06:20Nik Bhatia:There's not, meaning there's not much incentive. It's only downside risk. Yes. And I mean, you have to think about how these countries just laid down, including the European Union. I mean, you know most neutral people in Europe were like good god this deal has nothing for us and you just laid down to the United States but the only country who hasn't is China and if you look at the rare earth look at what happened with the rare earth you can make the direct comparison to tether I know it doesn't seem like it but United States put tariffs China said we're going to stop rare earth exports to you.

1:07:06Nik Bhatia:The United States says, oh my God, this is going to, this is going to kill us. We need the rare earths. So they called them back and they said, please. And then China said, okay, we'll keep it going for a year. Now what happens in a year? I don't know, but everyone needs each other. The United States needs the rare earths, but China needs our consumer. They need each other. So, I mean, what if you sanction Tether? Right? If Tether is owning treasuries, it means they are using a custodian or a banking partner that is custodian treasuries at DTC, you know, the depository clearing. the united states has governance over that and so the question is why what's what is tether's incentive it's not a market incentive that's the answer to your question it's not a market incentive it's a survival incentive and um i have been feeling myself getting more and more

1:08:21Nik Bhatia:along, let's say, in the early QE era, I was sure that the United States Treasury market would eventually collapse, that this can't go on forever. And as I age and see years go by, what I can see is that the soft power and the hard power of the United States is probably the highest it has ever been in history and heading higher. And that is my base case. That's my thesis. It's gone more that way. And it's not to defend everything that the U.S. does either. But if I look, if I just observe power and I observe the way Liberation Day went, and this Iran thing is going to be a big test for that soft and hard power, and who knows, in six months, this conversation might not age well if Iran goes really, really poorly, everything falls apart, and the United States loses a bunch of power because of the power.

1:09:35Nik Bhatia:decisions that it's made, which is part of my goal, which is, you know, thinking about this war, just wiping this slate clean and really just looking at the markets. What is the price telling you? But yeah, I have noticed myself observing the power continue to increase and just being a realist about it. I think that there's a heavy degree of realism that I always knew I had, but it's getting stronger and stronger. To take this back to the very start of the conversation, we were talking about Bessent wanting a weaker dollar. Everything we've spoken about in the last hour says he's not going to get that.

1:10:18Do you think that is out of the window now?

1:10:21Nik Bhatia:The dollar is a big challenge to the United States. And going stronger and stronger and stronger is going to damage plans. Um, will it, it will damage the United States plans to reshore production because it won't really be feasible at a very expensive dollar. I do believe even if that production is all robotics. Yeah. Because somebody else can do it cheaper if the dollar is too expensive that and that's the case it's not just the us or just china it's the third country that has to pick between the two so they're going to pick the cheaper one obviously quality matters but a strong dollar it is going more and more or let's say if the dollar gets 10 to 20 stronger a lot of the agenda around the margins is going to crumble.

1:11:24Nik Bhatia:So it's going to become a lot less feasible. And the dollar is going stronger now. You have a rush flight to safety in the dollar. This is another example. The treasury market didn't really get a bid to safety because oil, inflation, higher interest rates, but the dollar has done incredibly well. As is Bitcoin. And Bitcoin is doing great. Listen, I'm very bullish on Bitcoin. I started stacking again. Let's go. Not to overshare, but as a business operator, I've been investing in my company. And I haven't been investing the marginal dollar in Bitcoin for a couple of years. So it feels really good to buy Bitcoin again.

1:12:17Nik Bhatia:I think it's positioned really well. These prices are just too good. Yeah. It's one of those things where you just kind of have to smash. But Bitcoin has done well during this war. I'm very hesitant to get too far ahead of ourselves because I think there's probably multiple reasons. One, that it dropped 50 % just before it, which I mean, how many sellers were really left? But is it even a sign that it's becoming more of a safe haven asset in these sort of big geopolitical events? No, I don't know. What I think is that it was just leading. I think it's still very macro-driven. I think the correlation, well, I don't think.

1:12:57Nik Bhatia:The correlation with the stock market is still very high. But now you see Bitcoin going up, stocks going down. So people are like, well, how is it still correlated? Because there's a little bit of decoupling. The way that correlation is calculated is you look at daily returns and you compare them to each other. So on days where one goes up and the other goes up, that's a positive correlation. If you look at each day of Bitcoin's down move, it did match a lot of the stock move, only that stocks, when it went back up, stocks stayed flat and Bitcoin was going down. Now stocks have come down a little bit.

1:13:35Nik Bhatia:So I really believe that Bitcoin is still macro-driven and our liquidity index gave a sell signal on January 14th. That applies to both stocks and Bitcoin. Bitcoin reacted right away. It's down about 20 % from that January 14th level and stocks stayed flat, but now they're going down and showing more weakness. So I do think Bitcoin is leading and that's why my bias right now is to believe that the bounce that Bitcoin is showing is foreshadowing volatility coming down, which will boost TBL liquidity, our index, roll it back up and trigger a buy signal sometime in the next few months. So I've seen some of your recent videos and you were saying that you think equities are ready to roll over, but you're feeling sort of neutral to maybe ever so slightly bullish on Bitcoin.

1:14:32If you still believe they're correlated, how is that the case? Is it just the fact that it's a leading indicator?

1:14:38Nik Bhatia:Yes, yes. It's a great question. And the correlation, those are numbers that don't lie, right? If there's 60 % correlation between these two assets, that is statistically a fact.

1:14:55Nik Bhatia:Now, that's part of my framework, but also part of my framework is the price analysis. So when I look at the price of Bitcoin, it looks like it's making higher lows from the low 60s and looks decent. And I look at the stock market, it is rolling over and has just lost a support line. So on a pure price basis, stocks look weak and Bitcoin looks decent. Not strong, but decent. Not bad. Stocks do not look good and they look not great. They look bad. And so how do I tie these two? It's maybe a little bit of the leading thing, but also knowing that Bitcoin, there's two sides to it, that Bitcoin can go up and on up days, it can go up a lot where stocks go up and they go up a little.

1:15:42Nik Bhatia:And then on the down days, stocks go down more and Bitcoin goes down a little. So Bitcoin can actually massively outperform stocks, even if correlation stays high or, and this is equally as likely. we look at time series of correlation. So we see correlation go up and down over time. And we watch that. Bitcoin's greatest runs, the correlation goes high or low? What do you think with stocks? It's great. Yeah, it drops. It goes to zero, basically. It doesn't go to negative. It loses all correlation. It loses correlation when it goes crazy to the upside. So in that case, then correlation will drop and Bitcoin will get to some escape.

1:16:25Nik Bhatia:Now, I don't, I'm not. So I see. So it's not the inverse of stocks. It's just not even correlated at all. Correct. So in your scenario, I'm thinking about conversations I've had with Checkmate now. And he thinks we're probably in for like a period of what he calls chop solidation. That would make sense while equities maybe roll over and have to figure out where their actual support is. And then when we move higher, we really move higher. Yeah. So that gets on. Do you remember last time we spoke? We were talking about the four-year cycle being potentially over. And I think you weighed a 51 % chance that it was over.

1:16:59Do you think that the four-year cycle is alive and well, or do you think we could still prove that this time might be different?

1:17:04Nik Bhatia:You know, it's a great question. I'm actually, since the 51, I moved a little bit higher that I think it's over and I'm still there. I still think it's over. And I have a friend who's like, you know, the October high is like literally the exact date. How can you say that? Um, but also a 50 % drawdown is not really close to the seventies and eighties that we've seen in previous. And then it would also mean that we won't get an all time high until 2029. I can't see that. And so that's where I have a real problem with the thesis. And I do think it's over. And it's very empirically too early to call still, which is fascinating.

1:17:54Nik Bhatia:We can keep having this conversation for like two more years. Or maybe not. Maybe we get a new all-time high this year and it's officially over. But I like the idea that Chek said about stocks going lower and kind of dragging Bitcoin flat until stocks can bounce. And then they will both go up together. I think that's a, I mean, I think that that's a sound take and maybe, you know, how I'm also seeing it. And I love how people, uh, use his, his word chop solidation. Yeah. He's memed that into existence. Yeah. He invented it. So it's a good one. Um, all right. Last thing I do want to talk to you about is the fed.

1:18:28Cause we've spoken about the fed a lot in the past. Um, it's the job that I envy the least. Like it must be terrible to be the chairman of the fed. And And we've now got a new one coming in who's dealing with war, stronger dollar, stable, all the dynamics that we've spoken about today. What's he going to do?

1:18:47Nik Bhatia:You know, I don't think that they can do much. The market is what leads. We've talked about that for a long time. The Treasury market will eventually tell the Fed what to do. And it tells the Fed where inflation is and where inflation expectations are. Is the Treasury market going to tell the Fed or is Trump going to tell the Fed what it does? the Treasury market will absolutely tell the Fed what to do. You know, presidents have actually, for a long time, gotten the Fed to do what they want, or tried to get the Fed to do what they want. But the mandate is not to just go with the flow of the White House.

1:19:28Nik Bhatia:It's to support the functioning of the US economy. And when, you know, the reason why Trump has not been able to get the Fed to lower rates in the last six months, or when was the last cut? Toward the end of last year. So the last few months, the reason that he hasn't been able to get them to move lower and at a pace that is more aggressive is because the Fed doesn't have to respond to the president. And so it does have to respond, though, to the Treasury market. When the treasury market gets skittish, the Fed does come. And right now, the treasury market is saying that the Fed doesn't really need to cut rates.

1:20:13But Powell doesn't have to respond to the president. It feels like Walsh is coming in to respond to the president.

1:20:19Nik Bhatia:Yeah, you know, Trump put Powell in there, though, also, in his first term. So it's kind of like Supreme Court justices, too. They have a long term and they can be, you know, political and reward the president that put them there, but they can also not. We look at the Supreme Court decision on tariffs. I think two judges that he appointed voted against his emergency powers. And I mean, that's proof in the pudding there. it is no matter how much people like to think otherwise it is still a system of checks and balances he's going to get creamed in the in the midterms but it's also not going to stop him from doing the things that he still has the power to do yeah do you think at some point they have to get rid of the jobs numbers if ai does what we think it might potentially do and stop worrying about jobs and just worry about inflation?

1:21:20Nik Bhatia:No, I, no, I don't. I mean, employment is still, it's still central to an economy. So the United States is, has a lot of trouble with labor data. I'll say that, right? We see the revisions that they've done those March to March revisions that we've gotten two years in a row where they were like, by the way, there were a million extra jobs that didn't ever get created. So the government already has a lot of trouble with labor statistics itself, but the obsession over labor and job cuts and job hires and job listing quits and all that kind of stuff is going to persist and shareholders care about it too.

1:22:07Nik Bhatia:So they care about how many people are employed at companies. They also care about how many people are employed in the economy because that's how people buy those products. So, listen, the government is a disaster in terms of, I mean, so many things. Efficiency, just being late to things, the government is a disaster. Thankfully, the United States has a very robust private sector. We have deep capital markets. And part of the free riding problem to just bring that back one more time. Part of the free riding problem is that everyone uses the dollar because of our legal apparatus and how sophisticated our capital markets are and how sophisticated the investor base is to get transparency out of cash flow generators so that we know which ones to buy and which ones to not buy.

1:23:08Nik Bhatia:And you still get fraud and you still get all these things, but we do it pretty well in the United States. And we don't really need the government to tell us how many people are employed. Fair. Nick, this has been awesome. Thank you for letting me steal your Sunday afternoon. Of course. You need to tell everyone where to go to see the Bitcoin layer. It is one of the newsletters that I just don't miss. I think it's one of the best in the business. Tell people where they can go and check it out. Thanks, Danny. Yeah, the Bitcoin layer dot com. If you go to the Bitcoin layer dot com slash subscribe, you get right to our newsletter page.

1:23:44Nik Bhatia:We put out research articles I'm writing every Monday. I want to get people started on the week. I wrote this morning, actually, and I'll go home and and work on it tonight, publish that for people tomorrow. On Thursdays, I do a video that's my global macro updates behind the paywall now. I still have the YouTube channel interviewing people and doing shorter macro updates there, but really focused on trying to give people signal, give them a buy-sell indicator that's quantitative. It's not me. I was way more bullish on January 14th than my indicator told me to be, But that's part of it. You want some human opinion.

1:24:26Nik Bhatia:You also want a quantitative framework. So we're delivering that to our readers, thebitcoinlayer.com. Awesome. Thank you so much, Nick. Thanks, Danny. I will see you soon. Thanks.

1:24:52Thank you.